Good morning. My name is Arnica, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Fourth Quarter 2013 Earnings Call. Today is Thursday, March 13, 2014. [Operator Instructions] This call is being recorded.

Instructions for listening to the replay of the call are available in the company earnings press release issued this morning.

Now I'd like to turn the conference over to Ms. Mary Winn Pilkington, Vice President of Investor Relations and Public Relations. Ms. Pilkington, you may begin your conference. .

Thank you, operator, and good morning, everyone. On the call today are Rick Dreiling, our Chairman and CEO; and David Tehle, our CFO. We will first go through our prepared remarks, and then we will open up the call for questions.

Our earnings release issued today can be found on our website at dollargeneral.com under Investor Information, Press Releases. .

Let me caution you that today's comments will include forward-looking statements about our expectations, plans, predictions and other nonhistorical matters, such as our 2014 forecasted financial results and capital expenditures; our planned fiscal 2014 operating, merchandising and store growth initiatives; our share repurchase expectations; and statements regarding future consumer economic trends.

Important factors that could cause actual results or events to differ materially from those reflected in or implied by our forward-looking statements are included in our earnings release issued this morning; our 2012 10-K, which was filed on March 25, 2013; our 2013 first, second and third quarter 10-Qs; and in the comments that are made on this call.

We encourage you to read these documents. .

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

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

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

Thank you, Mary Winn, and thanks to everyone for joining our call. Today, we reported results for the fourth quarter 2013 and the full year. 2013 had many successes for Dollar General, representing our 24th consecutive year of same-store sales growth. .

one, the severe winter weather that the country experienced from Thanksgiving through January; two, aggressive competitive promotions that were -- we selectively did not participate in; and three, a pullback in our core customer spending due to a number of factors, including reduced government assistance. .

Turning first to the weather. Across all of retail, much has been said about the weather in the fourth quarter. We experienced persistently adverse weather during the quarter that was far greater than normal.

As a result, we experienced significantly reduced selling hours, driven by a combination of stores that were closed due to the inclement weather and stores that operated on reduced hours. There is no doubt the winter weather negatively impacted us across the country.

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

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

January is typically a strong period for us as customers restock on the basics. Unfortunately, the last 2 weeks of January were the most severely impacted by extreme weather across a significant portion of our markets.

To sum up the weather impact, we estimate that in December, 1,000 store selling days were impacted by weather, and we estimate that 7,000 selling days were impacted in January. Another way to look at this is that 34 out of the 91 days in the quarter had a negative impact from the weather. .

Second, competition was and continues to be aggressive, not only in share of voice but also on the key items being advertised and the promotional pricing of these items.

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

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

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

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

In our third quarter earnings call in early December, we shared with you our expectation that we would be chasing the calendar during the fourth quarter due to the loss of 6 selling days between Thanksgiving and Christmas. With the added impact of the weather, we simply were not able to close that gap in spite of cycling our easiest comps of 2012.

As you most likely have personally experienced, some of the weather issues have continued into fiscal 2014. Our sales trends, starting out so far in the first quarter, have been impacted by the continued weather volatility. But I am pleased to report that on days when mother nature is more cooperative, we are very happy with our sales performance. .

In spite of the quarter 4 headwinds, we remain focused on the long-term growth and health of the company and believe that we have plans in place for 2014 to control what we can control.

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

We still were able to increase both our customer traffic and average ticket for the 24th consecutive quarter, although at a slower rate. We also leveraged our SG&A expenses and generated significant cash flow from operations with an increase of more than 7%.

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

David is going to talk about the details, but I'd like to share the highlights of the year and our fourth quarter. Full year sales increased 9.2% to a record $17.5 billion, and sales per square foot increased to $220 compared to $216 a year ago. Same-store sales were up 3.3% for the year and 1.3% in the fourth quarter.

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

For the year, our gross margin rate decreased 69 basis points, and we leveraged SG&A, excluding certain discrete items detailed in our press release, by 31 basis points. For the quarter, our gross margin rate decreased by 58 basis points, which was somewhat better than we expected.

While there are always puts and takes on our margin performance, net-net, tobacco was the largest negative impact, and we leveraged SG&A expense by 14 basis points. .

On the bottom line, net income in the fourth quarter increased 1.5%, with earnings per share up 4% over last year's fourth quarter. And for the year, our adjusted net income increased 6.5% to $1.04 billion and adjusted earnings per share increased 10% to $3.20. .

