達樂 (DG) 2016 Q4 法說會逐字稿

Good morning.

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

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

Today is Thursday, March 16, 2017.

(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, Senior Vice President of Investor Relations and Public Relations.

Ms. Pilkington, you may begin your conference.

Thank you, Kayla, 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 the call up for questions.

Our earnings release issued today can be found on our website at dollargeneral.com under investor information, news and events.

Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters including, but not limited to, our fiscal 2017 financial guidance and store growth plan; investments and initiatives; capital allocation strategy and related expectations, and future economic trends or conditions.

Forward-looking statements can be identified because they are not statements of historical fact or use words such as outlook, may, will, believe, anticipate, expect, forecast, estimate, intend, plan, opportunity, continue, focused on or goal, and similar expressions that concern our strategy, plans, intentions or beliefs about future matters.

Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under risk factors in our 2015 Form 10-K filed on March 22, 2016, 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 may be otherwise required by law.

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

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

I will start today's call by providing a review of the financial highlights for the fourth quarter and fiscal 2016, and our planned strategic investments for 2017.

Then John will provide additional detail regarding our financial results and review our guidance for fiscal 2017.

I will then come back and discuss our operating priorities for the coming year before opening the call up to questions.

While our overall fiscal 2016 sales performance was softer than we anticipated when we entered the year, I am very pleased with the way the team managed through what proved to be a challenging retail macroeconomic environment to deliver same-store sales growth of 0.9% and diluted earnings per share growth of 12% for the year.

We are continuing to strategically invest in our business for the long-term.

In fiscal 2017, these investments will be focused on an increased compensation structure and additional training for our store managers, as they play a critical role in our customers' experience and the profitability of each store.

Also, as I will discuss a bit later in the call, we are investing in strategic initiatives that we believe will help to differentiate us from the competition over time.

Now let's recap some of the financial results for fiscal 2016.

Full-year sales increased 7.9% over the prior year to $22 billion.

Same-store sales for the year increased 0.9% over the prior year, marking our 27th consecutive year of same-store sales growth.

Our same-store sales for the fourth quarter increased 1% over the prior year fourth quarter, driven by strength in consumables and home, partially offset by negative performance in the seasonal and apparel categories.

For the full year, operating profit increased approximately 6% with diluted earnings per share of $4.43.

As compared to the prior-year fourth quarter, diluted earnings per share improved 15% to $1.49 per share.

For the year, we returned nearly $1.3 billion to shareholders.

We continue to believe many of the headwinds we faced in 2016 are transitory in nature, such as the impact of average unit retail deflation, due in part to commodity cost declines as well as customer behavior, due to changes to the federal SNAP benefits program.

We estimate that overall average unit retail deflation and changes to SNAP benefits negatively impacted our same-store sales for 2016 by approximately 115 to 125 basis points, with overall average unit deflation being the largest factor.

In 2016, we continued to deploy our capital to invest in new stores, relocations and remodels, which continue to provide compelling returns.

We invested in our infrastructure such as new distribution centers to support continued growth.

During the year, we celebrated the grand opening of our 13,000th store, opening 900 new stores and bringing our total store count to 13,320 stores at the end of our fiscal year.

We increased our selling square footage by approximately 7% and remodeled or relocated a combined 906 stores, exceeding our initial target of 875 locations.

We continue to be pleased with the return on investment and performance of our real estate program, as our new stores overall are yielding returns of approximately 20%.

We also continue to be very pleased with the performance of the 42 former Walmart Express locations that we purchased and rapidly converted to the Dollar General banner.

Within our distribution network, we completed our 14th distribution center in Janesville, Wisconsin.

We began receiving inventory at this location in December of 2016, and shipping in January 2017.

During the third quarter, we started construction of our 15th distribution center in Jackson, Georgia, and expect to begin shipping from this location in the fall of 2017.

These investments are key to driving the efficiency and speed of our network and to support our growing store base, while reducing our stem miles.

As for the fourth-quarter sales cadence, all periods had positive comps, with November and January exhibiting the best performance.

In December we, like many retailers, experienced a slowdown in traffic that impacted our same-store sales performance.

Overall, the team did a great job during the fourth quarter to drive the top line with tight controls on gross margin and SG&A expense to allow us to deliver fiscal 2016 diluted earnings per share growth of 12%.

We estimate that the 53rd week of 2016 added approximately 2 percentage points to our EPS growth rate as compared to 2015.

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

In the second half of the year, we made pricing and marketing investments in designated market areas where we saw opportunities to be proactive, as we looked to help drive consumer traffic and improve same-store sales and market share.

