達樂 (DG) 2011 Q3 法說會逐字稿

Ladies and gentlemen, this is the Dollar General Corporation third -quarter 2011 conference call on Monday, December 5, 2011, at 9.00 AM 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 conference over to Ms.

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

Thank you, David, and good morning, everyone.

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

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

Before Rick begins, this morning, we filed a preliminary prospective supplement relating to a potential secondary offering by several of our existing shareholders of up to 25 million shares of our common stock plus up to an additional 3.75 million shares to cover overallotment.

No shares would be sold by the company.

This offer is pending, and there can be no assurances as to when it may be completed if at all.

We will not comment further than our prepared remarks regarding the offerings nor will we address in the Q&A session that follows.

So in advance, thank you for not asking about this topic.

Let me caution that today's comments will include forward-looking statements about our expectations, plans, objectives, anticipated financial and operating results and other matters.

For example, our fourth-quarter and fiscal-year 2011 financial and capital expenditures, forecasts, our comments regarding planned 2011 and 2012 merchandising, operations, expense control and store growth initiatives and comments regarding our expected consumer and economic trends, are forward-looking statements.

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, forecast, 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 third-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.

We will also 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.

This information is not a substitute for the GAAP measures, and may not be comparable to similarly titled measures of other companies.

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

Thanks, Mary Winn.

Good morning, everyone, and thank you for joining us.

We are very pleased with our sales and earnings results in the third quarter.

We have had a strong first three quarters, with the third quarter building sequentially on our momentum from the first half of the year.

We could not have achieved this level of success without the hard work of over 91,000 dedicated employees throughout our stores, distribution centers and store support center.

We are in the midst of the busiest retail season of the year and I would like to thank each and every one of our employees for their commitment to Dollar General's mission of serving others every day.

Now to recap the quarter, comparable store sales increased 6.3%, driven by strong increases in both traffic and average ticket.

Our total sales increased 11.5% to $3.6 billion.

On an annual basis, sales reached $207 per square foot, up from $200 a year ago.

Operating profit was $311 million, an increase of $37 million or 13% over last year.

Our operating margin rate was 8.6%, an increase of 14 basis points over the 2010 third quarter.

Once again, we had a very balanced approach to managing our financial performance.

Gross margin decreased by 31 basis points, but was offset by 45 basis points of SG&A leverage.

Interest expense decreased from the prior year by $29 million.

Adjusted net income for the third quarter increased 29% to $172 million or $0.50 per diluted share compared to last year's adjusted EPS of $0.39.

Consumable sales continue to increase at a faster pace than the non-consumables with the strongest growth across our food and snack categories.

Salty snacks, carbonated beverages, coffee and milk were the largest contributors.

Pet supplies and health care also performed very well as we further increased our share of the consumables market.

Our most recent Nielsen data shows that we have continued to increase our market share in units and dollars on a four-week 12-week, 24-week and 52-week basis.

Several areas within our non-consumable categories showed good success in the quarter as well.

For example, automotive, hardware, stationery, sundries and domestics.

We were pleased with our Halloween sales and back-to-school was strong.

We are seeing signs of strength in several areas in our home category that had been weak for some time, such as core bath towels, window treatments and bedding, and we are optimistic that this trend will continue.

On the other hand, our apparel sales have been disappointing.

During the second-quarter conference call we shared with you that we had started to gain traction in select apparel categories.

In the third quarter, sales of core men's and boys, infants and toddlers, accessories and shoes were encouraging.

We believe that repositioning of our merchandise with greater space allocation to infants and toddlers and men's and boys is the right move for the longer term.

Where we have seen more pronounced softness is in our non-core and hanging apparel, especially in ladies.

And while we believe we can improve our execution in this area, the economy has also been a factor.

High unemployment and underemployment, higher year-over-year gasoline prices, tightened credit requirements, continued weakness in the housing markets, and uncertainty in the financial and political arenas continue to impact the consumers' discretionary spending.

We at Dollar General have been and will continue to respond to our customers' needs by providing the right mix of items along with our unique combination of value and convenience they depend on us.

We continue to strengthen our merchandise offerings with great national brands, and the continually growing selection of high quality national brand-equivalent private brand products.

We have added more than 175 SKUs this year, bringing our total private brand consumable SKUs to almost 1,900.

Sales of our private brands in the quarter were up 14% compared to an increase of 13% for national and other brands in the same categories.

In the third quarter, our private brands represented 23.9% of sales in their respective categories compared to 23.6% in the 2010 period.

We are also making progress on improving our store in-stock levels.

In October our average out-of-stocks were 17% better than last year.

In support of this initiative we are investing in training and technology, and we've made important changes in our store recovery processes.

This is an ongoing effort, and we have a long way to go, but importantly, our customers have taken note of our progress, recently rewarding us with the highest customer satisfaction scores to date, specifically noting our improved in-stock.

We are making significant improvements in technology to support our store teams and driving store performance.

For example, over the last two years, we have been upgrading or POS registers.

We will complete the final 800 stores in 2012.

