達樂 (DG) 2011 Q1 法說會逐字稿

Ladies and gentlemen, this is the Dollar General Corporation first-quarter 2011 conference call on Wednesday, June 1, 2011 at 9.00 a.m.

Central Time.

Good morning and thank you for participating in today's call, which is being recorded by Conference America.

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

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

Thank you 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 first 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's 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; capital expenditures; debt redemption; as well as our expectations with regards to certain consumer and economic trends.

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

Because they are subject to significant risks and uncertainties we cannot assure you that forward-looking statements 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 first-quarter earnings release issued this morning, in our 2010 10-K filed on March 22, 2011, and in the comments that will be made on this call.

You should not unduly rely 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.

Reconciliations 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.

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.

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.

Once again, we are on track for yet another great year at Dollar General.

Sales exceeded our expectations as we maintain our focus on serving our customers and adhering to our everyday low price promise.

This was our 13th consecutive quarter of increasing both traffic and ticket in our comp stores.

Later I'll share some of our updated customer research, but I think our sales performance is a good indicator that our customers are depending on the convenience and value they find at Dollar General.

As you all know, the macroeconomic environment has remained difficult and the cost of fuel and commodities posed challenges both for our customers and our gross margin.

We acted thoughtfully with regard to raising prices in the quarter and where we could we continued to battle price increases across multiple categories including food and commodities.

We strategically elected to give up some margin dollars as we focused on delivering value for our customers.

We also invested in some markdowns in apparel and home in the normal course of business.

We believe these were the right investments for the long-term health of the Company.

While our gross profit rate was impacted, our customers responded favorably and, as I said, we are pleased with the results and what they mean for our longer-term prospects.

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

Total sales increased 11% over last year.

Same-store sales increased 5.4%.

Gross margin did decline by 63 basis points, but we will address that later in more detail.

On an adjusted basis we leveraged SG&A by 50 basis points.

Our interest expense decreased by $6 million and adjusted earnings per share increased 14% to $0.48 per share.

Finally, we opened 139 stores in the quarter bringing our total store count to 9,496 and we remodeled or relocated an additional 184 stores.

Our sales results are a testament to the strength of our business model.

Our strategy of small box convenience combined with great value continues to resonate with our customer.

Sales growth in the quarter was primarily driven by consumables with very strong results in food and health and beauty care.

We completed the final phase of our project to raise the shelf height in our stores to 78 inches, which contributed to the strong increase in health and beauty sales.

Our customers had become even more cautious with regard to their discretionary spending and this is reflected in our apparel and home sales.

The duration of this period of economic uncertainty is unprecedented and is affecting the average consumer's spending habits.

We had strong sell-through of our holiday seasonal merchandise including Valentine's Day and Easter.

As has been the trend, purchases came late and close to the holiday.

Sales of lawn and garden merchandise in the first quarter were down significantly from last year.

We believe a portion of this is timing as we've seen signs of a comeback in our seasonal sales driven by lawn and garden.

We are optimistic that sales will improve as we progress into late spring and early summer.

In addition to our commitment to holding prices down as much as possible, key factors impacting our gross margin performance in the quarter included -- first, markdowns used to clear winter home and apparel were up compared to last year.

Second our higher mix of consumables in the quarter put some pressure on the margin rate.

There is increasing evidence that customers are being impacted by the difficult economy including the recent escalation in gasoline prices which has diminished their capacity for discretionary spending.

I believe customers today are experiencing more uncertainty and were shocked by the dramatic move up in gas prices.

Retail gas prices moved out over 30% in just eight weeks during the first quarter.

Compare that to 2008 when a similar run-up happened over about a six-month period.

Third, higher fuel costs are impacting our transportation line as diesel rates were up 30% compared to last year.

Offsetting a portion of these margin pressures in the quarter, we made good progress in reducing inventory shrink and we leveraged our distribution costs.

I'll let David talk about the detail of SG&A, but I'm very pleased with our progress on leveraging store expenses and especially our store labor.

All in we believe we have a good start to the year.

David?

Thank you, Rick, and good morning, everyone.

Rick has already discussed sales for the quarter, but I'll quickly summarize.

First-quarter sales were $3.45 billion, up $340 million or 11% from the first quarter of last year.

Same store sales grew 5.4% and both customer traffic and average ticket continued to increase.

Sales were primarily driven by consumables, including strong results in all of our food categories as well as health and beauty.

Clearly our customers view the changes we've made in these areas favorably, including additional coolers and expansion of our HVA offerings.

Our gross margin rate was 31.5%, that's our second highest first-quarter gross profit rate ever, down 63 basis points from last year's record high.

As Rick said, the year-over-year decrease was the result of balancing rising input costs and deeper markdowns with our EDLP pricing strategy.

As a result of these increasing costs we recorded a LIFO charge of $3.6 million or 10 basis points in the quarter.

This is our best estimate on a prorated basis of the full-year impact.

We will update this estimate as the year progresses.

Increased markdowns over the prior year were the most certificate factor affecting the gross margin rate.

