達樂 (DG) 2013 Q3 法說會逐字稿

Good morning.

My name is Lindsey and I will be your conference operator today.

At this time I would like to welcome everyone to the Dollar General third-quarter 2013 earnings conference call.

Today is Thursday, December 5, 2013.

All lines have been placed on mute to prevent any background noise.

This call is being recorded.

Instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.

Now I would like to turn the conference over to Ms. Mary Winn Pilkington, Vice President of Investor Relations and Public Relations.

Ms. Pilkington, You may begin your conference.

Thank you, Lindsey.

And good morning, everyone.

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

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

Our earnings release can be found on our website at dollargeneral.com under investor information, press releases.

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

Some examples of forward-looking statements discussed in this call include our 2013 forecasted financial results and anticipated capital expenditures, our planned operating and merchandising initiatives for fiscal 2013, our share repurchase expectations and planned store openings for fiscal 2014 and statements regarding future consumer economic trends.

Forward-looking statements are based upon management's beliefs, assumptions, and expectations about future events, and operating results.

Important factors that could cause actual results or events to differ materially from those reflected in or implied by our forward-looking statements are included in our earnings release issued this morning, our 2012 10-K, which was filed on March 25, our first- and second-quarter 10-Qs, our third-quarter 10-Q, which was filed this morning and in the comments that are made on this call.

We encourage you to read these documents.

You should not unduly rely on forward-looking 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.

Reconciliation to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on dollargeneral.com.

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

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

Thank you, Mary Winn.

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

Today we plan to discuss the results of our third quarter, update you on our operating initiatives, and share our store growth targets for 2014.

Our third quarter sales increased 10.5% over last year to $4.4 billion, with comp store sales up 4.4%.

Both traffic and average ticket increased for the twenty-third consecutive quarter, with customer traffic contributing most significantly to our sales increase.

As we expected, the addition of tobacco products resulted in strong customer traffic growth throughout the quarter.

Consumables, which include tobacco and perishables, showed the strongest sales gains.

For the second quarter in a row, we had comp sales growth on the non-consumables side of the business.

Comp sales in both seasonable and home were positive and we were pleased with our apparel performance.

As part of our phase 5 merchandising initiative to optimize square footage productivity, we reduced the selling space allocated to hanging apparel in over 4,000 stores in the third quarter, and the results are meeting our expectations for both sales and more importantly, increased profitability.

October Nielsen data indicates that we continue to increase our market share of consumables in units and dollars over the 4-week, 12-week, 24-week, and 52-week periods.

Our market share in dollars continues to grow in the high single-digits.

The third quarter operating profit increased by 8% to $390 million, or 8.9% of sales.

Our gross profit rate decreased 61 basis points to 30.3% of sales, with the vast majority of the rate compression relating to strong sales of tobacco and refrigerated items.

In addition, we leveraged SG&A expenses by 40 basis points, as we continued our focus on expense control.

Adjusted net income increased 10%, and adjusted earnings per share increased 14%, to $0.72.

We're pleased to announce that we continued to return cash to our shareholders with an additional $200 million of share repurchases in the third quarter, and we increased our share repurchase authorization by another $1 billion, our single largest authorization to date.

Total inventories including tobacco, which is incremental year over year, were up 11%, and on a per-store basis, were up 4%.

We are pleased that we have begun to get our inventory growth back in line with sales growth.

This is our lowest inventory growth rate since the 2012 second quarter.

In October, we have reached another major milestone, the grand opening of our 11,000th store here in middle Tennessee.

Our third-quarter results were solid in spite of an aggressive competitive environment.

Starting late in the second half of the quarter, we saw increases in the competitive share of both Voice in both print and electronic media.

As has been reported over the last week, item and price intensity increased across all channels.

Before I turn the call over to David, I would like to take the opportunity to congratulate Todd Vasos on his recent promotion to Chief Operating Officer, assuming the responsibility for store operations, merchandising, and the supply chain.

This is a very conventional alignment that I believe will strengthen the Company and position us as well for future growth.

Since 2007, Dollar General has added almost 3,000 stores, and nearly doubled in sales.

I'm very proud of what we have accomplished and Todd has played a critical role in this amazing growth story.

I would also like to welcome Dave D'Arezzo as EVP and Chief Merchandising Officer.

Dave joined the Dollar General team in early November and brings more than 30 years of retail and consumer product experience across merchandising and operations.

I worked very closely with Dave at Duane Reade before I joined Dollar General in 2008 and I am confident he is a great fit for the Dollar General team.

I will talk more about our operating initiatives in a moment.

But now, I would like to turn the call over to David.

Thank you, Rick.

And good morning, everyone.

Rick covered the highlights of our third quarter sales performance, so starting with gross profit, I will share more of the details.

Our gross profit increased 8.3% for the quarter.

As a percentage of sales, gross profit decreased by 61 basis points to 30.3%.

As expected the gross margin rate was impacted by a higher mix of tobacco and perishables, which have lower initial mark-ups.

In addition, our inventory shrinkage rate was higher than last year and we incurred higher mark-downs as expected.

The margin compression was partially offset by a benefit from transportation efficiencies and lower fuel costs as well as a favorable LIFO credit.

SG&A increased 8.5%, significantly lower than our sales increase.