I am pleased that we recently completed the implementation of our store workforce management system, including a task management program to help the store managers effectively plan and schedule the team's hours to accomplish all of the necessary daily tasks as well as any special projects.

This system provides electronic updates to our district managers to identify store managers in need of assistance and keeps all the field leaders aware of store execution levels.

Also during the third quarter, we finished the installation of DSL and Wi-Fi capabilities to support faster and better communications with our stores.

All of these changes will support our growth and help us continue to improve our operations as we expand our footprint in both new and existing markets.

During the third quarter, we opened our first stores in New Hampshire, Connecticut and Nevada.

We introduced our updated General Market banner in Nevada, and these stores are performing well above our initial expectations.

These are our first new Dollar General Markets since early 2007, and we are excited about introducing the concept into new markets.

In total through the third quarter, we have opened up 482 new stores and relocated or remodeled 544.

Selling square footage increased 6.7% over the same time last year, and we ended the quarter with 9,813 stores, including 62 Dollar General Markets.

We are on track to open a total of 625 new stores for the full year and to relocate or remodel 575 stores, including 25 Dollar General Markets which are already complete.

In the fourth quarter, we plan to replace six traditional stores with Dollar General Markets in areas where we believe we can serve our customers even better with our fresh meat, produce and expanded cooler assortment.

We believe the DG Market concept is well positioned to serve food deserts in both rural and metro areas and reinforces DG's heritage of serving the underserved.

Our new distribution center in Bessemer, Alabama, is on track for completion in the first half of 2012.

And we plan to begin serving our Arizona, New Mexico, Nevada and California stores from a leased facility in California, also in the first half of 2012.

I will discuss more of our plans for next year shortly, but now I will turn the call over to David, who will give you more detail on our financial metrics.

David.

Thanks, Rick.

We are very pleased with our third-quarter results.

It was another great quarter for Dollar General.

We have had strong sales momentum this year.

We believe that our investment in price has been the right strategy for Dollar General and it has helped us further strengthen our reputation with our customers.

As a result, and as we expected, our third-quarter gross profit rate continued to run below the prior year, declining by 31 basis points to 31.0% of sales.

This is still a strong margin rate in the current economic environment as well as from a historical perspective for Dollar General.

As we have seen all year, our mix of sales tended toward a higher percentage of consumables, which generally have lower markups than non-consumables.

While some commodity costs moderated a bit in the quarter, our overall purchase costs were up year over year, particularly on some of our food items, such as sugar, coffee, salty snacks, nuts, vegetable oil and juice.

Our LIFO charge was $11 million in the quarter or about 31 basis points, based on the year-to-date pro rata potion portion of our $35 million full-year estimate of LIFO, which is up $5 million from our prior estimate.

We have been successful in selectively passing through some of the impact of this inflation, although as I mentioned, we have been committed to investing in price to support our strong EDLP strategy.

Transportation costs also increased in the quarter, primarily impacted by fuel rates, which were up 28% on average for the quarter year over year.

Shrink reduction and distribution leverage helped to offset these margin pressures.

Inventory shrinkage was at the lowest rate in well over a decade.

As you know, shrink reduction has been a major initiative for us for several years.

And while we still have opportunities to improve, it is great to see this dramatic progress.

SG&A as a percentage of sales was 22.4% in the 2011 third quarter, compared to 22.8% in the 2010 third quarter, a decrease of 45 basis points, largely due to the impact of increased sales and improved utilization of retail store labor, which has resulted primarily from our new workforce management initiatives.

Lower incentive compensation expense, resulting from a more aggressive bonus target, as well as other cost reduction and productivity initiatives, such as our energy management programs and recycling efforts, favorably impacted SG&A in the quarter.

Items which partially offset these reductions included higher depreciation and amortization costs related to new store fixtures, improved technology, coolers and purchase stores in addition to incremental costs relating to our improved data communications capabilities for store computers and charges resulting from increased customer usage of debit cards.

Operating profit increased by 13% to $311 million or 8.6% of sales in the 2011 third quarter compared to $274 million or 8.5% of sales in the 2010 third quarter.

Our $29 million decrease in interest expense for the quarter resulted primarily from lower average borrowings due to the repurchase of our senior notes and reduced amounts on our interest rate swaps.

The effective income tax rate for the quarter was 37.1% compared to 35.6% for the 2010 period.

If you will remember, the 2010 period included a reduction in income tax reserves resulting from the resolution of several previously uncertain tax positions.

For the 39-week year-to-date period, net sales were $10.6 billion, an increase of 11.2% over last year.

Same-store sales increased 5.9%.

Comps improved sequentially throughout the year, from 5.4% in the first quarter, 5.9% in the second quarter and 6.3% in the third quarter.

Sales growth has been driven primarily by our strong consumables performance and has reflected increases in both traffic and average ticket throughout the year.

Our 2011 year-to-date gross profit rate was 31.6% compared to 31.9% in 2010, a decrease of 35 basis points.

