Good morning, ladies and gentlemen, and welcome to Dollar General Corporation's First Quarter 2013 Earnings Conference Call on Tuesday, June 4, 2013, at 9 a.m. Central Time. Thank you for participating in today's conference, which is being recorded by Conference America.

No other recordings or rebroadcast of this session are allowed without the company's permission..

It is now my pleasure to turn the conference call over to Ms. Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations. You may begin. .

Thank you, operator, and good morning, everyone. On the call today are Rick Dreiling, our Chairman and CEO; and David Tehle, our CFO. We will first go through our prepared remarks and then we will open up the call for questions. Our earnings release can be found on our website at dollargeneral.com, under Investor Information, Press Releases..

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

Some examples of forward-looking statements discussed in this call include our 2013 forecasted financial results and anticipated capital expenditures, our planned operating and merchandising initiatives for fiscal 2013, expected ongoing share repurchases and future consumer economic trends.

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

We encouraged you to read these. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call..

We will also reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which I mentioned is posted on dollargeneral.com.

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

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

Thank you, Mary Winn. Good morning, and thank you all for joining us today. As we shared with you at the time of our fourth quarter conference call, we expected the first quarter of 2013 to be our most difficult quarter, given the well-publicized tough weather comps, payroll tax increases and sales headwinds from the tax refund delays.

With the first quarter behind us, we've updated our outlook to reflect the revised sales estimate and gross margin compression. The continued mix shift within consumables to lower-margin items without the benefit of sales of higher-margin non-consumables and higher inventory shrink are the key drivers of our gross margin performance.

This revised view of sales and gross margin has tempered the high end of our earnings outlook. I still believe our sales ramp will come later in the year as we look forward to same -- sales growth of 4% to 5% for 2013, and we continue to have long-term opportunities for growth..

David will provide more details on our financial results in a moment, but I wanted to share just a few highlights from the quarter. Our total sales increased 8.5% over last year to a record $4.2 billion. Same-store sales grew 2.6%, with both traffic and average ticket increasing for the 21st consecutive quarter.

They characterize the shape of the quarter with a U shape, with February and the back half of April sales much stronger than March as we felt the most significant weather impact, and we were lapping a double-digit comp increase in that month..

Adjusted operating profit increased 3% to $396 million, or 9.4% of sales. And adjusted net income increased 8% to $232 million. Adjusted earnings -- EPS increased 13% to $0.71 per share..

For the quarter, sales growth was healthy across our consumable categories. It's my belief that the best way to judge the health of a retailer for this quarter is based on the strength of his core business. For us, that would be our consumable business, and we delivered a strong same-store sales improvement in this category.

However, our non-consumable or discretionary categories were soft during the quarter as sales of seasonal merchandise and apparel were impacted by the weather. Given the positive trends we experienced in non-consumables in 2012, it's noteworthy that every non-consumable category had a negative comp in the first quarter.

Even so, we're pleased with the sell-through of our holiday seasonal merchandise, including Valentine's Day and Easter.

While we expected spring and summer seasonal sales to be soft given the cooler weather patterns over the quarter compared to a near-perfect weather in the prior year, we had expected total discretionary sales to recover more significantly than they did in April and, quite honestly, at a faster pace.

Although our consumable categories did pick up nicely in April, we did not see a similar recovery in our discretionary categories..

Like other retail CEOs you have heard from this quarter, I don't like to talk about the weather, but the impact on our business. However, we believe it was a factor in our discretionary business. Overall, when the weather improved across the region, we saw a positive impact with improved sales.

For example, it's been easier to be a district manager in Texas or Florida, where we have had better weather, as compared to the Northeast and the Midwest, where the weather has not been in our favor..

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

Thank you, Rick, and good morning, everyone. Rick covered the highlights of our first quarter sales performance, so I'll start with gross profit. Gross profit dollars increased 5% for the quarter, with an 89-basis-point decrease in gross profit rate to 30.6% of sales.

This decrease was driven by higher markdowns, higher consumable mix, an increase in inventory shrink and lower initial markups. You will recall that we had forecasted a gross margin decline and called it out on our last earnings call..

While our total shrink units per store continued to decrease, our financial shrink increased due to the increased loss of SKUs greater than $5 at retail. While these high-value items are generating greater shrink, they are also driving increased sales and higher-margin dollars.

We're now forecasting that this negative shrink trend will not turn around in 2013. These negative margin impacts were partially offset by a benefit from transportation efficiencies driven by lower stem miles and modestly lower fuel rates..

SG&A expense was 21.3% of sales in the 2013 period compared to 21.6% in the 2012 period, an improvement of 37 basis points. Decreases in incentive compensation, workers compensation and general liability expenses contributed to the overall decrease in SG&A as a percentage of sales.

We were also able to leverage our retail labor expense, partially due to ongoing benefits from our workforce management system and other operating efficiencies. Our mining for cost reduction program also contributed to the overall decrease in SG&A as a percentage of sales.