Looking back, we accomplished a great deal in 2013. We hit our upwardly revised target of opening 650 new stores and exceeded our combined remodel and relocation target with 582 stores, increasing our selling square footage by 6.6%.

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

On the merchandising front, we continue to innovate and maximize the sales productivity of our stores. The biggest change to our merchandising mix in 2013 was the addition of tobacco products. We completed this effort in the second quarter, and tobacco sales are continuing to have a positive impact on our sales and store traffic.

A key metric is the attachment rate, and we are continuing to see this grow as 68% of our tobacco transactions include one or more additional items. In fact, 41% of tobacco transactions now include 3 or more items. In the first half of the year, we expanded coolers in over 1,600 stores, bringing our chain average to about 12 cooler doors per store.

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

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

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

Looking at gross margin overall, we're very pleased with how the year progressed. Although I'm disappointed with our shrink performance for the year, we remain optimistic that the changes we implemented in 2013 will have a greater impact this year.

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

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

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

From an expense reduction standpoint, we continue to benefit from the capabilities of our workforce management system. This system provides our store managers with a tool to assist them as they prioritize and manage work, allowing them to be more effective in how they manage their staff in their stores.

Several work elimination initiatives were introduced in 2013 to help reduce or streamline the work in our stores. Improving efficiencies in our store has been and will continue to be a significant priority for Dollar General.

This is a cross-functional initiative to remove non-value-added work and reinvesting in activities that allow our store managers and their teams to better serve our customers. For instance, we are now sorting our rolltainers by planograms to eliminate re-sorting and reduce the number of steps and rolltainer moves required to stock a shelf.

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

We made further inroads with regard to hiring and developing employees. In 2013, over 60% of our management positions were filled by internal candidates. This represents continued strong improvement during the past 2 years as we've made this a high priority.

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

We are constantly striving to fill the needs and meet the changing demands of our customers. What we saw in 2013 was that our customer needed us more than ever.

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

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So we are executing on our detailed plans for 2014. I think it's fair to say that we plan to reach to our -- reach out to our customer and fill her everyday needs for basic consumable merchandise.

Whether we are her first stop or a regular fill-in shop, we know that having the items our customer is depending on at price points that meet her budget requirements is crucial to our success and hers. Of course, we're always looking for new items and new categories that make her life easier, so you will see some of those in 2014 as well. .

leveraging category management; eliminating work that is non-value-added in the retail stores; continuing our mining for cost reduction program with a target of over $50 million, which allows us the ability to reinvest in the business, offset other costs or drive our profitability; the testing of a life cycle remodel program to build our brand positioning in the marketplace; continuing our focus on reducing shrink; and finally, enhancing our customer service program.

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

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

We're very optimistic about our new store outlook for 2014, and our 2014 pipeline is full. We are excited about our plans, and I'm confident that we can meet our operating goals.

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

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

Thank you, Rick, and good morning, everyone. As Rick has reviewed the highlights of our performance, let me now take you through some of the financial details. Gross margin for the fourth quarter was 31.9% of sales, a decrease of 58 basis points from last year's fourth quarter and somewhat better than our updated 2013 guidance.

Sales growth of tobacco products and perishables, both of which have lower gross margins, outpaced our other categories across both consumables and non-consumables. As expected, our shrink rate increased. These margin pressures were partially offset by a favorable LIFO credit and a favorable impact of net purchase costs. .

Total SG&A improved by 14 basis points in the fourth quarter. As a company, we did not meet the financial performance threshold for our annual team share incentive compensation. However, we made the decision to provide a modest discretionary bonus to employees, excluding officers, who are eligible for our team share bonus plan.

This reduction in incentive compensation contributed 45 basis points to SG&A leverage in the fourth quarter. Primarily as a result of our sales performance, we delevered most of our other operating expenses.

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

Interest expense was $22 million for the fourth quarter, a reduction of $5 million from last year's fourth quarter, primarily due to our debt refinancing. Our tax rate for the quarter was 37.5% compared to 35.9% in the 2012 quarter.

The prior year quarter included a $6.5 million or a $0.02 per share benefit related to the first 3 quarters of 2012 for the retroactive reinstatement of the Work Opportunity Tax Credit. .

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

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

As of the end of the year, total inventories at cost were $2.6 billion, up 6.5% in total and up less than 1% on a per-store basis. As we had planned, we were successful in getting our inventory growth in line with our sales growth as we moved through the year. .