On an average per-square footage basis, SG&A increased about 1%.

As a percentage of sales, SG&A for the quarter was 21.4%, an improvement of 40 basis points.

Contributing to this favorability was retail labor expense, which increased at a rate lower than sales.

In addition, decreases in incentive compensation expense, health benefit cost, and worker's compensation and general liability expenses contributed to our SG&A leverage.

Costs that increased at a higher rate than the increase in sales, include depreciation and amortization, and fees associated with the increased use of debit cards.

Interest expense for the quarter was $21.5 million, a decrease of $6.2 million primarily due to lower rates resulting from the completion of our refinancing earlier this year.

Our ratio of adjusted debt to adjusted EBITDA remains unchanged at 3. The third quarter effective tax rate was 35.6% and includes a discrete tax benefit of approximately $6 million, or $0.02 per share relating to the reversal of reserves that were established in 2009.

This reversal was associated with the expiration of the time period in which additional taxes could have been assessed.

GAAP basis net income increased 14% to $237 million in the 2013 quarter, from $208 million in the 2012 quarter, and earnings per share increased 19% to $0.74, from $0.62 last year.

Adjusted to exclude the discrete tax benefit in 2013, and certain items in 2012, net income increased 10.5%, to $231 million, and earnings per share increased 14%, to $0.72.

Year to date we generated cash from operations of $761 million, a 10% increase over the 2012 period.

Capital expenditures totaled $444 million, including $167 million for upgrades, remodels and relocations of existing stores, $103 million related to new-lease stores, $86 million for distribution and transportation, $65 million for storage we purchased to build and $17 million for information system upgrades.

Year to date we have opened 577 new stores and relocated or remodeled 534 stores.

We continue to be pleased with the performance of our new relocated and remodeled stores, confirming our confidence in the relevance of our business model.

As Rick mentioned, we repurchased an additional $200 million of our common stock in the third quarter.

Year to date, we have repurchased $420 million, or 7.8 million shares, with approximately $224 million remaining under the existing authorization.

This week, our Board approved an additional $1 billion for share repurchases.

Since the inception of the share repurchase program in December 2011, we have repurchased 27.1 million shares, with a total cash outlay of approximately $1.3 billion.

We plan to remain consistent as well as opportunistic in share purchases going forward.

In November, we signed an agreement to sell and lease back 233 of our own stores.

This transaction is expected to close in January, and results in net proceeds to us in excess of $200 million, which we expect to utilize to fund incremental share repurchases in 2014.

Now let's look at our outlook for the remainder of the year, which is basically in line with our existing guidance but refined with only one quarter to go.

We expect total sales for the full year to increase 10% to 10.5%.

Full year same store sales are expected to increase 4% to 4.5%.

As a reminder there are six fewer selling days between Thanksgiving and Christmas, which will likely impact our sales.

We are also cautious with regard to the competitive environment and our customers' ability to spend on discretionary items for the holidays, as many continue to face tough economic challenges, and uncertainties about the future.

Operating profit, excluding the items identified in our press release, is expected to be in the range of $1.745 billion to $1.77 billion for the full year, raising the low end and maintaining the high end of our previous guidance.

Interest expense is forecasted to be approximately $90 million.

The full year 2013 effective tax rate, excluding the $6 million discrete third-quarter benefit is expected to be between 37.5% and 38%.

Adjusted earnings per share for the year are expected to be in the range of $3.18 to $3.22, which is a $0.03 increase on the low end.

For the full year, our earnings per share forecast is based on approximately 324 million weighted average diluted shares, which assumes approximately $620 million of share repurchases.

Our full year operating profit and earnings per share guidance are based on adjustments consistent with those detailed in our earnings release for the year to date results.

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

That is down $25 million, from our earlier guidance, primarily as a result of our efforts to reduce the cost of our new stores and remodels.

We continue to plan to open approximately 650 new stores for the full year, or an additional 73 stores in the fourth quarter.

Remodels and relocations are expected to total approximately 550 stores for the year, or 16 in the fourth quarter.

We have a proven track record of serving our customers, and generating strong returns for our shareholders and we plan to continue to build on that record.

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

Thank you, David.

2013 has turned out to be another difficult year for our core customer.

Consumers are challenged by ongoing high unemployment and under-employment levels, higher payroll taxes, the reduction in staff benefits, and uncertainties over health care insurance and insurance costs, as well as unemployment benefits.

All of these factors are contributing to erosion in consumer confidence.

Yet our business model of strong value and convenient locations, is based on consistently serving these customers in good times and bad, and we will continue to help them meet these challenges going forward.

Last quarter, I updated you on our major 2013 initiatives.

We had completed our 2013 goals, with regard to phase 5 merchandising evolution and our cooler expansion, enabling us to expand our assortment of refrigerated foods.

We are continuing to benefit from these efforts.

As I said earlier, the addition of tobacco products has had a significant impact on growth in our customer traffic, which I continue to believe is the most important metric with regard to evaluating the success of our tobacco initiative.

We're very pleased with the progress we made in building our market share in tobacco.

Going forward, we expect both traffic and transaction size to build, as customer awareness of tobacco products in our stores continues to grow.

Looking at the fourth quarter, there are many moving parts making the quarter extremely difficult to read.

Competition has gotten more aggressive on select traffic-driving items, and consumers are overly cautious.