That is attributable to the higher mix of consumables, increased product and fuel costs and higher markdowns to sell through certain home and apparel products.

We recorded an increase to the LIFO reserve of $25.4 million in the 2011 period, compared to $0.7 million in the 2010 period.

These factors were partially offset by selective price increases, lower inventory shrinkage and leverage of our distribution center costs.

On an adjusted basis, SG&A decreased by 51 basis points to 22.2% of sales in the 2011 period compared to 22.7% of sales in the 2010 period, and our operating profit increased 13% to $997 million or 9.4% of sales compared to 9.2% of sales last year.

Adjustments include expenses related to the secondary offering of stock in both 2010 and 2011, and $13.1 million relating to payments and accruals in the 2011 first quarter related to two legal matters.

These are discussed in detail in our 10-Q.

Year-to-date interest expense decreased by $44 million from last year to $165 million in the 2011 period, and the [two checks] lost on the debt repurchases from earlier this year totaled $60 million compared to a pretax loss of $15 million in the 2010 period.

The effective income tax rate was 37.4% from the 2011 period compared to 36.9% for the 2010 period.

We reported 2011 year-to-date net income of $474 million or $1.37 per diluted share.

On an adjusted basis, net income increased by 23% to $520 million or $1.50 per share compared to adjusted net income of $424 million or $1.23 per share in the 2010 39-week period.

Our strong operating performance resulted in year-to-date cash flow from operating activities of $604 million.

That is a 50% increase over last year.

Year-to-date, we invested $363 million in capital expenditures and reduced our long-term obligations by $566 million.

As of October 28, total inventories at cost were $2.09 billion, up 5% on a per store basis from the prior year.

This increase resulted from increased commodity costs net of LIFO charges and the addition of new items to the company's merchandise offerings, primarily, consumables.

Inventory turns, based on the most recent four quarters, were 5.1 times.

Long-term obligations at the end of the quarter were $2.72 billion.

Net of cash, our ratio of long-term obligations to adjusted EBITDA was 1.5 times at the end of the third quarter compared to 2.1 times a year ago.

We are pleased to announce that our Board of Directors has authorized the company to purchase up to $500 million of our common stock.

Given our strong cash flow and significant deleveraging of our balance sheet, we believe that share buyback is the best way to give back to our shareholders and further strengthen our capital structure.

The timing and amount of transactions under this program will depend upon price, market conditions, regulatory and contractual requirements and other factors, but it is our intention to repurchase these shares over the next year.

This morning, we also filed a preliminary prospectus supplement with regard to an additional secondary offering of our stock by Buck Holdings, our controlling shareholder.

In connection with this proposed offering and as part of the overall share repurchase program, we have entered into an agreement with Buck to repurchase approximately $185 million of our common stock concurrently with and conditional on the completion of a secondary offering at a price per share equal to the net price Buck receives in the secondary.

The amount of this repurchase is roughly equivalent to our current buyback capacity under our credit facilities.

Now for an update on our 2011 earnings guidance, based on our year-to-date performance and our current expectations, we are raising the 2011 full year or 53-weeks earnings estimate to a range of $2.29 to $2.32.

That is based on 345 million weighted average diluted shares, assuming we repurchase the shares from Buck Holdings in the quarter.

We expect a full-year tax rate of about 38%.

Total sales for the year are expected to increase approximately 13%.

And keep in mind this is a 53-week year.

Same-store sales are now expected to increase approximately 5.6% to 5.8% based on a comparable 52-week period.

And same-store sales for the fourth quarter are forecast to increase approximately 5%.

Adjusted operating profit for the 53-week 2011 period is expected to increase approximately 15% over fiscal 2010, driven by increased sales and prudent expense management.

Purchase cost increases, higher fuel costs and weakness in discretionary spending are expected to continue to pressure our gross profit rate in the fourth quarter, in line with what we have seen year to date.

Guidance now includes an estimated full-year LIFO charge of approximately $35 million.

Full-year interest expense is expected to be in the range of $205 million to $210 million.

Capital expenditures are expected to be in the range of $550 million to $600 million.

We will provide 2012 guidance in connection with our fourth-quarter earnings, but as you build your models for 2012, please keep in mind the following investments we will be making for the long-term growth of our business.

First, start up costs in the Alabama and California DCs will impact our SG&A expense before they open sometime in the first half of the year.

Second, once operating, these DCs will impact gross margin, given the ramp up time to full capacity.

And, third, we will be making some investments in SG&A as we begin to expand into California and as we open more DG Markets in 2012.

These investments will help us capture growth opportunities over time and ensure the strength of our business for the future.

With that, I will turn it back over to Rick and he will share more about these from an operational standpoint.

Thank you, David.

First I would like to update you on our Black Friday results and plans for the holidays, and then I will share a few of our initiatives for 2012 before opening it up for questions.

We are very pleased with our sales through the month of November.

Our sales are better prepared for the holidays than ever before, in part due to our improved merchandise allocation processes, combined with better workflow management.

We have a great mix of toys, gifts, apparel and home decor as well as gift wrap, bows, trim-a-tree, candy, and holiday baking needs.

