達樂 (DG) 2013 Q4 法說會逐字稿

Good morning.

My name is Arenka and I will be your Conference Operator today.

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

Today is Thursday, March 13, 2014.

(Operator Instructions)

This call is being recorded.

Instructions for listening to the replay of the call are available in the Company 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, Operator, 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 issued today 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, predictions and other non historical matters such as our 2014 forecasted financial results and capital expenditures, our planned FY14 operating, merchandising and store growth initiatives, our share repurchase expectations and statements regarding future consumer economic trends.

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, 2013, our 2013 first, second and third quarter 10-Qs and in the comments that are made in this call.

We encourage you to read these documents.

You should not unduly rely on forward-looking statements that speak only as of today's date.

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

We will also reference certain financial measures not derived in accordance with GAAP.

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

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

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

Today we reported results for the fourth quarter 2013 and the full year.

2013 had many successes for Dollar General, representing our 24th consecutive year of same-store sales growth.

As you've heard from other retailers, the fourth quarter was a challenging time for our industry.

While our sales results fell short of our expectations, we did successfully manage the business to deliver better than anticipated gross margin, SG&A expense control and inventory growth in line with sales growth.

We also delivered earnings per share at the midpoint of our guidance range.

Overall, the three most important factors impacting our sales in the quarter were, one, the severe winter weather that the country experienced from Thanksgiving through January.

Two, aggressive competitive promotions that we selectively did not participate in.

Three, a pullback in our core customer spending due to a number of factors including reduced government assistance.

Turning first to the weather.

Across all of retail, much has been said about the weather in the fourth quarter.

We experienced persistently adverse weather during the quarter that was far greater than normal.

As a result, we experienced significantly reduced selling hours driven by a combination of stores that were closed due to the inclement weather and stores that operated on reduced hours.

There is no doubt the winter weather negatively impacted us across the country.

When our core markets like the mid South and the Southeast get hit with severe winter storms, the communities are simply not well equipped to handle the snow and ice and it takes a while for these markets to return to normal.

As you can imagine, our distribution network was also significantly disrupted in terms of inbound as well as outbound freight movement.

January is typically a strong period for us as customers restock on the basics.

Unfortunately, the last two weeks of January were the most severely impacted by extreme weather across a significant portion of our markets.

To sum up the weather impact, we estimate that in December 1,000 store selling days were impacted by weather and we estimate that 7,000 selling days were impacted in January.

Another way to look at this is that 34 out of the 91 days in the quarter had a negative impact from the weather.

Second, competition was and continues to be aggressive.

Not only in share of voice, but also on the key items being advertised and the promotional pricing of these items.

Promotional activity was particularly heightened during the critical selling days going into Christmas, and pricing was aggressive across all channels of retail during the fourth quarter.

While we made a conscious decision to selectively participate in this arena, overall we stayed true to our everyday low price strategy which our customers trust and have come to depend on from us.

Finally, our core customer doesn't feel as she is out of the woods yet economically and continues to be cautious with her spending.

All in, the record ice and snow across many of our key markets, the shortened and more promotional holiday season, and the continued economic uncertainties for our core customer presented significant and greater than anticipated headwinds in the fourth quarter.

In our third quarter earnings call in early December, we shared with you our expectation that we would be chasing the calendar during the fourth quarter due to the loss of six selling days between Thanksgiving and Christmas.

With the added impact of the weather, we simply were not able to close that gap in spite of cycling our easiest comps of 2012.

As you most likely have personally experienced, some of the weather issues have continued into FY14.

Our sales trends starting out so far in the first quarter have been impacted by the continued weather volatility.

But I am pleased to report that on days when mother nature is more cooperative, we are very happy with our sales performance.

In spite of the quarter four headwinds, we remain focused on the long-term growth and health of the Company and believe that we have plans in place for 2014 to control what we can control.

We continue to increase our overall market share of consumables in both units and dollars across all markets over the 4-week, 12-week, 24-week and 52-week periods ending February 15, according to latest available Nielsen data.

We still were able to increase both our customer traffic and average ticket for the 24th consecutive quarter, although at a slower rate.

We also leveraged our SG&A expenses and generated significant cash flow from operations with an increase of more than 7%.

During the fourth quarter, we returned $200 million to shareholders, through the repurchase of our common stock for a full year total of $620 million, or 11 million shares.

David is going to talk about the details, but I'd like to share the highlights of the year and our fourth quarter.

Full-year sales increased 9.2% to a record $17.5 billion, and sales per square foot increased to $220 compared to $216 a year ago.

Same-store sales were up 3.3% for the year and 1.3% in the fourth quarter.

Both average ticket and customer traffic were positive for the year and for the quarter.

For the year, our gross margin rate decreased 69 basis points and we leveraged SG&A, excluding certain discrete items detailed in our press release, by 31 basis points.

For the quarter, our gross margin rate decreased by 58 basis points, which was somewhat better than we expected.

While there are always puts and takes on our margin performance, net-net tobacco was the largest negative impact.

We leveraged SG&A expense by 14 basis points.

On the bottom line, net income in the fourth quarter increased 1.5% with earnings per share up 4% over last year's fourth quarter.