All retailers will be dealing with the significant calendar shift, as the period between Thanksgiving and Christmas has six fewer shopping days, pushing sales closer to the Christmas holiday.

Thanksgiving, which came a week later than the prior year, was essentially at the end of the month for our customer, a time when she is more pinched than earlier in the month.

All that being said, we had a solid Thanksgiving Day, and Black Friday, both comping positive.

I need to also remind everyone that Black Friday was on a payday this year, and would have some influence on consumer spending across all channels.

We have a strong plan in place for the remainder of the holiday season and into January, when our customers are restocking their pantries after the holidays.

Looking forward to 2014, we are putting plans in place that build on our commitment to our four key operating priorities: driving productive sales growth, enhancing gross margin, leveraging process improvements and information technology to reduce costs, and strengthening and expanding Dollar General's culture of serving others.

We will share more details of our 2014 initiatives, when we give guidance in March, but for now, I want to share some insight into our store growth opportunities.

We're very pleased with the results of our new stores, remodels and relocations over the past several years.

We have continued to evolve our traditional Dollar General store and make this small box model even more relevant.

We currently have approximately 900 of our traditional stores in the new DG-13 format, which is a more convenient layout, improved store signage, and refreshed yellow and black color scheme.

This design is delivering a comp lift above what we have seen with our previous remodels.

Importantly, our customers are excited about the fresh look, and shopability of this new layout.

We continue to refine our Dollar General Plus model which is similar to our traditional store but with wider aisles, and significantly expanded coolers.

The Dollar General Plus format works very well as a replacement for an existing traditional store, where customers already know and trust Dollar General, and where there is also a demand for expanded refrigerated food offering.

And finally, we are continuing to test new ideas in our Dollar General Market concept.

For example, in the third quarter, we added fuel pumps to one of our Market stores in Alabama.

So far, the store has surpassed our expectations.

At the end of the third quarter, we had 11,061 stores with 81.4 million square feet of selling space in 40 states.

This year, we upgraded our site selection technology in order to fine tune the way we look at opportunities for growth, and to help us better understand the long-term potential of our small box store.

Our new model now estimates more than 14,000 additional opportunities for the industry, 40% higher than our previous estimate of 10,000.

The sales and returns of our new stores, relocations and remodels are strong, and we believe that reinvesting in our business through store growth, remains the best use of our capital.

In 2014, we plan to open approximately 700 new stores, and to relocate or remodel approximately 525 stores, resulting in square footage growth of 6% to 7%.

Our real estate pipeline is nearly 100% committed and we are ahead of where we were this time last year.

We're looking forward to opening some great new stores in 2014.

In closing, I want to recognize our leadership team and over 100,000 Dollar General employees who serve our customers every day.

We are in the midst of our busiest season in retail and our customers are depending on us for convenience and everyday low prices that we provide them.

I want to thank all of our employees for their contributions this year, and encourage them as we embrace the opportunities and challenges of the holiday season with enthusiasm.

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

All right, Lindsey, we will take questions, please.

(Operator Instructions) Meredith Adler at Barclays.

Good morning.

Thanks for taking my questions.

I will start with the sale leaseback you're thinking about doing.

I think this is the first time you've done one.

Two questions about it.

The first is, what are you thinking about the rate that you are going to get?

Is it comparable with what you do when you do a lease directly with a landlord?

And then the other question would be, are there more properties that you would be able to do sale leasebacks on?

Great questions, Meredith.

I think we're pretty consistent in terms of the rates.

For competitive reasons, I don't want to state numbers out there.

But clearly, as we thought about this transaction, and looking at it, we believe it is going to be accretive to Dollar General to do it.

And, as we said in the release, a large part of that cash will be applied to additional share repurchases.

As we look in the future, it is a little too early to call whether we will continue to do this on an ongoing basis.

We spent several years buying stores back.

And we knew at some point we would turn them and we would do exactly what we are doing today -- have a gain, create cash, and then use that to re-employ in the business to increase the profitability of the business.

So, stay tuned on that one.

And I would just say we will be opportunistic as we look to the future.

And then switching gears almost completely, you have talked about the competitive environment getting much more challenging.

Could you talk a little bit about how you're responding?

I think you talked about both media spending, as well as actual prices that are being promoted.

Can you talk about both of those?

Yes, Meredith, I am a strong advocate of everyday low price.

I think when the market begins to get highly promotional, I think you're renting your sales rather than really driving people who are loyal to your operation.

What we will do is what we have always done.

We're going to continue to focus heavily on everyday low price, knowing that sooner or later the high promotional activity sooner or later runs out of steam.

But along the way, we are not afraid to throw a few prices out there that we think will continue to help drive our already good traffic.

In regards to incremental share of voice, we currently have a program that we run two ads in print through the course of the month.

We invest basically all of the electronic media back into our cost of goods and focus on the retail.

So we think we have a solid program in place that we intend to stick to.

We think at the end of the day, EDLT wins.

And we're pretty comfortable with what our strategy is the back half of the year, the back quarter of the year.

Great.

And I just have one more question.

You did get some benefit this quarter from lower incentive compensation.

Could you just talk about why the incentive comp was lower and whether that was a significant benefit to SG&A or margins?

And it is predominantly SG&A where you see that.