Our ads have been well-timed and we have accelerated some of our promotional activities to add excitement and further drive traffic into the stores.

As you all know, in a number of the big-box retailers started their Black Friday promotions early, adding to an already highly competitive holiday retail environment.

Like last year, our stores opened, both early on Thanksgiving day and Black Friday, and customer response to our Thanksgiving week advertising was positive.

This year we continue to offer a great assortment at enticing price points for Thanksgiving day and Black Friday.

Some of our special featured items included a 7-inch e-Reader for $50, a Garmin GPS priced at $65, and a 60-game Atari Flashback for just $25.

We also had some great values in our stores during the week leading up to Thanksgiving, and many of these items were available online for the first time.

Looking forward to 2012, we are putting plans in place that build on our commitment to our four key operating priorities, which are -- driving productive sales growth, increasing gross margin, leveraging process improvements and information technology to reduce cost, and strengthening and expanding Dollar General's culture of serving others.

We are still in the process of wrapping up our plans for 2012, but wanted to share a few of our more significant initiatives with you today.

Let's start with our priority of driving productive sales growth.

The returns on our new stores remain some of the best in retail, thanks to the capabilities we have developed in our real estate model.

In 2012, we expect to open approximately 625 new stores.

We also plan to continue our remodel and relocation program with an additional 550 stores in 2012.

In total, we expect square footage growth of approximately 7% yet again in 2012.

I should point out that a higher percentage of our new stores next year will be in our newer states, including an estimated 50 stores in California.

As I mentioned earlier, we are also testing the further rollout of the DG Market concept.

We currently expect that about 40 of our new stores in 2012 will be Dollar General Markets.

We are excited about the opportunities to introduce the concept in both new and existing Markets.

The results of the DG Market remodels we have completed to date and the early success of our five DG Market stores in Las Vegas are very encouraging.

To support our Western stores, we expect to enter into a short-term lease for a distribution center near Bakersfield, California, which we expect to open in the first half of 2012.

As David mentioned, the DC will serve our new California and Nevada stores, as well as our existing stores in Arizona and New Mexico.

We will continue to enhance our category management efforts and we are focused on optimizing our planogram productivity.

We have embarked on region-specific plans to ensure that we have the right balance of offerings based on demographics and store statistics.

We expect to continue to expand our merchandise offerings at the $1 price point and plan to add more items in food and snacks as well as seasonal in 2012.

Our $1 Christmas ornament program is terrific, and we think there are other opportunities of that nature.

Additionally, we further -- we plan to further expand our cooler presence.

Currently our new stores are opening with 14 to 16 colors and we are installing four additional cooler doors in approximately 1200 existing locations to better serve our time-conscious customer.

We increased the number of coolers in 500 stores this year, still leaving approximately two-thirds of our stores today with eight cooler doors or fewer.

Fresh and refrigerated foods helped us drive customer traffic and increased basket size by serving a greater share of our customers' needs.

We will continue to take an aggressive stance towards improving our in-stock position.

This is a never ending effort which requires focus on store-level perpetual inventory accuracy, as well as improved execution across ordering, fulfillment, stocking and delivery.

With regard to expanding our gross margin, we have been limited in 2011 by the shift toward consumables, which has been driven by economic pressures on the consumer.

However, some areas of our non-consumables appear to be gaining traction, and we plan to remain focused on growing this higher-margin part of our business model.

Going forward, we believe we have the capability -- the ability to capture an additional savings from both our sourcing program and private brand development.

In the area of sourcing, we are expanding product sourcing to new categories and importing from new countries.

To further expand our private brands, we will be adding 150 new SKUs as we move into new categories.

We also intend to take additional steps in our price optimization efforts and expect to utilize multiple price zones while remaining true to our EDLP strategy in 2012.

Zone pricing is as much about markdown control as it is about price.

We will share more specifics about our merchandising projects and our initiatives to leverage costs when we report year-end and give guidance for 2012.

I'm very excited about the many significant opportunities that remain ahead of us.

We are proud of our leadership position in the channel, and we're looking forward to continuing to be first to market with fresh new ideas as we further grow the Dollar General brand.

Mary Winn and operator, I will now open the call up for questions.

All right, David, we will now start with first question please.

(Operator Instructions).

John Heinbockel, Guggenheim Securities.

A couple of things -- when you look strategically here over time, as you add more private-label and add more cooler space and other categories, where do you think assortment comes out?

Because you are not going to enlarge the size of the store, where do you pull stuff out either by items or categories?

What is your thought on that?

Yes, that is actually a great question, John.

We are right around 10,000 SKUs now if you count the in and out seasonal items.

We actually think that is the right SKU count.

So our category management process is very robust.

And when we raise the profile to 7 to 8 inches, that allowed us the ability to expand and contract different categories.

And my team does what is called heat mapping, where we go in and not only look at how SKUs and categories perform in terms of sales, but we also look at it in terms of margin.

So it is very much an evolutionary process.