For the year, our adjusted net income increased 6.5% to $1.04 billion, and adjusted earnings per share increased 10% to $3.20.

Looking back, we accomplished a great deal in 2013.

We hit our upwardly revised target of opening 650 new stores and exceeded our combined remodel and relocation target with 582 stores, increasing our selling square footage by 6.6%.

In the fourth quarter, we opened our 12th distribution center in Bethel, Pennsylvania to help us serve our growing store base in the Northeast.

On the merchandising front, we continued to innovate and maximize the sales productivity of our stores.

The biggest change to our merchandising mix in 2013 was the addition of tobacco products.

We completed this effort in the second quarter and tobacco sales are continuing to have a positive impact on our sales and store traffic.

A key metric is the attachment rate and we are continuing to see this grow as 68% of our tobacco transactions include one or more additional items.

In fact, 41% of tobacco transactions now include three or more items.

In the first half of the year, we expanded coolers in over 1,600 stores, bringing our chain average to about 12 cooler doors per store.

Perishables have delivered strong growth over the course of the year.

As part of our ongoing effort to maximize store productivity, we completed our phase 5 optimization in 3,000 stores in the first half of 2013, and reallocated square footage from hanging apparel in 4,000 stores to health and beauty aids with a focus on high margin, private brands in the third quarter.

Most of these changes were in our older legacy stores where we continue to see opportunities for growth.

Looking at gross margin overall, we're very pleased with how the year progressed.

Although I'm disappointed with our shrink performance for the year, we remain optimistic that the changes we implemented in 2013 will have a greater impact this year.

For example, we installed defensive fixtures in about 2,600 of our higher risk stores in the first half of the year, and we began the process of eliminating some of the less productive, higher cost items, mainly in health and beauty, later in the year.

I think this is an area where we may have been both -- we may have both overestimated our customer's willingness to purchase these higher ticket items and underestimated the risk of shrinkage.

Our SKU rationalization efforts to address this are well under way with more than 300 SKUs eliminated in 2013 and an additional 300 identified or already eliminated in 2014 to ensure that we meet our customers' needs, while also reducing our shrink risk.

From an expense reduction standpoint, we continue to benefit from the capabilities of our workforce management system.

This system provides our store managers with a tool to assist them as they prioritize and manage work, allowing them to be more effective in how they manage their staff in their stores.

Several work elimination initiatives were introduced in 2013 to help reduce or streamline the work in our stores.

Improving efficiencies in our stores has been and will continue to be a significant priority for Dollar General.

This is a cross functional initiative to remove non-value added work and reinvesting in activities that allow our store managers and their teams to better serve our customers.

For instance, we are now sorting our rolltainers by planograms to eliminate resorting and reduce the number of steps in rolltainers moves required to stock it shelves.

We have also established a new stocking program that incorporates both training and productivity tracking.

We made further inroads with regard hiring and developing employees.

In 2013, over 60% of our Management positions were filled by internal candidates.

This represents continued strong improvement during the past two years since we've made this a high priority.

As Dollar General grows, we want our employees to have the opportunity to build their careers and grow both personally and professionally with the Company.

We are constantly striving to fill the needs and meet the changing demands of our customers.

What we saw in 2013 was that our customer needed us more than ever.

With much of the economy -- excuse me, while much of the economy seems to have improved, many of our core customers are continuing to struggle, giving the well-publicized headwind such as reduced Government benefits, continued high unemployment and underemployment, higher taxes, uncertainty around the healthcare costs and the reduction in unemployment benefits, just to name a few.

So we are executing on our detailed plans for 2014.

I think it's fair to say that we plan to reach out to our customer and fill her everyday needs for basic consumable merchandise.

Whether we are her first stop or a regular fill-in shop, we know that having the items our customer's depending on at price points that meet her budget requirements is crucial to our success and hers.

Of course we're always looking for new items and new categories that make her life easier so you will see some of those in 2014 as well.

Top initiatives, supporting our four operating priorities in 2014 include the following.

Leveraging category management.

Eliminating work that is non-value added in the retail stores.

Continuing our mining for cost reduction program with a target of over $50 million, which allows us the ability to reinvest in the business, offset other costs or drive our profitability.

The testing of a life cycle remodel program to build our brand positioning in the marketplace.

Continuing our focus on reducing shrink.

And finally, enhancing our customer service program.

We talked about our new site location technology and our 2014 store growth plans in last quarter's call.

We plan to open 700 new stores in 2014, and we are confident that we have substantial opportunities for store growth in both new and existing states for many years to come, as our new model estimates 14,000 current opportunities for the small box value retail sector in the United States.

We're very optimistic about our new store outlook for 2014 and our 2014 pipeline is full.

We are excited about our plans and I'm confident that we can meet our operating goals.

We continue to be cautious regarding the economic outlook for our core customers, but we will do everything we can to provide them with the value and convenience they have come to expect from Dollar General.

Now David will share a more detailed review of our fourth-quarter financial performance and our 2014 guidance.

Thank you, Rick, and good morning, everyone.

As Rick has reviewed the highlights of our performance, let me now take you through some of the financial details.

Gross margin for the fourth quarter was 31.9% of sales, a decrease of 58 basis points from last year's fourth quarter and somewhat better than our updated 2013 guidance.