Basically, the way our incentive comp is set up, we have a budget that we set every year, at the very beginning of the year, that is approved by the Board in January.

And all of our compensation is based off of that budget.

And it is an aggressive budget, obviously, that is set.

And, because we're missing that budget, we don't accrue as much compensation because we won't be paying as high of a bonus payout, or what we call team share, in the Company at the end of the year.

And, yes, to answer your question, the fact that we are spelling it out here as well as in our filings in the 10-Q, it is significant enough that we felt like we need to point that out.

And is it the sales budget that is being missed?

No, it is really profitability.

It goes to the bottom-line profitability of the Company.

In spite of the good year we're having, it just tells you that we entered the year with incredibly higher expectations.

Okay, great.

Thank you for answering my questions.

Charles Grom with Sterne Agee.

Thanks, good morning.

And if I could, congrats to Todd, well deserved.

Could you, Rick, could you speak to the progression of the comp in the quarter and any thoughts on November?

It sounds like it has been a little bit choppy.

And then, Dave, if you could quantify what the lift was from tobacco and also what the corresponding hit was from these apparel reductions.

As I look at the quarter, our sales trend, the first part of the quarter, were very solid.

I think as traffic-driving initiatives in regards to price started to take place, we saw our sales in October a little bit lighter than they were in August and September.

However, I still want to, Chuck, bring out that every week of the quarter we had positive comps, and every period we had positive comps.

So, while we saw an increase in competitive activity, we still felt pretty good where we were at.

November, Chuck, I think all of retail is going to be looking at a very choppy November and December.

We chased the calendar all through the course of the month in November.

I think you had Thanksgiving come a week later.

I think also we have to be careful, there was a pay period Black Friday.

So I think that might have spurred some results on, also.

But, saying all of that, we had a good Thanksgiving, and we had a good Black Friday.

But just the calendar is very hard to read.

And, remember, what is going on here with those six fewer days, everything is getting pushed closer to Christmas.

And so we are optimistic on our plans, but we're being real cautious as we look at the month.

And, David, I'll let you talk about the rest.

First, on the markdowns, if you remember, we had a timing issue between second and third quarter.

And we spelled that out that we actually had a plus last quarter from some apparel markdowns that we moved into third quarter because, for weather reasons, we wanted to give the product more time to sell.

And basically those markdowns came in about where we thought they would come in.

In terms of the impact, Chuck, we're not going to spell out the exact dollar amount or the basis points.

But I will say that, again, they were up there.

They were lower than tobacco and lower than shrink in terms of the impact that it had on the quarter.

But, again, they were high enough for us to be calling out.

On the cigarettes, or on the tobacco, again we continue to be pleased with what we're seeing there, particularly the impact on transactions, driving people to come into the stores, which we're very happy to see.

And, again, we're not going to be specific in terms of the impact on the comp but, again, we're pleased with what we're seeing based on our model and what we thought cigarettes would do for us.

Chuck, I will give you one more piece of information on the tobacco.

When we started the tobacco journey, one-third of our cigarette sales were by themselves, one-third were what we would call a smoke-and-a-Coke where they would grab a cigarette and maybe a soda or chips, and then one-third is where the cigarettes were actually going into a basket that was beginning to grow.

We're now at the stage of the game, that back one-third, where cigarettes are going into the actual basket, is now at 44%, and cigarette-purchases-only are declining to 26%.

So we're beginning to convert the cigarette customer into a shopper.

And I guess that supports your optimism for continued benefits from tobacco, then?

Yes.

And, remember, we talk, Chuck, about transactions-added drive.

It's driving people into the store.

And it is our job to convert it.

And then my final question, Rick, you have done a great job since 2007 improving sales per square foot, back with the Phase 1 through 4 programs, and on shelf heights and then, more recently, with Phase 5 on some of your legacy stores.

When you think about the opportunities from here, and the white space that you have, could you maybe flush out some of your early thinkings for us?

Yes, I think as we move into 2014 and beyond, it is now about SKUs and really understanding their productivity.

And now what we are doing is we are beginning the process of evaluating not only those SKUs but the categories that we have in the store.

And the idea here now -- and my favorite example is picture frames -- when I got to this chain, we had 12- to 16-foot of picture frames.

We're now down to 8-foot, which has allowed us to add an additional category.

And now the challenge for us is where are picture frames going to be in another year or two.

And maybe we want to get ahead of the curve and introduce something that is more productive now.

So, now, the journey is about maximizing SKU productivity for the next couple of years.

Great.

Best of luck.

Thanks.

John Zolidis with Buckingham Research.

Hi, good morning.

Fantastic results.

A question on the long-term store opportunity, raising it to 14,000 additional locations for the industry from 10,000.

Can you give us a little more color on what is driving that increase in the potential store count?

And are you taking into account changes from what competitors are doing with their stores?

Thanks.

John, it is a couple of things.

Number one, there is no doubt the environment is creating more of our core customer.

That's number one.

But number two is we have a new software program that is allowing us to literally identify the corner of such and such where we can locate a store.

Historically, we have gone in and we have had several square blocks where we can go.

But now what happens is you have this piece of software that allows us, by taking into account competitive positioning, where our customer is, being able to go in and take a look at the demographics, being able to go in and look at traffic patterns, how they flow, being on the going home side, not putting yourself at risk.