Regarding our share repurchase program, we repurchased an additional $200 million of our common stock in the fourth quarter. For the 2013 fiscal year, we repurchased $620 million or 11 million shares.

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

Since the inception of the share repurchase program in December 2011, we've repurchased 33.8 million shares, with a total return of cash to shareholders of $1.7 billion. We plan to remain consistent, as well as opportunistic, in share repurchases going forward. .

Now for an overview of our guidance for 2014. We expect top line sales for 2014 to increase 8% to 9%. Overall square footage is expected to grow 6% to 7%, and same-store sales are expected to increase 3% to 4%. .

With regard to expenses, we have significant headwinds in SG&A that will result in us delevering SG&A in 2014. The most significant is the planned increase in our cash incentive compensation year-over-year. In recent years, we have met or exceeded the threshold for our team share annual cash incentive plan, making 2013 an anomaly.

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

Compared to 2013, this impact is estimated to be about $35 million or $0.07 per share and an 18-basis-point headwind to SG&A. Also we're facing increased costs in SG&A due to the implementation of the Affordable Care Act.

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

As a result of our sale-leaseback transaction that closed in late January, we will be facing a modest increase in SG&A of approximately 5 basis points. The sale-leaseback will have a negative impact to both operating profit and net income.

However, this project is accretive to earnings per share as we have already used the majority of the proceeds to repurchase shares. In total, these 3 SG&A expense items will likely negatively impact us by $55 million to $60 million or 28 to 30 points of SG&A deleverage in total. .

The anticipated earnings per share impact is about $0.09 to $0.10 for the combined incentive comp and ACA headwinds. Post-2014, we would not expect year-over-year increases of this magnitude, but rather that these costs would be normalized into our operating performance going forward.

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

Adjusted operating profit is forecasted to be in the range of 2% to 5% -- profit growth is forecasted to be in the range of 2% to 5%. The anticipated SG&A headwinds are impacting this growth rate by approximately 3 percentage points. We are forecasting net interest expense for the year to be in the range of $85 million to $90 million.

We're committed to maintaining our investment-grade rating while managing to a leverage ratio of 3x adjusted debt to EBITDA. At the same time, if circumstances in the debt and equity markets are such that we deem it prudent to temporarily increase or decrease our debt levels, we may do so. .

We expect our full year tax rate to be approximately 38%. We expect diluted earnings per share for the year to be $3.45 to $3.55. It's a growth rate of 8% to 11% on an adjusted basis over the $3.20 in 2013.

Please keep in mind, the anticipated combined impact of incentive compensation and the Affordable Care Act is approximately $45 million to $50 million or $0.09 to $0.10 per share. This is about 3 percentage points of growth on our adjusted earnings per share. .

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

In total, this repurchase activity represents approximately 5% of our current market capitalization. 2014 capital expenditures are forecasted to be in the range of $450 million to $500 million. .

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

As we mentioned, the adverse weather impacting sales in the fourth quarter of 2013 has continued into the first quarter this year. Gross margins will continue to be impacted by our tobacco introduction as this product category was not fully launched until the second quarter of 2013.

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

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

As has been the trend for the last several years, we believe our customers' discretionary spending will continue to be constrained in 2014. As our long-term track record demonstrates, Dollar General is well positioned to serve our customers regardless of how the economy plays out. .

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

Thanks, David. Dollar General is a strong and growing business with tremendous high-return store growth opportunities that we intend to capture. Our long-term commitment to growth and shareholder value are unchanged.

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

My sincere appreciation goes out to more than 100,000 Dollar General employees for all they do to fulfill our mission of serving others in the more than 1.5 billion annual customer transactions. With that, Mary Winn, we'd now like to open it up for questions. .

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

[Operator Instructions] Your first question comes from Paul Trussell with Deutsche Bank. .

Provided -- but I wanted to ask a question about operating income growth. Certainly, I understand that these factors, particularly the incentive comp, is very specific to 2014.

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

Yes. Well, Paul, we're not giving specific guidance beyond 2014. But I did say in my prepared comments that we do think we've got some headwinds in 2014 that are -- that won't reoccur as we get out of 2014 and in 2015 and beyond.

Specifically, we talked about the team share, the incentive comp being $35 million or about $0.07 a share, 18 basis points on SG&A. We talked about the Affordable Care Act. That's $10 million to $15 million or 5 to 8 basis points, $0.02 to $0.03 earnings per share.

