達樂 (DG) 2014 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Dollar General first-quarter 2014 earnings call.

Today is Tuesday, June 3, 2014.

(Operator Instructions)

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, Brandy, 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 fiscal 2014 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 2013 10-K, which was filed on March 20, 2014, and our 2014 first-quarter 10-Q 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.

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

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

Thank you, Mary Winn.

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

As we expected when we gave our first-quarter outlook in March, the challenges of weather, the heightened competitive environment and the current economic environment continued to impact our sales.

However, as we reported today, our first-quarter sales performance proved to even be more challenging than anticipated.

As we said in March, as the weather normalized, our sales trends improved.

We saw a turn in our Business during April, even as we take into account the Easter shift.

That momentum has continued quarter to date.

In quarter two, we are seeing strength across both our consumables and the non-consumable categories.

The impact of inclement weather across much of the country affected each first of the month in the quarter, typically the strongest sales week.

So, we essentially lost the opportunity for sales across the first of each month.

Although our sales performance was softer than we anticipated for the first quarter, there were several positive highlights.

For example, in addition to the favorable impact of the Easter shift on Easter-related sales, we saw an improvement in our comp sales trends across the store as we moved through April.

Based on our current sales trends, I believe that we are starting to see our initiatives gain traction, albeit a little later than we had anticipated.

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

Our net sales increased 6.8% over last year, to over $4.5 billion.

Same-store sales grew 1.5%.

We are pleased to report that both customer traffic and average ticket increased for the 25th consecutive quarter.

As expected, April was stronger than February and March for several reasons, including the shift in timing of Easter.

We had a very good Easter, as we saw our sell-through rates increase significantly from prior year's Easter sales.

Our gross margin as a percentage of sales declined 57 basis points, primarily due to the increase in the sales of lower-margin consumables, including tobacco and perishables, as a percentage of overall sales.

SG&A increased by 37 basis points, primarily the result of deleverage on rent and utility costs resulting, in part, from our same-store sales performance, as well as additional costs incurred due to the extreme winter weather.

Net income was $222 million.

Earnings per diluted share was $0.72, at the low end of our guidance.

We returned $800 million in cash to shareholders through the repurchase of 14.1 million shares of stock, bringing our total cash returned to shareholders since the inception of our store (sic) repurchase program in December of 2011 to $2.3 billion.

We are maintaining our sales and earnings-per-share guidance for the year.

I'll talk more about our operating initiatives for 2014 in a moment, but now I'd like to turn the call over to David.

Thank you, Rick.

Good morning, everyone.

Rick covered the highlights of our first-quarter sales performance, so I'll share more details on the rest of the results, starting with gross profit.

Gross profit increased 5% for the quarter, with a 57-basis-point decrease in gross profit rates of 30.0% of sales.

This decrease was primarily driven by the higher mix of lower-margin consumables, which includes tobacco and perishables.

In addition, we incurred higher markdowns, primarily due to promotional activities in consumables, which were partially offset by better initial markups.

SG&A expense increased 9% to $978 million, or 21.6% of sales, an increase of 37 basis points over the 2013 period.

The impact of lower sales growth affected our ability to leverage our fixed costs, with rent and utilities having the most significant impact.

Adverse weather also contributed to higher utility costs.

As we called out in the fourth quarter, SG&A in 2014 is impacted by the sale leaseback transaction, adding about 5 basis points in the first quarter.

Decreases in workers' compensation and general liability expenses partially offset the overall increase in SG&A as a percentage of sales.

As of May 2, total merchandise inventories were $2.6 billion, up 1% on a per-store basis.

Over the last five quarters, we've made great progress in managing our inventory growth to be in line with sales growth.

We are very pleased with our performance here.

We generated cash from operations of $251 million in the quarter.

Capital expenditures for the quarter totaled $84 million, including $27 million for improvements, upgrades, remodels and relocations of existing stores; $25 million related to new lease stores; $14 million for information systems upgrades and technology related projects; $12 million for distribution and transportation; and $6 million for stores we built.

Regarding our share repurchase program: As Rick mentioned, we repurchased 14.1 million shares for $800 million in the first quarter.

Since the inception of the share repurchase program in December 2011, we've repurchased 44.5 million shares, with a total return of cash to shareholders of $2.3 billion.

We currently have a remaining authorization of $223 million.

Turning now to guidance: At the time of our fourth-quarter earnings call in March, we provided a significant amount of detail to help you build your models.

Looking forward, we continue to expect top-line sales for 2014 to increase 8% to 9%.

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

While there may be some puts and takes in our operating performance, we are managing the Business for the long-term benefit of the Company and its shareholders.

We continue to expect diluted earnings per share for the year of $3.45 to $3.55.

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

This quarter, we temporarily increased our debt level based on our share repurchases in the quarter.

We're anticipating that we will repurchase $1.1 billion of our common stock this fiscal year.

This includes the $800 million of share repurchases completed in the first quarter.

For the year, we plan to open approximately 700 new stores, and capital expenditures are expected to be in the range of $450 million to $500 million.

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

Thanks, David.

I was pleased to see our overall business trends improve as the quarter progressed, and we are well positioned to achieve our 2014 objectives as we enter the second quarter.

