達樂 (DG) 2012 Q1 法說會逐字稿

Ladies and gentlemen, this is that Dollar General Corporation first-quarter 2012 conference call on Monday, June 4, 2012 at 3.30 PM Central time.

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

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

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

Thank you, Jeff, and good afternoon everyone.

On the call today are Rick Dreiling, our Chairman and CEO, and David Tehle, our CFO.

A couple of things before Rick begins.

This afternoon, we filed a preliminary perspective 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 offering is pending and there can be no assurances as to when it may be completed, if at all.

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

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

Next, I'd like to remind you all of our upcoming investor conference in Nashville on June 25 and 26.

If you would like to register, please feel free to call me or send me an e-mail and we will get you the information.

Now to the first-quarter results.

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

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 2012 forecasted financial results and initiatives, expectations regarding potential debt and share purchases, debt refinancing, and capital expenditures and comments regarding expected consumer 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, guided, intends, will likely result or 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 afternoon, our 2011 10-K which was filed on March 22, and in the comments that are 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 afternoon's earnings press release which can be found on our website 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.

Now it's my pleasure to turn the call over to Rick.

Thank you Mary Winn.

Good afternoon and thank you all for joining us today.

We had another record first quarter and we are on track for a great year at Dollar General.

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

Our total sales increased 13% over last year to $3.9 billion.

Same-store sales grew 6.7%.

Both customer traffic and average ticket increased for the 17th consecutive quarter.

Operating profit, excluding a $13 million litigation charge in 2011 and the secondary offering expenses in 2012 increased 15% to $385 million, or 9.9% of sales.

Interest expense was down $28 million and adjusted net income increased 29% to $215 million.

Adjusted earnings-per-share increased 31% to $0.63 per share.

Sales were strong in every department in our consumables and seasonal categories and the positive sales momentum in home continued.

We're very pleased with the sell-through of our holiday seasonal merchandise, including Valentine's Day and Easter.

Spring and summer seasonal sales had a strong an early start due to warmer weather and our improved product quality and assortment from our global sourcing initiatives.

I'll talk more about our operating initiatives in a moment but now I'd like to turn the call over to David.

Thank you, Rick, and good afternoon everyone.

Rick covered the highlights of our first-quarter sales performance, so I will start with gross profit.

Gross profit dollars increased 13% for the quarter with a 2 basis point decrease in gross profit rate, or essentially flat year-over-year at 31.5% of sales.

This performance was better than we had anticipated going into the quarter for a number of reasons.

First, we leveraged distribution and transportation costs even though average fuel, diesel fuel rates were up about 7% and we brought two new distribution centers online in the quarter.

Also, year-over-year shrink was favorable and markups on beginning inventory were higher than last year.

Finally, the LIFO provision in the quarter was $1.6 million compared to $3.6 million in the 2011 quarter, a 6 basis point favorable impact.

These factors were offset by higher markdowns and a greater mix of consumables.

In part, the increased markdowns resulted from our new apparel strategy and were anticipated.

We're very pleased with the gross profit rate for the quarter.

Our two new distribution centers ramped up more efficiently than we anticipated, and our category management processes have continued to be very effective.

SG&A expense was 21.6% of sales in the quarter, a 20 basis point improvement after excluding $1 million of secondary offering expenses in the 2012 quarter and $13.1 million related to certain litigation settlements in the 2011 quarter.

The 20 basis point improvement was primarily the result of our increased sales and more effective utilization of store labor which was due to benefits from our workforce management system.

Also, our mining for cost reductions mindset continues to be a benefit.

For example, our cost reduction efforts affecting store rent and other expenses contributed to the overall decrease in SG&A as a percentage of sales.

Several expense items increased at a higher rate than our increase in sales, including fees associated with the increased use of debit cards, costs associated with opening our new distribution centers, and higher workers compensation and general liability insurance and advertising costs.

Even though our workers comp costs increased year-over-year due to more stores and labor hours and higher medical costs, our incident rate continues to decrease thanks to safety efforts in our stores and DCs.

Again, we're pleased with our ability to effectively balance sales, gross margin and SG&A resulting in strong operating profit growth.

Interest expense decreased to $37 million in the 2012 quarter compared to $66 million in last year's first quarter as the result of our debt reduction and refinancing.

The effective income tax rate for the quarter was 38.2% compared to 38.1% in the 2011 quarter.

First-quarter net income increased 36% to $213 million compared to net income of $157 million in the 2011 quarter.

On an adjusted basis, net income increased 29% to $215 million compared to $166 million last year.

Adjusted earnings per share was $0.63 per share, a 31% increase.