And then the sale-leaseback, although it doesn't hit earnings per share, it does hit the basis points on SG&A, and that was about $10 million. So we have some discrete items here that are impacting 2014. And again, as we get beyond 2014, we see these being more normalized and not being an impact as we get into 2015 and beyond.

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

Fair enough. And then just moving to the top line. If -- in addition to the weather, it was mentioned that there's consumer headwinds, taxes, health care, et cetera, along with some competitive headwinds with Walmart and others being promotional and also trying to open up small stores.

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

Yes, Paul. I'll take that one. A couple things here. First of all, our remodel, relocation and new store program continues to be as healthy as ever. Our new stores continue to open up at 85% to 90% of our average comp number.

I -- fact, I looked at some real estate numbers just yesterday, reviewing the 2013 projects, and they were tracking at almost 101% of our projection, so continue to be very, very healthy. I have historically laid out on this call, all of our initiatives going forward in a lot of detail.

And I've elected this year, because of the intensity of the competitive environment out there, to choose to rather come back to you and tell you how we're doing once we get them done. But I will tell you that we are focused on SKU productivity. We actually believe we can do more in 2014 with less SKUs.

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

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

We are also -- which I will report on as we move through the year, have developed what we are calling out a life cycle remodel, and the majority of these stores are undersized by our current standards. They're in the 5,700 to 6,500 square feet.

And these are stores that historically, we might stand up and say, "Hey, let's relocate them," but they're in keeper sites now. They're in good spots. We don't have the opportunity to expand them.

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

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

And then, of course, we're going to continue to stay focused on category management. And I know, Paul, that's kind of much broader than we historically have given you, but I would rather report this year on how we're doing versus laying it out on the table upfront. .

Your next question comes from Peter Keith with Piper Jaffray..

[Technical Difficulty].

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

Sure, I'll restart. When I look at the comp guidance for Q1 in the context of the full year guide, you're guiding 2% to 3%, so the full year guide of 3% to 4% implies some acceleration. At the same time, you're going to be lapping the tobacco rollout in the second quarter.

So assuming you kind of have an easy compare in the fourth quarter, but I wanted to get some comfort around how you're thinking about the acceleration quarters 2 through 4. .

Yes, great question. We actually -- we're feeling very comfortable about the merchandising initiatives that are starting to roll out. We are actually getting ready to do our spring roadshow, where we could go out, Peter, and lay all those out for the store managers. We're very comfortable there.

And we're also -- quite honestly, I think the competitive environment is going to settle down. And really intense competitor -- competitive environments have a habit of coming and going, and when that does happen, I believe the role of EDLP is going to be even more important than the promotional activity that we've seen recently.

So -- and I also think -- I fall back to what we said in our comments, when mother nature is not interfering with what's going on, we're pleased with what we're seeing. And I know the groundhog is getting every bit they can out of seeing their shadow this year, but we think the good spring weather is coming. .

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

Okay, very good. On the weather, certainly, you guys are going to have some disruption with closures. I was curious more on the backdrop of energy costs.

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

number one, the weather. I do think that we do know that natural gas and propane are both going to be up significantly for the consumer, and we might be seeing some of those higher heating bills working their way through now. So it's a little bit of both. .

Your next question comes from Edward Kelly with Crédit Suisse. .

It's actually Judah on for Ed. Just wanted to first follow up on just the operating margin guidance. And I think even x the items that you called out, the growth is a little lower than we expected, which seems like there may be some gross margin impact that's more than we anticipated.

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

Yes. I'll take it off, and then, please jump in, Rick. As we look at our gross margin for the year, clearly, the first half of the year is being impacted by tobacco, particularly the first quarter, but also in the second quarter. And then as we get to the back half of the year, that mitigates.

And right now, we are actually forecasting that as we get into third and fourth quarter, we should start seeing some leverage in gross margin. So I don't think there's a whole lot besides the tobacco impact to talk about here. On the first -- we talked about shrink. We see shrink improving as we go through the year.

And again, that will be more second half-based than first half-based. We're still dealing with that a little bit here in the first part of the year. But besides those items, I don't think there are many other items in gross margin that would have an impact. .

Okay. And then just a follow-up. Can you talk a little bit about the comments out of Walmart that they're going to be expanding their small store rollout. It's currently not a huge number of stores, but there is focus on that Express format that maybe competes a little bit more with you guys. .