We have expanded some categories on both the consumables side and the nonconsumable side.

And we have contracted categories in the consumable and nonconsumable side.

So it is very much an evolutionary thing.

But the SKU count we have right now we think is the right amount.

And then as a follow-on to that, you have got some nonconsumable businesses that are doing a fair bit better than others.

What is the commonality between the ones that are doing well?

And are there learnings from those categories that you can take to the ones that are not doing as well?

Yes, another good question.

I think what we are discovering in this economic time that nonconsumable items that are less discretionary that I have to have are doing much better than a purchase I can put off.

I have to have socks and I have to have underwear, but I don't have to have a brand-new pair of jeans.

I don't have to have that fancy hanging item.

And what we are doing here is we are really -- when I called this out, it was interesting in that the core nonconsumable items are starting to do pretty good again.

Then, finally, if you think about -- then sort of the trade-off, right, you obviously would like to capture a higher-income customer, at least moderately higher income, down the road.

How do you balance getting more basic or too basic in your offering, which would make it less easy to attract that customer?

I actually think, John, that staying with the basic things is going to attract every customer.

Everybody has got to have socks; everybody has got to have T-shirts.

And by staying focused on that, I actually think we might be broadening our appeal.

All right, thanks, guys.

Meredith Adler, Barclays Capital.

Congratulations.

A couple of questions -- you have accomplished a lot in terms of labor management and also energy management.

I was just wondering whether you believe there is still more opportunity in both those areas.

Is there more technology coming in terms of labor management or is it just using this technology more effectively?

I will take it and David will probably piggyback with me.

I think the technology being installed was, of course, the first piece of all this, The most important piece.

But what the labor management system is allowing us to do is step back, analyze what we are doing and believe it or not, eliminate unproductive work, as well as allocating the work properly through the store.

So we still think we have lots of legs yet on that.

And the energy management system, we continue to have many stories in the chain.

We haven't gotten that installed in yet, so there is still upside there also.

The only thing I would add to that is this task tracking and compliance, this electronic to-do list that is available in workforce management is very impressive.

It is called the START program -- store task assignment response tool.

And it really allows the DMs and the stories to keep track of what should be getting done, reporting back on it and seeing what is and isn't getting done.

And again we're just starting to use these tools.

And the third quarter is when we finally got this installed in the whole chain.

So now the learnings begin and the productivity comes out of these tools.

So I still think we have a ways to go before they are fully productive.

I could use something like that task management.

I have an unrelated question just about real estate.

You guys do a lot of build-to-suits and I think you do you mention CapEx spending on actually buying stores.

Could you just talk a little bit about what is happening with developers?

And do they have the funding to build stores, or are you doing more of that?

And then what would you do with the assets if you own them?

Would you do sale lease-backs or something like that?

Yes.

No, we are still seeing our developers do a great job for us overall.

And again, we set aggressive goals at the beginning of the year and we meet those goals, and we reaffirmed our guidance on the store openings for this year.

So we're feeling good about that.

Now having said that, one of the byproducts of the store buyback, of course, is it does give a little more capital out there to the developers.

And I think long-term, the back half of your question there on the store buyback, at some point, we might bundle some of these stores and do some type of financing transaction with them.

But we are in no hurry to do that.

Again, the stores that we have bought back have been outstanding stores that we want to keep for a very long time.

So you're actually, just to get a new story opened, you are not using your own capital?

No.

Okay, great.

And I do have just one final question.

I was very pleased to see the stock buyback.

You did say that you are at your limit now in terms of what the -- this bank facility permits.

But I am just wondering why now?

What made you decide to do it now?

I think, Meredith, as we look at our capital structure, and first and foremost, and I have said this many, many times, our number one priority continues to be investing in the business.

Our opening new stores, doing relocations, remodels and having the infrastructure to support the stores, both inside and out, whether that be distribution centers or creative, innovative things we are doing within the four walls of the store.

We have reached the point now on our debt levels and after having some meetings with the credit rating agencies in September where we feel like the overhang issue with Buck Holdings will probably prevent us from being investment-grade until we do something about that.

We also believe that because of where we are on our ratios, we can go out in the marketplace and get, if not investment-grade interest rates, very, very close to investment-grade interest rates.

That is the main reason that we want to be investment-grade, anyway, is to get the lower-price financing.

So we think this is an opportunity to return cash to our shareholders and -- in a very productive way.

And, again, as we mentioned it will include a direct purchase from Buck Holdings, which addresses the issues with the credit rating agencies and, ultimately, down the road, should leverage us to a formal investment-grade.

Great.

Thank you very much.

Deborah Weinswig, Citigroup.

It is actually Shane on the line for Deb today.

Just wanted to dive into your e-commerce business and just what learnings you guys have had over the last few months, and then how Cyber Monday and things like that panned out for you guys.

The e-commerce side is up and operational -- pleased to say that.

We are adding SKUs to it almost on a weekly basis now as we grow the size of the site.

I will give you an interesting observation.

All of the electronic items we had in the stores were also on that website.