Costs that increased at a higher rate than our increase in sales include rent expense, advertising costs, depreciation and amortization and utilities expense. The team did a nice job leveraging SG&A on a sales comp of 2.6%, which is better than our goal of leveraging SG&A on a 3% to 3.5% comp increase..

As of May 3, total inventories were $2.41 billion, up about 14% on a per-store basis. This rate of growth should moderate as we move through the year. Our inventory turns were 5.0x. The quality and aging of our inventory continues to be in good shape..

Capital expenditures for the quarter totaled $150 million, including $30 million related to new leased stores; $25 million for stores we purchased or built; $74 million for upgrades, remodels and relocations of existing stores; $14 million for distribution and transportation; and $6 million for information system upgrades.

During the quarter, we opened 165 new stores and relocated or remodeled 207 stores..

At the end of the quarter, we had outstanding long-term obligations of $2.84 billion, essentially in line with the prior year. We continued to improve our capital structure to ensure long-term flexibility, ample liquidity and enhanced financial performance. In March, Moody's upgraded our senior unsecured credit rating to Baa3.

This upgrade completed our transition to investment grade as our S&P corporate rating was already BBB-..

During the quarter, we successfully issued $1.3 billion of senior unsecured notes, consisting of $400 million of 5-year notes at an interest rate of 1.875% and $900 million of 10-year notes at an interest rate of 3.25%.

We concurrently entered into a new 5-year senior unsecured credit facility, which includes a $1 billion term loan and an $850 million revolver. Proceeds from the offerings, together with the term loan borrowings under the new credit facility, were used to repay the senior secured credit facilities.

This successful refinancing allowed us to extend our average debt maturity and move to an unsecured debt structure at very attractive borrowing rates..

Now to guidance. Based on our first quarter results and our outlook for the balance of the year, we now expect total sales for the year to increase 10% to 11%. Same-store sales are expected to increase 4% to 5%.

We are forecasting gross margin contraction for the full year to be in line with the first quarter due to the continued mix shift within consumables to lower-margin items, higher inventory shrink and softer sales in non-consumables..

As you model gross margin, please keep in mind we had our best performance on gross margin in fourth quarter of 2012. This will be our most challenging quarterly overlap on gross margin for the year as you look at the quarterly spread..

Operating profit for 2013 is expected to be in the range of $1.73 billion to $1.77 billion. Given our successful refinancing during the quarter, we now expect interest expense to be in the range of $95 million to $100 million..

Adjusted earnings per share for the year is now forecast to be $3.15 to $3.22 based on about 326 million weighted average diluted shares. This share count assumes about $500 million for total share repurchases.

For the second quarter, please keep in mind that we will be lapping a $0.04-per-share impact from a discrete tax item from last year that we do not expect to reoccur this year. The full year 2013 effective tax rate is expected to be about 38%..

For the year, we plan to open approximately 635 new stores and to remodel or relocate a total of approximately 550 stores. Capital expenditures are expected to be in the range of $575 million to $625 million..

It is still very early in the year, and the outlook for the rest of the year is very hard to call. The new guidance reflects our best estimates given what we know today. Looking at the balance of the year, I believe we have clear operating priorities in place to help us deliver on our goals..

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

Thank you, David. The first quarter was an extremely busy and productive one at Dollar General. I'll give you a few examples of the tremendous work that has been accomplished in just one quarter..

First, store growth. Through the first quarter, we opened 165 stores, including 10 Dollar General Markets and 8 Dollar General Plus formats. Compared to the past couple of years, our store pipeline is very robust, and we are ahead of where we were at this time last year for both new stores opened and store weeks.

Our new stores are continuing to deliver strong performance that is exceeding our plans. In addition, we remodeled or relocated 207 stores in the quarter, including 44 Dollar General Plus stores. The DG Plus format is a great tool for relocations, and we were driving higher baskets given the expanded perishable assortment in those stores.

At the end of the first quarter, we had 10,662 stores in 40 states, well on our way to our next milestone of 11,000 stores..

Turning to store operations. We made great progress in implementing Phase 5, our initiative aimed at optimizing shelf space in 3,000 legacy stores that have not been remodeled to our customer-centric format. For the quarter, we completed the fixturing and reconfiguration of 2,800 of the 3,000 stores in this legacy group.

While it's early, we are pleased with the comp sales lift of about 100 basis points we are seeing as our customers realize we expanded our product assortment..

Additionally, across the rest of the store base, the implementation of new planograms increased over 30% year-over-year as we advance the timing of our planogram changes into the first quarter of this year to better align with our category management plans and new product introductions.

Specifically, we made over 600,000 planogram changes across our store base in the first quarter. All in all, this is substantial work at the store level that should provide a real benefit going forward..

We're very pleased with the results of our cooler expansions for perishable items. Most of our new stores are being built with 16 cooler doors, and we plan to increase the number of coolers in approximately 1,700 existing stores.