Yes. I mean, Walmart is a fabulous competitor. There is absolutely no doubt about it. I think, though, Judah, if you look at it, their primary focus is the neighborhood store. They're talking about adding 100 Express stores, I think, this coming year, and primarily, their focus is on the neighborhood market. And we're going to open up over 700 stores.

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

Your next question comes from Matthew Boss with JPMorgan. .

So as we think about your model beyond 2014, is it fair to think about a 3% comp or so, flattish gross margins and a low-single-digit leverage point as kind of a baseline? Any color you can kind of give us on how to think about the model over a multiyear basis would be really helpful. .

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

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

Matt, I would say is what David's calling out is spot on. I would say to you that we have a long track record, though, of really good results, so I wouldn't let 2014 influence me looking forward. .

Right. On the same-store sales front, the 3% to 4%, I think you -- on our math, you basically get 200 basis points just from the store opening waterfall and relocations. Just kind of trying to plug the delta between the 3% to 4% and the 2%. I guess that's some of the merchandising initiatives that you said are still to come. .

That's exactly right. We call out, historically, 1.5% to 2% on the real estate program. And then the rest is what we're going to do going through the course of the year to drive traffic and sales. .

And then last question on the square footage front. So last call, you raised the saturation target about 40% to 14,000.

Have you seen anything competitively that would relate to the availability of sites? And one thing I was wondering is would you guys consider acceleration? Is that an opportunity if a key competitor were to slow the growth for a few years here?.

Yes. I think the issue of accelerating our new store growth is one that David and I wrestle with all the time. We are very much into organizational capacity. And if you think about it, every year that we've been together here as a team, we've upped the number of new stores that we've opened.

And what we don't want to do is get ourselves into the jam the company got itself into several years ago, where it actually had to come in and close 400 stores because in the rush to open new stores, we were more focused on quantity rather than quality. And I would rather guide open 700 stores and open them right than open 850 and be marginal.

So it's something we wrestle with all the time. It's a very fair question. But right now, we're very comfortable with the number of stores we're going to open. .

Your next question comes from John Heinbockel with Guggenheim Securities. .

So let me start with, strategically, when you look at the discretionary categories, right, which have struggled for a couple of years here, is -- how do you think about that business longer term in terms of -- I think you've cut back a little bit on apparel.

But really thinking about getting a major change there in terms of space allocation, what you carry in terms of SKUs, maybe you cut back toys, categories that are hard to compete in beyond convenience, how you think about revitalizing that business? Or is it just a matter of the economy getting better?.

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

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

Having said that, though, Phase 5 is the perfect example of how we're looking at everything, in that we're saying that every category has to carry its own water in the store. And if you look at the fact that we have reduced hanging apparel in some areas, we are committed to getting the store balanced properly.

But saying -- having said all of that, we think the non-consumables side of the business is incredibly important. We are today's general store, and getting that offering moving, we think, is incredibly important to the overall mix and to our value [ph] proposition. So we're very committed, and we're still committed to it. .

All right. And then 2 final things. If you -- we had talked, I think, on the last call or the one before that, maybe migrating some of the learnings from DG Market into the rest of the box, particularly something like produce.

Any updated thought on that? And then, secondly, how aggressive do you think you'll be in trying -- and how much of an opportunity do you think it is going after the CVS tobacco customer? Big opportunity? Do you go after that aggressively? Or is that just kind of whatever falls into your lap happens?.

Yes, 2 good questions. We continue to experiment with Dollar General Market. John, I grew up selling produce and meat, and it's pretty easy for me. But it's very difficult teaching somebody how to sell it when they're not used to selling it in terms of rotation, how you order it, how you mark it down, how you keep it fresh.

And right now, I don't see a lot of movement like moving produce items into the traditional DG. I will tell you, Todd and his team have made some learnings on the perishables side, the cooler side, that we've been able to move into the traditional Dollar General stores, that are beneficial.

In regards to the CVS thing, I think what happens when someone gives up a category like that, those sales just tend to go where they're going to go. I think we'll get our share of it, but I don't think it's going to be more than that. .

Your next question comes from Meredith Adler with Barclays. .

I'd like to start by just talking a little bit about the gross margin. And I know there's been a bunch of questions about it, but I actually want to be a little backward-looking. And you had a very tough comparison this fourth, and clearly, shrink was a negative. The mix wasn't particularly a positive. And yet, the gross margin was much better.

Can you talk about maybe what the factors were? You talked about the cost of products.