We generated $193 million of cash from operating activity, down $31 million from last year's first quarter.

Net income was higher, partially offset by higher income tax payments.

In addition, there were timing and mix differences in our domestic merchandise payables.

There were no policy changes or significant business trends that caused this shift.

Partially offsetting these items were reduced bonus and interest payments.

Our 53-week fiscal year in 2011 is also affecting certain of our working capital accounts but we expect this impact to be minimal by the end of 2012.

As of May 4, total inventories were at $2 billion, up 13% in total and 7% on a per store basis, in line with our sales growth.

Our inventory turns were 5.3 times.

We have seen improving in-stock levels even as we continue to focus on inventory reduction.

Capital expenditures for the quarter totaled $146 million, including $33 million related to new leased stores, $36 million for stores we purchased or built, $41 million for upgrades, remodels and relocations of existing stores, $31 million for distribution and transportation, and $4 million for information systems upgrades.

During the quarter, we opened 128 new stores and remodeled or relocated 224 stores.

On April 2, we purchased 6.8 million shares of our common stock for $300 million concurrent with the closing of a secondary offering, funding the repurchase with $300 million in borrowings under our revolver.

Given the seasonality of our cash flows and ability to execute additional share repurchases, we currently expect to go back to our Board of Directors for additional authorization in the fourth quarter of this year.

At the end of the quarter, we had outstanding long-term obligations of $2.88 billion, down $382 million from the year prior with a much lower average borrowing rate.

We continue to take steps to positively manage our debt structure and maturity ladder.

On March 30, 2012, our term loss facility was amended and restated to extend the maturity on $880 million of the total $1.96 billion facility to July 2017 from July 2014.

In addition, the new terms provide for the ability to refinance our existing senior subordinated notes with senior notes and provide additional capacity to make investments, restricted payments and debt repayments.

Further, in April, S&P raised our credit rating to BBB minus, the first level into investment grade.

There are numerous benefits of the investment grade rating which should favorably impact our borrowing, rental rates and our collateral and covenant requirements.

Now to guidance.

We've had a strong start to the year.

Based on our first-quarter results, we're raising our full-year earnings guidance by $0.03.

Earnings-per-share adjusted is now expected to be approximately $2.68 to $2.78 based on approximately 336 million weighted average diluted shares.

Previous guidance was $2.65 to $2.75 based on 335 million shares.

We currently expect total sales to increase between 8% and 9% over the 53-week 2011 fiscal year or between 10% and 11% on a comparable 52-week basis.

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

Adjusted operating profit is now expected to be in the range of $1.62 billion to $1.66 billion compared to previous guidance of $1.60 billion to $1.65 billion.

Interest expense is still expected to be in the range of $145 million to $155 million based on our intent to redeem our senior subordinated notes through a refinancing at the first scheduled call date in July of 2012.

The full year 2012 effective tax rate is expected to be between 38% and 39%.

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

Capital expenditures are expected to be in the range of $600 million to $650 million.

As our first-quarter performance indicates, I believe we are well positioned for future growth.

Our employees are executing on our plans to win with our customers as we stay true to our EDLP strategy.

This results in a bright financial outlook for 2012, allowing us to continue to invest in the business for sustainable growth, drive returns and generate significant operating free cash flow.

I look forward to seeing everyone and sharing more insights about Dollar General at our upcoming investor day.

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

Thank you, David.

We had yet another great quarter and we are focused on growing and improving every day as we continue to build loyalty with our customers.

In our investor conference later this month, we intend to share some new insights into our customer, her spending habits and a few things that have changed in recent years.

But the ultimate measure of customer trend shows up in our continued strong market share performance as measured in syndicated data.

Over the last 12 weeks, 24 weeks and most importantly 52 weeks, our consumables consistently gained share in both units and dollars against food, drug, and the mass retail channel.

In our year-end conference call, we discussed our most significant operating initiatives for 2012 and here is a quick update.

First, store growth.

Through the first quarter, we opened 128 new stores, including eight Dollar General markets and seven Dollar General Pluses, which are our new larger format stores.

The DG Plus stores have an expanded cooler section for convenience, wider aisles for shopability, and increased linear space for better in-stock position.

This larger format layout is driving a higher basket as we continue to offer our customers both value and convenience.

In addition, we remodeled or relocated 224 stores in the quarter, including 12 Dollar General market remodels and 20 Dollar General Plus stores.

We opened 11 new stores in California and also added our first store in Massachusetts.

These new states are all off to a great start.

At the end of the first quarter, we had 10,052 stores in 40 states.