And it just, quite frankly, has swelled to 14,000.

So, a lot more analytics, more than just demographics, and it allows us to literally pinpoint where we can go.

And it is all automated, which is really fascinating.

It takes all of the guess work out of it.

And as a follow-up to that, you discussed the lower CapEx budget, and it sounded like it came out of some of the spend on new stores.

Can you just talk about how much it is costing you to open a new store and the efficiencies you're gaining there?

Thanks.

I think -- and, again, on our total budget, $25 million isn't a huge decrease when you're talking about the numbers that we're looking at.

I think it is just a matter of doing a variety of things differently and driving some better procurement in terms of the vendors that we're dealing with, getting some better deals, and things of that nature.

So I don't think it is anything revolutionary.

It is just doing the right thing every day and driving better relationships with our vendors.

And, John, if I could piggyback on that.

We centralized our procurement operation the back half of 2012 and we're starting to see the benefits of that.

We have one piece of the organization particularly buying things that don't relate to what the customer is actually purchasing.

And then we also have an initiative in place where we're actually taking some of the costs out of your new stores, which we're very pleased with.

Great thanks.

And have a good holiday.

Matthew Boss with JPMorgan.

Good morning.

On the gross margin front, how should we think about this line item longer term in the P&L algorithm?

Any opportunities with shrink and on the discretionary side into next year?

Just larger picture, how you're thinking about decline.

I will start and certainly Rick will jump in.

As we go forward -- and we've talked about this previously -- we continue to believe that our private label, what we're doing in private label, as well as foreign sourcing, will continue to provide benefits to our model.

Shrink, clearly we have gone the wrong way on shrink this year, and there is opportunity for that to turn overall.

I think tobacco will be a negative next year because keep in mind that we only started selling cigarettes in the second quarter this year, and they really started to kick in, in the June and July time frame.

So in terms of some pressure, we will be dealing with that next year also.

But I think we have got a lot of levers that we can pull long term on gross margin in terms of helping increase it, and get some leverage out of it.

Great.

And then on the non-food side, on the more discretionary, we have seen some more encouraging trends recently.

Do you guys think this is something that is sustainable?

Do you think part of this is trade bound?

Or is it assortment changes that you've made?

Matt, I would actually answer it's a little bit of both.

I think the trade down customer is getting more comfortable with the quality of the products that we are putting out there.

Also, I think we are doing a much better job on merchandising selection here.

I have to say Todd and his team, our Christmas assortment as an example this year, is the best I've seen in five or six years.

I think we are doing a much better job in positioning the product in the store.

And I think we are doing a much better job on the labeling of the product which makes it look a little more upscale and still having that great price in it.

Great.

Best of luck.

Stephen Grambling with Goldman Sachs.

Good morning.

Thanks for taking my question.

You had mentioned customer concerns over healthcare, specifically.

How are you seeing that reflected in your results?

And how should we be thinking about the impact of the Affordable Care Act on expenses longer term?

I don't have anything really definitive, where we have done any market research on it.

But I think everything you read, and everything you're hearing about, is the number of customers who have had low coverage policies that are basically more catastrophic, moving into the healthcare network and finding out, while they have more complete coverage, it costs a lot more.

That customer that has that catastrophic coverage, a lot of that is our customer.

And they're going to be dealing with that going forward.

I think it's one of those new things that has entered into all of this dynamic, where people who make $50,000 or less per year are starting to deal with what I am calling dinnertime economics.

They sit down at that dinner table at night, and, Steve, they've got, if you make $50,000 or less per year, you have given up $1,000 worth of disposable income with the change in the payroll tax.

Have high unemployment.

A lot of the unemployment benefits that we're getting are in higher skilled jobs.

And what I have been saying for a long period of time, my concern is under-employment -- that people are going back to work but they're making less per hour and getting less hours.

I think there is uncertainty, future uncertainty, over unemployment benefits.

And I think there is uncertainty about the cost of healthcare.

Recently we have had the introduction of the change in staff benefits.

And I think if you think about this, you have our core customer sitting at the dinner table, she still has to put dinner on the table for her family and she is wrestling with all of these things.

And I think that is the value that Dollar General brings to the table and always has -- is that we are always there with everyday low price for our customer, regardless of what is going on.

In regards to the Obamacare next year, David, I will let you handle that.

We're in the midst of wrapping up our open enrollment period here for healthcare coverage.

And clearly we will have a head wind from this in 2014.

But it's bouncing around on us a little bit right now We have to see how many people sign up and at what levels they sign up on, and that sort of thing.

So, we will update you more on that.

But, like most companies in America, it will be a head wind for us next year.

Thanks for all that color.

And then another quick follow-up.

The new distribution center that is opening, is there any impact that we should be thinking about on the P&L, both in the near term and then longer term as it ramps up?

Yes, I think, generally, when we bring on a DC, there is some -- again, all of this is included in our guidance that we have for this year, and will be in next year's guidance when we give it.

You do have some impact of inefficiencies when you start up a DC.

And it takes a few months before it gets up to capacity and starts operating efficiently.

So we will have a little bit of that.

But, again, we're pretty good at working through that.

We've shown that, as we've opened DCs.

As a matter of fact, in the prior year we opened two DCs at once and worked through it pretty well overall.