Our objective was and is to provide our customers with affordability, value, and convenience at a time when they need us the most.

These proactive pricing actions were implemented selectively across about 17% of our store base and on about 450 targeted, high household penetration, fast-turning categories.

We are seeing anticipated improvements in transactions, units, and weekly same-store sales across the majority of these participating stores.

We believe we are on the right track as these investments are positively impacting sales and gross profit dollars.

In 2016, our digital coupon enrollment increased over 200% as we continued to expand our customer engagement through this innovative program that we brought to the channel.

Importantly, the average basket for our digital coupon transactions continues to run more than 2 times higher than our average basket, indicating that our customers appreciate the value being offered.

We continue to increase our overall market share in highly consumables, growing mid-single digits based on the most recent syndicated data over the 4, 12, 24 and 52-week periods ending January 28, 2017.

With 2016 in the books, the team is focused on moving the business forward.

Our recent strategic review is a very exciting part of advancing our business.

With the full support and engagement of our Board of Directors, we undertook a comprehensive, strategic review of our business focusing on the actions that had the greatest potential to drive shareholder value over the longer term.

We undertook this review and analysis from a position of strength, as we believe we operate in one of the most attractive sectors in retail.

Over the last eight months, the leadership team has conducted robust scenario analysis to envision the future of Dollar General through 2025.

The goal of this review has been to assess our current performance, key trends, and the evolving competitive landscape to align on the prioritized opportunities we should pursue for additional growth.

We recognize customer preferences are changing more rapidly today than perhaps at any time in the retail history, and the current pace of change does not appear likely to slow.

Our review analyzed those trends that are changing and that are likely to change, and how successful retailers are expected to do business over the next 10 years.

While focusing on our customer base, we assessed the size of the opportunities presented by these trends and how we can leverage our strengths to capitalize on them.

The strategic initiatives determined as the best fit to be big ideas for Dollar General are more evolutionary in nature and are in keeping with our brand heritage and organizational capacities.

They were also filtered through the lenses of, one, growing the core and second, extending into adjacent opportunities.

These initiatives are in varying degrees of development with staggered implementation time horizons.

One area that we identified as a near-term strategic opportunity is leveraging digital to influence our customer shopping behavior over time.

Digitally- influenced sales are becoming more and more prevalent across retail, as customers are increasingly utilizing and being targeted through digital channels and tools to shop smarter and faster.

Lower income shoppers are also following these general trends as smartphone penetration continues to grow with this population.

Digital engagement is expected to increase and influence retail sales, and our mission is to develop capabilities that highlight and improve our historical value proposition to our customers, namely the intersection of value and convenience.

To do this, we are focused on building capabilities centered on our core customers' needs, leveraging our unique assets.

Capabilities to support this goal will be phased in over time.

We are uniquely positioned to capitalize on our 13,000 plus and growing store base to be highly responsive to our customers in an evolving digital environment.

We are establishing a dedicated strategy department to work with the business owners to build out and coordinate the implementation of our initiatives.

Over time, I look forward to sharing more with you on our strategic initiatives and how they support our four ongoing operating priorities.

Now let me turn the call over to John.

Thank you, Todd, and good morning everyone.

Now that Todd has taken you through the highlights of 2016 and our strategic review, let me take you through some of the important financial details of the fiscal quarter and year.

I will also spend some time discussing our 2017 guidance.

Gross profit as a percentage of sales was 31.6% in the fourth quarter, a decrease of 19 basis points from last year's fourth quarter.

The gross profit rate decrease was primarily attributable to higher markdowns, driven mainly by promotional activities and inventory clearance and a greater proportion of sales of consumables.

Partially offsetting these items were higher initial inventory markups.

For the quarter, SG&A as a percentage of sales increased 6 basis points to 20.3%.

The SG&A increase was primarily attributable to retail labor costs, which increased at a rate greater than the growth in net sales.

Partially offsetting these costs were reductions in incentive compensation expenses and administrative payroll costs, which were essentially unchanged.

In addition, we had an SG&A reduction totaling $4.5 million in the quarter associated with the sale or assignment of leases for a total of 12 store locations, which had been previously closed due to the acquisition of locations from another retailer.

You may recall that we took a charge of $11 million in the third quarter of 2016, primarily for the lease terminations with the relocation of Dollar General stores into these purchased locations.

This quarter's reduction in SG&A dollars is a partial offset of the previously recognized expenses.

Our tax rate for the quarter was 36.8% compared to 36.1% in the 2015 quarter, due to the one-time benefit recorded in the fourth quarter of last year for retroactive tax benefits, primarily for the work opportunity tax credit.