To support our stores, we opened a new distribution center in Bessemer, Alabama and another in Lebec, California in the first quarter.

We're very pleased with how well these DCs are performing.

Currently, we're shipping approximately 700 stores out of Bessemer and 100 stores out of Lebec.

Later this year, we plan to begin construction on a distribution center to support our store growth in the Northeast.

Our category management efforts are ongoing.

We made great progress on implementing Phase 5, our initiative aimed at optimizing shelf space to reflect demand in the stores based on geography, demographics, and actual customer experience.

In typical DG fashion, we began a test and learn of this concept to 2011 and have already impacted more than 5000 store=specific planogram changes out of the potential for 40,000 to 50,000 opportunities.

This is a multiyear initiative designed to drive productive sales growth that our store managers and teams are excited about implementing for our customers.

We continue to move forward with adding items at the $1 price point.

Currently, about 26% of these items in our stores are currently -- excuse me 26% of the items in our stores are $1 or less.

That's up 150 basis points from the beginning of 2011.

We are very pleased with the results of our cooler expansions.

Most of our new stores are being built with 16 cooler doors and we expanded the number of coolers in over 500 of our traditional stores in the first quarter.

As I mentioned earlier, we had strong performance in many of our non-consumable departments in the quarter, including hardware, toys, summer seasonal, housewares, and domestic.

Apparel sales overall continued to struggle but there were several positives in the quarter, including infants and toddlers, ladies' sleepwear, and under garments and accessories.

Hanging apparel in particular continues to be an area where we believe we can improve our results.

We are executing our fresh approach to apparel pricing as we are adding in-season promotional events and we are flowing new apparel to the stores more frequently so that our customer sees fresh merchandise more often.

We are making further progress in improving our in-stock levels, contributing to an enhanced customer shopping experience overall.

Out-of-stocks through the first quarter were down 30% from a year ago.

This is an ongoing effort, and we believe that our focus in this area can continue to drive sales growth going forward.

We believe the initiatives are contributing to the positive results we are seeing in our customer service scores.

The success of the Dollar General business model has always been based on everyday low price commitment and we are unwavering in that commitment.

We are convinced that the EDLP strategy is one of the things that distinguish Dollar General in the minds of our loyal customers.

With only 10,000 SKUs, we believe that our customer is incredibly sensitive to all of our price movements.

We've used our price optimization tool to support -- in support of the EDLP strategy since 2009 to help us deliver our margin targets while also maintaining that strong competitive price position.

But are very careful in the way we use this tool.

In support of zone pricing, the tool generates both price decreases and increases but we always make sure we ultimately protect our unit growth.

So that is the critical measure of success of our pricing approach in the long run.

We currently have eight zones for pricing.

In general, our approach to zone pricing is to keep it simple, supporting a consistent price image across our stores.

As David mentioned, our store workforce management system has been instrumental in helping us more effectively manage labor costs while improving our store execution and overall customer experience.

We are continuing to improve the quality of reports and communications between the store managers and the district managers.

We believe we have additional opportunities to utilize this system to help streamline work in the stores.

We are also moving forward with the implementation of our new supply-chain system which we expect to complete over a multi-year time frame.

As we said before, this project spans the entire organization with a goal to reduce costs, increase efficiency, and improve margin.

From master data management, merchandising assortments and in-store operations to forecasting and replenishment, distribution and supplier management, we will have an end-to-end capabilities for our supply chain.

In summary, we're improving our operations across the board and believe we have a long runway for continued success.

While it's still early, I am pleased with the start of the second quarter.

We're building our systems and our teams to support long-term consistent and sustainable growth.

Before we take your questions, I wanted to thank our over 90,000 Dollar General employees and our new teams in Bessemer, Alabama and Lebec, California.

We have a great team now from coast to coast.

Now we will take your questions.

Mary Winn?

All right, thank you.

So we will take the first question please.

John Heinbockel, Guggenheim Securities.

So couple of things.

If you look at SG&A, the run rate had been sort of in the high single digits.

You know, it bumped up here to 12.

So how much of that to you look at as timing and more transitory versus something that's more structural?

I guess how much of that was the growth initiatives in the DCs in California?

Definitely a piece of that has to do with the growth initiatives, both in terms of incremental advertising costs that we had in the quarter that we will continue to have in the second quarter to support our California effort, and then the cost, as we mentioned before, as the distribution centers come up to speed before they start shipping, a piece of that cost goes to SG&A because it can't be capitalized into inventory.

That definitely hit in the quarter also.

For the full year, our goal remains to leverage SG&A as we told you've before.