We remain focused on executing our top initiatives supporting our operating priorities in 2014.

My goal is to share some of the insights into how we are thinking about sales and initiatives that support the projected acceleration of comp sales.

First, as many of you have consistently heard from me, our disciplined category management is the foundation for our limited assortment offering and staying relevant to our customer.

Today more than ever, given the economic environment that has lingered for quite some time, affordability has now become the focus of our core customer.

What affordability means to our customer today is the tradeoff between price and quality that best fits your budget.

At times, she is showing a greater willingness to compromise on quality or functionality to get a lower price point to stretch her money.

We will never lose sight of our core customer and the trust that she places in us to help her stretch her household budget.

In the first quarter alone, 49 planograms have been changed to provide more affordable items on our shelf across about 90% of our departments, making it easier for our customer to not only to see great value, but also to see affordability.

We are leveraging the Smart & Simple private brand.

Smart & Simple is a great platform that allows us to offer the lowest opening price points in categories on the shelf.

The Smart & Simple brand was launched about six years ago to deliver affordability.

Our customer recognizes that the brand is just as the name indicates, and does not expect the product to be national-brand equivalent like our portfolio of other private brands, including Clover Valley, DG Health and DG Home.

Smart & Simple allows us to further expand our product offerings and to offer a good product at an opening price point that delivers affordability.

This year alone, we will add approximately 40 new Smart & Simple products, primarily across food, paper and home cleaning, including items from liquid dish soap to macaroni and cheese.

This is complemented by SKU additions in key consumable categories such as food, home cleaning and paper products that are, again, focused on affordability.

This includes new items that are a combination of national brands and our private brands.

Given our customers' search for affordability, we have placed a renewed focus on the sweet spot for our customer across these important categories.

Also, we expect to comp positive in tobacco for the year based on our customer shopping pattern for this item.

Pet food and related products is an important category for our customers.

To capitalize on this trend, we implemented a new planogram with a better flow and brand blocking.

At the same time, we have a soft launch that is a complete rebranding of our private brand pet offerings; again, with a focus on opening price points and affordability.

The planogram has a completely new look and a new feel.

We're already seeing some positive sales results as a result of this chain as it rolls out across the Organization.

We have also significantly increased the SKU assortment in the $1 to $5 price points across our non-consumable categories, including seasonal, home decor, stationery, accessories and shoes.

We are not waiting on the economy to improve for our core customer, as she continues to face headwinds and cost increases.

Rather, we are sharpening our price points, and we expect our diligent work across categories to pay off as we move through the year.

Our Business is about continuous improvement.

We are also committed, as ever, to our philosophy of everyday low price to drive traffic in units.

Our customers trust our pricing, and we are committed to our brand promise of save time, save money, every day.

In the current promotional environment, we have begun recently, and will continue, to selectively and strategically invest in price in key product categories that are sensitive to our customers, to reinforce our value message.

However, in line with the trust placed in us by our customers, these promotional activities will not be at the expense of EDLP.

Later in the year, we will launch a DG digital coupon platform to accept digital manufacturer coupons and capitalize on this growing trend in retail.

We have partnered with coupons.com, the leader in digital promotions.

Using this platform, we will be able to deliver individualized content, such as national manufacturer coupons and DG exclusive offers, to participating customers with the goal to drive trips and basket size.

For our customers, the DG digital coupon program is flexible, personal, and most importantly, incredibly easy to use.

Our pilot to 1,000 stores rolls out in the next few weeks, with a national launch scheduled for completion by October.

Over time, we believe this exciting program will drive shopper engagement.

Turning to expense control, we are eliminating work that is non-value-added across every function in Dollar General, with a concentration on our retail operations.

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

This is a two-pronged cross-functional initiative to create time savings that we can reinvest to better manage our stores and service our customers.

First, we are removing non-value-added work; and second, we are continuing to eliminate and streamline processes and activities in our stores.

We expect these changes to allow our store managers and their teams to enhance their customer service efforts.

For example, we have utilized technology to improve our tobacco ordering process, and to better facilitate various personnel actions performed by our store managers, both of which provide time savings and improve our visibility to, and control around, these processes.

The most significant ongoing work simplification effort relates to our store stocking process.

During the fourth quarter of 2013, we rolled out the sorting of our rolltainers in the distribution centers by planogram to eliminate resorting at the stores, and to reduce the number of steps or moves required to stock the shelves.

We are now rolling out a rolltainer sort that separates promotional merchandise from core merchandise to produce efficiencies in setting promotional planograms and end caps.

Throughout the year, we will have several incremental technology improvements that will help our store managers and their teams close the store faster each evening, and streamline store reporting of key financial and operational information.

As I mentioned earlier, we are focused on continuous improvement.

As such, we are steadfastly committed to improving shrink and to utilizing the store-by-store optimized shrink level targets developed using applied predictive technology.

We know we have the significant room to reduce our inventory shrink on a store-by-store basis utilizing specific data for each store.

This granular approach to controlling and reducing shrink provides us with the ability to prioritize areas for improvement.

Enhancing our customer satisfaction program is another great example of Dollar General's dedication to continuous improvement.