But is that about global sourcing or something else?.

Yes. Our IMU was definitely better, and our net purchase cost, ultimately, was better in the quarter than we had in our original guidance forecast. And I think there are a whole variety of factors that go into that, Meredith.

And quite honestly, it's a little hard to dissect and say exactly how much is due to what, but you're definitely hitting on it there. A piece of it would be a little better activity going on in our foreign sourcing. We continue to expand products that we're sourcing other places. We now do trash bags out of Thailand, crackers out of Colombia.

We have $1 pasta out of Italy. We're doing some $1 lotions out of Mexico. It goes on and on. So we continue to be very, very, very innovative with what we're doing with our foreign sourcing.

And then I think just the merchants and the buyers did a better job overall in terms of the -- how they were able to partner with the vendors and the types of deals that they were able to get for Dollar General. So I think it's a whole variety of things. .

And I think, Meredith, I'll throw out one thing, too. I think the -- it was our feeling the environment was incredibly price competitive. And people were throwing prices during extreme weather conditions that I don't think people were going to respond to anyway because they couldn't get to the store or they'd already stocked up.

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

Okay. And I guess, David, back to what you were saying. Is there any reason to believe that the sort of tailwinds you have in the gross margin aren't going to continue? You didn't use up all the opportunities you had. .

We still have a lot of opportunity in our private label, our foreign sourcing and our shrink. Again, let's not forget shrink because shrink, unfortunately, has been going the other way now for several quarters. So again, we continue to work those areas.

And I think the question we have, Meredith, and we've talked about this before, is how much of that do we invest in price, staying true to EDLP, driving units to the box and growing margin versus letting fall to the bottom line because we've said publicly several times that the most important thing for us is making sure we are the EDLP operator and that we continue to grow our market share.

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

Okay. And then I've got another question. You actually said something that surprised me a little bit about changes being made with the rolltainers and how -- stuff that goes in them. And I was under the impression that the rolltainers were already sorted by aisle, and that was the whole point of having rolltainers.

Is that not true?.

That is 100% true, but we've taken and refined it even further, where the product actually comes out how it's laid out on the shelf. So imagine all the detergent used to show up for the detergent aisle, and now we're trying to lay the rolltainer out where it actually matches to the shelf by the planogram. .

Wow, that's great. And then I just have one other quick question. You did a sale-leaseback, and I believe that you have been buying -- you're doing fee development for a while now.

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

There are other opportunities in our real estate area to do that if we wanted to. We don't have any plans right now to capitalize on that at this point in time. So I would say just stay tuned, and it may be something that we'll do in the future as we evaluate doing incremental share buybacks.

I do want to stress, when we do something like that, and we demonstrated this with what we did when we closed the deal in January, the main reason for doing that is buying back stock, taking that cash and buying back stock.

And that's exactly how we funded -- the $200 million that we have already bought back in the fiscal first quarter came from that, the funds from the sale-leaseback. .

Your next question comes from Charles Grom with Sterne Agee. .

So we've obviously observed some irrational pricing and promotional tactics from your friends down in Charlotte, I'm just wondering how you'd characterize the environment today. And I guess more importantly, how do you react -- I mean, to David's points a couple months ago, you guys have been great about investing in price to drive units.

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

Yes. I think, Chuck, that is a very fair question. We do a lot of work on our sensitive items every month. We do a full book every quarter. And to be honest with you, the gap between me and that guy you mentioned has not narrowed at all. And I do think they have been more promotional, and I think they have publicly said they want to back out of that.

I will tell you that we have responded on promotional items that we think are important to the consumer. But we're staying focused, true blue to everyday low price because we think, long term, that always wins. .

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

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

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

Yes, I will say this. We didn't talk about the cadence of the quarter. But I will tell you, January was the day that -- or January was the period in which the most affected days were there that we experienced. And the gap between the bottom 1,000 and the high 1,000, while we didn't call out a specific number, I will tell you it was significant. .

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

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

Yes. I would tell you, Chuck, probably the non-consumable side. And believe it or not, not the apparel side, but the hardware, the automotive, the stuff where we think we really can play well in. And we're pleased with the assortment. We just think we need a little bit of help -- more help from the economy. .

Your next question comes from Dan Wewer with Raymond James. .

I wanted to follow up on the -- your answer to Peter Keith's question regarding accelerating same-store sales growth. Tobacco has been adding roughly 150 basis points to same-store sales. So taking that into account, your guidance implies comps maybe at 5% or better during the second half of the year.