Most of the markdowns were in winter, home and apparel and were made in the normal course of business to reduce inventory levels on a timely basis and allow us to move forward with fresh resets for spring and summer.

Next, our mix of sales between consumables and higher-margin non-consumables continued to be impacted by both economic factors and volatile weather patterns year-over-year.

Sales of consumables were up 13% in total compared to a combined 5% increase in non-consumables.

Consumables represented 73.3% of the first-quarter sales, up 155 basis points from the prior year.

Transportation costs were up in the quarter primarily due to the increased diesel fuel rates Rick mentioned.

On a positive note, we're very pleased with our inventory shrink reduction results through the first quarter and we continue to see improved efficiencies from our distribution network.

Total SG&A expense was 22.2% of sales in the quarter, a decrease of 60 basis points.

Excluding approximately $13 million related to the expected settlement of two legal matters in the 2011 quarter and approximately $15 million of expenses related to our secondary offering in the 2010 quarter, SG&A decreased by 50 basis points.

Adjusted SG&A leverage was due primarily to improvement in store labor, although we had good performance in several other areas including advertising and repairs and maintenance.

As you would expect, depreciation expense as a percentage of sales is up a bit primarily related to our recent investments in store fixtures and equipment.

I know some of you have asked about the recent tornadoes throughout the South.

Our property and inventory losses from these tornadoes amounted to about $1.5 million.

We have begun the implementation of a new workforce management system that helps us plan our work more efficiently.

In addition, store labor in the quarter was favorably impacted by a slight shift in the timing of our planogram resets.

In the quarter, two of our outstanding legal matters were settled for a total impact to the Company of about $13 million after expected recoveries of proceeds from our insurer, including about $10 million for a claim arising out of the 2008 termination of an interest rate swap agreement subsequent to the bankruptcy of the counterpart to the agreement.

We also have reached a proposed settlement of the [culvert] matter.

After insurance proceeds, the cost to Dollar General, if the court approves the settlement, will be about $3 million.

Both of these settlements were recorded in the first quarter and are discussed more thoroughly in the legal proceedings section of Note A to our financial statements filed in our 10-Q this morning.

Adjusted operating profit increased 9.5% to $335 million or 9.7% of sales.

Again we are pleased with our ability to effectively balance sales, gross margin and SG&A.

Over the last three years we've made great progress as our adjusted operating profit rate was only 4.6% in the '08 first quarter, more than doubling in three years.

Interest expense was $66 million for the quarter, a reduction of $6 million from last year's first quarter as a result of debt repurchases made last year and lower interest rates.

At the end of the quarter we repurchased an additional $25 of our Senior Notes, a non-operating loss of $2.2 million including the premium and associated costs was recorded in connection with that repurchase.

As of April 29, we had outstanding debt of $3.3 billion and our ratio of long-term debt less cash to adjusted EBITDA was 1.7, down from 2.3 a year ago.

The effective income tax rate for the quarter was 38.1% compared to 37.8% in 2010.

First-quarter net income increased 15% to $157 million compared to net income of $136 billion in the 2010 quarter.

On an adjusted basis, net income increased 14% to $166 million or $0.48 per share.

We generated $224 million of cash from operating activities, which was up significantly from last year due to higher earnings and improved inventory management.

Capital expenditures totaled $92 million for the 2011 first quarter.

As of April 29, total inventories at cost were $1.8 billion, up only 4% over a year ago on a per store basis and our inventory turns were at 5.2.

Q1 represents the lowest year-over-year growth in inventories in five quarters.

If you remember, per store inventory at the end of January was up 9% from the previous year, so we're very pleased with our progress in the first quarter on inventory.

Continued inventory reduction remains a high priority even as we focus on increasing our in-stock levels.

We have had a strong start to the year.

Based on our first-quarter results we remain comfortable with our earnings guidance issued in March.

For the 53-week fiscal year, we expect total sales to increase 11% to 13%, including sales in the 53rd week which are expected to be approximately 200 basis points of the total increase.

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

Adjusted operating profit for the 2011 53-week period is expected to increase 14% to 16% over the 2010 52-week adjusted operating profit, driven by increased sales and SG&A leverage.

We believe the economic environment and the gross margin trends we experienced in the first quarter will continue through the second quarter as we maintain our efforts to balance sales with gross margins.

For the year, we expect the strength of private brands, additional progress on sourcing initiatives, distribution efficiencies, and further shrink reduction to help mitigate some of the margin pressures.

The Board has approved the redemption of our remaining $839 million of senior notes as of the July call date.

Based on this expect full-year interest expense to be in the range of $215 million to $225 million.

Diluted earnings per share for the 52-week fiscal year adjusted to exclude the legal settlements discussed earlier and any losses from redemption of the senior notes is expected to be approximately $2.20 to $2.30 based on approximately 346 million weighted average diluted shares.

The full year 2011 effective tax rate is expected to be approximately 38%.

The 53rd week is expected to contribute about $0.06 per diluted share.