Sales growth of tobacco products and perishables, both of which have lower gross margins, out paced our other categories across both consumables and non-consumables.

As expected, our shrink rate increased.

These margin pressures were partially offset by a favorable LIFO credit and a favorable impact of net purchase costs.

Total SG&A improved by 14 basis points in the fourth quarter.

As a Company, we did not meet the financial performance threshold for our annual team share incentive compensation.

However, we made the decision to provide a modest discretionary bonus to employees excluding officers who are eligible for our team share bonus plan.

This reduction in incentive compensation contributed 45 basis points to SG&A leverage in the fourth quarter.

Primarily as a result of our sales performance, we delevered most of our other operating expenses.

Consistent with our performance throughout the year, bright spots included favorable results in workers' comp and general liability, as well as employee benefits.

Interest expense was $22 million for the fourth quarter, a reduction of $5 million from last year's fourth quarter, primarily due to our debt refinancing.

Our tax rate for the quarter was 37.5%, compared to 35.9% in the 2012 quarter.

The prior-year quarter included a $6.5 million, or a $0.02 per share benefit, related to the first three quarters of 2012, for the retroactive reinstatement of the work opportunity tax credit.

Turning to our cash flow.

We generated more than $1.2 billion of cash from operating activities for the year, an increase of over 7% year over year.

Total capital expenditures were $538 million, including $124 million for new lease stores, $76 million for stores purchased or built by us, $112 million for distribution centers, $187 million for improvements, upgrades, remodels and relocations of existing stores and $28 million for information system upgrades and technology related projects.

As of the end of the year, total inventories at cost were $2.6 billion, up 6.5% in total, and up less than 1% on a per store basis.

As we had planned, we were successful in getting our inventory growth in line with our sales growth as we moved through the year.

Regarding our share repurchase program.

We repurchased an additional $200 million of our common stock in the fourth quarter.

For the FY13, we repurchased $620 million or 11 million shares.

So far in 2014, we have repurchased an additional 3.5 million shares, or $200 million, using the majority of the cash proceeds from the closing of our sale lease back transaction, leaving us with a remaining authorization of approximately $824 million.

Since the inception of the share repurchase program in December 2011, we've repurchased 33.8 million shares with a total return of cash to shareholders of $1.7 billion.

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

Now for an overview of our guidance for 2014.

We expect top line sales for 2014 to increase 8% to 9%.

Overall square footage is expected to grow 6% to 7%, and same-store sales are expected to increase 3% to 4%.

With regard to expenses, we have significant headwinds in SG&A that will result in us delevering SG&A in 2014.

The most significant is a planned increase in our cash incentive compensation year over year.

In recent years, we have met or exceeded the threshold for our team share annual cash incentive plan making 2013 an anomaly.

Based on our budgeting process, bonus targets have been established for 2014, and our quarterly accrual will be based on our outlook as we move through the year.

Compared to 2013, this impact is estimated to be about $35 million, or $0.07 per share and an 18 basis points headwind to SG&A.

Also, we're facing increased cost in SG&A due to the implementation of the Affordable Care Act.

While we have made progress in minimizing the impact, this will likely be a headwind of about $10 million to $15 million, or $0.02 to $0.03 per share, and 5 to 8 basis points headwind to SG&A.

As a result of our sale lease back transaction that closed in late January, we will be facing a modest increase in SG&A of approximately 5 basis points.

The sale lease back will have a negative impact to both operating profit and net income.

However, this project is accretive to earnings per share as we have already used the majority of the proceeds to repurchase shares.

In total, these three SG&A expense items will likely negatively impact us by $55 million to $60 million, or 28 to 30 points of SG&A deleverage in total.

The anticipated earnings per share impact is about $0.09 to $0.10 for the combined incentive comp and ACA headwind.

Post 2014, we would not expect year-over-year increases of this magnitude but rather that these costs would be normalized into our operating performance going forward.

We do expect that healthcare costs will continue to be subject to increases depending on enrollment and our claims experience.

Adjusted operating profit is forecasted to be in the range of 2% to 5%.

Profit growth is forecast to be in the range of 2% to 5%, the anticipated SG&A headwinds are impacting this growth rate by approximately 3 percentage points.

We are forecasting net interest expense for the year to be in the range of $85 million to $90 million.

We're committed to maintaining our investment grade rating while managing to a leverage ratio of 3 times adjusted debt to EBITDA.

At the same time, if circumstances in the debt and equity markets are such that we deem it prudent to temporarily increase or decrease our debt levels, we may do so.

We expect our full-year tax rate to be approximately 38%.

We expect diluted earnings per share for the year to be $3.45 to $3.55, it's a growth rate of 8% to 11% on an adjusted basis over the $3.20 in 2013.

Please keep in mind the anticipated combined impact of incentive compensation and the Affordable Care Act is approximately $45 million to $50 million, or $0.09 to $0.10 per share.

This is about 3 percentage points of growth on our adjusted earnings per share.

We're assuming in the range of 306 million to 307 million weighted average diluted shares outstanding for the year which assumes the anticipated repurchase of approximately $1.1 billion of our common stock including what we have already completed in the first quarter.

In total, this repurchase activity represents approximately 5% of our current market capitalization.

