達樂 (DG) 2016 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Dollar General first quarter 2016 earnings call.

Today is Thursday, May 26, 2016.

(Operator Instructions) This call is being recorded and instructions for listening to the replay of the call are available in the Company's earnings 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, Hope, and good morning, everyone.

On the call today are Todd Vasos, our CEO, and John Garratt, our CFO.

After our prepared remarks, we will open up the call for questions.

Please remember to keep your questioning to one line of thought.

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

Let me caution you that today's comments will include forward-looking statements about our expectations, plans, predictions and other nonhistorical matters, including but not limited to, our fiscal 2016-2017 store growth, fiscal 2016 initiatives, capital allocation strategy and related expectations, our long-term financial growth model and future economic trends or conditions.

Forward-looking statements can be identified because they are not statements of historical fact and use words such as outlook, may, should, could, believe, anticipate, expect, looking ahead, focused on, estimate, forecast, goal or intend, and similar expressions that concern our strategies, plans, intentions or beliefs about future occurrences or results.

Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in our earnings release issued this morning, our 2015 10-K filed on March 22, 2016, and our most recent 10-Q filed today, 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, except as follows.

We previously outlined (technical difficulty) model and certain 2016 financial guidance in our press release issued on March 10, 2016.

As noted in that release, we plan to update our diluted EPS guidance only if we no longer reasonably expect diluted EPS to fall within the 10% to 15% range outlined in the growth model, and we generally do not intend and specifically disclaim any duty to update our expectations regarding where in the range of guidance net sales, same-store sales, or diluted EPS may fall, or to update any component of the growth model, other than diluted EPS, as just referenced.

As we noted in that press release, we also do not intend and specifically disclaim any duty to update our dollar range for expected fiscal 2016 capital expenditures, unless otherwise described by applicable securities laws.

Our comments today will be consistent with the approach we just outlined.

We will not discuss and will not answer any questions regarding the quarter's results as related to the long-term growth model or the specific 2016 financial guidance first given on March 10, 2016.

However, due to our accelerated store growth plans during this call, we are discussing our square footage growth targets for 2016 and 2017.

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

Thank you Mary Winn, and welcome to everyone joining our call.

As we noted in our press release, we had a very good start to the year and are pleased with our results.

For the first quarter, the team executed well, as we were keenly focused on ensuring the effectiveness and efficiency of every aspect of our business.

Let's recap some of the highlights for the first quarter of 2016 as compared to the 2015 period.

First quarter sales increased 7% to $5.3 billion.

We delivered same-store sales growth of 2.2% for the quarter.

In an environment where many retailers struggled, we delivered good performance.

Same-store sales growth was positive for both consumables and non-consumables, with growth stronger across our consumable categories.

Growth in non-consumables was due to seasonal and home products.

For the 33rd consecutive quarter, we increased both our customer traffic and average ticket year-over-year.

Gross margin expanded by 16 basis points to 30.6%.

We levered selling, general and administrative expenses by 26 basis points as our zero-based budget initiative started to contribute to our results.

Operating profit increased 12%, with operating profit margin expansion of 42 basis points.

Net income in the first quarter increased 17% to $295 million.

For the quarter, diluted earnings per share increased 23% to $1.03, including a $0.03 benefit from a lower tax rate, which John will discuss later.

During the quarter, we returned over $300 million to shareholders through the repurchase of 2.7 million shares of common stock and the payment of a quarterly dividend.

In the first quarter, we made notable progress against our key initiatives for 2016.

As I will discuss in more detail a bit later in the call, the team has done a great job of developing compelling initiatives across merchandising, store operations and supply chain to help drive our business in 2016 and for the long-term.

Additionally, we continue to grow (technical difficulty) and item units in syndicated share data for the quarter.

In the most recent syndicated data, we experienced relatively consistent mid-single-digit growth in both units and dollar share for the 4-, 12-, 24- and 52-week periods.

Now I would like to turn the call over to John to go through more details of the quarter.

Thank you, Todd, and good morning everyone.

As Todd has taken you through the highlights of our first quarter, I will share more details on the rest of the financial results, starting with gross profit.

Gross profit for the first quarter was $1.6 billion, or 30.6% of sales, an increase of 16 basis points from last year's first quarter.

The most significant drivers were higher initial inventory markups and reduced transportation costs, partially attributable to lower fuel rates.

This was in part offset by a greater proportion of sales of consumables, which have a lower gross profit rate than non-consumables, increased inventory shrink and higher markdown.

SG&A expense decreased by 26 basis points over the 2015 quarter to $1.1 billion, or 21.5% of sales, in the first quarter.

The majority of the SG&A decrease was due to lower utilities costs, administrative payroll, incentive compensation, travel expenses, workers compensation costs, and advertising costs, as well as higher volume of customer cash back transactions, resulting in increased convenience fees paid to the Company.