Again, we don't give specific quarterly guidance on that, but clearly there are a few items hitting there that we've mentioned that are causing SG&A to be a little bit higher that won't be there as we get on an ongoing basis more back to an average run rate for the business.

Nothing has changed when you look at the various expense items, nothing has changed structurally?

That's correct, nothing has changed structurally.

Okay.

Secondly, Rick, you talked about DG Plus versus DG market in terms of differences in returns, how you think about where you put a Plus versus the market, distinguish the types of locations between the two, and then do you think DG Plus has more potential when you look out over 5 to 10 years than market would?

Yes, great question John.

You know, it's still really early as far as the returns are and we're continuing to work our way through them.

I will tell you I am pleased with the progress we're making on both the Plus and the Dollar General market.

I view the Dollar General Plus, John, as the opportunity where we anticipate doing larger volume.

I think, if you think in terms of the 7300 square foot store, that store gets really constrained when you start doing $1.7 million, $1.9 million a door, and the DG Plus affords us the opportunity with incremental refrigerated space, wider aisles so two carts can get by and of course additional linear footage to help us with our in-stock.

The DG market we are still very excited about.

We think that gets us the opportunity to differentiate ourselves in smaller rural markets as well as perhaps the urban environment down the road.

What we promise to do is keep you guys up to date as we move through the year on all of this.

Alright and then one last thing.

When you look at non-consumables, do any categories jump out where you think you need to increase assortment where you think there's a market opportunity be it at housewares or toys or is there something that jumps out as unique opportunity to add assortment in?

Yes, I would say, John, as I look across the non-consumable side, I'm very pleased with where we're going in seasonal.

We are doing a lot of hard work on it again, as much improvement as we've made, hitting it really hard again toward the end of the year.

You have to say what we're seeing in home decor, what we are seeing with window treatments, items like that, I'm pleased with what I'm seeing there.

Our struggle continues to be hanging apparel and we're still working on that.

We will move to the next question please.

Charles Grom, Deutsche Bank.

Good afternoon.

Just to follow up on the last question on the DG Plus, what do you guys think the market potential is for the Plus stores?

Just to clarify, are those three models or are they actually new stores that you guys are opening?

Yes, great question.

It's actually a combination of both.

We have remodeled some higher-volume Dollar Generals to see if we get a bigger leap with the additional space, or relocated them rather.

Then of course some of them are out of the ground.

And in terms of what is the long-term potential, we really have not called that out yet other than to say, Chuck, we are pleased with what we're seeing at this stage of the game.

Okay, fair enough.

Then on the comp, can you give us a little bit of clarity on the traffic and ticket during the quarter and also how it trended?

I guess my follow-up though would be, given the strength, why not raise the comp guidance for the full year and keep it at 3% to 5%?

We saw traffic and ticket both increase through the quarter.

The cadence through the quarter, as you can imagine with the shift in Easter, we had a good start in February, had a great March and of course it slowed a little in April.

But if I took an added margin and April together and divided by 2, you would say to yourself you had a really good April and March.

To be honest with you, we feel good with what we're seeing in May, but it's too early in the year to really step out and up the guidance.

What I'd rather do as you guys at the end of the second quarter after we've got one more quarter and tell you to -- give you a feel for the year.

There's just there is so much chatter with the election.

You saw what happened with unemployment.

There's just a lot of noise right now, and I would just like a little more time.

Okay.

That make sense.

Then just as a follow-up to that, any major changes on the competitive landscape, whether it's with FDO or with Wal-Mart?

You know, if I look at the overall competitive landscape, I would say that it's actually a little calmer than we've seen the previous couple of quarters.

You know, you look at our numbers that we posted in the first quarter where we're certainly doing -- controlling what we can control, so feel pretty good about the competitive environment now.

Next question please,

Deborah Weinswig, Citi.

Good afternoon.

Congratulations on a great quarter.

Thank you.

So what inning do you think you are in with regards to improving out of stocks?

I would say we are probably -- how about I do it to a football game, I'm a big football fan.

I would say first quarter.

Okay.

Then can you update us on your new apparel strategy?

You know, we started the apparel strategy.

We're doing the more promotional pricing.

We are pricing very much like you'd see when you would go into a more traditional seller product.

I can say that we've seen some traction in infants and toddlers.

We're doing a little bit better in men's.

The important thing is that we are seeing units improve.

While we're still struggling on the overall sales number, we're starting to sell more of it.

I think we're going to have to give it a few more months to unwind.

Our new VP stuff doesn't really start to show up until September.

Okay.

Then the last question -- how should we think about the current margin benefit from global sourcing?