All of the electronic items sold out within three hours, which we thought was really amazing.

The business is building.

As I have said before, you know, it is not like it is going to be a large part of our sales long term.

It is more of a convenience for our customers and really gives us a lot of awareness when they go into new markets.

But, yes, it is moving along at a steady pace.

Great.

And then just kind of talking about the sourcings, moving into new countries, can you expand on that a little bit and what you're doing there, and what your people on the ground are saying?

Yes; I will let David take that.

Yes; we continue to build our sourcing efforts.

And we have mentioned before, we are looking in different areas of China, going more North and more Western in terms of where our presence is going to be felt.

But just to give you a flavor of some of the things that have happened very recently in the breadth of what we are doing, we are sourcing pickles out of India right now.

We are doing aluminum foil out of China, denim shirts out of Kenya and bandannas out of Pakistan.

So we continue to really expand our foreign sourcing efforts and we see that even getting broader and broader as we move forward in this effort.

So stay tuned there.

We still think there are a lot of legs on foreign sourcing.

And of course, as you know, that helps take cost out of the business anytime we take an item and take it overseas.

Interesting.

Thanks a lot, guys, and a great quarter.

Aram Rubinson, Nomura.

It is actually [Ed Raiche] for Aram.

First of all, just a little bit on the competitive environment.

You signaled the past couple quarters that there might be a little gross margin compression, and that has come to pass, but it hasn't really hurt your results at all.

You have had some terrific unit and dollar market share gains.

Would you say the response has been stronger to your pricing strategy than what you might have expected?

Yes, another really good question.

I tell you, the competitive environment, particularly if you look at what happened around the whole Black Friday, Black Friday is turning into Black Friday week.

People are pulling stuff forward.

I think the competitive environment is -- I think it is very, very competitive, but it is not irrational.

It is not like people are out there doing crazy things.

I will say though that everybody is working the value message incredibly hard, whether it be EDLP or whether it be promotional markdowns.

I think the consumer is traveling across multiple stores and multiple channels more than we have seen in the past.

Thanks for that color.

And then one other question, as the DG Market starts to become a bigger component of your store growth, one of the benefits we see is that you get more square footage growth for each new unit.

Could you speak to some other effects on the P&L?

For instance, EBIT margin impact?

Thank you very much.

David.

Yes, I think the key on the DG Market is the sales volume that it generates.

Keep in mind DG Market has an average sales of $4 million to $5 million versus the $1.4 million that we see out of our regular box.

And we have several stores that last year in fiscal year 2010 produced over $9 million in sales.

So this is a volume piece of the equation in terms of what it provides to us.

The raw margin dollars and profit dollars that we get out of a DG Market is very impressive.

Now the mix is more consumable, so the margin percent is somewhat lower, but again, the dollars, the raw dollars we get, because of the volume, is very impressive.

We also think there is opportunity in smaller markets that are what we would call food deserts to add tremendous volume, where we can go into a town that really needs a DG Market and get a lot of volume and get a lot of market share.

So that is really the way that we are playing the DG Market.

Ed, did that take care of your question?

Yes, thank you.

Joseph Parkhill, Morgan Stanley.

Congrats on a good quarter.

Along those lines of consumables, from a long-term perspective, do you think there is a proportion of sales where your consumables will actually max out at?

Like -- and along those lines, is there an amount of mix-shift in consumables that you feel comfortable with in offsetting from a gross margin perspective?

Yes.

You know, what we don't want to be long term, Joe, is a 7100 square foot grocery store.

We have said that all along -- the importance of getting the nonconsumable side to be as productive as the consumable side.

Having said that, though, our whole merchandising strategy is building around letting the customer vote with what they have got in their pocketbook when they have got it.

So I have never really stood up and said, geez, I would feel really good if it was 60/40, 75/25 or whatever.

We are going to let the customer decide that.

But what we are going to continue to do is work on ways of taking cost out, so we can pass that on to consumer in terms of everyday low price.

And as we get better, I think, on the nonconsumable side, I think we're going to see that start to accelerate again.

And remember, the work we have done on the consumable side, it has been the Haba items we've introduced; all of the private brands we've introduced; the whole $1 items we've introduced in consumables and GA.

So we have actually caused some of this ourselves.

Right.

And then from a margin perspective, this quarter, you had about 150 basis points of mix-shift and ex-LIFO gross margins would have been flattish.

Is that a rate that is sustainable, or were there some puts and takes that (multiple speakers)?

So as we look at the third quarter, obviously, the three big impacts were the LIFO charge that we had, the sales mix that you mentioned and then the transportation costs, because of the price of fuel.

And, again, as we look at fourth quarter we see fairly -- in terms of the impact -- fairly similar to what we have seen the first part of the year overall in terms of the basis points that we are anticipating deleveraging in the fourth quarter.

So, yes, we do see that continuing as we move forward into the fourth quarter.

I think, too, Joe, when you look at the consumable/nonconsumable mix in the third quarter, the rate of movement into the consumable side actually slowed down a little bit compared to the two previous quarters of the year.