In the first quarter alone, we installed about 6,300 cooler doors in over 1,400 of those stores, or about 80% of our target..

We're also making progress on installing defensive merchandising fixtures to help us reestablish our trend of shrink improvement.

In hindsight, over the last year or so, we introduced some new products with a higher dollar value per unit and did not implement the associated defensive fixturing or labeling that we now realize is necessary in select stores. During the quarter, we accelerated the installation of the fixtures, installing them in over 2,600 stores.

We also completed additional shrink training workshops for all of our field management..

At the store level, the most significant initiative implemented has been our aggressive roll out of tobacco products. We are on track to have tobacco rolled out to essentially all of our stores before the end of the second quarter.

As of today, we have tobacco in about 10,000 stores, which is quite an achievement when you consider the amount of work involved.

For each and every store location, we have to get a license, develop a planogram, source fixturing for the product, schedule and complete the installation of the fixture, ship inventory, set the planogram and training employees.

In addition, we have reconfigured the front end of the store to facilitate the sale of tobacco, including the addition of more impulse items. Much like raising of the shelf height profile to 78 inches, this effort has been a great example of success -- successful cross-functional execution at Dollar General..

We continue to gain insights into the tobacco category and how we think it will contribute to traffic and sales over time. So far, as we look at tobacco purchases, we are seeing about 1/3 with tobacco only, and the remaining 2/3 are tobacco plus one or more items.

The average basket with tobacco and additional items is currently above $17, and our sales and traffic are building each week along with our customer awareness. Based on our experience, we expect that the percentage of baskets with tobacco will continue to ramp up over the next several months..

In summary, we accomplished much in the quarter that we believe should pay dividends as the year progresses. While it's still early, the second quarter is off to a solid start, and we are beginning to see a slight improvement in our non-consumable sales.

However, the current expected growth rate for total comps and gross margin performance for the year is not where we had projected it when we last spoke. As a result, we have moderated our outlook for the year..

It is definitely clear that as we look at our business, our customers' dependence on Dollar General's Every Day Low Pricing on basic items in our convenient format has never been greater.

We are focused on meeting those needs as our customers continue to manage their way through the ongoing financial pressures they face, as they always do and they always have done. At the same time, we are continuing improving our operations across the board and believe we have a long runway for continued success..

Before I open it up for questions, I want to thank over 95,000 Dollar General employees for the hard work that was completed in the first quarter. My sincere thanks go out to all Dollar General employees for their extra -- extra efforts in this quarter..

Now we'll open up for questions, Mary Winn. .

Okay. Operator, we'll take our first question, please. .

Ladies and gentlemen, our first question will come from Meredith Adler, Barclays. .

I'd like to focus on the gross margin. I think that's probably everybody's concern. And I understand what you've said, but you are -- seem to be making an assumption that the rest of the year stays very similar to the first quarter. And maybe you could just talk more about what you believe is in the consumer's mind.

If weather gets better, why wouldn't we see discretionary sales start to pick up? So maybe just talk to -- and then a little bit more about shrink and how quickly can you make improvements. .

Yes. Fair, fair question, Meredith. What I'm looking at right now is, literally, where we stand today, having looked back on the quarter and thinking about how things are going. We have said for a period of time that the non-consumable side of the business is going to need just a little bit of help from the economy, I believe.

We made some solid progress in 2012, but as I look across 2000 -- the first quarter of 2013, when we came out of that trough in March, I had anticipated that the non-consumable side would accelerate at a faster pace as we move through April.

And we didn't see that, albeit we are seeing it improve as we are moving through May and June, but still not at the rate that I thought it would at this stage of the game.

The other thing I want to talk a little bit on the margin side, why there's still opportunities in warehouse and transportation and category management and sourcing, I want to talk a little bit about what I think has happened in our quest to be a little more relevant to the customer out there.

As we moved through the back part of last year and into the first part of this year, we began to expand our SKU base to include more and more national brand items, and those national brand items historically carry a little bit lower margin than our private brands, and we began to give the customer more alternatives to our private brand offering.

We historically have been about good and best, or good and better when you look at our product assortment. And now, we're a little bit more good, better and best, having given more alternatives to the consumer. And let me give you a perfect example here.

Six months ago, we carried the private brand version of Claritin in a 12-count, a 24-count and a 36-count, and we only carried Claritin in the 24. So if you wanted less than 24, you bought our private brands. And if you wanted more, you bought our private brands. Now we have -- the customer has their option across all 6 SKUs.

And we inadvertently, in our zest to be a little more relevant, allowed the customer to be able to trade down on the margin on the -- in the consumable side of the business. I think the other thing, in our quest to be a little more relevant, we've added more high-value SKUs.

And while they're selling, they're putting a little more pressure on the shrink side of the ledger, and that's this idea that while units are down, our shrink is up. So I think that we've made a lot of progress.