Our balance sheet is strong and our working capital is in good shape.

Cash and cash equivalents at year-end were $188 million.

Merchandise inventories were $3.26 billion at fiscal 2016 year-end, down about 70 basis points on a per-store basis year-over-year.

For the year, growth in our inventory and net sales were very much in line.

Exiting the year, we believe our inventory is in excellent condition as the team has been focused on better aligning our inventory growth with our sales growth, while also improving our in-stock position.

In 2016, we generated cash from operations of $1.6 billion, an increase of 15% from the prior fiscal year.

Total capital expenditures were $560 million in 2016, and included the majority of the cost of our new Janesville distribution center.

For the quarter, we repurchased 4.2 million shares of our common stock for $311 million.

Since late 2011 through the end of the 2016 fiscal year, we have repurchased $4.6 billion or 74.4 million shares of our common stock.

As of year-end, we had a remaining share repurchase authorization of approximately $930 million under our repurchase program.

We remain committed to our disciplined capital allocation strategy.

Our first priority remains investing in new and existing stores and the infrastructure to support our growth.

Our goal is to create lasting value for our shareholders through our share repurchase program and anticipated quarterly dividends, while maintaining our investment-grade rating by managing to a leverage ratio of approximately 3 times adjusted debt to EBITDA.

Turning now to guidance.

For fiscal 2017, we anticipate net sales growth of 4% to 6%, with the lapping up the 53rd week in 2016 expected to negatively impact net sales growth by about 200 basis points.

Growth in same-store sales is expected to be in the range of slightly positive to up 2%.

With the investments in the business for store manager compensation, training and strategic investments, we anticipate deleveraging SG&A in 2017.

Diluted earnings per share for fiscal 2017 is forecasted to be in the range of $4.25 to $4.50.

Our fiscal 2017 diluted EPS guidance includes an anticipated negative impact totaling approximately $0.34 per share, lowering the fiscal 2017 EPS growth rate by approximately 8 percentage points as follows: approximately $0.16 per share relating to anticipated store manager compensation and training, along with other strategic investments; approximately $0.09 per share due to lapping of the 53rd week in 2016; and approximately $0.09 per share for the combined impact for early adoption of income tax changes for stock-based compensation in 2016; lower estimated share repurchases in 2017 that will be weighted towards the second half of the year; and an anticipated charge related to the retirement of debt.

Capital spending is forecast to be in the range of $650 million to $700 million, with about 45% for new store growth, relocations and remodels, 35% to 40% for special projects including our distribution center infrastructure to support our store growth, and the remaining 15% to 20% for maintenance.

As you model 2017, please keep in mind the following: We anticipate that in the second half of 2017 same-store sales and financial performance will be stronger than the first half, given the lapse from 2016.

The 2016 53rd week also shifts the timing of markdown clearance from the third quarter of 2016 to the second quarter 2017, which we anticipate will negatively impact gross margin in the second quarter and have a corresponding benefit in the third quarter.

As you look at the quarterly cadence, our EPS comparisons begin to ease in the 2017 third quarter.

We anticipate that the third quarter will have the strongest EPS growth of any quarter in 2017.

We will be lapping a $0.03 per share benefit recorded in the first quarter of 2016 for the Company's early adoption of the income tax changes for stock-based compensation that we do not expect to reoccur to the same extent in 2017.

Our early Q1 same-store sales, particularly in February, started out slowly.

However, as customers have received federal tax income tax refunds, we have noticed some improvement in overall comp sales trends.

Additionally, to date during the first quarter, we have experienced a more pronounced mix shift to the consumables category which has a lower gross margin.

We continue to believe that we have compelling new store economics with significant runway for growth across channels, customer and product segments that we intend to capture over time.

Looking beyond 2017, we remain focused on the long-term opportunity ahead of us, with the goal of delivering 10% or higher earnings-per-share growth over the long-term on an adjusted basis.

We will continue to focus on the things that are within our control, including managing our working capital and always being a low-cost operator.

We will also be financially disciplined in our capital allocation.

Now I would like to turn the call back to Todd.

Thank you.

As John mentioned, we remain focused on capturing the long-term opportunities ahead.

Our ongoing operating priorities remain.

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 our competitive advantage.

Our first priority is to continue to drive profitable sales growth.

As we look to attract and grow new customers and trips and capture share with existing customers, a key area of focus for 2017 is to build on our 2016 progress.

This includes expanding the merchandising initiatives in our existing store base to drive traffic into those stores and improve same-store sales.