Partially offsetting these items were our retail labor investment and occupancy costs, each of which increased at a rate greater than the increase in sales.

Our zero-based budgeting initiative contributed to our robust results.

This process leverages our cultural heritage of thrift and further solidifies our leadership as a low-cost operator.

We implemented zero-based budgeting proactively and thoughtfully as we developed our fiscal 2016 budget using three filters: the customer, our strategic priorities, and risk mitigation.

The team is now actively working on a pipeline of additional future savings opportunities across the Company.

Moving down the income statement, our effective tax rate for the quarter was 35.4%, as compared to 37.7% in the first quarter last year.

As we detailed in our press release, the effective income tax rate was lower in the first quarter of this year due primarily to early adoption of amendment to existing guidance for employee share-based payment accounting and the recognition of incremental benefits from the Work Opportunity Tax Credit.

The income tax benefit of the employee share-based payment accounting change in the quarter was approximately $9 million, or $0.03 per diluted share.

Because the majority of our stock-based awards typically vest in the first quarter, we do not expect this accounting amendment impact to reoccur to this degree over the balance of the year.

As you may recall, the WOTC was retroactively reenacted in the fourth quarter of 2015, which resulted in a significant portion of our 2015 annual benefit being recorded at that time.

Due to Congress approving the WOTC through 2019, we will be able to recognize greater amounts of each quarter's benefit in the respective quarter in which it is earned.

Now to our balance sheet and cash flow.

At quarter end, merchandise inventories were $3.07 billion, up 8% in total and 2% on a per-store basis.

We believe our inventory is in great shape, and we are comfortable with the quality.

Our longer-term goal continues to be inventory growth in line with our sales [growth].

We generated cash from operations of $404 million in the quarter, an increase of 9% or $34 million, compared to the first quarter of 2015.

During the quarter, we repurchased 2.7 million shares of our common stock for $231 million and paid a quarterly dividend of $0.25 per common share outstanding, totaling $71 million.

From December 2011 through the first quarter of 2016, we repurchased $3.8 billion or 64.7 million shares of our common stock.

As of the end of the first quarter, the remaining share repurchase authorization was approximately $693 million.

We remain committed to a disciplined capital allocation strategy to create lasting value for our shareholders.

Our first priority remains investing in new stores and the infrastructure to support our store growth, while our second priority is to return cash to shareholders through anticipated dividends and share repurchases.

Underlying our capital allocation strategy is our goal to maintain our investment grade rating by managing to a leverage ratio of approximately 3 times adjusted debt to EBITDA.

In closing, we feel really good about delivering a strong first quarter.

We remain committed to focusing on profitable growth, reinvesting in our business and capturing cost savings through our zero-based budgeting program.

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

Thank you, John.

Now let's turn to an update on our initiatives for 2016.

Our customers are the starting point and center of all we do at Dollar General.

We recently did the first recut of our consumer segmentation in four years to provide shopper insight that impacts decisions across the entire Company.

This research helps us know who our customers are, where they shop, how they shop, what they buy, how much they spend and, most importantly, their attitudes and their behaviors.

The exciting news is that we are improving our core customer productivity and retaining our trade-down customer, all while we expand our reach.

New segments shopping with us include an older male middle income consumer and a Millennial female shopper.

The Millennial shopper is a segment that I was particularly excited to see emerge as a core consumer for DG, as this segment is so important to the future of retail and Dollar General.

Today, she represents about 12% of our shoppers and 24% of our sales.

On average, she is shopping our stores about three times a month.

One of her money-saving strategies is to utilize technology like our Dollar General digital coupon app to make lists, find deals, and save money.

She wants healthy food items, and likes to be on the cutting edge and try new products.

While national brands are important, she also trusts our private brands.

She utilizes the entire DG store as a way to stretch her budget.

These insights will help us serve her even better going forward as we strive to ensure she becomes an even larger consumer segment for us over time.

I believe our deep and actionable understanding of our consumers is a core strength.

As we implement and refine our initiatives, we have incorporated this knowledge of our consumers across merchandising and pricing, marketing, site selection, and store operations and design.

The primary goal is to grow transaction and item units, which continue to be key to our market share performance.

Our operating priorities continue to be, first, driving profitable sales growth.

Second, capturing growth opportunities.

Third, enhancing our position as a low-cost operator.

And fourth, investing in our people as a competitive advantage.

Our first priority is continuing to drive profitable sales growth.

As we look to attract and grow new customers and trips while capturing share with existing customers, the insights gained from our customer segmentation work are incorporated into our disciplined approach to category management.

In the process, we have assessed the expansion of groups that are most likely to drive traffic to our stores.

In 2016, we are expanding perishables, health and beauty care, party and stationery.

These 2016 sales driver initiatives are being implemented across not just new stores, relocations and remodels, but also into our mature store base at a greater degree than we have in the past several years.

We are adding a total of 23,000 cooler doors across 9,000 existing stores.