But, yes, absolutely there are some inefficiencies when you open it up and then as it gets downstream it gets more efficient.

And then the real help you get is from your stem miles, you reduce your transportation costs by having this new location.

Great.

Thanks for all the color and good luck in the holidays.

Paul Trussell with Deutsche Bank.

Good morning.

And congrats on a good quarter.

I just wanted to circle back on the implied guidance for the fourth quarter and just make sure that I am thinking about this correctly.

Is it fair to say that the mid point of the top-line range is suggesting a similar comp, about 4.5% or so, for the fourth quarter, with gross margins sequentially decelerating?

And just also, to that, if that is the case, if you can just give some of the puts and takes on gross margins in 4Q versus what we have seen in the past two quarters.

And then, lastly, maybe I missed it, but did you reiterate the $600 million for buyback figure for this year?

Paul, it is Mary Winn.

We actually said $620 million for share repurchases in total for this year.

Great.

Thank you.

I will comment on this and certainly Rick may want to jump in.

As we look at the fourth quarter, there is a lot of ongoing uncertainty in the macro economic environment.

And the potential for more promotional and competitive retail climate that we're dealing with.

And, as we said at the beginning of the year, the fourth quarter is our toughest comparison.

We're going to be lapping the highest quarter, particularly from a gross margin percent point of view that we had last year.

The other thing we're up against, and again this is last year, we had a $0.02 benefit in taxes from [WATSI] because we had a retroactive impact that we took in the fourth quarter.

And, again, we spelled that out in our press release last year when we released earnings.

So, I think as we look at it, probably the best I can say is we think it is prudent to be somewhat cautious in our outlook for the remainder of the year.

I want to point out we did raise the low end of our earnings per share for the full year to $3.18 from the $3.15 that it was.

And, again, our range now is $3.18 to $3.22 for the full year.

Okay.

Thank you.

And then just in terms of door growth for next year, the 700 doors, is there any plans to accelerate the rollout of the Plus or of the market format as a part of that?

Yes, the Plus is part of our relocation program.

We will increase the number of Plus stores next year.

And the Dollar General markets, Paul, are still very much experimental for us.

We want to make sure, when we are dealing with the concept that is a little more elaborate than what we do on a day out and day in basis, that we're doing it the right way.

And we're spending our time on Dollar General market right now thinking about new things that it doesn't have that we think it might have, like the fuel that we put in, in Alabama.

All right.

Thank you.

Dan Wewer with Raymond James.

Good morning, Rick.

The addition of cigarettes and perishables obviously benefiting your same-store sales quite a bit.

Family Dollar had a similar experience when they rolled that out a year or so ago.

But it was interesting, once they reached the one-year anniversary of cigarettes and perishables, based on their forecast, same-store sales thawed out pretty quickly.

So, when you think into the second and third quarter of next year, how should we be thinking about what happens with Dollar General's sales momentum once you anniversary those two programs?

I actually think that is a very fair question, Dan.

We're on our sixth year on the perishable journey and we have continued to comp in the double-digit range for six years consecutively now.

I think that our category management process, particularly on perishables where you're dealing with an outside vendor, is very rigorous, because you have to have the right items.

And as I think about what we have done in perishables over the last six years, we have actually evolved with what I would say would be the grocery channel en masse.

I can remember when we had one shelf of pizzas, now we have a whole door of pizzas.

I have watched the evolution of more what I would call ready-to-eat, quick-serve meals, where that has gone from basically a shelf to a whole door and maybe even a door and a half.

And I think, as you look at us, what we have historically done, is taken something and continued to build on it over a period of time.

In regards to the cigarette thing, my view on the cigarettes is not what it does for comp sales.

It is what it does for traffic, and the fact that it brings in incremental traffic.

And then it is up to us, through our offering and the way we manage our stores, to turn that into a bigger basket.

And, again, if you think about us, if you look at our sales per square foot, if you look at our transaction growth, and look at our basket growth, we have been very good on building on those for a very long period of time.

So, I see no reason for caution, the fact that we're lapping cigarettes.

Okay.

I just have one other question.

On the 14,000 incremental stores for your industry, I'm assuming you're including Family Dollar and Dollar Tree but not the drugstores?

That would be correct.

I'm thinking, talking just about the dollar channel, Dan.

And so that 14,000, how many of those would belong to Dollar General?

And then also if you could talk about the portion of those that are going to your virgin markets in the western states, and how much of these fill in into your legacy markets?

A fair question, Dan.

The 14,000, that is up for grabs, right?

It is our ability to get out there and get as many as we can.

And what I try to do is define what the total opportunity is.

And obviously how I would look at this is, if Dollar General has opened 700 stores a year, there is a lot of growth opportunity out there for a long time to come.

In regards to is it more in the markets we're in or new markets, I would like to leave that one open.

And what I would rather say is we continue to be excited about the new markets we're entering.

And a piece of these are in new markets but a piece of them are also backfill opportunities in the markets we're in.

Okay, great, thank you.

David Mann with Johnson Rice.

Hi, good morning, Rick.

If we can go back to a question about shrink, can you just let us know how the rate of increase in shrink in this quarter compared to the last couple of quarters?

And given the defensive moves that you have taken, when do you expect the shrink increase to moderate or perhaps no longer be a head wind?