You know, we continue to work on our sourcing efforts.

Overall, the receipts grew in the first quarter versus a year ago.

It continues to be one of our largest items in terms of where we're going to get long-term margin growth.

We've opened up, we're in the process of opening an office in Turkey and one in northern China.

We continue to work on ways to increase that effort\, so I think getting a little bit more into consumables also on sourcing, so we're pretty pleased with that effort right now.

Great.

Thanks so much and best of luck.

Next question please.

Our next question comes from Aram Rubinson, Nomura Securities.

Everybody, thanks for taking the question.

You bet.

Good afternoon.

Two questions.

First is if you can give us some line of sight into fresh and how these supply chain is perhaps being reworked to allow that over time to find its way into the 10,000 stores that you've got out there?

Yes.

In regards to the fresh items, we're still using the outside companies that we have dealt with before.

While we're moving a lot of product overall, it's still a small amount of product on a store-by-store basis.

We used two companies to help us.

We used [Armor Eckridge] in the base stores and the Plus stores and we used Nash Finch on the DG markets.

Thanks.

So in terms of rolling that forward into the core Dollar General stores, we're still not quite at that point where we're ready to roll out fresh into that assortment?

Yes sir, that's correct.

Okay.

Then just to follow-up, if you can give us a little line of sight into LIFO?

That was a little bit more favorable than it's been.

Any idea on how we should think about full-year there?

Thank you.

Yes, the LIFO charge in the quarter was $1.6 million versus $3.6 million in the prior year.

Right now -- and again, this change is obviously every quarter and changes depending upon what vendors are doing on prices, but our best thought process is that somewhere between $8 million and $10 million in total for the full year.

Okay thanks a lot.

We will see you in a few weeks.

Thank you.

Jeff we will move over to the next question.

Thank you.

Our next question is from Matthew Boss, JPMorgan.

Hey, you guys mentioned earlier that the mix of $1 price point items has increased 150 basis points since 2011.

What would be the total mix today and what's been the initial impact on the overall basket?

Yes, we're at slightly north of 26% now.

In terms of the change in the basket, I can't -- Matt, I don't know what that is at the top of my head.

I can't say this though, that we added the $1 items and we are not suffering any kind of cannibalization with the items we added in.

So to give you an example, we put in anywhere from 12 to 16 foot worth of $1 HBA and assorted items and it didn't erode our margin and it didn't cost us any sales, so it's all incremental.

So our feel is it's a purchase we weren't getting.

Okay great.

Then second question -- can you talk about the initial performance from your California store, your California store rollout?

Yes.

We have right at 10 stores in California and they are exceeding our real estate performance, so are doing much better than we thought we would be doing.

Jeff, we will move on please.

Dan Wewer, Raymond James.

I want to follow-up on your comments about marketshare capture from the drugstores to retailers and mass market.

So in thinking about the drugstores, you're obviously winning on a pricing advantage.

I'm assuming break even on the convenience niche.

On the other hand, when you're taking share from the mass-market, you're probably winning on convenience, breaking even on price.

Is that the way you think about it?

Of those three channels, which one do you think is the most vulnerable to yourself and your competitors?

Yes, I think you called it perfectly to be -- yes, I think you called it perfectly.

If you look at the Nielsen data, we're gaining share from grocery first, drugs second, and mass third.

So that would be kind of how I would look where it's coming from.

Grocery winning on the convenience niche?

You know, I would think, on grocery, you're winning on price and convenience to be honest with you.

I could see both.

How do you see those three channels responding to your success?

I can't imagine they're just going to sit there and not do anything to defend their market share.

You know, I think the issue is we deal -- if we look at all the consumable retailing, it's an $800 billion pie.

I think what's going on is that we're taking a little bit from a lot of different spots, and it's really hard to really focus on just us.

So I think when we -- as long as we stay true to what our formula is, which is everyday low price and convenience, and don't get into the trap of going high/low, I really believe that we're going to be able to move the business.

Then the last question I had is on the sales productivity, the Plus and the market stores.

When you think about the extra 2000 or 3000 square feet in a DG Plus, are you seeing any diminishing returns on sales per square foot?

Or is actually increasing because space you're devoting is primarily in consumables?

Yes, the sales per square foot is going up.

It's a question now of us managing our way through what it cost to build them and the marketing team is continuing to work on the mix, so it's a matter of fine-tuning the vehicle.

Thanks.

We'll move onto the next question please.

Joseph Parkhill, Morgan Stanley.

Thanks.

I was just wondering if you can maybe talk about your comps accelerating over the last 12 months.