In the first quarter alone, more than 20% of these stores received a new cooler expansion, which allows for the extension of cold beer, more immediate consumption items, and greater product selection.

Additionally, more than 7,000 existing stores will see planogram expansions across health and beauty care, party and/or stationery, with many of these stores getting all expansions.

Our ongoing affordability initiative is front and center, with an expanded $1 offering, including a greater selection of national brands.

Increased penetration of national brands at the $1 price point gives us the opportunity to increase trial with our consumers, which leads to brand acceptance.

Acceptance drives loyalty, which tends to encourage trade-up over time.

Currently, nearly 60% of our baskets contain a $1 item or less.

Our private brand portfolio plays a key role in driving profitable sales, as these items continue to -- both sales and enhance our gross margins.

Private brands offer exceptional value to our core consumers, and they offer lower opening price points, which is especially important to our customers.

We continue to have private brand opportunity, as our penetration is below both mass merchant and grocery segments.

Our plans include engaging our store associates as private brand ambassadors.

In addition, we will continue to communicate with our customers the unparalleled value our private brands offer.

In the first quarter, we launched a new private brand line named Heartland Harvest to expand our better-for-you offerings, which really resonates with our Millennials.

By September, we anticipate over 15 new SKUs under this better-for-you brand.

We will also be expanding our private brand offerings in health and beauty care.

In about 160 Dollar General Plus locations, we are testing limited assortment of the best-selling fresh fruits and vegetables, as we look to gain more experience in this category and capitalize on our customers' desire for fresh options.

Our Fast Way to Save digital coupon offering continues to gain traction since we first brought this innovation to the channel in September of 2014.

The program provides consumers exclusive savings available only as Dollar General coupons.

The compelling offers -- which include national brands, private brands, and instant savings -- are helping to drive enrollment.

We are seeing higher average basket and greater trip frequency for those enrolled in the program.

Our recent limited market test across about 300 stores captured 30,000 new enrollees in just two weeks.

Additionally, we have made system changes that simplify enrollment.

We are on track to more than double enrollment in the program by the end of this fiscal year, allowing for greater shopper analytics and targeting.

The store operations team is aggressively improving our on-shelf availability.

Across the board, we are seeing progress as our third-party audits indicate that our stores have improved their in-stock position by more than 100 basis points.

In addition, we continue to optimize our labor investment in our more competitive markets and are pleased with the returns.

Notably, these stores continue to show significant improvements in customer satisfaction metrics and same-store sales growth along with operating profit gains.

Across the chain, our customers are taking note of the improvement in in-stock position with recent customer satisfaction scores for our in-stock position at the highest level in two years.

Our first-quarter results indicate we are aggressively pursuing opportunities for continued gross margin expansion through global sourcing, cost management and supply chain efficiencies.

We believe we will be able to improve both product quality and value for our customers over time.

Second, we are focus on initiatives to capture growth opportunities.

Our real estate program is the foundation of our growth and a proven high return, low risk model.

Our long-term growth model contemplates 6% to 8% square footage growth annually.

We anticipate accelerating our square footage growth in 2016 to about 7%, with 900 new stores, and increasing this to 7.5% in 2017 with about 1,000 new stores.

Our new DG 2016 store layout is being used for all new stores, relocations and remodels.

The layout is designed to expand high-growth, traffic-building categories in a more customer-friendly format with faster checkout.

We believe this layout can drive both existing and new store -- new consumer trips to Dollar General as we place a greater emphasis in the store on value, affordability and convenience.

While it is still early, the results of this DG16 layout are encouraging.

For instance, we are seeing stronger perishable sales, a double-digit lift in our new front end items.

Overall, our sales performance in stores using the DG16 layout is meeting our expectations.

In addition, we are utilizing a smaller format store that allows us to capture growth opportunities in more densely populated metropolitan areas.

Currently, we have opened approximately 45 stores with selling square footage of less than 6,000 square feet, about 20% smaller than our traditional stores.

Based on the early results, sales productivity and returns are very encouraging.

This smaller footprint store has all of our strategic initiatives, but with added assortments.

By eliminating less productive product segments and adding or expanding product departments to meet the needs of our metro market consumers, we believe this smaller, more flexible format store will allow us to have a higher capture rate for site selection.

Additionally, we believe this smaller format will work in rural locations with a lower household count.

With this format, we have greater confidence in our real estate strategy for metro sites and smaller, lower household rural sites.

In total, we anticipate about 80 of the smaller format stores for the 2016 fiscal year.

We have an active remodel and relocation program designed to keep our brand relevant, as we utilize our most current store layout and in-store communication of value to drive same-store sales and returns.

About 875 locations are expected to be relocated or remodeled in fiscal 2016, with around 900 locations slated for 2017.

We are very optimistic about our new store outlook for 2017, as our 1,000 store pipeline is already 50% complete.

We remain disciplined and focused on our new store program continues to drive compelling returns with low cost to build and a low cost to operate.