I think, as I look at the margin we move through the year, we're going to continue to tweak that, and I think it's going to take us a couple -- 3 quarters to get -- to make that rebound. .

Okay.

And then maybe, is there any reason -- as we think about the discretionary part of the business, do you need to cut any orders? Have you done that?.

Yes. We actually -- much like a lot of the other major retailers out there, we have been looking down the road on this for 6 or 7 months. And our inventory on the non-consumable side is very healthy. It's not like we have an issue there that's going to sneak up on us. .

Okay, that's good to hear.

And the promotional environment, is that contributing in any way?.

Another very fair question. I think the competitive environment, like the last quarter, is relatively stable. I think very much like the last quarter, I think share of voice, people are competing for. There's more radio out there and more TV out there, more pages and ads, but the pricing in all of those vehicles is very rational right now. .

And I just had one more question. You've got obviously aggressive square footage growth plans.

Given everything you're seeing, is there any reason to believe that the ROIC on new stores, over more than a couple months, but the long-term ROIC is changing at all?.

We are as excited about the returns on our new stores. The speed at which they ramp up, Meredith, as I was 5 years ago when I first talked to you about it. .

[Operator Instructions] Our next question will come from Deborah Weinswig, Citigroup. .

Rick, is there any reason to think that you're at peak margins?.

I think that we still have lots of room in lots of different areas. David, I think as we tweak what's going on in the stores in terms of the SKU base, I think that's opportunity. David, I think in terms of private brands and... .

Yes, I think you look at category management, sourcing, private brands, distribution, transportation and now, ironically, with a bigger opportunity in shrink because it's going a little bit the wrong way. So I think short-term, clearly, as we look at 2013, we don't see ourselves going up in margin, and we've put that into our guidance.

But as we look out over the next 5 years, absolutely, we still believe there's opportunity to expand our operating margins. .

I do think, Deb, the low-hanging fruit is gone. I think as we move through the next few years, it's going to -- we're going to have to be a little more thoughtful, a little more precise on how we get it. But I think the opportunities are still there. .

And then do you think that there's anything structural here, either with the company, the consumer or the competition?.

I think the competitive environment is very stable. Like I said, it's not like we're picking up -- coming to work one day and someone's got great big ad. I think there's more pages, more radio as people are trying to make sure that consumers are there.

In terms of the macroenvironment, I think the pressure that exists on customers is universe-ed across all of retailing. I think there's -- we talk about -- there's a lot more people who have an income under $50,000 a year than those that have an income of over $100,000.

And I think the environment, while the governmental regulation -- there's not as much noise as there was a couple of quarters ago, and I actually feel better about the environment that our customer is in. We went through the Memorial Day weekend without a big spike in gasoline prices. I think that's a very positive thing for us.

And I think structurally, in terms of the business, I tell you, I feel as good about Dollar General today as I've felt in a long time. We got a lot of work done in the first quarter. And I think it's fair to say that maybe we might even have bit off a little more than we could have chewed -- should have chewed in the first quarter.

But we are -- as my chief merchant is fond of saying, our guns are loaded. And we're looking really, really, really hard at 2, 3 and 4. .

Okay.

And then maybe a question you can answer, maybe you can't, but can you talk about what trends are like now?.

Our -- where we stand as of this morning is smack dab middle of the range that we've given you, the guidance range. .

Next question, Paul Trussell, Deutsche Bank. .

So within -- Rick, within your guidance, has the sales contribution or margin impact from tobacco changed at all from a few months ago? And can you just speak to how satisfied you are with what you've seen to date?.

Paul, that's a very fair question. It's too soon yet. While I've got the cigarettes installed in 10,000 stores, we haven't really reached the stage of the game where I'm selling them there yet. I'll give you some update on where we are in the margin on cigarettes as we get through the next quarterly call.

But right now, there's no reason to think that there's any -- anything out of the ordinary. .

Okay, understood.

And then when it comes to apparel and home, is your customer simply not purchasing those goods today because their wallets are tight? Or do you think that the customer has perhaps gone to purchase those goods elsewhere because of the assortment that you have within your stores, or just not wanting to shop your channel anymore for those goods, given that you're their destination for consumables?.

we need to keep that side of the ledger. We like that side of the ledger. Obviously, there will be tweaks to it down the road, but we really like the non-consumable business, and we think we need it overall for the margin. .

So is there -- just to follow-up on that comment, is there any change at all to how you're thinking about space allocation in new stores or remodels when it comes to home and apparel? Or do you feel like the current space allocated is appropriate?.

Our new stores are actually -- we're still pretty bullish on the home side, but our new stores are rolling out with an adjustment to the commitment in apparel. That is correct. And we have done that through all of 2012 and into '13. .

That's an adjustment down?.

Correct. Yes. .

And then just -- with that comment, though, if you are adjusting the allocation of discretionary goods down, wouldn't that perhaps signal continued unfavorable mix shift?.