Where do you think, from an income level perspective, that's coming from?

Are you seeing incremental trade-down from a higher-income consumer or do you think the lower income consumer is feeling a little better?

And maybe talk about paycheck cycle, if you're seeing how that compares to the prior years?

Sure, Joe.

I would say we are still growing our share of wallet with our existing customer, and there's been no change.

And the fastest growing customer segment we have is $70,000 or more per year.

So I would say you're continuing to appeal to your core customer and at the same time the changes we've made or that we've made over the last four years are continuing to be recognized by the trade-down and trade-in customer.

I apologize.

I forgot the second part of your question.

If you could comment on just the paycheck cycle, if you're seeing it, how pronounced it is.

Yes, I will tell you that paycheck cycles are as pronounced as they have been the last 18 months, and there's been no change in that.

Every indication is that our customer is still very much affected by what's going on and there's been no change in their sentiment at all, just to be straight.

Okay, I appreciate that.

Then just a little bit on how do you feel that weather impacted Q1?

Do you think it pulled forward a little bit of demand, or how are you thinking about that?

I mean I --

Yes, that's a great question.

We have felt all along that a couple of things happened January, February, particularly number one is the warmer weather.

I think while the warmer weather also put more money in people's billfolds because they didn't have the big heating bills, so I think you had -- the customer had a little more money and I think they spent it.

And I have said for some time here -- Mary Winn is getting tired of me saying it -- I think, as we look at sales in May and June, that's really going to tell everybody what's going on.

Jeff, we will move to the next question please.

Meredith Adler, Barclays.

Good afternoon.

Congratulations.

Thank you.

Sure.

A couple of questions for you.

Just following on kind of the last set of questions about the consumer and the paycheck cycle, you do accept food stamps in most of your stores.

Are you seeing any increase in the utilization of food stamps?

Meredith, we accept food stamps in all of our stores.

The growth we've seen in food stamps mirrors the growth that's taking place in the country.

It's not like it's growing significantly faster than anything else in the stores today.

Okay, great.

Then you talked a little bit about store-specific planograms.

I was wondering if you could talk a little bit more about that.

I'm wondering whether you're talking about just allocating space differently to the same product, maybe not having some products in the stores.

Are you -- or actually are you buying unique products that will only go into some stores?

What do you think that means for the efficiency, especially the distribution centers and the buying process?

Yes, to answer your question, it's one and two and not a lot of three.

We are going in -- and I've used the example of when you build a store in a more mature neighborhood, you would expand the incontinence and contract on the diapers.

You know basically the bulk of the set is the same.

You take the slower moving out and expand on the faster moving and perhaps even added a couple of additional SKUs.

We are also looking at the fact that there might be some categories that we don't need in certain stores.

But in terms of going in and altering the mix and really changing the number of SKUs, that would be a logistics nightmare if you did that.

Okay, great.

Can you comment on sort of customer reaction?

I guess, to some extent, this must go with the in-stock efforts you've got, right?

Yes, and actually where we're seeing where it gets done is in improved in-stock numbers.

That is exactly right.

Okay.

And then --

Meredith, what's been fun about it all is that the store managers are excited about it.

Every time I go into a store that's been done, the store manager is like "Oh my gosh, why is it taking so long to get it done?" It's pretty neat.

That's great.

Final question is just about real estate in California.

Are you seeing any changes?

Is it difficult to get the sized store that you want?

It sounds like you do buy some real estate and build your own stores.

Is that more the case in California or less?

Maybe just comment on changes in cost as well.

Yes, I mean the real estate program -- the surprise we've had in California has been the price of real estate.

Just to be -- which I think we've said a couple of times.

In terms of build-to-suit programs and all that is very typical of what we're doing in any other market.

There's no significant difference there.

When you say surprise has been the price, you mean high?

Low.

Low?

Yes.

There's an abundance of real estate out there that is small, which is what we want.

Great.

Super.

Thank you very much.

Jeff, we will move onto the next question please.

Scot Ciccarelli, RBC Capital Markets.

Hey guys, how are you doing?

Good.

Excellent.

Can you talk about any changes in your inflation expectations, given conversations with vendors at this stage?

Yes.

It's definitely come down.

If you remember, in fourth quarter, we were at like a 200 basis point hit on inflation and now it's more like 50 basis points or for the full year like 0.5%.

So it's definitely come down down.

Scot, and we're seeing broad across a lot of commodities too, sugar and flour and oil, everything is coming down.

Okay.

And your reaction, will you actually -- how will you react?

Are you trying to lower the price point or increase the value to the consumers?