Earlier this year, we revamped our program with more actionable items directly correlated to store standards, in stock and the check-out experience.

These new metrics give us a better view on what our customers want and value in our stores.

We expect this program to benefit our customers' shopping experience and help drive sales.

A true hallmark of the strength of Dollar General is our real estate processes for new stores, relocations and remodels.

We are highly analytical, with a focus on driving returns.

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.

In 2015, we'll enter three new states as we introduce the traditional Dollar General store concept into Oregon, Maine and Rhode Island.

These states have many communities where the Dollar General band will resonate over time.

We currently have approximately 1,400 of our traditional stores in the new DG13 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've 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, increased shelf-holding power 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 offerings.

We will add about 100 Dollar General plus stores to our fleet this year, primarily as a tool for relocations, as the returns are in line with the returns on a traditional Dollar General store.

And finally, we're continuing to test new ideas in our Dollar General market concept.

2014 will be another year of test and learn for this concept for the existing base, with five to six new stores being added, as we focus on driving sales, operating profit and returns.

At the end of the first quarter, we had 11,338 stores, with 83.6 million square feet of selling space, in 40 states.

Last 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 estimated more than 14,000 additional opportunities for the industry, 40% higher than our previous estimate of 10,000.

Importantly, while our new model estimates our opportunities across all urbanicities, the model identified the highest improvement in opportunities in small-town and rural markets.

This allows us to capitalize on our strong heritage of serving others in these types of high-return markets.

We've expanded our test of our life cycle remodel program to build our brand position in the marketplace, as there's an opportunity to maximize sales with significantly lower capital expenditures.

The life cycle remodel test focuses on our legacy stores that are smaller footprint stores, under 6,500 square feet, that have not been updated in more than seven years.

The life cycle remodel improves adjacencies and planogram layouts, allowing for a store that's closer to the format of our traditional Dollar General that we are building today.

Additionally, the number of coolers in these stores is also being increased by 4 to 5 cooler doors each, or 1,600 to 2,000 incremental cooler doors in total this year.

We plan to complete 400 of these life cycle remodels in 2014, of which we've already completed more than 160 since January.

These stores are already driving comparable sales with their lower capital spending requirement than a traditional remodel.

Over time, we believe we have a significant base of 2,000 to 3,000 stores eligible for life cycle remodel.

The sales and returns on 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 are ahead of schedule to open approximately 700 new stores, and to relocate or remodel approximately 500 stores, in addition to the 400 life cycle remodels, resulting in square footage growth of 6% to 7%.

To wrap up, we've started the second quarter with momentum, our inventories are in good shape, our balance sheet and cash flows are strong, and we are on track to distribute over $1 billion to our shareholders through the share repurchases in 2014.

We have significant organic new-store growth opportunities ahead that are high return and play to our strength, as we have built organizational capacities in our real estate function over time.

I remain excited about the long-term opportunities ahead for Dollar General.

My gratitude goes out to more than 103,000 Dollar General employees for all they do to fulfill our mission of serving others.

With that, Mary Winn, I'd be glad to open up the lines for questions.

All right, Brandy, if you'll poll for questions, please?

Certainly.

(Operator Instructions)

Your first question comes from the line of Scot Ciccarelli of RBC Capital.

Good morning, Scot.

How are you?

Can you help provide some more color around the price investment across what percent of the store, maybe number of SKUs?

Obviously Rick, you've been talking about for awhile how it's become a much more competitive environment, so just trying to get an idea around those price investments that we're talking about.

Especially given the fact that your biggest direct competitor is also talking about more price investments?

Scott, here is how we're looking at this.

First off, as I look at the competitive environment.

While the competitive environment is intense, it is no more intense than it was when we were in the fourth quarter.

It just kind of remains more at an elevated level.

It's not like people are doing silly things out there.

The second thing in regards to our major competitor out there, I think it's fair to say they're moving down towards us.

I don't think there should be any worry that they're attempting get under us.

Haven't seen anything to indicate that at this time.

And then in regards to the investments we're making, and I want to reiterate our commitment to EDLP, as we moved into April and into May, some of the high traffic, high penetration items that we've seen in the ad, we made the decision to place them in our ad also.

And by the way when I say that, a handful of items.

And you can't -- in our environment you can't operate where a competitor has a better price in an ad when you're in the ad with the same item.

So a handful of selective items across consumable categories, and again, no major change, no major change in the competitive environment and not seeing many changes at all in our price as it relates to where we are against drug, mass or grocery.

Got it.

And then Rick, you did talk about kind of private label and private label food.

Historically you guys talked about there is a lot of brand sensitivity around anything that customers were going to put in or on their bodies, I think is the phrase.

Are the customers now at the point where they're becoming more interested in private label food products?

Thanks.

Absolutely and that falls to the affordability thing.

The private brand, the gap we have in private brand against national brands is pretty significant and I think, Scot, that provides a wonderful trade down opportunity for our customer.

Then you couple that with the work we're doing on SKUs that are between $1 and $5 across the store, and you're getting a pretty powerful one-two punch directed at affordability.

Got you, thanks guys.

You bet.