Based on the lessons learned from the conversions of our recently-acquired Walmart Express locations to our Dollar General Plus format that include fresh meat and produce, we are remodeling about 300 traditional stores to include 34 cooler doors, an increase of about 160% from the existing cooler footprint in these locations.

This allows for a much greater perishable assortment, which helps drive trips and basket size.

Additionally, across about one-third of these locations, we are testing an assortment of fresh produce.

We will also be strategically investing in the portion of our existing store base that has been open for five years or more, or what we define as our mature store base.

We have a focus on stores that have fewer than 10 cooler doors, which in relative terms are expected to drive the highest returns.

By the end of 2017, we anticipate that across our store base we will have an average of 17 cooler doors, up from 10 in 2012.

Merchandising initiatives across all departments have been deployed to provide consumers with more of the products and brands they want and need to save time and money every day across this select group of stores.

For example, health and beauty represents large and growing department at Dollar General.

These products remain a significant opportunity for us to increase our share of wallet with our customers, as well as have only -- we only have about half of the share with our customers in these areas as compared to other consumables like paper and cleaning.

We are also redesigning the health and beauty area of a select group of stores to drive awareness and conversion.

For 2017, we plan to further integrate our traditional and digital media mix to ensure we are reaching our targeted customers where, when, and how they decide to engage with us.

Through applied predictive technology, we believe we can drive greater productivity of our advertising media mix through optimization and modification of our spending, including reallocating funds previously used for our NASCAR sponsorship.

We will also leverage in-store operational initiatives such as improving our on-shelf availability and our customer experience.

We have ongoing opportunities for gross margin expansion through improvements in shrink, global sourcing, private brands, distribution and transportation efficiencies, and non-consumables sales.

As always, we will continue to ensure that our value proposition resonates with our customers.

We are committed to providing them with everyday low prices that they know and trust from us.

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

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

1,000 new stores are in the pipeline for fiscal 2017, along with the combined 900 remodels or relocations, bringing our expected square footage growth in 2017 to about 7%, modestly below our previous forecast due to a greater mix of smaller stores.

I believe we continue to have a first-mover advantage to secure the best sites, while driving compelling new store average returns of approximately 20%.

The range of different DG formats is a strength that we can leverage based on the marketplace.

We are able to flex our square footage to match the market opportunity, ultimately allowing us to have a higher capture rate for sites.

The primary format will continue to be our traditional Dollar General box, which is about 7,300 square feet of selling space and provides us with strong new store economics and returns.

This format consistently proves to be our highest return format against which we benchmark the performance of all others.

We are planning for the future as we segment our store opportunities that we believe can have a greater impact on sales and productivity, while continuing to drive strong returns.

We view this as more of an evolution of our existing highly-productive traditional store format rather than a wholesale change.

As a leader in store format innovation, we are in the unique position to benefit from our knowledge across our multiple formats.

Given our success over the last two years with the results of our smaller box that is less than 6,000 square feet used in certain metro and rural locations, we anticipate opening an additional 160 locations this year, bringing the total smaller box store count to about 250 by the end of 2017.

Finally, we are testing an even smaller box under the DGX banner, with about 3,600 square feet to target metropolitan shoppers with our everyday low prices on essential items in a convenient, easy-to-shop format.

The DGX format is geared to meet the needs of our millennial shoppers, which are an emerging and important part of our customer base and well help us broaden our appeal to attract a new segment of urban customers who put a high premium on value and convenience.

We expect to learn valuable lessons about our metropolitan shoppers from this format, which we can then apply to our other formats in urban locations.

This test is in the very early stages, with two existing locations and two additional sites identified for 2017 store openings.

Across the format, we constantly are editing the assortments and taking our best-selling items from one format to the next to satisfy our customers' changing needs, while continuing to drive productivity.

For example, in addition to digital, our core customers are becoming more interested in healthier, better for you options and a greater fresh assortment.

Our range of formats positions us well to seek opportunities to capture this growing customer sentiment, as we continue to our cooler expansion that allows for a greater offering of perishable items.

We are disciplined and focused on financial returns.

We are very optimistic about our new store outlook for 2017, as our pipeline is full.

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

As evidenced by this year's results, we have a clear and defined process to control spending.

All of our spending is filtered through three criteria.

First, is it customer facing?

Second, does it align with our strategic priorities?

Finally, third, how does it impact our risk profile?

In our stores we are focused on simplifying our operations by reducing inventory, product movement within the stores, and operating complexity so that our store managers and their teams can reinvest time savings to provide better customer service and a clean in-stock shopping experience for our customers.

At the store support center, work elimination and process improvement are ongoing efforts to take cost out of the business.