Okay, thanks.

If I could just ask your intentions on repaying debt next year -- has that changed at all with the share repurchase, or do you still intend to --?

Yes, I think, again, as we look at the next year, there are two pieces of the debt to talk about.

The first one is the revolver -- our asset based lending revolver.

And that becomes due in July of 2013.

So as we enter next year we will be looking at refinancing that.

And obviously that is just a refinancing.

And a lot of that will depend upon the market and how we see interest rates going and when we think be an opportune time to do that.

On the sub.

debt, the $450 million of subordinated debt, you are probably aware that becomes -- we can purchase that at a [1.05%] price in July of next year.

The current thought process on that more than likely is that we will do a refinancing on it and roll it into some type of much lower cost debt than the interest rate that it is at.

And, again, the feeling is based on what we are hearing from the credit rating agency that the goal of taking -- getting the overhang out of Buck is probably the -- what is more important than taking debt down in terms of getting us to investment grade.

So we're focusing a little bit more on that overall.

And of course we are very comfortable with our debt, where it is today in the leverage ratios that the company is living under.

Very helpful.

Thank you.

Matt Nemer, Wells Fargo.

This is actually Trisha Dill in for Matt.

Just a question on the apparel sales decline -- do you think any of that weakness was related to weather during the quarter?

And then given the strength of some of the basics, should we expect you to accelerate any of those changes or further refine the percent allocation to basics?

Yes, you know, it was a little bit warmer, to be honest.

I would not say -- I would not attribute it to the weather.

I would say it is an example of a discretionary purchase that our customer can hold back on.

And I think a lot of the more fashionable things in apparel are not going to get any better until we see a major change in the macro economic environment out there.

I do think that staying focused on fashion, the basic items, the colored T-shirts, we talked about with pockets and things like that, I think our customer continuing to respond to that, and we are going to stay focused on that for now.

Okay.

And then just given the decline in apparel, how are you thinking about the potential markdown risk in 4Q, and I guess in general, how are you thinking about markdowns and promotions versus last year?

You mentioned the competitive environment.

It is rational, tut is there room in guidance to be a little bit more promotional in December and January if need be?

Yes.

We are very comfortable where our markdown budget is across every side of the business right now.

We pretty well know where we are going to be.

Okay.

And then just lastly within home, you mentioned a few categories that performed well --towels and bedding.

Other than just SKU rationalization in the category, can you talk about what you have done to drive this increase?

Those categories don't appear to be entirely needs based, so any color on what you have done there to drive that?

I have to say our towel program this year, in terms of the quality of the product, and we are more fashion relevant in regards to color.

And I think also part of our strategy that we are learning about is that we need to turn our nonconsumables more frequently.

And then our customer comes in once a week or once every other week and what we need to be able to do is have something different for them to see.

And that is part of what we are embarking on.

And some of the strategies that -- some of the areas we are starting to see is we are turning the product a little faster.

Okay.

And then just lastly, can you provide an update on the beer and wine rollout?

Yes, continue to be pleased with the beer and wine.

We are in about 3500 stores now or about 40% of our chain.

And I will tell you when beer is in the basket, those stores have a 1% additional comp, so we are real pleased with what we are seeing.

Great.

Thanks very much.

Anthony Chukumba, BB&T Capital Markets.

Just had a couple of questions related to real estate and new store openings in particular.

Just wanted to clarify, what are your projected store closings for this year and then for next year?

You know, it is usually, Anthony, a handful of stores here.

Maybe about 50.

Yes, right now we are about 40-ish, and we are thinking probably about 50-ish, somewhere in there.

Okay, so 54 for this year and also 50 for next year.

We haven't arrived at next year, but that number is pretty consistent if you look back over the last four years of the company.

Okay.

Okay, that is helpful.

Then just a little bit of a bigger picture question on new store openings -- you mentioned 7% square footage growth next year.

Family Dollar is obviously getting more aggressive with new store openings, as well as their store remodel program.

Dollar Tree continues to open stores.

Obviously, they are a little bit of a different animal.

How do you think about long term?

Are you concerned at all with everyone open -- pretty aggressively opening stores that you might get to a point where there is just too many dollar stores in the US?

How do you think about that?

Yes, that is really a good question.

I'll tell you a stat I got this morning, which blew me away, is that the number of dollar stores is now larger than the number of drug stores in the United States today, which is the first time that has happened.

I think the advantage -- obviously, there is a saturation point.

But our work now tells us there is 8,000 existing opportunities in the states we are in.

There is another 3,000 to 3,500 opportunities in the states we are not in.

So there is 11,000 opportunities to grab out there.

And the other advantage to our model is they don't have to be 25 or 30 miles apart.

They can be much closer together, because our trade areas are smaller.

And remember one of the driving pieces of this model is not only the value equation the customer gets, but the convenience angle as well.

Okay, that is helpful.

Thank you.

Scot Ciccarelli, RBC Capital Markets.

This is Austin Pauls on for Scot.

My question is on store traffic.