Actually, number one, we don't want to confuse adjusting apparel with adjusting all of non-consumables. The apparel -- particularly when I talk of apparel, I'm talking about hanging apparel. We have a solid undergarment business, a solid sock business.

And I think as you look at -- what we're working on is not adjusting the sales down, doing a better job of managing our sell-through. That's what we're trying to do, is maximize the margin out of those items. .

And Paul, that business that Rick is talking about is only about 2% of our total when he talks about hanging apparels. And do keep that in mind. .

Our next question will come from John Heinbockel, Guggenheim Securities. .

So when you look at the shrink over $5, is that more discretionary? Or is that HBA, OTC, or other consumables?.

I would call it discretionary inside the HBA category. So think in terms of a high-dollar eyeliner. .

So there should be -- in importing employees, fixturing to curtail that, is there a plan to do that? I would think that's something that could be done relatively quickly. .

Yes. As I've said, we've already got 2,600 stores installed. And you have to install them, then you have to go through the shrink cycle to see what happens. And I'm very pleased with the progress we've made on that particular effort. .

So when you think about shrink opportunity, do you think it's more than 50 bps? Or not that much?.

as hard as we're working on shrink, the number is still better than it was in 2007 when we started our initiative. So there's -- but I will say there's room for improvement. .

All right. And 2 last things. With tobacco, are you -- as I recall, there was not a lot of incremental labor. And as you put -- put that in the store.

Is that right?.

That is correct. .

Okay.

And then secondly, do you think discretion -- or you talked about improvement, you think discretionary could be or should be positive for the second quarter? Or it won't improve that much?.

I don't want to really get into that. But I will tell you, it is improving. All right? And again, you've got to remember, I'm not -- I don't want to -- all I can look at is where I am today. And like I said, it is improving. .

Right. Because you would think that there is pent-up demand here as weather gets better in the northern part of the country, right, that there'd be a 4- or 5-week period where people would buy all of their spring stuff all at once. .

Absolutely. .

And that's yet to come.

We haven't seen that yet?.

That's correct. .

Next question, David Mann, Johnson Rice. .

When you look at your performance of discretionary in some of those markets like Florida and Texas, can you just give us a sense on how it performed by -- in the different markets?.

Yes. I would tell you, the warmer market that haven't been impacted by the weather, our discretionary sales, particularly spring and summer, are just fine. .

Okay, great.

And then for David Tehle, would you -- when we're looking at the -- your SG&A assumptions that are implicit within guidance, are they a little bit tighter than what you gave us a couple of months ago? And if so, what's going on there?.

No. I think we're pretty close to what we had talked about before. We always saw ourselves in our guidance leveraging SG&A to the prior year. I will say, in first quarter, we were very impressed with that 37 basis points on a 2.6 comp, as that was beyond -- generally, we guide to a 3 to 3.5 comp.

But we definitely have leverage planned in our guidance on SG&A through the back half of the year. But again, I don't think there's anything too unusual about it. .

Our next question will come from Colin McGranahan, Bernstein. .

Why don't we go back and focus on gross margin for a second. First, I think it's the first time that we've kind of maybe gotten a little more understanding of what you're doing with the assortment toward national brands.

How do you rectify that problem? Are you going to be taking SKUs out, or adding additional private-label SKUs to try to get the mix shifting back a little bit?.

Yes. Actually, I think the answer to that is yes to both. We are going to further expand our private brand presence again this year as we have in the past. But Colin, to be honest with you, we're going to rationalize some of the SKUs that we've put in.

And the merchants have a plan to sell it down versus -- it's good merchandise here, and we feel that we can adjust that assortment and tighten it up as we move through the fourth quarter. .

And how do you think that impacts the relevance? Obviously, at the time, the strategy to add it was a sales-relevant strategy.

So as you start -- I don't want to use, "unwind," but as you kind of self-correct a little bit here, how does that impact your outlook for relevance and comp sales?.

That's a very fair question, and I do prefer the word "adjust" versus even "unwind." Okay? Just adjusted. You got to remember, what we're talking about here is not eliminating the brand. It's eliminating sizes that give the customer a choice.

So you're still going to be irrelevant in that you're going to have the national brands, we just don't want to offer as many alternatives in terms of size. That's all. .

Okay. That's fair. And then just trying to get my head around the rest of the year being gross margins down 80, 90 basis points.

Can you give us any rank ordering or quantification of the various factors there between mix, tobacco impact, shrink and markdowns?.

I think if you look at it and you're trying to compare it to where -- last year versus this year on those items, tobacco is the largest one, again, compared to last year. I'm not talking about how we updated our guidance, I'm just talking about raw numbers last year versus this year.

Mix would be the second one, and again, that would be the mix within consumables, as we've mentioned, going to some lower sales more in the lower-margin consumables. And then the discretionary, the non-consumable being less, the mix piece that that makes up. And then the last factor would be shrink. .