Our underlying principles are to 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 a competitive advantage.

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

In 2016, we had our lowest level of store manager turnover in four years.

To build on these improvements, we are making strategic investment in compensation and training for our store managers.

Our data-driven approach to store manager compensation segments our stores based on labor market data and stored level complexity.

We are making this investment in our store managers, as we know what a key role they play in our customer experience and the profitability of our stores.

In 2017 and beyond, we expect that this investment will help to further reduce our turnover and an improved customer experience.

Additional returns on this investment are anticipated through higher sales and lower shrink.

In 2017, we plan to create approximately 10,000 new jobs as a result of our 1,000 planned new store openings and two new state-of-the-art distribution centers.

The creation of new jobs will be roughly 9% overall increase to our workforce, and marks the largest one-year employee increase in our 78-year history.

As for our customer we continue to be cautiously optimistic about economic conditions, but acknowledge that for our core customer it is always challenging.

Given the pressures on her income and spending, regardless of the economic outlook for our customers, we will do everything we can to provide them with the value and convenience they expect from Dollar General.

This morning, an announcement that Jim Thorpe would be retiring from Dollar General.

When Jim rejoined the Company in 2015, we agreed upon a clear set of objectives for his tenure as Chief Merchandising Officer.

As I knew he would, Jim has delivered on the merchandising strategies we identified as our highest priorities.

I'm grateful for his contributions and want to wish Jim and his family the best.

Our strong business fundamentals and our long-term commitment to growth and shareholder value are unchanged.

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 our share repurchase program and anticipated dividends.

I would like to recognize the drive and dedication of the more than 120,000 employees of Dollar General.

Our focus remains on being successful over the long-term.

That success will be attributable to our people, as we look to capitalize on our unique and powerful mission of serving others.

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

All right.

Operator, we will take the first question, please.

(Operator Instructions) Scott Ciccarelli, RBC Capital Markets.

Good morning, guys.

So I guess my question is the expectations you laid out for us this morning, does that anticipate any further price investments?

Because you guys are kind of talking about labor and let's call it operating cost increases, and the last two quarters or so it has been more focused on price investment.

So I guess I'm just trying to get an idea of where you think you are today in terms of the pricing investments.

Where are you going?

Are we comparatively priced where you want to be, or is there more to come?

Thanks.

Yes, Scott, as you know, we are very diligent in our pricing and the way we look at pricing every two weeks on our top items.

With the proactive strategic pricing investments that we made last year, we feel that we are in very, very good shape right now on pricing.

Matter of fact, as good as at any other time in the recent past.

We will continue to watch prices as they maneuver from area to area.

We look at it by DMA, so we know throughout the nation where pricing is, and there is always some pricing activity that happens in certain areas.

But we feel as we sit right now, we are very well-positioned on pricing, but we will continue to monitor it so we offer our consumers that value that she has come to know from Dollar General.

Got it.

That is helpful.

And then just a quickie second one.

Did you guys mention the deflation and SNAP impact in the quarter?

Yes.

In terms of deflation, as we have said, we see the commodity deflation piece of it transitory.

We did start to see some reduction in our average unit retail deflation as we went from Q3 to Q4.

And as we look into this quarter, do expect to see -- have seen some signs of commodity deflation waning, but it continues to be a headwind.

But bear in mind, we will start to lap this jump last year as we work through Q2.

In terms of SNAP, that continues to be a headwind as well.

As you know, many of our customers utilize SNAP and other government assistance programs and it does take time for them to adjust their budgets.

So it still is an impact.

We do believe customers are starting to adjust and normalize their spend, and we will start to lap the bulk of that impact as we work through Q2 as well.

(Operator Instructions) Alan Rifkin, BTIG.

Thank you very much.

Todd, for the 17% of your stores where you made the pricing and marketing investments a few quarters ago, can you maybe shed some color on how that group of stores did relative to the corporate average in the quarter?

And when might we expect an acceleration in that initiative since it sounds like it is producing results?

Yes, Alan, what we saw -- and we look at it on a lot of different levels -- the great thing is we saw sales, we saw traffic, as well as our gross margin dollars all increase in those stores in aggregate since we have rolled out these pricing investments.

I can tell you that in these stores, these stores have performed better than the chain average over the time that we have rolled those out.

In saying that we have said from the beginning that we will continue to watch and monitor price.

And if we feel we need to take further pricing actions, the great thing is we have this model to be able to springboard on.

At this point, we don't see a further action needed because we are priced very, very aggressively in most of our areas today, if not all.

And we feel that right now, we are in a real good spot, but we always reserve the right to make sure that we -- make sure we deliver that value and convenience to our consumer.