Your next question comes from the line of Matthew Boss of JP Morgan.

Good morning, Matt.

Good morning.

So as we think about EBIT dollars, guidance this year is low to mid-single digit growth.

That includes the incentive in healthcare expense build.

As we think multi-year, do you think this is a mid-teens bottom line algorithm model, or what's the best way to think about the P&L going forward?

Yes, this is David.

We're not giving long term guidance at this point, but when we gave our guidance back in March we felt it was important to point out certain specific items that were hitting the P&L that we believe were more temporary in nature.

And you called out some of those and obviously we put them in our press release back in March.

So clearly once you get by those items you get into a more normalized growth rate as you look at the bottom line of Dollar General.

So I think getting by those items is important in terms of understanding our story as we move forward to the future.

Okay.

And then as a follow-up, sales per square foot are approaching about $200 here.

How would you rank the productivity opportunities going forward and how do you see your ability to continue to march this metric higher over time?

Yes, Matt I'll take that one.

One of the metrics that I'm most proud of is where we are in square footage, sales per square foot.

We started about $163 in January of 2008 and we're actually at $220 now.

And I believe we have -- there's still opportunity there.

I can't look at you and say, hey is it going to be $250 or $270.

But as we continue to refine our mix, maximize category management, believe it or not it's one of the metrics we look at the hardest and we still think we've got room to grow it.

Great.

Best of luck.

Thank you.

All right.

We'll move on to the next question, Brandy.

Your next question comes from the line of Dan Binder of Jefferies.

Good morning, Dan.

Hi good morning.

It's Dan Binder.

Yes, we do know how to pronounce your name.

(laughter)

Everybody gets it wrong.

No worries.

They get mine wrong too, sir, for what that's worth.

(laughter)

My question was around your initiative with regard to taking price points down.

I'm just curious based on what you've seen in April and May if you can talk a little bit about what's happening with AUR, UPT frequency, maybe break it down a little bit for us?

And also if you could just comment on whether these are similar type margin items as you had before or is that changing as well?

Yes, first of all I don't want anybody to think we're out there lowering a lot of prices.

Our EDLP position has got us incredibly strong as it relates to our competition out there.

What we have done, Dan, is taken some items in the ad and trued them up with what's going on around us, right?

And again, I think it's really important that I don't want anyone to think the competitive environment has changed radically in the course of the last quarter and a half.

Our average unit retail is slightly down and it's driven primarily probably by a little bit of deflation that we're seeing in cereals, grain items, sugar, oils.

And we don't have offsetting categories because of our limited amount of SKUs in the store to offset that.

So and in regards to these new items, $1 to $5, I would say quite frankly they probably carry margin rates that vary similar to what we normally deal with and in some cases sometimes the lower value rarer SKUs actually carry a little more margin.

Okay, great, thanks.

Thank you.

All right, Brandy, we'll move on.

Your next question comes from Edward Kelly of Credit Suisse.

Hi, Ed.

Hi.

Good morning, guys.

Quick question for you I just I guess maybe to start on the commentary around the comp performance.

You obviously mentioned that things improved in April or May.

Is there anymore color you can give us there?

I was just curious as to whether you're at this point in line with the full-year guidance or do you need to still drive a continued improvement from here in order to get to that number particularly as we think about cycling tobacco?

Yes, you know, let me answer it this way.

If I looked how I felt where I'm sitting right now in quarter four, or quarter one, where I was sitting in the quarter, I feel a whole lot better today.

So I think we have seen improving trends the minute the weather changed, so I think we're on track.

And Rick, if I remember correctly last quarter you talked about expecting some improvement in the promotional environment I guess throughout the year and how that was sort of factored into how you were thinking about things.

Is that still the case or are you now relying more on internal initiatives?

Yes, very fair question, Ed.

I actually thought as the weather would improve that the promotional environment would level off and that hasn't happened.

And we've made a decision on a handful of select items where we need to do the right thing for our customer and we've done that.

But the key takeaway is we have not abandoned our commitment to EDLP.

I want to make sure everybody understands we are managing this thing and I did think the promotional activity would slow down.

It's not any worse, but on the same token we're not going to wait around until it does.

Okay, great, thank you.

Your next question comes from Stephen Grambling of Goldman Sachs.

Good morning, Steve.

Good morning, and thanks for taking the questions.

One quick follow-up to Ed's question on the guidance there.

Just to be clear, is the expectation that some of the price investments that you're making on gross margin were basically balanced by some of the cost control initiatives you have put in place?

It sounded like they're incremental to what we discussed in the fourth quarter.

Yes, I think it's fair to say that we're working on cost and working on our margin like we always have and right now our number one priority is same-store sales growth.

And we're seeing -- we started seeing a momentum shift in April, and we're intent, Steve, on keeping that moving.

And then I guess a separate question, which is one of your competitors who -- Family Dollar announced some store closings going on and also slower store growth openings.

How do you think about the opportunity there from a market share standpoint and even real estate selection going forward?

Yes, really, really solid question.

You know, we look at our real estate returns every week, look at our projects.

We're opening our stores in that 85% to 90% of our same-store sales base.