You noted that your comp in 3Q came from both traffic and ticket.

And I am curious on the traffic increase, is that additional visits from your existing customers or are you actually attracting new customers into your store?

It is actually both.

Okay.

And then I guess a broader question then on your customer profile and maybe how that has changed over the past year.

I know you've talked about, over the past couple of years, attracting some consumers that were maybe trading into the category and had never shopped a Dollar General before.

So I am curious if you're still seeing that and whether the trade in customer, whether they are sticking.

Yes.

As a matter of fact, it is interesting you brought it up.

We talked the last quarter about our core customer, the trade-in customer and the trade-down customer.

the trade-down customer and trade-in customer are still our fastest-growing segments right now.

Now when I say that, though, I don't want to lose sight of the fact that our core customer is still 59% of our shoppers and still 83% of our sales.

But this idea that people are trading down and trading in and sticking, that is playing out.

Okay, great.

Thanks a lot.

Charles Grom, Deutsche Bank.

Just of the 625 stores you're opening this year, how many are in new markets?

And then when you look at the 625 you're going to open up next year, how many are going to be in quote, unquote new markets again?

Yes; I will let David take that.

Yes, it looks like 96% of them are in existing markets, and 4% in new markets in terms of what we are doing right now.

And next year -- and again, this can change looking at as we go forward, but you're probably looking at somewhere about 10% in new markets; 90% existing markets.

Okay, so not a major change.

Okay.

Then on the new markets, how would you expect the new store comp waterfall to shake out?

You mean (multiple speakers) cycle?

Yes; and as you -- historically you guys have had a pretty consistent comp out of the gate, 11% year one, 7% year two, year three around a 5%.

Would you expect it to be similar?

Yes, I don't -- I wouldn't expect it to be any different, Chuck, to be honest with you.

And, you know, we are entering two entirely big markets here.

So I think I need to give you a little more view on that when we get a little closer, but I would model it the same way for now.

Okay.

And then just to switch gears, on the commitment to lower prices, could you just dissect broadly which product categories you have chosen to keep prices low.

Do they tend to be more of the KVIs as opposed to the second tier?

Yes, it is more of the goods stuff, to be honest about it -- paper, chemical, a lot of food items.

What we are really watching, Chuck, as I've said before, is particularly price points, right?

The $1 price point is very, very critical for our customer.

And everything we're doing is exactly like we have said all along.

We make our price adjustments, and if we see a significant erosion in units, we back it back off.

Okay.

And then just one quick housekeeping -- on the full-year EPS guidance of $2.29 to $2.32, could you just quantify the EPS lift that you're going to get from the extra week?

Yes, we think it is approximate --

Earlier in the year -- Chuck, it is Mary Winn -- earlier in the year we had stated what that was back at the time that we first issued our guidance.

Was it about $0.05 to $0.06, something like that?

Yes, that is correct.

Okay.

All right, great.

Nice job.

Operator, I think we have got time for maybe one more question.

Mark Montagna, Avondale Partners.

A couple quick questions, just regarding gross margin and SG&A.

When you look at the SG&A for next year, you were talking about the Alabama impact with the distribution centers and also California.

Wondering with -- assuming you achieve a mid-single-digit comp, should the payroll management software more than offset the additional expenses related to the DCs in California?

Yes, we have several things we're working on in terms of assets.

And of course, we haven't finished our budgeting process yet, so it is a little preliminary to lock and load on any number, but certainly, the labor standards from work force management will continue to help us as we move forward.

And as I mentioned earlier, as we mature in terms of using that and understanding that tool and using it even better, we think there is still more to come out of that.

The energy management systems that were mentioned, again, right now we are thinking we will be in a little over 8,000 stores at the end of fourth quarter.

And as we roll into next year, you will get the impact of having those in the stores for a full year, and then we will obviously finish up putting them in the stores.

We think there is still room in damages in terms of how we receive the product from vendors.

And then just a full-court press on things like supply, shopping bag usage, maintenance in the stores, rent, continuing to look at ways to take costs out of rent, as we renegotiate contracts.

So a lot of things going on that should help provide offsets to the items I mentioned earlier.

Okay.

And then just regarding the gross margins, curious about the merchandise margin gains that you should be able to get from apparel and home.

Is there a certain point where we should expect to see the merchandise margin improvements in these two categories?

I need to reflect on that one for a minute.

Logically, yes.

I have to say that as I think about it, Mark, that while we have made some improvement, there is enough areas out there where we still have to work on it.

So I think it is going to be a period of time using sourcing, allocating the space, getting a little more work done on allocation of space, and then I think we will get there.

I just can't -- I don't want to be a 7,100 square foot grocery store.

And it is one of those things we have to work our way through to yet.

Okay.

All right, that is great.

That was all I had.

Thank you.

Thank you, Mark.

All right, operator, I think that will wrap it up for us from a time standpoint, but just thank you to everyone for joining us on the call today and thank you for your interest in Dollar General.

Please feel free to give me a call if there is anything that I can help you with.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect at this time.