For the year we plan to open approximate 625 new stores and to remodel or relocate a total of approximately 550 stores.

Capital expenditures are expected to be in the range of $550 million to $600 million including $90 million for the new distribution center in Bessemer, Alabama.

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

Thank you, David.

I think the key message you could take away from our first-quarter results is that in challenging economic times, Dollar General delivered yet again for its customers.

We're building loyalty with both our existing and new customers and we believe they will stay with us and spend more when the economy improves.

We have recently updated our customer research and are encouraged by the findings.

This research indicates that we are attracting a broad cross-section of Americans including households from all income brackets and life stages.

A large portion of our new shoppers are from higher income brackets who are not typical dollar store customers.

And among households earning more than $50,000 annually, we've seen continued growth in customer counts over the last year.

The economy has created trial, but our improved store standards and merchandise selections have kept our customers coming back.

Dollar General's new store format is winning back former DG shoppers.

Recent research confirmed that shoppers who had previously stopped shopping at Dollar General are returning and are surprised by the new store improvements.

Our research indicates that 50% of new Dollar General shoppers are from non-core higher income households.

Shoppers with annual household incomes of greater than $70,000 are continuing to grow at a faster rate than other income segments with 22.4% of today's Dollar General customers earning more than $70,000 a year.

I'm very pleased to see these favorable trends in our demographics and we believe a strong percentage of these shoppers will continue to shop with us regardless of the economic environment.

But we're not only attracting new higher income customers, we are also capturing a 4.3% greater share of wallet from our existing customers.

And we are maintaining our dominant share in the dollar channel.

An encouraging finding of our recent research is that our customers understand and trust our pricing strategy.

Everyday low pricing is an important element in the DG model and our customers depend on it.

Customers in our recent study said they believe Dollar General, to quote them, walks the walk when it comes to delivering everyday low prices on the products they need most.

So we continue to partner with our vendors to control cost, optimize our product selection in order to best meet our customers' needs.

We're committed to strategically and selectively investing in price to provide our customers with the everyday low prices they have come to count on from Dollar General.

While we maintain that commitment, unprecedented commodity cost increases may result in higher shelf prices just as you've already seen at many retailers.

Nevertheless, we believe the adherence to our everyday low price strategy is the right way to reinforce and continue to build the Dollar General brand.

The ultimate measure of these customer trends shows up in our recent strong market share performance as measured in syndicated data.

As I look at our share performance over the last 12 weeks, 24 weeks, and most important 52 weeks for food, drug, and the mass channel, we are continuing and consistently gaining share in both units and dollars.

Across all time periods we are experiencing product unit growth increases in the high-single-digit rate and share growth of 12% to 13%.

As I said back in December, in inflationary times I believe the key metric to watch for retailers is underlying unit growth as this indicates the true health of a chain in difficult times.

I am pleased with the response from our customers and all in all these are positive trends that we expect to continue.

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

We exceeded our first-quarter sales plan but we are remaining cautious as unemployment, and just as importantly underemployment, gas prices, food inflation, and the general uncertainties of the economic outlook continue to challenge customers.

Our aggressive stance toward improving our in-stock position remains of the utmost importance in our effort to increase sales and improve the overall customer shopping experience.

We are seeing signs that the focus, tools, and processes we are putting in place are making a difference.

While it's still early, results in the first quarter indicate that our out-of-stock levels had decreased by 9% from last year's average in spite of the fact that we have reduced our inventory growth rate.

More importantly, this is resonating with our customers as we have had a 420 basis point improvement in our customer satisfaction scores related to in-stocks.

Sales growth in health and beauty is a major focus for us this year.

We're making good progress on the addition of 16 feet of core health and beauty products in the stores.

We're about 50% complete and expect to have the remainder fully completed by the end of our third quarter.

As we said before, health and beauty items are somewhat slower moving than some of our other consumable areas.

The trade-off is that they have a much higher gross margin, expanded health and beauty has already contributed nicely to the first-quarter sales and should continue to support growth throughout the year.

We have also begun rolling out new assortments that further expand our emphasis on our extreme value offering.

These assortments are devoted to $1 items in the health and beauty and home cleaning products.

The roll-out will be completed in the second half of the year.

We are expanding our frozen and refrigerated food and beverage offerings yet again, adding selections in non-carbonated beverages, refrigerated, frozen food, and ice cream.

These are proving to be very productive additions.

We plan to open 625 new stores including openings in Nevada and Connecticut in October and New Hampshire in November.

We also plan to complete a total of 550 relocations or remodels in 2011.

In total, this represents approximately 7% square footage growth for the year.

Looking forward, we are on track to open our first cluster of stores in California in the first half of 2012.

California offers a unique opportunity to expand our concept and we plan to capitalize on the prospect in a rational and thoughtful manner.

In total, we now have remodeled six of our existing Dollar General market stores and we are continuing to see strong results from the upgrades.

We expect to open some market stores in new geographies during the second half of this year.

In the second quarter, we expect yet again another wave of cost increases and we're closely monitoring these and trying to make good long-term discrete strategic decisions to build our brand with our customers.