To support our new store growth and drive productivity, we are making investments in our distribution center network.

Since 2012, we have opened four distribution centers.

Construction is on track for our newest distribution center in Janesville, Wisconsin, with a goal to begin shipping in early 2017.

Most recently, we purchased land in Jackson, Georgia, for our 15th distribution center.

In conjunction with the real estate team, we are proactively planning where our next distribution centers will be located to support growth across merchandising initiatives and store base.

Third, we will leverage and reinforce our positioning as a low-cost operator.

As evidenced by our first-quarter performance, our zero-based budgeting process contributed to our results, as we successfully leveraged our SG&A expenses on same-store sales growth below our 2.5% to 3% leverage target.

Our underlying principles are keep the business simple, but move quickly to capture opportunities, control expenses, and always be a low-cost operator.

Our fourth operating priority is to invest in our people.

We believe that our people are our competitive advantage.

Our strategy is focused on talent selection, store manager development through great on-boarding and training, and open communication.

We continue to make improvements as our store manager turnover decreased both sequentially from the fourth quarter of 2015 and quarter over quarter.

To build on these recruitments going forward, we have focused on aligning our talent with the skill set required for success based on store characteristics, in addition to revamping our store manager training.

We believe that continued improvements in store manager turnover will take time, but the payoff is there through higher sales, lower shrink, and improved store associate turnover.

Looking ahead, we are addressing the implementation of the Department of Labor's change to the overtime exemption regulations.

We have been anticipating there would be changes since the proposed regulations were first announced, and have been evaluating ways in which a change like this could be addressed once it was effective.

Between now and the effective date of December 1, we will continue to refine our analysis and determine the course of action that best serves the needs of our employees, customers and shareholders.

As for our customer, we continue to be cautiously optimistic about economic conditions, but acknowledge that it is always challenging for our core consumer, given the pressure on her income and spending.

Regardless of the economic outlook for our consumers, we do everything we can to provide them with the value and convenience they expect from Dollar General.

As I mentioned at the beginning of the call, we are very pleased to have delivered a strong first quarter.

The senior team is aligned and energized across merchandising, store operations and supply chain.

Our multiyear strategic planning process is much further along than typical for this time of year, and we are optimistic and confident in our opportunities going forward.

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

We have a business model that is proven and resilient.

Our business 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 and a competitive dividend.

Over the summer, we will celebrate a significant milestone the opening of our 13,000th store location.

With this type of new store growth, we continue to provide significant opportunities for our employees to develop their careers, as we anticipate adding nearly 17,000 new jobs between 2016 and 2017.

My appreciation and thanks goes out to the more than 115,000 Dollar General employees that fulfill our mission of serving others by providing our customer with convenience, value and service every day.

With that, Mary Winn, we would now like to open the call for questions.

Thank you.

Operator, we will go ahead and start with the first question, please.

(Operator Instructions).

Stephen Grambling, Goldman Sachs.

First, can you maybe quantify the potential impact from the recent minimum overtime ruling, and how you can potentially mitigate that specifically?

We are still evaluating right now all the different options.

As you can imagine, we have been working very, very diligently over the course of the last few months in anticipation of the regulation.

And now that we have the actual regulation, we are actually refining that so that we can ensure that we, as I indicated in my prepared remarks, really take care of our employees, our customers and our shareholders alike.

But the one good thing that -- about Dollar General particularly, and retail in general, is that we have a lot of leverage our disposal, Stephen, to really take a look at how we can mitigate a lot of what may be an expense here to us.

But again, we are looking at it and we are going to do the exact right thing for our employees, customers and our shareholders.

Stay tuned.

We will give you more clarity as we get a little closer to December 1.

Okay.

And then on the guidance, I know that you had said that the first quarter was supposed to be the weakest growth rate of the year due to the comp comparison.

Given the strong start to the year, should we be just assuming that it could be that much better in the back half, given the cost control?

Thanks.

Well, I will start by saying we are very pleased indeed with the Q1 results, as we delivered on all elements of the growth model.

But bear in mind that growth model is a long-term model, and what we are really focused on is putting the actions in place to drive that model for the long-term.

And we have a lot of great actions in place.

We feel great about real estate.

We are on track to open 900 units this year.

And as Todd mentioned, over 50% full, the pipeline, to open 1,000 next year.

The great thing here is the economics are as compelling as ever.

We continue to see our IRRs exceed our 20% target; continue to see a payback of less than two years; sales are indexing above expectations.

As we mentioned at our investor day, a lot of exciting things with sales comps in terms of product assortment, store format, operating initiatives.

That will be fully -- many of them will be fully implemented as we get into the back half of the year as you gain momentum.

And then in operating profit, as evidenced by the Q1 results, the team is very effectively managing all of the levers to deliver that 42 basis points of expansion, with growth in both gross margin and SG&A.