2014 capital expenditures are forecasted to be in the range of $450 million to $500 million.

Specifically, for the fiscal first quarter, we are forecasting a total increase in sales of 7% to 8%, same-store sales growth of 2% to 3% and adjusted earnings per share of $0.72 to $0.74.

There are several factors that are weighing on our first-quarter results.

As we mentioned, the adverse weather impacting sales in the fourth quarter of 2013 has continued into the first quarter this year.

Gross margins will continue to be impacted by our tobacco introduction as this product category was not fully launched until the second quarter of 2013.

On a quarterly basis, the anticipated impact of the incentive compensation and ACA on earnings per share is weighted to the second half of the year due to timing year over year.

As you build your quarterly models for the remainder of the year please keep in mind that we will still be facing the negative gross margin rate impact of the 2013 introduction of tobacco in Q1 and Q2.

As has been the trend for the last several years, we believe our customers' discretionary spending will continue to be constrained in 2014.

As our long-term track record demonstrates, Dollar General is well positioned to serve our customers regardless of how the economy plays out.

Now I'd like to turn the call back over to Rick.

Thanks, David.

Dollar General's a strong and growing business with tremendous high return store growth opportunities that we intend to capture.

Our long-term commitment to growth and shareholder value are unchanged.

We have a business model that generates significant cash flow and we are in a position to invest in store growth, while continuing to return cash to shareholders through consistent share repurchases.

My sincere appreciation goes out to more than 100,000 Dollar General employees for all they do to fulfill our mission of serving others in the more than 1.5 billion annual customer transactions.

With that, Mary Winn, we'd now like to open it up for questions.

All right, Operator, we'll take our first question, please.

(Operator Instructions)

Paul Trussell, Deutsche Bank.

You provided, but I wanted to ask a question about operating income growth.

Certainly I understand that these factors, particularly the incentive comp, is very specific to 2014.

But as we look beyond this upcoming year, I mean, do you -- are you stating that operating income growth can be back to at or better than top line growth going forward?

Yes well, Paul, we're not giving specific guidance beyond 2014.

But I did say in my prepared comments that we do think we've got some headwinds in 2014 that are -- that won't recur as we get out of -- in 2014 and into 2015 and beyond.

Specifically, we talked about the team share, the incentive comp being $35 million or about $0.07 a share, 18 basis points on SG&A.

We talked about the Affordable Care Act, that's $10 million to $15 million or 5 to 8 basis points, $0.02 to $0.03 earnings per share.

Then the sale leaseback, although it doesn't hit earnings per share, it does hit the basis points on SG&A and that was about $10 million.

So we have some discrete items here that are impacting 2014.

Again, as we get beyond 2014, we see these being more normalized and not being an impact as we get into 2015 and beyond.

Again, we're just not giving specific guidance beyond 2014 at this point in time.

Fair enough.

Then moving to the top line.

In addition to the weather, it was mentioned that there's consumer headwinds, taxes, healthcare, et cetera, along with some competitive headwinds with Walmart and others being promotional and also trying to open up small stores.

Can you go a little bit deeper into the top line initiatives and help us be comfortable with your ability to still comp 3% to 4% in 2014, what are you expecting from the DG remodels and what kind of lift are you seeing as you make these planogram changes?

That color would be helpful.

Yes, Paul, I'll take that one.

A couple things here.

First of all, our remodel, relocation and new store program continues to be as healthy as ever.

Our new stores continue to open up at 85% to 90% of our average comp number.

In fact, I looked at some real estate numbers just yesterday, reviewing the 2013 projects, and they were tracking at almost 101% of our projection.

So continue to be very, very healthy.

As I have historically laid out on this call, all of our initiatives going forward in a lot of detail, and I've elected this year, because of the intensity of the competitive environment out there, to choose to rather come back to you and tell you how we're doing once we get them done.

But I will tell you that we are focused on SKU productivity.

We actually believe we can do more in 2014 with less SKUs.

We've examined a lot of categories and we have discovered there are categories we can expand and categories that we're going to contract as we move through the year.

We've become highly focused on not just work simplification but work elimination in the retail stores, which will free up our store managers and district managers to be more involved in the merchandising and store standards.

We are also, which I will report on as we move through the year, have developed what we were calling a life cycle remodel.

The majority of these stores are under-sized by our current standards.

They're in the 5,700 to 6,500 square feet and these are stores that historically we might stand you up and say, hey, let's relocate them but they're in keeper sites now.

They're in good spots.

We don't have the opportunity to expand them.

We've done some experimentation with going in and working the smaller store and it's costing us about 30% to -- 30% less to remodel them and we're generating a return that's 25% to 40% higher.

Really what this involves is going in and freshening the store up in terms of our new decor package and then making the commitment to the right categories that are in there, rather than trying to play in every category, really focusing on those that are most productive.

Then of course we're going to continue to stay focused on category management.

I know, Paul, that's much broader than we historically have given you but I would rather report this year on how we're doing versus laying it out on the table upfront.

All right, thank you.

Best of luck.

Thank you.

Peter Keith, Piper Jaffray.

Operator, we seem to be having a delay before the line comes on, so if we could just see what we could do about that, we'd appreciate it.