We may need to raise some prices as a result, but as I've said, we are very committed to being priced right for our customers.

Holding the line on prices might mean giving up some gross margin in the short term.

Currently we no longer expect gross margin expansion for the full year as we attempt to balance our customer focus in EDLP pricing with higher input costs and other economic challenges.

However, as David said, we do believe there's an opportunity to grow margin in the second half of the year and going forward.

Initiatives we are focused on include, first, further expansion of our private brand offerings.

Through the first quarter we've added 89 new private brand SKUs including 36 Rexall items this year.

Sales of our private brand consumables grew 12% over last year's first quarter.

Second, we are very happy with our direct sourcing program.

And we believe we continue to have additional opportunities for savings from this program.

Third, we are evolving our apparel strategy with more of an emphasis on fashion basics.

We've begun the expansion of infant's, toddler's, and children's clothes and the transition to more basic men's and women's apparel.

We are seeing the needle move across some subcategories of seasonal, home, and apparel.

And let me share a few noteworthy examples.

In toys we reset our core toy program during the quarter and are seeing double-digit comp gains.

The same holds true for hardware and party goods.

In apparel, the changes we have implemented to reemphasized kid's with licensed and high-value items at great opening price points are gaining traction, especially in kid's creepers and screened T-shirts.

In men's apparel, our new product T-shirts in trend-relevant colors are up dramatically.

We think our product selection is right on target even as our core customer remains cautious with her discretionary spending.

From a cost control perspective, we are making good progress on our two top improvements planned for 2011.

First, our new centralized procurement function has generated meaningful savings and allowed us to avoid cost increases in many areas such as store fixtures, printing cost, store supplies, freight, and various services at the stores, distribution, and corporate.

And second, over one-third of our stores are now utilizing our new workforce management system, which helps us better align our customer service hours with our customers' needs and shopping trends.

We are seeing good results in these stores we are gaining new insights that are already being implemented elsewhere.

As I've said before, we're focusing on the areas of our business that are within our control.

To wrap it up, we're pleased with our first-quarter sales growth and SG&A leverage.

We are committed to being priced right for our customers and we are confident that we are building strong customer loyalty.

We are generating strong operating free cash flow and are on track to pay down a significant portion of our long-term debt.

We are delivering best-in-class returns on invested capital.

My sincerest thanks and appreciation go out to all 86,000 Dollar General associates for their hard work and dedication.

And with that, operator and Mary Winn, let's open the call up for questions.

Sounds great.

Operator, we'll start with questions, please.

(Operator Instructions).

Deborah Weinswig, Citi.

Good morning and thanks so much for all the color on the call.

I think for most of us the biggest question is on the gross margin side.

Would you say that the biggest difference versus your expectations were the -- not only transportation costs and gas prices, but that cost increases were greater than expected?

Maybe if you can elaborate a little bit in terms of the differences versus your original expectations for the quarter.

Yes, Deb, that's really a great call, particularly when you think how we felt 12, 13 weeks ago.

So let me kind of give it to you -- I'll give you the whole blow-by-blow scenario here.

First, fuel prices came in much higher, much faster than we anticipated for our internal transportation costs.

We actually thought we would see some mitigation of that expense as we moved through the quarter and it didn't.

I can't say enough about the higher and faster cost pressures from our suppliers due to rising costs.

I'll give you an example.

Since December, coffee has gone up 4 times.

With our customer and how sensitive they are, we've elected not to take all four of those cost increases through the quarter and there's multiple examples of that.

We have 228 items that are priced at $1 that we think are incredibly important to our customers that we elected not to take price increases on.

So we were making decisions that were designed to take care of our customer.

I think it's also fair to say when you look at how fast gasoline moved up, our customer moved much harder to need than we anticipated.

Our ratio in the first month of the quarter of non-consumables to consumables is exactly where we've seen it the previous year and we watched that changes we move through the quarter.

And unfortunately it was masked by Easter, as we were anticipating the shift into non-consumables because of the Easter holiday.

I think it's also fair to say because of the change in mix the non-consumables business didn't perform like we had anticipated it would.

Since we got together as a team three and a half years ago, we don't believe in packing merchandise away and we took the necessary markdowns to clean out what we needed to do to position ourselves well for the new spring merchandise.

And I also think, Deb, it's really fair not to lose sight of how we managed inventory in quarter one.

We reduced our inventory growth from the fourth quarter by 60%.

On a same-store sales basis, our inventory grew less than our same-store sales and we did that by managing our receipts.

And the receipts you manage when you're really going after inventory tend to be the slower moving higher-margin items and that's some of what's involved there, too.

I know out of stock improvement has been a big focus for you.

Did that come quicker than you had expected?

We're doing -- to be very frank with you, customer perception of our in-stock is coming much faster than we thought.

As a retailer, being better 9%, I would rather have been better 25%.

But the exciting thing is the customer is seeing it and, again, that has wonderful implications going down the next three quarters of the year.