And the newest lever, zero-based budgeting, we are really seeing that start to contribute very rapidly and really become ingrained in the fabric in which we operate here.

And then lastly, we feel great about the amount of cash that this business continues to kick off, allowing us to reinvest in this low risk, high return new unit growth and the infrastructure to support it, while continuing to pay a competitive and, over time, growing dividend, as well as consistent, robust share repurchases.

So, the model is working great, we think, as evidenced by the Q1 results, and feel great about the long-term impact of this and the ability to continue improving it.

That's all very helpful.

If I can sneak one other, more specific one in there, can you just help us size the global sourcing opportunity that you referenced in gross margin?

Maybe giving us a little bit of a sense for what that percentage is now, that is being sourced globally direct, and what kind of categories may be underpenetrated?

Thanks again.

When you look at it, Stephen, we still have a pretty large opportunity for our global sourcing efforts.

And we have been working very diligently over the last many years.

We just opened an office, a new office in mainland China.

We continue to open satellite offices really all over the globe and the opportunity is still very big.

I could tell you that, when we started this journey eight years ago to really look at exactly how much opportunity we had, we always weighted that, depending on also where the consumer was going.

And we still think that the consumer is looking for national brands, in a lot of cases.

But also great value in our private brand offerings, which really goes toward that import piece.

So we think where we still have a tremendous opportunity and we are working that each and every day overseas, and we feel very, very good about that as we go into the rest of this year and then into the long haul here.

Thanks again, best of luck.

Peter Keith, Piper Jaffray.

Just circling back on the overtime rule change question, if you are giving a pay increase across your store manager base, we would get some back of the envelope math of about $90 million.

Just to size that up, is that where we are going to shake out?

Or what specific moves would you be able to take to perhaps mitigate that impact as you look out to 2017?

Peter, that's a great question.

As we look at it -- and we have done, as I indicated, many different scenarios.

And I can tell you that none of those scenarios are even close to that $90 million; substantially less.

And that is exactly what we are working on now, is to get that impact down even further, and looking at every lever that we have in our business to make sure we can lessen the impact.

But we think it is much, much less than the number that you just indicated, and with a big opportunity to lower it even further.

The great thing about this business, we have a lot of flexibility, as John indicated.

We are hitting on all of the elements of the growth model.

We feel that -- and in fact as we look out longer-term, we definitely have the ability to offset a lot of the pressure that this may put on that SG&A line.

Okay.

Very good, thank you.

And then maybe sticking on the SG&A topic, so the leverage was abnormally good in Q1.

You mentioned you came in below your 2.5% to 3% leverage target.

Were there some dynamics in Q1 that were abnormal or one-time in nature?

Or are you perhaps going to see some continuation of this through the year?

Well, I will start by saying we feel great about the progress of zero-based budgeting thus far, and we are very pleased to be able to leverage SG&A 26 basis points at that comp.

Which, as you indicated, was even better than the 2.5% to 3% that we had indicated previously, which had come down from the previous 3.5% level.

With that said, there were some -- there was some timing in there.

There was some benefit from mild weather that helped; you know, utilities.

But all in all, we are off to a great start on zero-based budgeting.

It's really taking hold.

It's contributing very quickly.

And I will say it is also really becoming ingrained in the fabric of how we operate.

I see people at all levels of the organization now looking at everything they do through the lens of zero-based budgeting and the filters we have talked about with the customer, our strategic priorities, risk management, and looking at things in terms of return on investment.

So, I would characterize it by a very strong contribution from zero-based budgeting.

We feel good about our ability to continue to leverage at the rates we mentioned before, going forward.

And feel the team is well on its way to building a pipeline of future savings to sustain that.

So we feel we are in a great spot on zero-based budgeting, as evidenced by the results.

Okay, thanks a lot and great execution on that.

Dan Wewer, Raymond James.

During the past year, Dollar General has successfully reduced shrink.

At the investor day, you had called that out as one of the potential sources of gross margin rate going forward.

But it sounds like shrink moved in the wrong direction in the first quarter, and typically that's never just a one-quarter event when you see that reversal in direction.

Can you talk about what's changed with the shrink accrual?

Yes, so as you look at shrink -- and I do want to say, over the long haul we feel good about where we are headed with shrink and all of the initiatives that we have in place to continue to reduce our shrink.

And it is our number one gross margin opportunity.

In saying that, though, we did see a little bit of an uptick in Q1.

And the majority of it was really due to our on-shelf availability efforts, to be honest with you.

And we like that trade-off right now.

We are not happy with it.

We are looking at ways to mitigate that exposure on shrink.

But what we felt that was even more compelling was to make sure that the customer, when they came in our store, had the product they needed on the shelf to purchase.

And that was really the key driver.

But rest assured that our operating team and our merchant marketing teams are working very, very hard, along with supply chain, to reduce that shrink number as we go forward.