So Peter, we missed the first part of what you were saying.

Sure I'll restart.

First off, good morning.

Wanted to look at the comp guidance for Q1 in the context of the full-year guide.

You're guiding 2% to 3%, so the full year guidance, 3% to 4% implies some acceleration.

At the same time you're going to be lapping the tobacco rollout in the second quarter.

So assume you have easy compare in the fourth quarter, but I want to get some comfort around how you're thinking about the acceleration in quarters two through four.

Yes, great question.

We actually -- we're feeling very comfortable about the merchandising initiatives that are starting to roll out.

We are actually getting ready to do our spring road show where we go out, Peter, and lay all those out for the store managers.

We're very comfortable there.

And we're also quite honestly -- I think the competitive environment is going to settle down and really intense can better competitive environments have a habit of coming and going.

When that does happen I believe the role of EDLP is going to be even more important than the promotional activity that we've seen recently.

So -- and I also think -- I fall back to what we said in our comments, when mother nature is not interfering with what's going on, we're pleased with what we're seeing.

I know the groundhog is getting every bit they can out of seeing their shadow this year, but we think the good spring weather's coming.

I want to jump on the weather piece of it that in so far in first quarter we have continued to have a weather impact and that plays a big role in how we set our guidance for the quarter.

Okay, very good.

On the weather, certainly you guys are going to have some disruption with closures.

I was curious more on the backdrop of energy costs.

Have you seen an overhang in some of the cold weather impacted markets of lower comp as maybe the discretionary income of your customers has come down a bit?

Yes, I can tell you, if I took -- it's interesting you brought this up.

We took the 1,000 stores, took the bottom 1,000 stores that were in the hardest hit in regard to temperature and compared them to 1,000 stores that were in areas that weren't as severely impacted by the weather.

Peter, the significant change in the comp, it's significant the difference in the comp.

I attribute that to two things.

Number one, the weather.

I do think that we do know that natural gas and propane are both going to be up significantly for the consumer and we might be seeing some of those higher heating bills working their way through now.

So it's a little bit of both.

Okay, very good.

Good luck this coming year.

Thank you very much.

Edward Kelly, Credit Suisse.

It's actually Judah on for Ed.

Wanted to first follow up on the operating margin guidance and I think even ex the items that you called out, the growth is a little lower than we expected which seems like there may be some gross margin impact that's more than we anticipated.

Can you talk a little bit more beyond tobacco about what's going on with the gross margin, you called out how the macro's hurting that a little bit also?

Yes, I'll take it off and then please jump in, Rick.

As we look at our gross margin for the year, clearly the first half of the year is being impacted by tobacco, particularly the first quarter but also in the second quarter.

Then as we get to the back half of the year, that mitigates and right now we are actually forecasting that as we get into third and fourth quarter, we should start seeing some leverage in gross margin.

So I don't think there's a whole lot besides the tobacco impact you talk about here.

In the first -- we talked about shrink.

We see shrink improving as we go through the year and again, that will be more second half based than first half based.

We're still dealing with that a little bit here in the first part of the year.

But besides those items, I don't think there are many other items in gross margin that would have an impact.

Okay.

And then a follow up, can you talk a little bit about the comments out of Walmart that they're going to be expanding their small store roll out.

It's clearly not a huge number of stores but there is focus on that express format that maybe competes a little bit more with you guys.

Walmart is a fabulous competitor, there's absolutely no doubt about it.

I think though, Judah, if you look at it their primary focus is the neighborhood store.

They're talking about adding 100 express stores I think this coming year.

Primarily their focus is on the neighborhood market.

We're going to open up over 700 stores.

So I think we've got a significant lead here and we'll just have to see how that one plays out.

Okay, thanks.

Matthew Boss, JPMorgan.

So as we think about your model beyond 2014, is it fair to think about a 3% comp or so, flattish gross margins and a low single-digit leverage point as a baseline?

Any color you can give us on how to think about the model over a multi-year basis would be really helpful.

Yes, I think -- I'll have to go back to my earlier comments, that we know we have items in 2014, the team share, the Affordable Care Act and the sale leaseback that are having an impact, particularly on our SG&A and our operating profit as you go to the bottom line that should be more normalized as we get outside of 2014.

But again, beyond that, we're just not giving guidance over and beyond 2014 at this point in time.

Matt, I would say, is what David's calling out is spot on.

I would say to you that we have a long track record, though, of really good results.

So I wouldn't let 2014 influence me looking forward.

Right.

On the same-store sales front, the 3% to 4%, I think you -- our math you basically get 200 basis points just from the store opening water fall and relocations.

Trying to plug the delta between the 3% to 4% and the 2%, I guess that's some of the merchandising initiatives that you said are still to come.

That's exactly right.

We call off historically 1.5% to 2% on the real estate program and then the rest is what we're going to do going through the course of the year to drive traffic and sales.

Then last question on the square footage front, so last call you raised the saturation target about 40% at 14,000.

Have you seen anything competitively that would relate to the availability of sites?

The one thing I was wondering is would you guys consider acceleration?

Is that an opportunity if a key competitor were to slow the growth for a few years here?

Yes, I think the issue of accelerating our new store growth is one that David and I wrestle with all the time.