And over time, we may need to deploy further price, but at this time we think we are in great shape on that proactive pricing that we took advantage of earlier on.

Okay, thank you very much.

My second question has to do with the long-term growth model.

In the past you were talking about 10% to 15% growth.

Now we are talking about 10% or higher, so you have kind of eliminated the higher end of the band.

Is that a function of just higher wage rates on your part that you believe will be persistent, or it also a function perhaps of increased competition over the longer term?

Curious why you are taking down the high end of the range.

Yes.

Well, I will start by saying that we feel good about this year's performance, delivering over 10% earnings-per-share growth following double-digit earnings-per-share growth last year.

And we are really trying to focus on the long-term and make sure that we are making the right investments for the long-term.

In terms of this year, we did mention that we are investing for the long-term and have some headwinds, which takes us outside of the model and as such, we are not talking about this year in the context of the model.

But again, our focus is on the business fundamentals which remain phenomenal with great unit level economics that remain unchanged.

And our focus and our goal remains to drive 10% or more earnings-per-share growth over the long-term.

But as we go through time, making sure that we make investments as needed so it is sustainable growth.

So as long as we are delivering double-digit earnings-per-share growth, we think we are serving our investors well.

Okay, thank you very much.

John Heinbockel, Guggenheim Securities.

So, Todd, a couple of things in one.

Just touch on again the timetable for the produce rollout.

You said one-third of the stores, but just what is the magnitude and then maybe beyond this initial test?

When you think about what more you can do with a 7,300 square foot box that would make you more like DG Market, is there a lot more that can migrate; maybe even assortment in dry grocery?

And then where does DG Market stand?

Is that ever likely to be accelerated, or it is kind of what it is; kind of a test kitchen, if you will?

John, let me first start by talking about the produce.

As you may recall from the last call, we talked about testing produce in our 7,300 square foot stores.

That test is ongoing, and due to that test as well as the stores that we took over from the Walmart Express stores, if you will, we are going to take about one-third of our smaller box remodels next year and put produce into those, so that is that 6,000 square foot store.

We believe, because where our consumer is moving toward more of a fresh alternative, including better for you and healthier for you, we believe this is the right thing to do.

But as you know us pretty well, we are going to do this very methodically and we are going to ensure that we have a return against this so that we can scale it across many more stores.

So we are going to go a little bit slow to make sure it works out the way we anticipate it working.

Early results are showing some real positive signs, but again, they are really early results.

In talking about DG Market, we continue to be happy with the progress that we have got in our DG Markets.

Our sales comps are in line with our chain.

Our margin expectations are good.

We are using DG Market a little bit differently right now, but reserve the right to look at it a little differently later.

But right now, we are looking at it as a true test kitchen, if you will, for our DG Plus format as well as our traditional format.

I don't think we would ever be thinking about produce and meats in smaller stores if it wasn't for having the capability of DG Market as an example.

So it is a great launching pad for a lot of other pieces that can go into and your last point being that smaller store.

We believe that there is still a lot of opportunity for us in and around that food arena, whether it be dry grocery or perishables in our smaller box.

As that consumer's preference continues to evolve over time -- you know us pretty well -- we evolve with her, and that is the great thing about having these different formats.

We have the test and learns already done and available to roll out as those preferences change.

So we feel good about where we are and where we are headed, and we will be right in lockstep with the consumer.

And then just as a quick follow-up, when you think about maybe evolving more DG Market into a core box, how much general merchandise do you need to have to be differentiated versus other competitors?

Because you don't want to go too far in that regard, right?

Yes, exactly right.

As we have always said, non-consumables really rounds out the basket for us and it obviously, as we know, works that gross margin line pretty nicely for us.

But again, as the consumer changes, so do their preferences for non-consumables.

And we continue to eat evolve our non-consumable offering as well.

And we believe that we have real opportunities in seasonal and home categories that really resonate well with our core consumer.

Party and occasions really resonate well in our core consumer's wallet as well.

So we believe we've got opportunities to continue to grow.

And as we talked about our strategic initiatives, I can tell you that that is in focus for us strategically over the long-term on how we look at our non-consumable business for the long haul here.

Thank you.

Absolutely.

Vincent Sinisi, Morgan Stanley.

Great.

Good money, guys.

Thanks very much for taking my question.

I wanted to ask on the expense side of the business, just any updates on zero-based budgeting?

And then also if you could give any further color around the store manager, kind of the data behind the compensation decision.

Is it largely in response to minimum wage changes, or what other factors might you be able to share with us behind that?