Okay. That's super helpful. And David, while I have you, I'll sneak one last question in. Just in terms of capital returned, obviously, a pretty light quarter from repo. Sounds like you're still committed to $500 million for the year.

What drove the decision not to buy back more stock in Q1? And how do you think about a dividend at this point?.

Yes. We -- again, in terms of our capital allocation, we remain committed to investing in the business. It's our #1 priority, opening stores. And again, we reiterated the 635 store openings as our guidance for 2013. We'll invest in the infrastructure to support that store growth because we are a growth story.

And then stock buy back is, of course, our next usage of cash. We became investment grade, as you know, relatively recently with Moody's. We already were with S&P. It takes about a 3.0 debt-to-EBITDAR ratio, somewhere in that vicinity, in terms of maintaining that investment-grade rating. That's very important to us.

So really, if you look at the quarter, the $20 million of stock that we brought back was pretty much in line with staying at that 3.0 on the debt to EBITDAR. .

Next question will come from Greg Hessler, Bank of America. .

So I think you actually answered my question with the last one.

But just to confirm, you guys are still committed to the 3x lease-adjusted debt-to-EBITDAR target?.

Yes. I think as we look at our business long term, clearly, being investment grade is important to us. And that 3.0 is what drives that.

Now I will say, on our last call, we mentioned that if there are circumstances in the debt or equity markets, changes that we deem it'd be prudent for us to temporarily increase or decrease our debt levels, we may do so. And I just want to reiterate that. Again, that was in on our last conference call.

But clearly, on a long-term basis, we are targeting investment grade and targeting net debt to EBITDAR of 3.0. .

And if you temporarily increased it, would the goal still be to maintain the investment-grade rating?.

Yes. .

Okay. And then last question from me, just in terms of working capital for the quarter, AP was a decent drain.

Can you just kind of walk through that and what your expectations are for working capital for the rest of the year?.

Well, we don't give guidance on working capital. But I can talk a little bit about what happened in the quarter, particularly on accounts payable. A chunk of that was related to tobacco. We had a lot of receipts come in in tobacco, as I'm sure you're aware, as we are stocking stores.

And the terms on tobacco are very, very, very, quick in terms of how you have to pay it. And so that was probably the biggest thing. And then we had a few more perishables come in, beer and wine, things of that nature. And again, those tend to be items that have quick payment terms.

I think that was probably the biggest issue in the quarter, with tobacco being the biggest single issue. .

Our next question will come from Edward Kelly, Crédit Suisse. .

Rick, can we just quickly just go back to the gross margin? I guess, as we think about your initial expectation going into the year of it being up, x tobacco, now it's down, could you just maybe sort of -- I know we could've gone through this a few ways, but just rank what's the biggest issue that has changed your expectation.

And then for the rest of the year, why wouldn't the gross margin get better? Because other than tobacco, which I know is an increased headwind, it feels like some of these other items, like discretionary getting a little bit better, easier comparisons, shrinkage should, I would think, be able to work.

So why wouldn't Q1 really be the low point and then improve from here?.

Yes. Let me take a shot at that.

Again, as we look at our guidance for the year, the biggest factors -- now we're talking of the change in terms of what changed from the last guidance, different from comparing to last year that we talked about previously, if you talk abut the change, clearly, the mix issue is the biggest issue we're looking at, the mix of sales to consumable and then the mix within the consumables category to the lower-margin items.

And it's just the way we're calling it. To answer your question, for the rest of the year in terms of what we're looking at, we're seeing -- we see that skewing differently than when we did our guidance previously in March. And then additionally, we mentioned shrink, and shrink is planned to be worse for the rest of year.

And again, that's a new development that we didn't have when we did our guidance in March. We actually thought we'd see improvement in shrink if we got to the end of the year. And we don't see that anymore.

And unfortunately, the way shrink works -- a lot of things we're doing that will clearly help us, but the probability of those impacting this year is pretty remote. That's probably going to be more likely to impact 2014. .

Okay.

And as we think about the gross margin beyond a lot of the noise, which is taking place this year with the roll out of tobacco and stuff, is this the line item that you think you can keep fairly stable over the next few years?.

Ed, you just said margins could be stable?.

Yes. The gross margin.

Do think this is an item that, longer term, you can keep relatively stable beyond this year?.

Yes. I mean, I think -- I mean, you're asking me to look pretty far out here, and you have to take into account the competitive situation, the environment you're in. But, Ed, I do fall back to -- I believe we've got one of the robust -- the most robust category management programs in place here.

And the beauty about category management, it's all about puts and takes, and you're constantly moving around, doing what's right for the business and right for the margin.

I think in terms of sourcing, I think there's still a tremendous opportunity there, particularly when the non-consumable side of the business starts to gain a little traction again. The private brand business for us, we continue to be amazed at the number of items we can add.

Distribution and transportation, I have to say, our sourcing team continues to surprise us on how they can cube out a truck and cut back on stem miles. I see no reason for that to abate. Yes, another distribution center coming online toward the first quarter of next year that I think will do, again, give us opportunity to help on the margin.