We still have a lot of levers to pull, still putting a lot of defensive merchandising tools and other tools for our district managers and our store managers to be able to monitor shrink even closer to the actual event.

So, we feel good that about the long-term, but still need to continue to work hard.

And I dare to say that, in the years to come, we will always be talking about shrink, because that is just the nature of this business.

And just as a follow-up, back at the investor day, the long-term growth algorithm had one scenario where same-store sales could be as strong as 4%.

When you look at the timing of the market share initiatives revolving around the customer segmentation work, what is a realistic time frame from when the type of same-store sales growth could become visible?

Is that a 2017 or a 2018 time line?

Dan, when we looked and we put this algorithm together, we felt very confident over the long-term that we could stay within those guardrails of 2% to 4%.

And the initiatives that are just now rolling out in 2016, the majority of them are just now starting to roll out and will continue to rollout in Q2 and into Q3, and start to come to fruition even greater in the end of Q3 and Q4.

And then, as I indicated, we are further along on our strategic planning right now than we've been in the last eight years here.

And that gives me great solace that, as we continue to move into 2017 and beyond, that there will be a very robust initiatives going forward to drive that top line.

So we are very confident in that 2% to 4%, and there will be ebb and flow in there, but we feel that we have all of the initiatives we need to make sure we deliver that.

Do you think that the current economic environment for your core customer is sufficient for Dollar General same-store sales to get in a 3.5% to 4% rate?

Or does some macro improvement -- will that be needed to get to that kind of objective?

When you look at our core consumer today, she is always under pressure, as I indicated.

Her income and her spending rates are usually under pressure.

The great thing about our model is we do very well in either of those two scenarios.

Where she has a little bit more money, she spends a little bit more almost non-consumable goods.

And when she doesn't have as much, she may pull back there but then utilizes us more on consumable and everyday staples that she knows she can get at an everyday low price.

And the great thing that just came out of this segmentation work, Dan, that we are really encouraged about is this Millennial shopper that is already making up about 24% of our sales line.

And as we continue to learn more about her over time and be able to service her better, we again feel confident on that sales line and be able to deliver that as we move forward.

Okay, great.

Thank you.

(Operator Instructions).

Michael Lasser, UBS.

It was mentioned that the weather provided a benefit to the expense line during the quarter.

Do you think that the weather provided a benefit to the sales line as well?

Maybe you could just talk about the flow of the quarter, given all the noise and volatility that we have heard out there.

The cadence of the quarter really worked exactly like we thought it was going to work, with the shift of Easter into the second period, March, out of the third, which is April last year, obviously March was a better months than April.

But when you looked at February, March and April combined, the cadence was exactly the way we had anticipated it coming into the fiscal year.

So, while there is always weather and different phenomenons that happen, we have got a lot of great initiatives here to continue to try to ensure that we capitalize on whatever those phenomenons are.

And we felt that we did a pretty good job here in Q1.

And Todd, as my follow-up, Walmart talked about the beginning to implement its price investments, and that is going to accelerate over the courses of the year.

So, what have you seen in the marketplace as far as pricing and promotions and how are you prepared to respond?

As we look at pricing overall, macro -- so taking into account mass, grocery, and drug -- we see still a very rational pricing that is happening in the marketplace today.

In saying that, there's always retailers that at times will try different things.

But the one great thing about our robust pricing model that we have here, we check prices every two weeks on our top items, and we also every quarter check it on the full book.

So, we know exactly where we stand and we today feel very confident in where we sit on pricing.

And if we see folks moving, you will see us move, because this is all about ensuring that we continue to (technical difficulty) units out of our stores and of course drive traffic into our stores.

So, anywhere that we may see where we need to be sharper on price, we will take action.

The great thing about Dollar General is, again, we've got the levers to enable us to do that.

And so, when we look at this, we also look at it from the standpoint that our vendors help us a lot as well.

We are in the top 10 of all CPG companies out there, and quite frankly, we are in the top five of the majority of them.

They gives us a great partnership with our vendor community.

That enables us to ensure we are right-priced anytime we need to be.

Just to clarify that thought, does that mean you haven't seen any major changes?

And if you do, you think you'll get support to match those changes from the vendor community?

I didn't say we didn't see anything (laughter), but I did say that we will continue to take appropriate action when we do see it.

And rest assured we have and will continue to do that if we see any retailer moving on price that we feel that our consumer -- because she looks to us to be a leader there as well.

And we will make sure we do everything we have to do to keep units moving through the box.

Okay.

Good luck.

Dan Binder, Jefferies.

I had a couple questions on -- first, on the labor investment that you have been making all through last year.

Is that -- do you feel like you're getting that payback in comps across all of the different phases that you rolled out last year?

And is there any more color you can put on how that comp differential looks versus the rest of the base?

And then lastly, if there are more stores identified to get that labor investment.

We watch this very closely, and as you know Dollar General pretty well, we don't do anything that doesn't have a return attached to it.