Thank you.

I will take the first part of that question.

In terms of zero-based budgeting efforts, we are very pleased with the efforts.

Came out of the gate very strong on this, and as you saw with the SG&A, nearly leveraged SG&A at that comp of 0.9%, so exceeded our expectations.

It has really become ingrained in the way we operate here.

We have always had a culture of cost discipline here.

But as Todd mentioned, the filters, I see everyone in this organization looking at all of the spend in terms of the customer, the strategic priorities, and the business risk.

And with that targeted focus on spending, I think that was a key contributor to the great cost discipline and performance we saw this year.

Looking ahead, we continue to have the rigor in place around zero-based budgeting.

The teams continue to work very hard on building a pipeline of future savings while making targeted investments as needed.

Then also, we look at it broadly in terms of operating margin, managing all of the levers within not only SG&A with the latest tools, zero-based budgeting, but also all of the levers available to us within gross margin.

Vinnie, when you look at the store manager pay initiatives that we have outlined, the great thing about Dollar General is that we don't do anything blindly here.

So if you look back to mid last year, we took a large group of stores and we instituted a new pay scale for them, even outside of what the government was looking at rolling out at the time.

We wanted to see how those stores would perform over time and if we could move the needle on sales as well as our turnover rates, both in our store manager turnover as well as our hourly turnover rate; and if shrink over time would be able to benefit from this as well.

The great news is we have seen sales increases, we have seen stability in our store managers, the turnover rate, and we have even seen stability in our hourly turnover rate in those stores as well to a greater degree.

The great thing about this, a little different than the government program, it is not a one-size-fits-all program.

It was really designed to best fit our store managers in the areas that they operate in, as well as the complexity of their individual stores.

So this has really been well-designed.

Our store operations team did a great job in putting this together.

And I can tell you that we have already rolled it out to our stores and it has been very, very well received, as you can imagine.

So we are looking for great things in the future to continue to happen, both on the top line as well as our turnover lines in our stores from this initiative.

Very helpful color.

Thank you, guys.

And maybe just a fast follow-up, just general kind of qualitative thoughts on the low-end consumer.

I know -- I think it was like two quarters ago maybe, you had said kind of a bit more cautious.

Today you said kind of still cautiously optimistic.

Just kind of any underlying thoughts for the 2017 outlook on the low end?

Thanks very much.

Thank you, Vinnie.

I think when you look at our core consumer, as we've said, they are always a little bit stretched.

I mean, that is just how they live.

In saying that, we go out to our customers quite frequently.

We just got a report back that really addresses your comment pretty well, and here is what the customer sentiment is right now.

It is, you know what, I feel a little bit better about the way things are.

The only thing is my finances aren't any better.

And so it is not allowing me to take that next step in freely spending a little bit more, because I have so many other headwinds in front of me and also some unknown; around healthcare as an example, around rents and a lot of the other things that are headwinds.

The great thing about Dollar General is we are uniquely positioned to help her.

And I think that as we look over the long-term, making sure we are there with the right price and convenience and the right item for our consumer is going to be the win-win that she needs to continue to pull that budget together for her family.

We feel real good about where we are with the consumer, and we will do everything we can to help that consumer be able to stem any tide that she may feel that may be going against her at this time.

Thank you, guys.

Best of luck.

John Zolidis, Buckingham Research.

Good morning, and nice results in a tough environment.

Thank you, John.

I have a question about the gross margin outlook, which is embedded in the guidance.

You didn't comment on it, and working through the midpoint of the other metrics which you did provide, I am coming up with approximately 30 basis points of pressure.

I guess as we look forward to next year, you have freight costs up, you have consumable shift.

You saw some deflation in price investment.

In the fourth quarter, that was offset by higher initial markup.

So as we are looking into next year what should we be modeling and thinking about for the gross margin line?

Thanks.

Well, I will start by saying that we really look at gross margin and SG&A in tandem, and look to make the right trade-offs between both of those for the long-term; and do make sure that we protect our low-cost positioning as well as our everyday low prices.

As we mentioned at the outset, given that this year is a little bit different in terms of the model, we weren't planning to go through all of the elements of the growth model in the context of 2017.

But I will tell you over the long-term, while it is always competitive in retail, the team does a phenomenal job controlling what they can control.

And over the long-term, we continue to see opportunities to increase margin with all of the levers available to us.

We continue to see opportunity to improve shrink over time, continue to see opportunities and drive opportunities with supply chain efficiencies, continue to see private label and foreign sourcing penetration as opportunity, and the team continues to do a phenomenal job with category management.