Yes, the first thing I want to say, while our shrink is up, it is still way below the 2007, 2008 and 2009 levels.

And we are making progress on our initiatives here.

Our number one priority right now, David, is to stabilize the shrink number.

We will begin to cycle in the first and second quarter the defensive merchandising steps that we have taken.

We have gone in and randomly inventoried some of those stores.

And, to be honest, we have seen some progress there.

I don't want to declare a victory here yet, but we certainly have the plans in place.

And we're hoping, as we move through the year next year, that we should begin to see not only it stabilize, but see it begin to move in our favor.

Great.

In terms of the macro economic, you called out, obviously, a variety of items that are head winds.

I'm just curious, with the lower gas prices that we're seeing, historically that has been a nice tail wind for your sector.

I'm just curious what your thoughts are about that, and if you're hearing anything about lower gas prices when you're talking to your consumers.

We love lower gas prices because it gives our consumer more money to spend.

I do think that the consumer today is incredibly value conscious.

And I think they are really and truly looking for many different ways to stretch their budget.

And I think the gas prices will help them do that -- lower gas prices.

And then I'm just curious, on the fueling station test, is that something that will likely be confined only to the DG market or do you see a white space for that across the entire chain potentially, if you like what you see?

David, that is actually a very fair question.

It is a little soon to tell you that.

We got one and I would tell you that it is pumping gas at the rate a convenience store would.

So we're very pleased with what we're seeing.

But a little soon to lay that one on the table.

Great.

Thank you very much.

Matt Nemer with Wells Fargo Securities.

Good morning.

Congrats on another very consistent quarter.

Two quick questions.

The first is on SG&A per foot, the growth has been very low, in the 1% range for a number of quarters.

What is a reasonable assumption for SG&A per foot growth going forward, assuming a neutral impact from some of these transitory issues like incentive comp?

And then, secondly, your new store opening growth will be a lot lower this quarter than the last few fourth quarters, and I'm wondering what kind of impact that might have on SG&A.

Thanks.

I think the whole SG&A question really has to do with our mining-for-cost-reduction efforts in the Company.

And we continue to look for ways to take costs out, whether it be our work force management, damages, stem miles, procurement, supplies, you name it.

We're working on a whole variety of things, and we always will be.

Every year we're going to have a mining-for-cost-reduction effort in the Company.

We like to look at it in terms of what does it take to lever SG&A.

And we're still locked in at that 3% to 3.5% comp in terms of leveraging SG&A.

So, in terms of looking at it on a square footage basis I would rather answer it by saying that we still see it levering at 3% to 3.5% in a normal environment.

We will continue to work on it.

We have been very pleased with how we have been able to lever it the past few quarters.

We have a lot of efforts going on in the Company.

And, again, we have a lot of levers to continue to pull on SG&A.

And then in terms of the lower store growth rate, is that a significant item potentially in Q4?

I don't think it is that significant overall.

And again, we would be comparing to the same thing for Q4 last year, consistently, in terms of the leverage that we would be seeing.

Every year our store openings are always lower in the fourth quarter.

That is a normal thing.

Okay.

Great.

Thanks so much.

And happy holidays.

Mark Montagna with Avondale Partners.

Hi, good morning.

A question on tobacco.

Is it fair to view -- and I know it is early -- but is it fair to view the tobacco maturity cycle as probably being similar to just your typical store maturity cycle?

Yes, I would think the maturity of tobacco would be like any other category, quite frankly, or you could even look at it in terms of store cycle.

Sure.

I think that the back half of next year it is going to be about capitalizing on that transaction growth and converting that customer.

Okay.

And then second question, just dealing with hanging apparel, did you face markdown pressure on that or had you planned those 4,000 stores in advance of the third quarter?

Yes, that was all planned, Mark.

That was part of our plan when we announced our initiative the end of last year, the first of next year, about the 4,200 stores.

Okay.

Could we see further scaling back next year?

Or if you do, is it just simply fine tuning it?

And then how do you view those stores?

Yes, I think that is a fair question.

It is a little soon to tell.

We are very happy with what we are seeing in this block of stores.

And what we're very happy is with the profitability.

And I think you have to give us a little bit of time.

We are going to continue to fine tune the initiative.

But we will get back to you the first part of the year next year and let you know for sure.

Were you equally happy with the performance in apparel at the other 7,000 stores?

Yes, I think the difference between the other stores and the 4,000 stores is the profitability.

And what we're trying to do is maximize our profitability per square foot.

All right.

Great.

Have a super Christmas.

Thanks.

Scott Mushkin with Wolfe Research.

Hi, this is actually Brian Cullinane on for Scott.

You guys talked about an increase in the competitive environment.

Just wanted maybe a couple of questions on that.

Has it picked up at all since the end of the quarter into Thanksgiving and into December?

And are you seeing it from a particular channel or a particular competitor, that increase?

Yes, I would say the uptick in competitive activity started in October, and it is about the same as it was in October.

And it is spread across every channel.

Every channel, okay.

And, again, I want to make sure, Brian, that I reinforce here that we are seeing it in select items that are designed to drive traffic.

Like soda, for example.

I don't want to lead anybody to believe that I think the market has gotten irrational because that hasn't happened yet.

Okay, that's fair.

And do you think that the competition is just -- is it in response to a weaker consumer?