As I look at our pro forma and how we're actually performing, we're at about 101% I believe, actually doing just a little bit better.

I actually think that the slowing down of growth in our competitor will lead to better real estate values for us hopefully down the road because there will be less people fighting over a site.

And in terms of the closings do you have any sense for the market share opportunity there?

You know, I think that they're scattered all over and I think we're going to have -- it's kind of like CVS abandoning cigarettes.

I think that's one of those things we're going to have to let it play out.

Great, thanks, best of luck.

Thank you.

All right, Brandy, we'll move to the next question.

Your next question comes from Dan Wewer of Raymond James.

Thanks.

Good morning, Dan.

Hi, Rick.

So Rick, when you joined the Company Dollar General store averaged about $170,000 of inventory.

And over the following 3 or 4 years you grew that to about $200,000 per store and your GM ROI increased every year as well.

But since 2011 another $30,000 of inventory has been added, but generally has dropped for eight consecutive quarters.

So I guess my question is how important is inventory productivity when you're looking at strategic plans, and then particularly when you're looking at the changes in your private label mix, pricing?

How will that impact generally going forward?

Yes, I think, Dan as I look at this, I think that's again a really solid observation.

And I think if you look over the last couple years, in our desire to become more and more relevant we added more and more SKUs that quite frankly weren't turning as fast as we thought they were going to.

And I think it was about this time this last year I actually admitted not only were they not turning as fast, but they were actually creating incremental shrink.

And we have begun the process now of -- we've taken out over 600 of those slower turn items that were creating shrink.

In fact I think we're just about complete with that process.

And we did it without getting incremental markdowns involved with it.

So to answer your question, I think if you go back to when I first got here, the fruit was much lower on the ground and it was easier to say we needed this and we needed this and we needed this.

Now what happens as we fine tune our mix, we're going to have to be a little more select going forward.

And I think what we should see as we add more SKUs in the $1 to $5 range, if the affordability strategy works, we should see our inventory turns increase.

Okay.

And just also one follow-up, maybe for David.

We normally don't give too much attention to Company guidance, but I did notice that you're not providing a second quarter guidance, which is -- past quarters you did provide upcoming guidance.

Is there a reason for the omission?

That's really not a change from the past, Dan.

In first quarter, I mean in fourth quarter when we were laying out guidance for the year we did give some first quarter guidance because there were a lot of ins and outs and it was very complicated.

But if you go back since we went public in 2009, our goal was to give guidance for the full year and try to steer people to that full-year guidance and on a quarterly basis update the full year guidance.

And there may have been select time periods over the last five years where we'll comment on a particular quarter, and certainly as we get through the third quarter and we're talking about the rest of the year, there's only one quarter left, so by definition we're giving quarterly guidance.

But in general we have not given quarterly guidance and that's not our intent.

Again, we'd like to have our investors focus more on the long term opportunity with Dollar General than the individual quarters.

Okay, great.

Thank you.

Thank you.

Brandy, we'll move on to the next question.

Your next question comes from David Mann of Johnson Rice.

Hi David.

Good morning Rick and David.

In terms of gross margin, I think you had talked about second quarter perhaps getting a little bit better.

The first quarter would have been the worst of the year.

Given the environment, what you're doing with some pricing, do you still expect that to be the case?

And any other puts and takes that you could call out would be appreciated.

David, we're not giving specific guidance on gross margin, but let me try to help you a little bit with it.

We tried to spell this out in the fourth quarter when we were talking about the full year and we gave a little more color on some line items.

I think we still think that as we get into the back half of the year and we lap tobacco, because the rollout last year ended in the June/July time frame, that we should see the comparisons get a little bit easier on the gross margin.

To your point, we still haven't reached that in the second quarter, so there still is more pressure on the margin in the second quarter than what we'll see the back half of the year as we get to the third quarter, end of fourth quarter.

Great.

And then as a follow-up, in terms of Family Dollar when you look at what they've done in the past quarter in terms of taking some price -- or putting through some price investments, how have your stores performed that are near the Family Dollar stores versus the other stores that you have that are not in direct competition with them?

David I'm not seeing anything different anywhere across the chain.

Great.

Thank you.

All right.

Brandy, we'll move to the next question.

Your next question comes from the line of Paul Trussell with Deutsche Bank.

Good morning, Paul.

Good morning, Rick.

Just a question regarding the food and consumable categories.

Your sales growth was just under 8% this quarter, so you're clearly continuing to gain market share.

But that was also the third consecutive quarter of a sequential slowdown in that growth line.

I'm just hoping you can speak a little bit more about overall demand of those goods, those basic household goods, and contrast that to all the meaningful additional shelf space that's being allocated across the industry to those products.

I think, Paul, as you look at the Nielsen numbers they would actually tell you that the pie is contracting a little bit.

And it's hard to believe that people are eating less or using less detergent, but apparently they are at the end of the day.

In fact we actually have market research that talks about how people are trying to stretch one meal into two by adding more starch to the product.

I think, and I literally looked at this information last night.

Literally looked at this last night.

The new Nielsen numbers are out and on a 4-week basis and a 12-week basis our unit share growth and share growth are accelerating.