Okay, and then last question -- can you update us on your direct sourcing opportunity this year and also longer-term?

Yes, we haven't changed our stance on that, Deb.

This is David.

As we look direct sourcing we still view it overall at retail as a $4 billion opportunity for the Company.

And through the end of last year we had achieved about $1.9 billion of that.

And as we look forward this year through 2015 we see ourselves getting about $1.4 billion of that on an ongoing basis.

And again, just to refresh everybody's memory, we'll get about a 10% savings in cost when we take things through foreign sourcing.

So even at the end of 2015 we'll still have about $1 billion at retail left to address on this opportunity.

So it's a big opportunity for the Company.

Great.

Thanks so much and best of luck.

Colin McGranahan, Bernstein.

Good morning.

Just on the pricing environment, can you talk about where you stood on some of these items versus competition?

So for instance like on coffee you got four price increases.

Did you find that you had price separation as you weren't taking some of those price increases?

And can you give us some other specific examples of where you had inflation and decided not to take the price increase?

Yes, that's a great question.

I can tell you as we move through the quarter the gap between us and traditional drug and grocery widened.

In fact, it's at the widest level I've seen in the three years I've been here.

So we are -- we do have separation.

And Colin, I want to reinforce that as we move through the quarter, this unit growth thing, we don't want to lose focus on the fact that we're increasing our unit sales, because I believe long-term when things stabilize, that's going to be very important.

We held the line on -- I don't want to get too specific here, but the dollar items is very important.

There are several beverage items that we held the line on.

And think in terms of holding -- this sounds almost silly, but a $1 item going to $1.15 in our channel is a major change for our customer.

And while $0.15 for a lot of us on the call doesn't sound like a lot, it is to them.

We had 228 items we chose to hold the line on and it's crossed -- coffee would be another example.

All across the consumables side of the table.

I don't know if that gives you enough color or not.

That's really helpful.

That's exactly what I was looking for.

I think one other point here, Colin, is that -- and again, I want to reiterate what Rick said in his opening comments -- we are experiencing product unit growth increases in the high-single-digit range and share growth of 12% to 13%, should there be any question about why we're doing this with pricing.

Yes, it makes total sense.

I've got it.

Secondly, on private label I was -- given the 89 new SKUs and the emphasis there, in the environment that we're in, where I would think the customer is really trying to find ways to make their dollar stretch a little further, I guess I was a little surprised that you only saw a 12% growth in private label consumables versus 13% growth in the consumables category overall.

So it looks like private label actually underperformed the national brands a little bit.

Can you give us some color on that?

Yes, it's another great observation.

And again, I'll be frank with you guys.

We are slugging it out on cost increases and we had some service-level issues as we moved through the quarter where a couple of the private brands -- where we're working our way back and forth.

But again, if you look at the 12% on top of last year, it's still a great number.

We still feel good about it.

Okay, great.

Thank you, then.

Joseph Parkhill, Morgan Stanley.

Good morning.

I was just wondering about your commentary on gross margins for the second quarter, just with the first quarter, the biggest detractor being markdowns.

With your inventories being in a better position now, is that just you being conservative on the second quarter?

Is there some other incremental headwind in the second quarter that's not in the first?

Because we look at the second quarter and the factors that impact that would be the mix shift.

Again, we are thinking the mix will stay similar to what we saw in the first quarter.

We also still have transportation headwinds.

Even though the curve on fuel has gotten a little better, it's still much higher than what it was last year at this time.

And then the LIFO will continue.

As I mentioned, we took a prorated share of that in the first quarter and we'll have another share of that that we'll be taking in the second quarter.

Okay, and with fuel prices at these levels and if they were to continue at this level, would you expect discretionary sales to also stay at a similar growth rate?

What kind of initiatives can you implement to drive discretionary sales?

Yes, that's another great question.

The new non-consumable merchandise we have is rolling in.

And we're very bullish on what we have to offer, Joe.

But I need to be frank here and tell you that the mix shift is something that we're keeping our eyes focused on.

Our core customer is buying based on need and the trade down customer that's coming in is more focused on the consumables side of the ledger right now.

I think we're going to know a little bit more about this as we get through the second quarter.

Now you also have to remember, I say all this stuff.

The fourth quarter historically is a high non-consumable because it's seasonal sales, Christmas and Thanksgiving and Halloween.

So I think we'll have a little more view at the end of the second quarter and let me give you a little bit better feel then.

I promise I'll do that.

Okay, great.

And then just my last would be if you could just update, I'm not sure if you mentioned it already, where you are in zone pricing initiatives.

Yes, zone pricing is rolled out in about -- over half the chain right now.

The results have been -- I would say would be fine.

Again, like back in 2008 when we held back rolling it out because of the inflationary environment, we've kind of curtailed it a little bit.

We're doing some massaging and some working with it.

But again, Joe, to be frank, we're being very careful with our pricing right now.

Okay, great.

Thank you.

Operator, I'll ask if everybody -- we've got a lot of people in the queue and if you could just keep it to one question and a follow-up question we'd appreciate it and get back in the queue and we'll try to get everybody.