We are very much into organizational capacity and if you think about it, every year that we've been together here as a team we've upped the number of new stores that we've opened.

What we don't want to do is get ourselves into the jam the Company got itself into several years ago where it actually had to come in and close 400 stores because in the rush to open new stores, we were more focused on quantity rather than quality.

I would rather guys open 700 stores and open them right than open 850 and be marginal.

So it's something we wrestle with all the time.

It's a very fair question.

But right now, we're very comfortable with the number of stores we're going to open.

Great.

Good luck.

Thank you.

John Heinbockel, Guggenheim Securities.

So let me start with strategically when you look at the discretionary categories, which have struggled for a couple of years here how do you think about that business longer term in terms of -- I know you've cut back a little bit on apparel, but really thinking about giving a major change there in terms of space allocation, what you carry in terms of SKUs, maybe you cut back toys, categories that are hard to compete in beyond convenience.

How do you think about revitalizing that business or is it just a matter of the economy getting better?

Actually, John, it's a combination of both.

We've said all along that we're really comfortable with the steps we've taken in non-consumables in terms of the branding, how the product's positioned in the stores, the quality, the fact that we've been able to improve the quality and reduce the price to the consumer, and we are going to need some help with the economy.

Having said that, though, phase five is the perfect example of how we're looking at everything.

In that we're saying that every category has to carry its own water in the store.

If you look at the fact that we have reduced hanging apparel in some areas, we are committed to getting the store balanced properly.

But having said all that, we think the non-consumable side of the business is incredibly important.

We are today's general store and getting that offering moving we think is incredibly important to the overall mix and to our brand proposition.

So we're very committed and we're still committed to it.

All right.

Then two final things.

We had talked I think on the last call, the one before that, maybe migrating some of the learnings from DG market into the rest of the box, particularly something like produce.

Any updated thought on that?

Then secondly, how aggressive do you think you'll be in -- and how much of an opportunity do you think it is going after the CVS tobacco customer?

Big opportunity?

Do you go after that aggressively or is that whatever falls into your lap happens?

Yes, two good questions.

We continue to experiment with Dollar General market.

John, I grew up selling produce and meat and it's pretty easy for me but it's very difficult teaching somebody how to sell it when they're not used to selling it, in terms of rotation, how you order it, how you mark it down, how you keep it fresh.

Right now I don't see a lot of movement like moving produce items into the traditional DG.

I will tell you, Todd and his team have made some learnings on the perishable side, the cooler side, that we've been able to move into traditional Dollar General stores that are beneficial.

In regards to CVS thing, I think what happens when someone gives up a category like that, those sales just tend to go where they're going to go.

I think we'll get our share of it but I don't think it's going to be more than that.

Okay.

Thanks.

Meredith Adler, Barclays.

I'd like to start by talking a little bit about the gross margin and I know there's been a bunch of questions about it but I actually want to be a little backward looking.

You had a very tough comparison this fourth quarter and clearly shrink was a negative, the mix wasn't particularly a positive and yet the gross margin was much better.

Can you talk about maybe what the factors were?

You talked about the cost of product but is that about global sourcing or something else?

Yes, our IMU was definitely better and our net purchase cost ultimately was better in the quarter than we had in our original guidance forecast.

I think there are a whole variety of factors that go into that, Meredith and quite honestly it's a little hard to dissect and say exactly how much is due to what, but you're definitely hitting on it there.

A piece of it would be a little better activity going on in our foreign sourcing.

We continue to expand products that were sourcing other places.

We now do trash bags out of Thailand, crackers out of Colombia, we have $1 pasta out of Italy.

We're doing some $1 lotions out of Mexico.

It goes on and on.

So we continue to be very, very innovative in what we're doing with our foreign sourcing.

Then I think just the merchants and the buyers did a better job overall in terms of the -- how they were able to partner with the vendors and the types of deals that they were able to get for Dollar General.

So I think it's a whole variety of things.

I think, Meredith, I'll throw out one thing, too.

I think the -- it was our feeling the environment was incredibly price competitive and people were throwing prices during extreme weather conditions that I don't think people were going to respond to anyway because they couldn't get to the store or they had already stocked up.

We chose not to play in that and we focused ourselves on taking care of the inventory we had in the store.

Okay.

I guess David, back to what you were saying, is there any reason to believe that the tailwind's you have in the gross margin aren't going to continue, you didn't use up all the opportunities you had?

We still have a lot of opportunity in our private label, our foreign sourcing and our shrink.

Again, let's not forget shrink because shrink unfortunately has been going the other way now for several quarters.

So again, we continue to work those areas.

I think the question we have, Meredith, and we've talked about this before, is how much of that do we invest in price, staying true to EDLP, driving units through the box and growing margin versus letting it fall to the bottom line.

Because we've said publicly several times that the most important thing for us is making sure we are the EDLP operator and that we continue to grow our market share.

So we'll have decisions to make on those private label sourcing, et cetera, plus as we get there, how much of that do we let fall through and how much do we invest in price.

Okay.

Then I have another question, you actually said something that surprised me a little about changes being made with the rolltainers and how stuff that goes in them.

I was under the impression that the rolltainers were already sorted by aisle and that was the whole point of having rolltainers.

Is that not true?