So that is really how we look at managing all of the levers within operating margin to grow that over the long-term.

Okay, thanks very much.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

Todd, as you skew more toward fresh products, meat, produce, dairy, does that put you more in the competitive crosshair of the hard discounters?

Or is the view you are already competing aggressively against those players, and so a skewing more towards that assortment won't really matter?

Michael, the competitive environment is always stiff out there, and we do compete with those competitors today.

The way we look at this is whatever our customer is asking for, we want to make available to her in a very convenient store base, as well as at a great price.

And we see the opportunity in fresh and frozen to being able to be able to give her what she needs at the time she needs it.

So I would tell you that while we do know that our competitors sell a lot of the same type of goods, we have a real competitive advantage and we own that last mile.

And that last mile is being close to her doorstep at home.

Nothing really trumps that convenient factor that we can offer, other than price.

The nice thing is we have both.

Todd, I want to follow up on your comments around being comfortable with where your pricing is right now.

Does that assume that market level prices stay the same, and then you might have to react if prices come down?

Or you are comfortable with where prices are and you are not assuming they are going to go lower

Yes, I would never assume that they won't go lower.

We look at pricing now and where we think pricing may go, as I made these comments.

So we feel good about where we are today and we feel good about the flexibility that we have in our model to be able to price where we need to take price across the DMAs that we operate in.

But the great thing is we have never lost sight of price here, and by not losing sight of price we don't believe it is ever going to be a hard left or a hard right we are going to have to take on pricing.

We feel that we are very competitive now and we can continue to be very competitive, no matter what may face us in the future.

If I could just add one more quick one because I think we are going to be talking a lot about it for the next couple of months.

You mentioned that as tax refunds were delayed, it probably caused some sluggishness in the first part of your quarter.

Because over the full course of your quarter, all of the refunds that were distributed last year should be distributed this year, do you think you get all of that back, or is some of that spending maybe leaked to other buckets and as a result, it won't be a full net-net impact to your results?

Well, as you look at the tax refunds, you could definitely tell early in the quarter, as John indicated.

We saw some general softness around not having those tax returns out there.

We saw a pick-up as they started to flow.

But I have to remind you, we've got a lot of time left in the quarter still.

Those tax returns, while flowing, aren't yet completely caught up, but they are getting closer.

And I am a retailer, and as a retailer when you move through certain periods of time and you don't get what you thought you were going to get, you don't bank that it is going to come.

And what you do is you put initiatives in place as we did to capture a greater share of these tax returns as we move through the quarter.

So we have done some things here to hopefully capture a greater share of those tax returns as she is ready to spend them.

But I just want to say we still have a lot of the quarter left.

Remember that Easter shift that is occurring between March and April this year.

And as we move into April, we are looking for some increased sales and hopefully deliver a pretty good quarter.

Very helpful.

Thank you so much.

Edward Kelly, Credit Suisse.

Good morning.

I wanted to ask you about -- back to store managers.

You're seeing some earnings pressure because of proactive investments and wages and training.

Assuming 20% or so annual store manager turnover, 1,000 new stores, you are going to have to hire and train something like 4,000 store managers this year.

So how much of this wage increase and pressure just relates to finding good people?

How are you finding that?

And then how is this dynamic impacting the execution risk associated with your growth plan?

Yes, that is a good question, Ed.

As you look at our store manager, the one great thing over the last couple of years is that we have been dealing with this turnover and about the same rate for quite a while now.

And our pipeline for good, talented store managers has not let up.

We have been able to fill that pipeline and we continue to be able to fill that pipeline.

This investment is not really geared toward that as much because we can't find.

It is more geared toward making sure that we take care of our current store managers, but also making sure that we continue to be able to retain and attract the right individuals as we go forward.

So I think it is really twofold.

But as we look at it, we feel very good about being able to attract and retain good, talented individuals.

And this test that we did back midyear last year and still ongoing has really proven to show us that we can really stem the tide of turnover by getting that right individual on the front side into our stores to run that.

Being an old operator as I am, the store manager is the key linchpin to everything that happens at retail; always has been, and at least probably in my lifetime as a retailer always will be.

Great.

That makes sense.

Then just a quick follow-up.

Of the $0.16, how much of that relates to what you are doing with store manager pay?

That is the vast majority of it.

Yes, there was also the training that went with it, but the bulk of it was the store manager investment.

Great.

Thank you.

Very helpful, guys.

Good luck.

Kayla, we have hit the top of the hour, so I think we will end it there.

To everyone, thank you for joining us on the call.

For those that we have left on the queue, please know Matt and I are around and look forward to speaking to you.

Thank you.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.