Meredith Adler, Barclays Capital.

Good morning, thanks for taking my question.

A couple of questions about the pricing issue.

Is it fair to say that you do plan to raise prices?

You're trying to move slowly but it's not your intention to never pass along the higher costs?

That's very true.

Meredith, if I passed on all the price increases we've gotten in this quarter, we wouldn't be looking at a 5.4% comp.

And I guess, do you expect, as the recent question about what the competitors are doing, do you expect them to become more aggressive on their pricing?

Is this -- are you going to lose some of that advantage I guess?

Yes, I think if you -- based on what I've heard on the earnings calls, everybody is talking about the fact that they're passing on the price increases and it's not causing any issues for them.

I believe that in our channel with our customers if we did that it wouldn't necessarily be -- we wouldn't be rewarded with that, if that makes any sense.

Okay, and then I guess my final question today will be just to talk a little bit about the LIFO charge and what you perceive.

Did anything happen I guess so far in the second quarter that would lead you to believe that you need to accelerate the charges?

Yes, not really, Meredith.

As we look at it, of course LIFO is an annual calculation that we do and each quarter we estimate our annual LIFO charge based on our projections of the year-end product costs and inventory levels.

And the provision or benefit for a quarter is prorated again based on that quarter's sales in relation to our current projections of total sales for the year.

So I don't think we see anything too different than what we saw in the first quarter.

Again, it was prorated based on the sales we had in the first quarter versus the full year.

Okay.

I hope that helps, Meredith.

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

Dan Wewer, Raymond James.

Good morning, Rick.

So I guess it was last year that Dollar General signed up with Revionics to implement one of their pricing optimization tools.

And I guess it was my understanding that you would be able to use that to selectively increase prices where those prices were less transparent to your customer to help protect gross margin rate.

When you think about that aspect of your margin management strategy, maybe on a scale of 1 to 10 how would you say it's working out?

Yes, it's rolled out in about half the stores in the chain.

I would think prior -- as we were moving through last year and we rolled it out, I would say in a scale of 1 to 10 probably happy at about an 8.

I would also say, though, Dan, to be frank about it, we slowed it down through this quarter.

We think the tool, as I've said before, we in essence have one price zone across the United States and this gives us the opportunity to be priced right in markets, particularly as you think about an urban strategy where there's a higher cost of doing business.

Happy with the program, pleased with the results.

Just to be honest, being very cautious right now, just to be straight with you.

I understand.

Then as my follow-up question, entering the quarter, your inventories per store were up about 9.4% and on that last conference call that was a big discussion with the investors.

In hindsight, do you think entering the first quarter with inventories so heavy had a major contribution to those extra clearance markdowns?

I think that's a very fair question.

I think the higher clearance markdowns in my opinion are attributable to the mix shift versus over buying.

And Dan, we're not a pack-away company anymore.

I'd rather take our hit, move the merchandise.

It doesn't make any sense that something didn't sell this year is going to sell next year if you hold onto it.

So that mix shift forced us to take heavier markdowns in order to move the product.

And it was deeper than we thought it was going to be, but it's part of our normal business.

Scott Ciccarelli, RBC Capital Markets.

I'm wondering if you could give us some -- you've been helpful in the past giving us some color on the cadence, sales cadence in the quarter.

That would be helpful.

And just a point of clarification on the gross margin.

Is there markdown activity expected in the second quarter?

Or there's not and it's just pure price increases?

Thanks.

I'll answer the cadence on the sales and let David handle the markdowns.

Scott, if I take into account, you've got to remember, the second period and the third period there's the Easter shift.

But if I took the two of them, added them together and divided, our sales were very consistent through the quarter.

Does that help at all?

Yes, yes, it does.

And on the markdowns, both our -- if you look at our seasonal inventory and our home inventory, they're both down from the prior year and it would appear right now based on our estimates that the markdowns will not be much different than what they were in the prior year as a percentage of sales.

I got it, so it's really just the price increases on the margin.

All right, got it.

Thanks a lot, guys.

Mark Montagna, Avondale Partners.

Good morning.

Just two questions.

I hoped you could just update us on what the private label penetration rate was.

And then also, if you end up seeing continued weakness in the home and apparel sector, are you able to adjust your orders for the fall so that you have perhaps a little less emphasis on those two categories?

Yes, let me give you the private label penetration first.

It's 23.1%, which up about 60 bps from the previous year.

Now in regards to adjusting fall, that's a great question.

Our orders are a year out, to be frank with you.

I can tell you that we did throttle back about a year ago as we were trying to figure out where we were, Mark, and where this was all going.

So cannot make any adjustments going forward, but I feel pretty comfortable that we are, particularly with the new mix, the new lines, the shift to very basic items, I feel pretty comfortable we are in pretty good shape.

Again, I will give you more of an update as that product hits the store and how we are doing, if that helps you out.

Yes.

Just as a follow-up to that, when you say the more basic lines, are you referring -- how much more basic is it for fall than it was for this past spring?