And I take that as a sign that we are -- the mix we have in the stores, the allocation of product based how it is in the store, is still the right thing to do.

Paul, did that help you?

No, that's helpful, thank you very much.

Thanks, Paul.

Just to follow-up.

Sure.

In terms of the color you're giving on gross margin, just to reiterate in the second half of the year as you cycle tobacco, are you comfortable giving your initiatives that gross margins will be flat to up in the second half?

Yes, again, we're not giving specific guidance on what we're seeing in gross margin, but we do see it getting better than what we saw in the first half of the year in particular as we get to third and fourth quarter, better than what we will see in first and second quarter.

Thank you.

Good luck.

Brandy, we'll move to the next line of questioning, please.

Your next question comes from Scott Mushkin of Wolfe Research.

Good morning, Scott.

Good morning, guys.

So I was wondering, Rick, your take on Walmart's Dollar General strategy as they're talking about it, which is to basically open up some of these express stores next to DGs and how the stores perform when you're seeing that activity.

And is there anything that you think that they go from a test to a full out roll here -- they're going to do 100 stores this year, that you're going to need to do.

Yes, I think Walmart is an outstanding competitor; the largest retailer in the United States.

You know, we have experienced express stores where our stores -- they've been opened up against us.

I can tell you in every incidence where that has happened after one year the stores are comping positive, so it's not like there's this major knockout punch here.

I do think that when we take the hit when a Walmart Express opens up it's no different than with another competitor would open up.

So I could actually make an argument if I got them all and just gave you an average it might even be less.

I do think that it's -- the small box is a different animal to operate in terms of the supply chain.

We ship in eaches and rolltainers versus pallets and truckloads, and there's a lot more work there that needs to be done.

Albeit, Scott, we do have a nice head start too, if you look at 11,000 stores out there.

So I think they're a great competitor.

I think they've done a lot of fantastic things, but I also think we're going to open up 700 new stores this year.

We're going to enter some new markets next year.

So I think we feel pretty good about where we are.

So on the same -- thanks for that answer, and I actually agree with some of your comments about Walmart.

Fresh and Dollar General, a lot of our research suggests that fresh trends are fairly significant and that some of these packaged foods, you were talking about the Nielsen data earlier, that maybe some people switching to fresh.

How does Dollar General deal with the trend for -- it looks like all consumers, even low end consumers, to buy more fresh?

Yes, I think one of the things we're wrestling at is, and I use fresh to mean also more organic, right, as well as just fresh produce and fresh meat.

I do think that our customer is becoming a little more receptive to the organic and the fat free.

I can tell you, Scott, when I got here four or five years ago they actually thought that product cost more.

And it probably did now and now it's actually coming down on the retail.

I do know Todd and his team are looking at that.

As far as moving into true fresh, to produce, true meat, that's a little more difficult animal to manage.

And the key to us has always been that 7,500 to 10,000 SKUs that are core, every day use.

And I think we'll continue to fit well with the people who are really pushing the fresh stuff.

Thanks for taking my questions.

I appreciate it.

You bet, sir.

Your next question comes from Meredith Adler of Barclays.

Good morning, Meredith.

Good morning.

Thanks for taking my question.

I'd like to start by just talking about stock buybacks, and I don't know whether you'll add anymore.

But you did borrow a bit in the first quarter to buy back stock.

And as you said it ended up with leverage that was a little bit higher.

If the stock were to stay depressed, would you be willing to go beyond $1.1 billion of stock repurchases?

Would you be willing to stay somewhat levered or push leverage up a little bit?

It seems like the $800 million that you spent so far you probably got -- you did well in terms of where you bought the stock.

Would you take advantage of that later in the year?

Yes, Meredith, this is David.

Our target right now today is still to buy back about $1.1 billion of stock.

And we have said many times that given conditions in the debt and equity markets we can temporarily change our thoughts on that, change our debt levels.

And we did so in Q1, accelerating our purchases due to what we saw in the stock price.

And we believe on a long term basis this is very positive for all of our shareholders, particularly our longer-term shareholders.

So Rick and I are continuously discussing this with our board, but as of right now the $1.1 billion is kind of where we're locked and loaded on this.

Okay, great, thank you.

And then sort of changing gears, this $1 to $5 items and some of the other things that you've been doing to provide a better value, an opening price point in many categories.

To what extent would you say that you're getting support from vendors?

To what extent are they actually coming up with ideas or being very supportive on developing products and helping to manufacture them?

Or is this something you guys are mostly doing on your own?

Yes, I actually, Meredith, to be honest it's a combination of both.

I think the affordability idea, which we will probably start hearing more about, initiated from our market research and the work that's being done here.

While those are manufacturer items, they're more also what I would quantify as in and out items.

Like a different brand, an old brand that we are now resurrecting.

So it is really a combination of both.

But I will tell you if Todd was sitting here in the room with me, he would say that the vendor community is much more receptive to this kind of thinking than they ever have been in the past.

Okay.

And then I just had one final question about real estate.

Somebody already asked you about not having as much competition for real estate from your most similar competitor.

But in just more generally what are you seeing in the real estate environment?

Any pressure on rate, rents and any shortages anywhere?

Or do you just still have tons of choice?