That is 100% true.

But we've taken and refined it even further where the product actually comes out how it's laid out on the shelf.

So imagine all of detergent used to show up for the detergent aisle and now we're trying to lay the rolltainer out where it actually matches to the shelf by the planogram.

Wow, that's great.

I have one other quick question.

You did a sale leaseback and I believe that you have been buying -- you're doing fee development for a while now.

Is there significantly more owned real estate that you would consider monetizing, and presumably if you did, not that you have a cash flow shortage, but that you would also use that to buy back stock?

There are other opportunities in our real estate areas to do that if we wanted to.

We don't have any plans right now to capitalize on that at this point in time, so I would say stay tuned and it may be something that we'll do in the future as we evaluate doing incremental share buybacks.

I do want to stress, when we do something like that and we demonstrated this with what we did when we closed the deal in January, the main reason for doing that is buying back stock, taking that cash and buying back stock and that's exactly how we funded the $200 million that we have already bought back in the fiscal first quarter came from that, the funds from the sale leaseback.

Great.

Thank you very much.

Operator, we'll move on to the next question, please.

Charles Grom, Sterne, Agee.

So we've obviously observed some irrational pricing and promotional intensity from your friends down in Charlotte.

I'm wondering how you'd characterize the environment today?

I guess more importantly, how do you react to David's points a couple minutes ago?

You guys have been great about investing in price to drive units.

Do you feel like because of that activity today that you need to step up your investments to continue to accelerate the traffic in your stores?

Yes, I think, Chuck, that is a very fair question.

We do a lot of work on our sensitive items every month.

We do a full book every quarter.

To be honest with you, the gap between me and that guy you mentioned has not narrowed at all.

I do think they have been more promotional and I think they've publicly said they want to back out of that.

I will tell you that we have responded on promotional items that we think are important to the consumer.

But we're staying focused true blue to everyday low price because we think long term that always wins.

Right, okay, great.

Then I hopped on a couple minutes late, but given the weather choppiness in the fourth quarter I didn't know if you went through the monthly cadence throughout the quarter.

As a follow on to that, the spread between the 1,000 good stores and the 1,000 bad stores, there's been a lot of retailers that have talked about that gap being somewhere in that 700 to 900 basis point range as the delta.

Is that fairly consistent with what you guys saw when you looked back?

Yes, I will say this.

We didn't talk about the cadence of the quarter but I will tell you January was the day that -- or January was the period in which the most affected days were there that we experienced.

The gap between the bottom 1,000 the high 1,000, while we didn't call out a significant number, I will tell you it was significant.

Okay and then last question to follow on Paul's from earlier.

When you take a step back and you do heat maps on the productivity within the store by category, where do you feel like the biggest opportunity is to improve the sales productivity by category?

Yes, I would tell you, Chuck, probably the non-consumable side.

Believe it or not, not the apparel side but the hardware, the automotive, the stuff where we think we really can play well in.

We're pleased with the assortment, we just think we need a little bit more help from the economy.

Okay.

Good luck, guys.

Thanks.

Thank you, Chuck.

Thank you and, Operator, we'll go to the next question, please.

Dan Wewer, Raymond James.

Wanted to follow up on the -- your answer to Peter Keith's question regarding accelerating same-store sales growth.

Tobacco has been adding roughly 150 basis points to same-store sales.

So taking that into account, your guidance implies comps maybe at 5% or better during the second half of the year and yet these non tobacco categories have been struggling.

You did indicate that you thought that the competitive pressures will be easier this year than last year, but what if that doesn't happen?

What if anything they become a bit more intense?

How will that --?

Yes, I think when I reflect back on -- we had a pretty solid quarter two and quarter three.

I think -- I don't want to take quarter four where we obviously suffered severe, severe weather issues.

I think as we reflect on quarter four, we have to remember that when the weather's bad, people don't come to Dollar General to stock up.

They go to the more traditional retailer and they stock up there.

They go there for a number of reasons.

Number one, we're limited assortment.

More importantly, they can get what they want.

There's broader depth.

You come to a Dollar General to buy sugar with another 15 or 16 people and all of a sudden there's no sugar and then we don't deliver for another full week.

So I don't think that you can necessarily look at everything that happened in quarter four and push it out going forward.

I do think that tobacco, the point you're raising is that it is adding to our comp line and it's doing exactly what we want.

We're not looking at the comp number, we're looking at the transactions it's driving.

Again, if you look at the fourth quarter, we're one of very few retailers who called out the fact that we still had transaction growth.

So I feel as we move through the back half of the year that tobacco's going to continue to do what it's been doing, deliver, it's going to deliver transactions.

Then more importantly the attachment rate is continuing to grow.

So I feel pretty solid, feel pretty good about the back half of the year, particularly when I roll in what we intend to do on the initiative side.

Then also want to make sure I understood your answer regarding pricing at Family Dollar.

It was I guess, our understanding that their management believed a high, low pricing strategy was not competitive against Dollar General and hence, they're moving to a pricing strategy very similar to yours.

Do you think that makes them a stronger competitor against Dollar General or are you actually seeing opportunities that evolve from that transition on their part?

Yes I -- as I look at our price -- as I look at our pricing studies that are conducted on the most sensitive items, I continue to see a gap that was very similar to what it was five and six months ago.