There's a significant change.

I mean you think of men's clothing, we are centered around T-shirts and fleece and jeans and work boots.

The women's side is much more scrubs and pants and very basic tops, and quite frankly undergarments, things like that; very, very basic lineup.

And we are very -- feel very good about our price points coming up, to be honest about it, too.

Mark Miller, William Blair.

Good morning, Rick.

A question on really just the maintenance and improving store standards and execution, big part of your story.

I want to understand store manager turnover, where that's at, having come down from 50% to I think around 30% in 2009.

Where was that in 2010 in the first quarter?

Then as we think out a couple years, do you think you have further opportunities to improve that, or does that become harder with the pace of store growth and hopefully in an improving economy more jobs available, which I guess gives your managers other options as well?

Yes, you know, you are talking about a subject that is very near and dear to my heart, and that's turnover and creating an environment where people can grow.

Our store manager turnover right now is probably in the 28% to 30% range, which is a little flat compared to last year.

Our higher turnover usually happens with the store managers in the first quarter of the year, because that's when we make all of our changes.

We make a lot of changes in regards to schematics and planograms in the shelf profile.

I see the store manager turnover and retail is usually in the 22% to 23%, and our goal is to get down to that level over the course of the next year -- next couple of years, excuse me.

One of the things we are very excited about, Mark, is our internal promotion rate last year was 50%, which is the highest level the Company has had in many, many, many years.

Store manager turnover, store standards, inventory shrink, attitude in the store, customer service, it's all linked together.

So it's a big focus for us.

We are making some improvement and we feel good where we are going to be in the course of the next couple of years.

Mike Baker, Deutsche Bank.

Thanks.

So I'll ask two questions.

One -- so it's one, I guess, and a follow-up, officially.

It counts as one for me.

Don't worry about it.

One, on the mix, the biggest shift towards consumables, I think since the height of the recession in 2Q '09, I appreciate you guys not using weather as an excuse, but I'll give you the chance.

How much of that do you think was because of weather instead of people not buying seasonal product?

That's the first question.

And then second, on the high-single-digit unit growth, can you compare that to recent trends?

And more importantly, do you see a big difference on an item like coffee, where you didn't change the price, versus some items where you did change the price?

Yes, great questions.

I am not a guy that likes to talk about weather, but since you brought it up, there's no doubt the weather affected our lawn -- our summer and lawn and garden sales in the first quarter, particularly as we're looking at the numbers today.

So there's no doubt there's a weather issue in there.

The second thing, our unit growth accelerated through 52 weeks to 24 to 12, okay, so we saw unit growth improve.

I don't have in front of me, Mike, anything that would compare coffee to something else and I apologize for that.

That's something maybe you can follow up with Mary Winn on through the course of the week and we'd be happy to share that with you.

Okay, thank you.

Matt Nemer, Wells Fargo Securities.

Good morning, everyone.

So my first question is around margins.

You clearly invested in price and the EDLP message.

You can see the benefit in comps and units.

But I'm just wondering if you have data that shows that that message sticks with customers after they buy, whether it be exit interviews or some other survey methodology?

I'm thinking about that.

Yes, I think the message would be 22 consecutive quarters of same-store sales growth.

It's a fair question and, no, I don't have any exit interview that says it's going to stick.

All I've really got in front of me is what the customers are saying and they did come out and say when it comes to EDLP pricing, which I can tell you in the market surveys, Matt, they said Dollar General walks the talk.

They called out the fact that we have pricing that they trust and that we're consistent.

One thing I want to reiterate, I was talking about moving a $1 item to $1.10 or $1.15, I could tell you I spend a lot of time in the stores and a customer will come up to you and tell you you moved the price of olives $0.05.

They are very price-sensitive.

So I think there's more to play out on this.

I think if you look at our unit growth, the fact it accelerated, you look at our comp number which is a nice improvement over quarter four, people are voting with their wallets.

And we'll have to let the rest of it play out.

Okay, fair enough.

And then the follow-up, which is totally unrelated, is on the planogram reset.

I think you mentioned that there was shift in the reset.

I'm just wondering what -- is that a shift into Q2?

And what exactly is that?

And also what impact did it have on labor expense?

Yes, we actually moved a little bit of the work back, to be honest with you.

And the reason being we want to be a little more complete when we roll out.

We're thinking of our -- I'm thinking of our new dollar planogram, 24 foot -- 20, 24 foot of HVA and chemical and paper and it's all tied into the 78 inch.

So there's a little more moving introducing this new set, but it's going to roll out.

The numbers by the way where it's hitting in the stores are very pleasing.

Aram Rubinson, Nomura.

Good morning.

It's actually [Ed Raasch] for Aram.

If you look at the business from a discretionary versus an everyday needs perspective, would you say more of your price investment is on one of those categories over the other?

If you could give us a little color on that please?

Yes, to be frank, the price investment is on the consumable side.

That's where the bulk of the price changes are rolling in.

You're a year out on the non-consumables side, so you've pretty well locked into those prices.