Yes, well, I think the signal here that's the most obvious is we're already ahead of the 2014 pipeline.

We've already moved into the 2015 pipeline, which would tell you the availability of the real estate is as strong as it�s been the last couple of years.

I would say right now there might be some minus upward pressure in specific pieces of the country, but overall I would tell you the rates that we're negotiating for are very consistent with what we got in the last couple years.

In fact I could tell you we're actually doing better in California.

That's great.

I hear good things about the real estate you're picking in California, so congratulations.

We've come a long way on the California thing.

We're starting to get really, really excited.

Great.

Those are my questions, thank you.

Thank you, Meredith.

And Brandy, we'll move to the next question please.

Your next question comes from Matt Nemer of Wells Fargo Securities.

Good morning, Matt.

Good morning, everyone.

My first question is actually on the apparel business.

It looked like there was a nice sequential improvement from Q4.

It's still down per foot, but I'm just wondering if you are getting traction from merchandising changes there or if some of that's driven by markdowns?

It's absolutely driven by merchandising.

We are, Matt, like I said in my script, we are very pleased with what we're seeing on the non-consumable side.

You haven't heard me say that in a long time.

Anything in particular in apparel that's causing that change, it's like a 9 point change from Q4 to -- ?

Yes, I'll tell you, and again, I never thought I'd say this.

It's women's hanging apparel and shoes are both doing very well.

And what's happening is it's starting to drag, the halo effect is starting to drag men's with it.

Now there's been a lot of hard work done on men's too.

We're pleased with what we're seeing.

Okay, thanks.

And then just secondly, the digital coupon strategy that you mentioned, how does that impact the P&L and does it replace any circular marketing expense?

If you could just explain how that might play out over time?

Yes, Matt.

It's driven by manufacturer expense.

It's all the FSI coupons that you historically see in the Sunday newspaper.

They're going to take all of that digital.

And then of course sooner or later we'll probably add some DG offers along with it, but there will be no P&L hit with the implementation of the program.

Got it.

Okay great.

Thanks so much.

You're welcome.

All right, Brandy, next question, please.

Our next question comes from Chuck Grom of Sterne Agee.

Good morning guys.

How are you?

Just looking back, Rick, part of your success since you became CEO has been the price lead and kind of adopting the Costco philosophy on everyday low price.

And I think we'd all agree that's been the right formula.

And I believe some of our price work and others would show that the lead relative [depth DO] got pretty wide the past few years, and some studies say 3% to 7%.

And as you look forward and as that gap begins to narrow and they get to par with you, which I think they're starting to do on some categories, how do you respond to keep that customer coming back to Dollar General, that customer that you've earned over the past few years?

Just how do you guys react?

Yes, I think, by the way, your callout's right on.

That's about what the gap is.

Now why were the gaps narrowing?

We still significantly have some lead here yet.

But I think at the end of the day, Chuck, if that were to happen, if there were to be parity down the road, if that were to happen, it will turn into an execution gain.

And that will be the ability for us to conceptually take what we've got and make sure it translates its way into the store, which I think most people will tell you that we're very good at.

And I never, never want to sell short our ability in category management and the fact that we have one of the best category management programs around and that's how you stay relevant.

It's not just having the right price.

You have to have the right items at the right time at the right price.

And I happen to think we're very good at that.

Okay, I'd agree.

And then the follow-up with that, one for David, just when you went through the components of the guidance in March you guided EBITDA growth of I believe 2% to 5%.

With presumably more buybacks front end loaded than I think probably most people had in their models, it would appear to be that maybe the guide of the EBIT dollar growth would be at the lower end of that range.

Is that kind of how the math plays out this year for you guys, or is it still at the mid-point of the range for the year?

As we look at it, Chuck, and again we're not giving specific numbers there, but the impact -- if you put in the impact of the share buyback and you put it all together, I think the range on the operating profit growth, it's still, if you look at that, it doesn't change it all that much from what we had said previously in terms of the high end of the guidance there.

So it doesn't have a significant impact on that overall.

Okay.

Thanks, David.

And just one more if I could on new store productivity.

It was on our math around 74%, which is a little bit lower than what you guys have been running.

I didn't know if there was some late in the quarter openings that maybe pushed that number down, or if you were seeing something else that led it to be only 74%?

No, I mean we historically have said it's in the 85% to 90% range.

And I'm pretty comfortable with that number, Chuck.

Okay, good luck, guys.

Thanks.

Thank you.

All right, Brandy, we'll move to the next question.

Your next question comes from John Heinbockel of Guggenheim Securities.

Good morning, John.

Hi.

Let me ask you about discretionary sales trend here.

So in the sequential improvement you've seen, how broad based is that, and have we turned positive yet in discretionary comps?

And do you think that -- can you consistently grow that business with the low end consumer stressed the way they are?

The improvement that we started seeing in April and into May is broad based across all the categories, and it's fair to say that non-consumables are running positive.

Now there's puts and takes in there, but we are running positive in non-consumables.

As a group?

Yes, but I would say if you looked at all the categories within there, it's probably as close as it�s been in a long time, in terms of the boat is floating pretty evenly.