And we don't just shelve it after we roll it out; we really monitor and watch.

So, what I can tell you is that we are very pleased on all levels, from our price -- excuse me, our labor investments into these stores.

Now, over the time, we have over the course of the last few months, we have taken some stores off of that and we have added additional new stores onto it, depending on those returns.

And we will continue to do that.

So we will always continue to add new stores if we see the need and the benefit that will be there.

But we also will take stores off if we see that the benefit is not meeting or exceeding our expectations, or they don't need it any longer for whatever other reason.

But, we are continuing to really like what we see here, and looking at ways we can continue to expand that as we go forward.

And just one other question.

On the small formats, as you look out to markets that can support it, what do you think the small format opportunity looks like longer-term?

And when you look at your broader store expansion plan, how many markets do you look at as effectively one-store markets, where there would be room for essentially Dollar General and nobody else, given the size?

This is really new for us, still.

We've got 45 stores up and running.

We've got approximately 80 planned in total to be open by the end of the fiscal year.

And so, as you can imagine, we are out looking now on -- as we are very happy with what we see so far -- is where those next stores will be as we go into 2017 and beyond.

But again, because of the nature of it, one being in these more metropolitan type areas, and then secondly in these very rural areas, we got our arms around pretty close to about how big that is.

We are not really going to say exactly how big it is, because what we are doing is making sure that we can refine the model appropriately with, again, only 45 open.

But we've got a good idea.

The important thing here is we are concentrating a lot, though, in those rural areas where there is only room for one store.

And that is why you see us moving very quickly in a lot of cases, with our growth of 900 stores this year and up to 1,000 next year.

And a lot of those areas are in these towns or even crossroads that can only support one retailer, and I sure would rather it be Dollar General.

That's how we are going about this.

So, we are moving pretty quickly there and so good about where the pipeline is for 2017 already.

Okay.

Thanks.

Ed Kelly, Credit Suisse.

I just have a follow-up for you on the (technical difficulty).

And I guess what I'm trying to figure out is, how do we think about (technical difficulty) at the end of the year?

And do you think you will be able to achieve 2.5% to 3% target despite this?

Or should we plan for some temporary pressure as we think about our model?

Ed, we had -- it's Mary Winn -- we had a real hard time understanding your question.

Do you mind repeating that?

Yes, sorry about that.

I'm sitting in an airport.

Much better, thank you.

Okay, good.

I just had a follow-up question on the wage pressure.

My question is, as this headwind grows at the end of the year, how do we think about your ability to achieve the 2.5% to 3% leverage point?

Is that something that you think you're going to be able to manage through as we look at next year?

Or as we think about our models, should we be planning on some type of temporary pressure even though it's not usually material?

What I would say is that, in terms of the FLSA, that is new breaking news, but conversely, we had the tax benefit that wasn't contemplated when we spoke with you last.

So, we continually have puts and takes.

And I would point back to the number of levers we have to -- and the track record we have of successfully managing through and mitigating the various puts and takes as we move through.

Okay.

And then just maybe one quick follow-up for you.

Can you maybe give us a little insight in terms of what you think you are seeing from the consumer at this point?

We've seen out of Walmart that the big-box stock-up trip seems to be okay, but others have complained about fill-in.

Just your general thoughts about what you are seeing out there today in your business from a traffic standpoint.

Yes, when you look at it, the consumer is probably about the same as they were coming out of Q4, to be honest with you.

We are seeing about the same trends.

There is no doubt that she is still watching what she spends, but again, that is the nature of our core consumer.

She is always looking for the ability to make sure she can deliver to her family at the lowest price.

And so, that is what we are concentrated on mainly, is to ensure that we have got the right item at the right price at the right time for her.

And we've been delivering that.

But, the consumer right now, overall, I would tell you back to work for the most part; probably feeling a little bit more confident; but -- and spending a little bit more on her non-consumables, and we are still seeing our non-consumable growth -- but still being cautious.

So, we look at that as an opportunity for us, especially for fill-in, because if she is cautious, that stock-up trip is not always in her eyesight, if you will, and at times she may be a little bit more reticent to stock up and a little bit freer to fill in.

And again, with our offering and our prices, we offer a compelling reason to come to Dollar General when she does that.

Great.

Thank you.

Vinny Sinisi, Morgan Stanley.

Congratulations on a nice quarter.

I wanted to go through the zero-based budgeting.

You guys mentioned that you are certainly starting to see some nice traction so far.

Could you give us all maybe just a little bit more color in terms of the bigger learnings thus far, where the opportunities have come from?

Then I think, John, you mentioned seeing more opportunities going forward.

If you can give us a little more sense around that.

Sure.

I think one of the biggest learnings is just the additive effect it has as people really embrace this mentality.

I think we had everybody very thoughtfully looking at everything they do.

They are spending through those filters: of the customer, of the strategic priorities, of risk mitigation.

It really focuses our efforts and focuses -- and our resources -- towards the highest returning, mission-critical activities.