Is it the consumer or is it people are fighting for volumes?

Any thoughts there?

I think the weaker consumer is part of the macro environment and everybody is fighting for sales.

It is about driving traffic, and that's why people are selecting these high traffic-driving items.

So, again, Brian, as you think about us, we are intently focused on everyday low price.

It is my belief if you get too promotional, all you do is rent those sales for a matter of time.

And we continue to be relentlessly focused on getting the best value every day to the customer.

Okay.

And then in terms of maybe just a little bit on inflation, what do you guys see for the next few months in terms of inflation?

Is there any chance that with some of this competition and promotional from other people, is there any chance of outright deflation?

And what does that do to your model?

Right now, I would tell you, we have seen virtually no inflation this year, and we are anticipating none next year.

And in regards to the competitive activity, we're going to have to let that play out.

I can't give you a view on that one.

Sure.

But any view on is deflation in play?

I would imagine there is probably some categories specifically that are.

Yes, I would look at you and tell you, right now, there is absolutely no indication of any deflationary pressure.

Okay, thanks very much for the color.

I appreciate it.

John Heinbockel with Guggenheim Securities.

So, two things.

One, discretionary relevance in two different areas.

When you look at categories or sub categories that you are in on the discretionary side, are there some that you shouldn't be in because it is hard to be relevant assortment-wise or share of voice-wise?

And then, secondly, this time of the year when you think about what has gone on with Black Friday, getting hotter and earlier, how do you maintain a competitive share of voice this time of year with the mass and Best Buy and others?

Or is that just going to be harder to do over time?

In regard to the discretionary question, the name of the game is SKU productivity.

And what we're constantly doing, John, we have a very, under Todd's guidance, a very robust category management process.

And the discretionary side, quite frankly, is all about being relevant.

And the advantage we have, we have a small amount of SKUs, a small SKU base, and it allows us to be a little more surgical in what we choose to promote.

And we can stay a little more relevant.

In regards to your question about Black Friday turning into a week of black days, which I think is quite fair, the first thing I would say is we're not necessarily a destination for Black Friday purchases.

We are the fill-in to all of that.

We are the -- I forgot the stocking stuffer, or I forgot this.

We do particularly good on the consumables side during the Black Friday process.

And, again, I still believe, as long as we stay focused to our mantra of being focused on EDLP, all of this chatter and all of this noise is going to play out over time.

So, you think on discretionary you could be an item merchant, pick a good apparel item, pick a good home item, and if the price is right that makes up for breadth.

That is exactly right.

In fact, by the way, that is our strategy that we have really been trying to focus on the last 18 months.

I need to have whatever the best-selling sweater is.

If it is blue, we don't need the red one and the green one and the gray one and the cream one.

We just sell the best one.

And that's the whole idea.

All right.

And then, I know with Todd's promotion, you are going to spend incremental time on other things.

What might those be?

I thought one of them might be DG Market, given your food background.

I think that with Todd stepping in to spend a lot more time on the day-to-day stuff, it gives me the opportunity to spend my time thinking about broader pictures and, more importantly, where we want to be in five years.

And rather than standing up and saying -- this is exactly what I am going to do -- I would say, John, it gives me the opportunity to be a little more reflective and provide a little bit bigger direction for the Company.

Okay.

Thank you.

Patrick McKeever with MKM Partners.

Good morning, Rick.

On the last call, there was a question on what you thought might happen with the reductions in SNAP assistance.

And I think you gave a similar response to what you just said about Black Friday, in that you are not the primary destination for that particular purchase, more of a fill-in.

So now that that has -- and the bigger guys, the grocers, would be the ones that would lose out more.

With the reduction having gone through at the beginning of November, I know it was a choppy month, November, but do you feel like what you were thinking would happen has happened there?

And that there hasn't been a significant impact from the reduction in food stamp assistance?

Yes, I think what we thought was going to happen has happened.

The bulk of that shop goes to the big box retailers and the grocers.

I do believe, Patrick, we will feel something but it is going to be minimal compared to everybody else.

The only thing I want to be cautious about is one month.

And you got to remember we had Thanksgiving in there.

But I would think that I'm very comfortable with what we have said.

Okay, got it.

And then this doesn't come up much, but you do have an e-commerce business.

And you've got Cyber Week savings all week this week.

And it is Cyber Week.

And e-commerce, of course, is really in focus right now, as we roll through the holidays.

So, could you just give us an update on what you're seeing with your e-commerce operation?

Is there a material impact there to same-store sales?

Is it more oriented -- the purchases, are they more individuals, or small businesses?

Our e-commerce site has a very small base.

So while we were up tremendously on that date, on Cyber Monday and this week, it is on a very small base.

And, Patrick, it does not affect our same-store sales number.

And, by the way, in relation to whether it is businesses or individuals, it tends to be more the individual.

And the one thing I will say is the electronic items that we have do very well on the e-commerce side.

Okay.

Good stuff.

Thanks very much.

Lindsey, it is Mary.

We have let the call go a little bit longer so I think we ought to just go ahead and cut it off here.

I do just want to tell everyone thank you for joining us today.

I am around so if you need anything please don't hesitate to give me or Emma Jo a call.

And I look forward to talking to you soon.

Thank you.

This concludes today's conference call.

You may now disconnect.