And more importantly, John, we've got a team that's working really hard on it.

It's taking us awhile.

I still believe the non-consumable side of the business is incredibly important to us, and I actually believe that's how we'll grow the basket long term.

And I think the trouble with non-consumable stuff -- well with your extensive retail background it takes awhile for your initiative to gain traction where the consumer comes in and actually sees something different, something new.

And that's I think it's actually what's starting to happen.

So could we actually, when you think about -- it's not too early to think about holiday.

You think about the set up, the easy compare, weather, the calendar, et cetera, are you more optimistic about going into holiday than you've been in a while, couple of years?

I think, again, if I had Vasos with me he would tell you the offering we have for Christmas is pretty doggone strong and it's built around affordability.

It is going to be a very interesting holiday for us.

Having said that, we'll talk more about that probably as we get a little bit closer to it.

And then you didn't really talk much about tobacco attachment metrics.

Have they continued to improve sequentially?

Yes, I'll give you the latest cut I've got on it, John.

31% of our cigarette purchases are cigarettes only, 27% are tobacco plus one or two items.

But the big number now is 42% of tobacco purchases have three or more items.

So it's continuing to move exactly as we projected.

And then lastly --

And I was going to say and the basket is growing with it.

I was going to say based on that, is there any clever way to get more than your fair share of the CVS customers, or not really, you just got to -- they'll come in if you're close to their store?

Yes, I think the trouble when someone gives us something like that it's going to go a little bit of everywhere.

And I think what we have to do, John, is just let that play out and see what actually happens.

Okay, thank you.

All right, Brandy, we'll go to the next question.

Our next question comes from the line of Anthony Chukumba of BB&T Capital Markets.

Good morning, Anthony.

Good morning.

Just had a question on inventory shrink.

This is the first quarter in a while that you haven't specifically called out inventory shrink as a headwind to your gross margin.

So I just wanted to make sure that you are seeing inventory shrink improvements, and to the extent that you are, what is driving that?

Thank you.

Yes, we didn't call it out because it wasn't significant enough to be called out.

But it's still a little bit of a headwind for us as we look at shrink, and where we'd like to be versus where we had planned it to be.

But again, not enough to be called out as it was in some previous quarters overall.

We continue to have quite an effort going on in terms of things that we're doing with our defensive merchandising, our corkscrew pegs, our anti-sweet pegs, a lot of new thoughts in terms of additional things we'll be doing, particularly when it comes to DSD and some of the more high shrink items that we have there.

So stay tuned there.

So again, still not ready to declare victory there, but making progress.

But little bit negative, but not enough to call out like it was in prior quarters.

Probably from a headwind to a breeze, right?

Got it.

Just to clarify then, so it's still a headwind, not as much of a headwind as it's been in the past.

Is that a fair assessment?

Yes, again, we didn't feel the need to call it out, and in the past it was significant enough that we felt like we needed to call it out.

Got it.

That's helpful, thank you.

All right, Brandy, I think we're at the top of the hour, but we'll try to squeeze one more question in.

Your next question comes from Joe Feldman of Telsey Advisory Group.

Good morning, Joe.

Hi, guys.

Good morning.

Thanks for taking me at the end here.

I appreciate you doing that.

I guess two quick questions.

One was more kind of functional.

Was wondering -- the digital couponing that you're going to be doing, can you give a little more color?

I guess I'm not clear exactly what you're doing and how that customer is going to access that.

Is it just via their phones or I guess computer?

How is that going to work functionally?

Yes, so what happens, Joe, you can either go into the store or you can go into our website on your laptop and all you do is you sign in with a reference number, most people probably put their phone number in there.

And once you sign in you opt in, you can look at the assortment of coupons and say I want these.

Or you can just check the all box.

And then what we will do is we'll download those onto your Smartphone, you'll go in, check out, key in your number, and then those coupons will be subtracted from your purchases.

It is pretty slick.

It's kind of like a loyalty program without all the expense.

Right.

And now do you guys have -- and you have enough of a database, or I guess it will build as you start the program?

Absolutely.

So what will happen is we'll begin to be able to link purchases to a phone number or groups of phone numbers and be able to market against those.

Got it.

And then the one last question I had sort of bigger picture, but as you guys look at your 11,000 plus stores can you see any differences based on, I guess for lack of a better word quality of the store, the demographic.

You know like the stores that are in better markets or better demographic areas versus those that are in the weaker ones.

Do you see a range of -- are people buying different things?

Are there just any subtle differences that you can share with us just to get a better sense of where the customer is at?

You know, Joe, this is one of the most interesting businesses I have ever dealt with in that the SKU base is so limited and so narrow and so relevant that it pretty much, it's pretty even just about everywhere regardless of the demographic.

And that's why we've been so successful with every region in the United States historically trends positive because the model is so basic.

Got it.

That's good to hear, thank you.

I appreciate that.

Great.

Operator, that I think, Brandy, that will conclude our call at this point.

Thank you, everyone, for joining us.

I know we left a few people in the queue, so please feel free to give me a call today or Emma Jo a call.

And we look forward to updating you as we move through the year.

Thank you.

That concludes today's conference.

You may now disconnect.