And shrink, I have to say, I've been doing this for a long period of time. Even before our shrink went a little sideways a couple of quarters ago, I -- we still saw room for improvement there, as good as we've done and as far as we've come. And the thing about shrink, it's just not a straight line to the top.

It -- you do really well for a period of time, and then you kind of have to realign everything and get after it. So I will tell you that my view is, as I look out down the road, I feel as good about our ability to manage the margin in the future as I do today. .

Our next question will come from Mark Miller, William Blair. .

A question about store manager turnover. I know last quarter you had upbeat comments about that.

Can you share with us what you're seeing here in 2013? And I was wondering if you see a risk that turnover could rise as employment opportunities are better in the market? That has happened in the past and might make that -- might that make it tougher to bring shrink down? So I'm speaking about a cyclical headwind here. .

Yes. Hey, Mark, there's no doubt that store manager turnover and shrink, there is a direct correlation. Right? And there's also a direct correlation to store standards and customer service. Our store manager turnover at the conclusion of the first quarter approved yet again and was down from the previous year.

Store manager turnover in retail to me usually runs in the mid- to high-20s, and we're rapidly getting into that, getting towards that number.

I do think the advantage that we have with our store managers today, as I look at it over the last -- particularly the last 5 years, is -- my view is the quickest way to a store manager's heart is through their wallet. And the company has performed very well, and we're paying out bonuses better, much better than they've been in the past.

So I look at the store manager turnover in 2012 as the best it's been in 5 years. It is not -- has not changed. And I think we're going to be able to hold on to them. .

Okay, that's great. And I have a question about tobacco. So it does obviously lift the business as that gets rolled out.

Can you just talk about longer term? I mean, obviously, if the category is in decline, what do you think your comps can be there, year 2, year 3? Do you think you can increase that?.

Yes. I think the -- well, by the way, I agree with you. Tobacco is a very different -- difficult category. We have said that -- there is one good thing about tobacco, why usage goes down every year. The manufacturer increases the cost, which we turn around and then tax increases that we pass on to the consumer. So there is a built-in comp there.

The comp we're looking at right now, as we've said, will be about the same as beer and wine for 2012. .

Our next question will come from John Zolidis, Marketing and Research. .

A question on traffic. You mentioned it was positive, I think, for the 21st consecutive quarter.

In that context, can you talk about the customer demographic? Are you seeing a deceleration of higher-income customers coming into the store? How has your customer kind of changed compared to 2 to 3 years ago in terms of income profile? And what do you expect going forward in terms of which new customers you're most likely to attract and you hope to help you drive the business?.

Yes, good question. The core customer for us in terms of the amount of our sales that they are generating remains as consistent as it's been the last 3 or 4 years. There is no evidence at this time that there's a change with the trade-down customer or the trade-in customer. I have not seen anything that indicates that.

I can tell you -- you do your market research, John, with the customer about every year. The last time we did that, which was probably 3 or 4 months ago, there was no indication from the higher demographic that if the economy got significantly better, that they were going to trade out of the channel.

And again, though, it's too soon for me to tell you that as we begin to move through the year. But right now, the fastest-growing customer segment we still have is that customer that's around $7,000 -- $50,000 to $70,000 a year, which is above the income of our core customer. .

Next question, Dutch Fox, FBR Capital Markets. .

So moving over to the balance sheet, I was curious.

Could you talk to us a little bit about the inventory we built -- build we saw this quarter? What that primarily related to tobacco? And if it was, should we continue to expect 10 plus or so per square foot growth in inventory over the course of the year? And I have a quick follow-up to -- answer to a question you guys gave a little bit earlier. .

Sure. If we look at our inventories for the quarter, our turns were 5.0 in the quarter. If we look at the increase, as you mentioned, we were up about 14%, which is higher than we'd like to be. We added new items in 2012 that rolled over. And then as Rick mentioned, we did a lot of planogram work in first quarter.

We pushed a lot of the things we would have done later in the year into first quarter to get a head start on it. So with those planogram shifts, we brought in more inventory. And then certainly, as you mentioned, we had the tobacco inventory that came in in one fell swoop and hit us.

Keep in mind, as we look at our inventory, the vast majority of the increase that we have is in our core inventory, and a large piece of that is in our consumable side of the house overall. As we look at inventory for the year, and we mentioned this last time, we see the inventory staying pretty close to where it is short term.

But then as we get to the back half of the year, seeing improvement in terms of the inventory growth versus the sales growth and getting more in line with sales growth, i.e., inventory growing closer to the rate that we see sales growing. So that's how we're calling it right now. .

And, Dutch, I'd like to throw in -- my personal contribution of the inventory growth is the in-stock initiatives, that we're very committed to being in stock, and that's creating a little bit of growth, too. .