I do think that when you deviate from EDLP, it takes a while to get that notion back into the customer's head.

The customer's used to coming in and getting these one-time prices, and then it's hard to re-establish that, hey, my price of Tide is good day in and day out.

So I don't want to really speculate on someone else's pricing strategy or what they're doing.

I'm saying we're very comfortable with where we are today and where we've been.

Okay, great.

Thank you and good luck.

Thank you very much.

All right, Operator, we'll go to the next one.

Matt Nemer, Wells Fargo.

So it's very tough to gauge the category performance given the weather issues, but in markets where weather wasn't or isn't a factor, do you see the spread between consumables and non-consumables growth getting narrower or wider?

I would say about the same that we've seen historically.

I would not say that non-consumables is getting better but I would also tell you it's not getting any worse.

Then as a follow up to that --

We now have -- yes and we have tobacco in there, too, Matt, which distorts the consumable side.

As you look at your 2014 guidance, is it fair to say that you don't have a non-consumables categories comping positive and if not, do you think that, that's something that we could potentially see in 2015 or 2016?

I -- actually we're quite bullish on the non-consumable side and we're looking to see some solid comps on that side of the table in 2014.

Then lastly, if you look at the 2014 class of new stores, how would you characterize the mix between new and existing markets and does anything change versus recent history?

Yes, almost all of it will be in existing markets.

We're going to add somewhere between 50 and 60 stores in California.

However, we're looking at California as an existing market now.

But we will probably not enter into any new markets in 2014.

Okay, great.

Thanks, good luck this year.

Thank you very much.

Operator.

Mark Montagna, Avondale Partners.

A question on the apparel strategy.

You cut back on those 4,000 stores, does that change your -- given the results, does that change your outlook on maybe other 7,000 stores perhaps cutting back there?

That's actually a very fair question.

We are actually -- those 4,000 stores very pleased with the numbers we've seen.

Now, those stores were more space constrained than our traditional store and we made the decision there, Mark, not trying to be everything to everybody on every category.

So I would look at you and tell you we haven't really arrived at that conclusion yet.

I will tell you as we look at apparel so far into this quarter, we're actually, I wouldn't say pleased but we're seeing some rays of hope in our apparel strategy.

That's good.

Then a question, I know you don't like to comment so much on the current quarter, but what I've heard from other retailers this February was actually even more weather impacted than January.

Wondering if you're seeing that?

When I think about that when I look at your comp guidance for the quarter, first quarter versus the fiscal year and I'm wondering if you're seeing the same thing?

Yes, I will tell you the first 15 days of February were very tough.

I'll also tell you the first 10 or 12 days of March were tough.

Okay.

Yes, that was -- appreciate that.

Thank you.

All right, Operator, I think we've got time for one more question, please.

Scott Mushkin, Wolfe Research.

Actually had some bigger picture questions for you.

The first one goes to the planned changes for overtime rules that I think President Obama's going to lay out today.

I think they're going to increase the $24,000 threshold.

How should we think about that for you guys?

Yes, I've got to tell you, Scott, I haven't seen -- I've heard all kinds of speculation on it, where it's going to go, what's -- how significant it is.

But I think where we are right now is we're waiting to see what the President's going to do.

I would be remiss if I didn't tell you that we are evaluating several scenarios and looking at what the impacts going to be.

Again, I don't think it'll necessarily impact 2014 and it's going to impact everybody.

I'll tell you what I've always said to everybody on these calls, we are just a retailer and whatever cost you can't remove from the system eventually gets passed on.

Okay, great.

I may follow up with you guys offline about that in a little more detail.

I wanted to actually move to a second one as we're long on the call.

Want to understand as you view it, Rick, the competitive advantage of basically the dollar business, it's all about -- it's always been about convenience but also certainly price.

It seems that the price component is fading a little bit.

I know you [touched] on Meredith's question, you talked a little about gross margin you didn't chase.

But it's hard not to notice that people like Delhaize, with the Food Lion, their volumes are now strongly positive.

In our own proprietary pricing surveys, we don't show the dollar business necessarily generally being priced much lower than some of the other competitors out there that also offer convenience.

So I'd like from your point of view, where does this lead?

It seems like everyone's around the same place right now and how does a dollar business fit in this new environment?

Yes, I think the competitive landscape has suddenly decided that the dollar channel is a viable channel that can't be ignored any longer and I think there's a lot of work being done on that.

I will tell you though, at the end of the day, what we bring to the table is the true value proposition.

The beauty of our model is a national brand is a national brand and we have the ability to trade in and out of brands and always have the best value in front of the customer.

I'll also tell you, the work that we're going to do in 2014 is all focused around that value proposition and giving the customer even more choices on those particular items.

Again, I would look at everybody and say the environment has gotten very competitively intense.

That does not sustain itself for a long, long period of time.

Again, I fall back to where everyday low price, every day of the week on the basic necessities that the customer needs and I think that's going to be -- that's going to serve us well into the future.

Thank you for taking my questions.

So Operator, thank you very much and thank you everyone for joining us on the call today.

Emma Jo and I are around if you have any other questions, and we look forward to speaking to you soon.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.