Yes, you know, that is a case-by-case item, but I will tell you I want to reinforce we are really committed to EDLP.

So will do what we need to do.

Got it.

Then the second question is regarding the new DCs in the quarter, were they a drag on a net basis?

As they ramp up, how should we think about the financial benefits that they should deliver?

Yes, clearly, any time you're opening up a new distribution center, there is going to be somewhat of a drag because it's just not efficient when your first -- when it first starts out.

As we get down the learning curve and as we add more stores to each of the distribution centers, they will get more efficient and ultimately -- obviously the reason we did it is it helps us particularly on our transportation costs cutting down the transportation, cutting down stem miles.

So, yes, it will absolutely help us in the long-term once we get over the initial startup period.

And how long does that typically take?

You know, it varies by individual DC.

As we go --

Six months.

Yes, probably six to eight months.

Again, we opened these in the February-March time frame.

Jeff, next question please.

John Zolidis, Buckingham Research.

Hi.

Great start to the year.

Thank you, thank you very much.

I have two questions.

One, you just mentioned that inflation seems to be coming down, yet comps have been accelerating for five consecutive quarters.

What do you attribute the sequential improvement in comps to?

I think, John, we have been relentlessly focused on unit growth, and I think it's translating into more customers, more trial.

I would tell you this time last year we made a pretty big call and I think it's worked out as I look back the last year.

By unit growth, you mean the items that people are putting into their basket?

Well, what I mean is if you go back and you look at the last year, John, you had all of this inflation taking place and people were passing it all on to the customer and it slowed their unit growth.

You recall we took our price increases a little bit at a time and actually didn't pass them on and we kept our unit growth going, which created more market share for us.

Okay, thanks for that.

Then my second question is on SG&A.

I don't know if you can give us any more color regarding some of these other items you cited in the press release, the debit card usage, the preopening costs, the higher workers comp, general liability insurance, advertising, all of these items that serve to dampen the SG&A leverage in Q1.

I don't know if you can quantify those.

Then secondly, going forward, are there any of those that don't continue?

I think, again, we don't really get that granular in terms of quantifying individual line items with SG&A.

When we started the year, we made the comment that, for the full year, our goal is to leverage SG&A.

That remains to be our goal.

As we go through the year, we really don't see that changing.

The one item that goes away in SG&A is those DC costs that we talked about.

Again, as we you're starting up a distribution center and you are not shipping yet, SG&A does take a bit of a hit for that, and that will go away.

Seven.

Great.

Look forward to seeing you at the end of the month.

Look forward to seeing you John.

Thanks a lot.

Next question please?

Matt Nemer, Wells Fargo Securities.

A couple of questions.

One, your seasonal business had a nice acceleration and you called out some non-consumables categories like summer seasonal and toys.

How much of this do you think is attributable to the weather and maybe how much could be the early results of Phase 5?

Yes, good question.

I think the weather no doubt affected the -- particularly the summer seasonal sales.

Hey, we had a good Easter; we had a good Valentines.

But I will tell you there's also been a serious change in the product mix again this year, not only in terms of what we've got but the quality and we've been managing to hold the retail on it.

We are still seeing really good seasonal sales as we move through the quarter.

Okay.

Then secondly, could you give us an update on some of your new merchandising -- merchandise categories?

Beer and wine, maybe an update on the tobacco test in the Las Vegas market?

One of your competitors announced a deal today to rollout video rental machines in their stores.

I'm wondering if there's an opportunity for vending or other type machines in the front of the stores.

Yes, we're actually doing some work with Redbox as we speak also.

We have been working with it for a few months now.

We're happy with what we see.

It does take a lot of transactions to make the Redbox thing work; I can tell you that.

In regards to beer and wine, we are at about, oh my gosh, 5000 stores --

3900 stores.

3900 stores, excuse me, with the goal of trying to get to 5000.

It's on track.

We are still pleased with what we see in regards to what happens to the basket and we're pleased with what we see, how it affects total store comp.

Regards to cigarettes in Nevada, I would say it's unchanged.

We're seeing what we have seen since we have been doing it in November.

We continue to work with it but, again, we will wait until it plays out a little longer.

All right, operator, next question please.

David Mann, Johnson Rice.

Thank you.

Great job.

My question -- a couple of questions.

On the comment you made earlier about SG&A, can you just clarify in terms of the advertising deleverage?

Was all of that due to the increased spend in California or are you doing some other increased spend throughout the Company?

No, the vast majority is due to what we're doing in California.

At what point in time would you expect that to not have the deleveraging impact?

Well, we continue to grow California and experiment, so I guess it's a little early to make that call yet.