Okay. And Rick, just to clarify on an answer you gave to a previous question when asked about trends in managing, you said you were smack dab in the middle of guidance. Can you -- are you talking about the 4 to 5 guidance for the year? Quarter-to-date, you're running something better than a 4.

Is that what you're trying to say?.

I'm just saying that I'm really pleased with where sales are so far in this quarter on this day. .

Well, with it -- Dutch, it's Mary Winn. With the update on our guidance, where we just updated to that 4 to 5, I think you -- we said we had a solid start to the quarter, so you would start to see some acceleration there. .

Our next question will come from Dan Wewer, Raymond James. .

So Rick, as I recall, Buck Holdings has 3 seats on your Board of Directors. But if their ownership drops below 5%, they no longer have that guaranteed representation.

Can you tell us how you're thinking about changing the board going forward in light of their ownership change?.

Yes. The first thing I'd like to say, Dan -- and by the way, it's very -- another very fair question. First thing I'd like to say is you're talking about Adrian Jones, Mike and Raj. And I would just like to say, the value they've added to that Board of Directors over the last 5 years has just been -- it's been sensational.

It's been great working with them. As we move through the course of the year, it's fair to say we'll need to step back and take a look at that. We just recently elected them for another year. And I think as we move through the year, we'll take a look at that.

Now I have asked Mike Calbert, who I believe to be one of the best business partners I've had, to stay on as lead director. And he has agreed to that. But then we'll work our way through the other 2 seats as we move through the year. .

Okay. And then just to beat the dead horse one more time, I think what's a little puzzling for those of us on the call are, one, why are you lowering the high end of the comp sales guidance from 6% to 5%? I mean, it's a small change to begin with, particularly if you're indicating you're off to a solid start in the second quarter.

And then further, and not to talk about the reasons why the margin guidance is dropping, but gosh, it was only March 25 that the company last gave guidance. And we knew at that time there was going to be significant growth in these higher-priced SKUs that are susceptible to shrink and you have a lot of experienced people in your staff.

So I'm just -- those are the 2 things I think are really puzzling. .

Yes, Dan. I think that -- and again, I think that's, again, a quality question here. I think that -- I've always prided myself on being incredibly transparent and calling it like I see it when I see it. And we moved into March knowing that it was going to be tough period.

And we didn't fare through it as well as we thought we would, but the thing that we did see is when we came out of March -- and by the way, in March, we were up against a double-digit comp from the previous year. We didn't see April catch as fast as we thought it was going to.

In fact, we went through a couple of weeks in April before the sales started to accelerate. And what we have noticed over the course of the last few weeks is, no doubt, a shift that's taking place within consumables, as well as the non-consumable side.

And while we are better off in non-consumables today than where we were in the first quarter, we're still not where we want to be. And I thought it was prudent since a 4 to 5 comp is still a -- which I think is a pretty healthy comp to stand up to, I thought it was prudent to just tell you what I was thinking.

In regards to the margin, while you're seeing that mix, that mix change in non-consumables, you're -- excuse me, you're also seeing a mix change in consumables and the customers gravitating into a lower-margin national brand item. And we haven't seen a lot of that before.

And again, that comes back to -- I think we were a little overzealous in adding SKUs in there. .

So when you were completing cycle inventories after you cut off the fiscal year 2012, that's when you began to get some bad numbers roll in?.

No, I had -- I don't want to incur that we're seeing bad numbers. What I'm seeing is as we move through March, we started to see a change in the purchasing pattern of the customer. Our traffic's great, the basket is great, it's just what they're buying is just a little bit different.

And we also thought that we would see more progress on the shrink side of the ledger. And it's proving to be a little bit more difficult. And again, that's why we're -- that's how we're -- that's why we're looking at that. So... .

Our next question will come from Peter Keith, Piper Jaffray. .

I just want to wrap up with a question on Phase 5 and kind of how you're thinking about that as a sales benefit for the full year. It looks like you're bringing in mostly HBA inventory. And kind of in that context, your main competitor in this space has talked about HBA inventory kind of having a long sales ramp because it turns slower.

So could you kind of summarize how Phase 5 has fit into the guidance in terms -- if there is a benefit? Or we should be patient on the ramp that you're going to see from the new inventory?.

Yes. I think as I look at Phase 5, it's HBA, but it's also some grocery -- consumable items, too. Think in terms of paper, in terms of the chemical side of the business. We do particularly good in candy and snacks. So there is the non -- the consumable as well as the HBA.

I will tell you, those stores that have been completed, and it's awfully soon to tell, the consumer has to find the product, realize it's there, but they're already running 1% above what they were trending and continuing to improve on that. So we feel pretty good about that, that group of stores. .

All right. Operator, I think we're at the top of the hour. So with that, we will conclude our call. Thank you very much for your interest in Dollar General. Emma Jo and I are around all day. I know we're leaving a few people in the queue, and I do apologize on that, but please feel free to give us a call. And we look forward to talking to you soon.

Thank you. .

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you..