Okay, and so you're taking a lot of share there and you're a little bit concerned about the mix shift, but you're also steering at that direction at least for the near term, right?

Yes, I mean, we don't want to wake up and be a 7,100 square foot grocery store, that's not the goal here.

But right now the way the customers are voting with their wallets, the consumables side of the business is the most important.

And I've got to tell you, Ed, you look back on the history of this Company over the many years it's been around, it has done a spectacular job of being flexible enough to be there for what the customer wants when they want it.

And I believe the non-consumables business is going to come back and we're going to be prepared for that with the change in the mix, the change in the items, the change in quality, the change in the commitment, but right now when they're voting we're going to give them what they want.

All right, thanks for the color.

Emily Shanks, Barclays Capital.

Good morning, thank you for taking the question.

My first one is just around real estate trends.

I was hoping you could give us an update around availability and what pricing is looking like, particularly as you look to grow your footprint this year.

Yes, David?

It's still very positive for us.

Again, we stand firm on our current estimate of opening 625 stores through the year.

We're on track right now to do that.

And again, we have a very powerful real estate department that executes very well.

Are you seeing actual year-over-year costs come down?

Actually I would look at you and say we're investing in a little bit better sites because of the changes.

And so consequently our costs are relatively the same, but we're getting a better location.

Mark Mandel, ThinkEquity.

Good morning.

Thanks for taking my question.

Just first a quick follow-up.

Can you remind us what the LIFO number was a year ago?

It was very small, $1 million or something.

What have we got here -- $1 million?

Yes, about $1 million.

Okay, fine.

And just a little bit further on the real estate question.

Could you give us some idea about specific numbers in terms of store openings for the next few quarters?

I would love to do that for you, but the trouble is real estate kind of ebbs and flows.

So I'll sit there and commit to the numbers we said we're going to open for the year as well as the remodels and reloads.

Is there any change in the mix of projects, either build to suits or going into existing space?

Actually about the same as it was in 2010.

Joe Feldman, Telsey Advisory Group.

Good morning.

A quick question.

We've talked a lot about cost increases coming and you talked a lot about the second quarter, but how should we think about it for the second half?

I mean, Obviously you've maintained your guidance for the second half and it's still not clear in my mind where the offset is going to come I guess from some of these cost increases.

Because my understanding is this is just the beginning of several years of cost increases to come.

Yes.

As we look at the second half of the year, in all honesty, first of all the comparisons get a little bit easier on the gross margin percentage.

For example, last year in Q3 it was 31.4% and that compares to the last year numbers of 32.2% in Q2 and 32.1% in the first quarter.

So we have the advantage of slightly easier comparisons.

Rick mentioned the non-consumable strategy and particularly the infant's, the toddler's, and the children's kicking in and helping us there and obviously that's higher-margin business in the apparel area.

And then we see momentum with both the private brand and the sourcing, the foreign sourcing opportunities in the back half of the year, as we discussed.

And you know we need to be honest here.

We'll probably be easing our customers into a little bit higher price as we move through the year.

Got it.

Well, that's kind of my follow-up, because it would seem to me that, look, you guys already are the price leader and it seems like the grocers and even the drugstores are starting to pass on price and they're being accepted, at least based on what we can tell so far.

I was just kind of curious, did you need to maintain such a wide gap?

If you could do it over, would you have, I guess?

Yes, I think if you look at the syndicated data that I'm looking at, if your definition of success is that you're gaining units versus losing units, then I would say we're being very successful and there's other channels that are not being successful.

It's very interesting when you watch this, you see -- when you implement price changes, you're going to get a comp bump and you're going to feel really good.

And then about seven, eight, nine months later as your units are declining, so did that comp.

We are growing units and market share in the channel and I believe we've made the right decision long-term for this Company.

And I would rather come out of an inflationary environment with 7% to 9% unit growth rather than no unit growth and then see where you're going to be long term.

I don't know if that helps or not.

One follow-up to the LIFO question.

I want to clarify, the non-cash charges we had in the quarter last year were $1.8 million, but it was all fixed asset type of trade-offs.

The LIFO charge was actually zero in Q1 last year, so the LIFO difference was 10 basis points on gross margin.

If anybody has any questions on that, feel free to follow-up with me on that.

And operator, I think we have time for one more call, please.

Anthony Chukumba, BB&T Capital Markets.

Good morning.

I just had a quick question on your customer centric stores.

I just wanted to get an update in terms of, A, how many stores are in the customer centric format?

And then B, just an update in terms of sales [lift] performance versus your older stores.

Yes, we have about 1,700 done now.

Look at it this way, Anthony -- basically every new store remodel and reloca through all of '10 and most of '09 I think falls into that format.

The research tells us that our customer loves the customer centric format and I can tell you that our new stores are opening at a higher rate of average same-store sales than they have the previous years, so the customer is embracing the concept.

Okay, thank you.

Everyone, thank you all very much for joining us today.

I'll be around for any follow-up questions and please don't hesitate to call me.

Thank you.