David, when you enter a new market, the money you spend out of the chute is going to be the least expensive long-term.

We really want to come out.

We have a lot of thoughts on California and we're trying to come out of the box really strong there.

Sounds great.

Then in terms of gross margin, on the last call, you talked about seeing a slight gross margin contraction in the first half.

Given the results of the first quarter, how should we think about that comment now with the second quarter ahead of us?

Yes, still a valid comment.

For the full year, again, our goal remains to leverage gross margin.

I want to be clear on that.

Don't see that happening in the second quarter because of the depreciation and some other expenses for the two new DCs that are going to impact the margin in Q2.

Again, as we talked about on the call, in Q1, some of these expenses hit SG&A because they were preopening expenses from a timing perspective.

Also, for Q2, there will be a full quarter of depreciation hit for the DCs.

They weren't open the full first quarter; they will be open the full second quarter.

So we will have somewhat of an impact there.

I do want to stress again that once the new DCs get up to full capacity, their efficiency improves quite a bit.

Ultimately, this will be a positive for Dollar General down the road, but we clearly still see that margin hit the first half of the year.

And then one last question about gas prices -- obviously in the latter part of the quarter, you saw -- those continued to ramp up.

Now they're coming down.

Can you just elaborate?

Any change in consumer behavior as that was going on that you could parse out or does it seem not to impact you too much?

Yes, Dave, I'll tell you, I have looked at this really hard over the last four years trying to ascertain that when gas prices go up, does it affect our business or when they go down.

All I can -- all what David and I can come up with is when gas prices are high, people need us more often, and when they come down, they have more to spend.

Sounds good, thank you so much.

Operator next question please.

Emily Shanks, Barclays.

Great quarter.

Thank you very much.

Appreciate all the detail.

I have one question.

Around the hanging apparel niche, where do you think it is you guys are missing?

I recognize it has been a volatile category for you for a number of years.

Do you think it's a competitive issue?

Do you think that your consumer just isn't buying?

What are your views there?

Yes, I think, Emily, that we're going to need a little help with the economy before we really get that piece going.

I can tell you, when we look at our market research, our customer buys for their child first, their husband second and then selves third.

I think it might, since we are seeing a little bit of improvement now in infants and toddlers, in men's and boys, that might actually be bearing out.

So we've worked really hard on getting a little more fashion relevance which we will see in the spring and -- or excuse me, in the fall.

I can tell you we've brought in some shorter shorts and some capri pants and we saw those blow out of the stores.

So I think it's a little bit about mix and it's a little bit about the economy.

Great.

Just one last follow-up on that -- what is your outlook for inflation in that category in the back half of this year?

Yes, cotton is down significantly now and we're not looking for any inflation at all on apparel this year.

Jeff, we will go to the next question please.

Trey Schorgl, Credit Suisse.

Thanks.

We were just wondering.

We've been seeing one of your primary competitors doing a lot of promotional activity, a lot of two-for-one, a lot of buy one get 50% off.

So we were interested in your comment about the competitive intensity.

We were just wondering.

Do you think your different price message as far as your focus on EDLP versus high-low, do you think it's making your value proposition more meaningful for your customers?

Yes I -- we are real committed to everyday low price.

You know that's been the backbone of this Company for all the years it's been here.

I think, if you listen to customers today, while they do recognize certain prices, they're getting a little ornery about not knowing what the price is going to be when they come in because of promotional activity.

So we're focused on EDLP.

We think that's the right way to go, and we think our numbers in the first quarter show that it's a successful strategy.

Jeff, I think we have one more person in the queue.

We do.

Thank you.

We're taking a question now from Joe Feldman, Telsey Advisory Group.

Hi guys.

Congratulations from us as well on the quarter.

Just one more thing I wanted to ask was about freight costs actually.

Have you guys seen any issues there in terms of increased trade expenses?

Is there any pressure that you're seeing or is it just being offset by the distribution infrastructure?

Our freight costs have actually been down if we look at where we are as a percentage of sales from the prior year.

Now, some of that is due to our efforts reducing stem miles, improving cartons per load and things of that nature, but we've also done a very good job in negotiating our contracts and feel pretty good about where we are in freight right now.

Thanks, that was it for me.

Thanks and good luck with the quarter.

Thank you so much.

I just don't think we have anybody else in the queue.

No ma'am, that was our final question.

Great.

Thank you everyone for joining us today.

As always, we appreciate your interest and hopefully we will see many of you in Nashville at the end of the month and please call me if you have any questions.

Thank you.

Thank you.

This does conclude our teleconference for the day.

You may now disconnect.