There is a lot of power to that, and it really has a compounding effect.

In addition, we have teams.

We have 23 different cost packages teams, with senior-level folks on the teams, cross functional engagement, interaction.

And we have a pretty rigorous routine now: monthly meetings with the senior leadership team, where we go deep and wide through all the costs.

And with that increased learning, with that sharing across the Company, it really drives best practices that feeds on itself.

And we are going after cost in process improvement.

We are going after cost in efficiencies.

We are going after cost in just good old-fashioned prioritization of spending, working very closely with procurement to go deeper and wider on those activities.

So, it really cuts across the entire P&L.

It really is the power of the teams working together to uncover -- but we've always had good cost management here, and it's been a strength of ours.

But with this zero-based budgeting, it really allows us to go that layer deeper, to get those costs out of the baseline that are hard to wring out and really drive an ownership type of mentality.

Where it is not a use it or lose it budget that rolls over, but really, everything has to pay for itself.

Okay, that's helpful.

Thank you.

And then maybe just one quick follow-up.

You've mentioned quite a bit about different category expansions, including the private label testing, some more perishables.

How should we think about -- like, is there anything notable in terms of an overall assortment standpoint, in terms of some of these new things that are going in?

Is anything notable coming out?

How you are shifting the shelves around?

Anything to call out there?

When we -- the nice thing about Dollar General and our category management system that we put together years ago, we have a very robust category management process that looks at, each year, every single category, and then every item -- with only 10,000 SKUs, it's a little easier -- every item within those categories.

And we adjust, each and every year, depending on where the consumer is going -- whether it is her economic condition or her attitude and how she feels about her economic condition -- we are able to move left and right, if you will.

Now.

in saying that, at times we do reduce items inside of our store and reduce square footage on some categories and increase others.

So this time -- this year, we've really worked hard to increase our perishables, our health and beauty areas, our party and stationery areas.

And in many cases, a lot of the reductions were coming out of a mix of both consumable and non-consumable areas.

I think I gave an example before, but right now the -- a lot of the dry cereal business is in a secular decline.

So, what we do there is we reduce some square footage so we can increase square footage of other dry grocery areas.

So, we are very attuned to what is happening in the marketplace.

And the great thing about us is we are very nimble and we are able to take advantage of that very quickly.

Okay, that's helpful.

Best of luck going forward.

Alvin Concepcion, Citi.

Congrats on a great way to start the year.

I am wondering if you could talk about second-quarter same-store sales trends to date.

It sounds like there was a lot of noise in April with Easter shift and weather, so I am wondering if we can get a sense of how things are currently looking.

And related to that, I think you previously expressed confidence that you could accelerate comps to the 3% range for the year.

Is that still your view?

Again, when you look at it, the quarter ended up exactly the way we thought it would from a shape perspective, exactly the way we planned it.

Again, we really feel confident long-term, and we look at this long-term, that in fact we have the initiatives in place and we have the strategic planning already moving forward to ensure that we can keep those comps moving as we go through this year and in the years to come.

So again, we are confident in that 2% to 4%, that guardrail that we put up, and we want to just continue to move through that.

Very good.

And unrelated to this, I am wondering if you could give a little bit more color on the produce test in the 160 locations; just some more color on the strategy there.

Wonder if you get a sense of the price points relative to discounters or even conventional grocery.

And if you could, what kind of margin profile did you construct for that, relative to the overall consumables category?

So, when we look at it, keep in mind today we have got fresh fruits and vegetables in about 160 of our Market stores today.

And so, we've been in this business for a while.

We understand it.

We know what the sales and margin levers look like there.

In these stores that we are talking about, these 160 or so -- and we internally call them Dollar General Plus stores, because they have a larger expansion on coolers, on perishables already -- but now the introduction of fresh fruits and vegetables will be a nice addition.

But keep in mind, this will be just limited amount of SKUs.

So this will not be like a Market store, where we have a lot of different SKUs.

This will be a core 10, 12 item type of an arrangement right now, where some of the basics -- apples, bananas, oranges, onions, tomatoes, those type of things.

But really what (technical difficulty) to do is address what that consumer is looking for.

They are looking for fresh opportunities.

And for us, to be able to give her that at a very convenient time in her shop -- and again, we are very convenient-based -- we think it's the right thing.

And we are able to leverage our Market stores and the cost profile we have from those stores into these.

So we feel good about where our costs will be, retailers will be, and what our profitability will be on that.

It will be a small piece of the business, though.

This is not meant to be a big driver of sales, but it is meant to be a driver of traffic.

Got it.

Thank you very much.

We have hit the top of the hour, so I think we are going to end the call now.

But thank you very much for your interest in Dollar General.

Both Matt and I will be around to handle any calls, so please -- look forward to speaking to you soon, and thank you for your interest.

Thank you.

This does conclude today's conference call.

You may now disconnect.