And yet, these non-tobacco categories have been struggling. You did indicate that you thought that the competitive pressures will be easier this year than last year.

But what if that doesn't happen? What if, if anything, they become a bit more intense?.

Yes, I mean -- yes, I think when I reflect back on -- we had a pretty solid quarter 2 and quarter 3. I think that I don't want to take quarter 4, where we obviously suffered severe, severe weather issues. And I think as we reflect on quarter 4, we have to remember that when the weather is bad, people don't come to Dollar General to stock up.

They go to the more traditional retailer and they stock up there. And they go there for a number of reasons. Number one, we're limited in assortment, and more importantly, they can get what they want, right? There's a broader depth. You come to a Dollar General to buy sugar with another 15 or 16 people, and all of a sudden, there's no sugar.

And then we don't deliver for another full week. So I don't think that you can necessarily look at everything that happened in quarter 4 and push that out going forward. I do think that tobacco, the point you're raising, is that it is adding to our comp line, and it's doing exactly what we want. We're not looking at the comp number.

We're looking at the transactions it's driving. And again, if you look at the fourth quarter, we're one of very few retailers who called out the fact that we still had transaction growth.

So I feel, as we move through the back half of the year, that tobacco is going to continue to do what it's been doing, deliver -- it's going to deliver transactions and then, more importantly, the attachment rate is continuing to grow.

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

And then also just wanted to make sure I understood your answer regarding pricing at Family Dollar. It was, I guess, our understanding that their management believes a high-low pricing strategy was not competitive against Dollar General. And hence, they're moving to a pricing strategy very similar to yours.

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

Yes. I mean, I -- as I look at our price -- as I look at our pricing studies that are conducted on the most sensitive items, I continue to see a gap that was very similar to what it was 5 and 6 months ago. I do think that when you -- I do think when you deviate from EDLP, it takes a while to get that notion back into the customer's head.

The customer is used to coming in and getting these onetime prices, right? And then it's hard to reestablish that, "Hey, my price of Tide is good day in and day out." So I don't want to really speculate on someone else's pricing strategy or what they're doing.

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

Your next question comes from Matt Nemer with Wells Fargo. .

So it's very tough to gauge the category performance given the weather issues.

But in markets where weather wasn't or isn't a factor, do you see the spread between consumables and non-consumables growth getting narrower or wider?.

I would say about the same that we've seen historically. I would not say that non-consumables is getting better, but I would also tell you it's not getting any worse. We have tobacco in there, too, Matt, which kind of distorts the consumable side. .

As you look at your 2014 guidance, is it fair to say that you don't have the non-consumables categories comping positive? And if not, do you think that, that's something that we could potentially see in '15 or '16?.

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

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

Yes. Almost all of it will be in existing markets. We're going to add somewhere between 50 and 60 stores in California. However, we're looking at California as an existing market now. But we will probably not enter into any new markets in '14. .

Your next question comes from Mark Montagna with Avondale Partners. .

Just a question on the apparel strategy. You cut back on those 4,000 stores.

Does that change your -- given the results, does that change your outlook on maybe the other 7,000 stores, perhaps cutting back there?.

That's actually a very fair question. We are actually, in those 4,000 stores, very pleased with the numbers we've seen. Now those stores were more space-constrained than our traditional store. And we made the decision there, Mark, not trying to be everything to everybody on every category.

So I would look at you and tell you we haven't really arrived at that conclusion yet. I will tell you as we look at apparel, so far into this quarter, we're actually -- I wouldn't say pleased, but we're seeing some rays of hope in our apparel strategy. .

That's good. Then just a question -- I know you don't like to comment so much on the current quarter. But what I've heard from other retailers is February was actually even more weather-impacted than January.

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

Yes. I mean I will tell you, the first 15 days of February were very tough. I will also tell you the first 10 or 12 days of March were tough. .

Your last question comes from Scott Mushkin with Wolfe Research. .

Actually, I had some bigger-picture questions for you. And the first one goes to the planned changes for overtime rules that I think President Obama is going to lay out today. I think they're going to increase the $24,000 threshold.

How should we think about that for you guys?.

Yes. I got to tell you, Scott, I haven't seen -- I've heard all kinds of speculation on it, where it's going to go, what's -- how significant that is. But I think where we are right now is we're kind of waiting to see what the president is going to do.

I would be remiss if I didn't tell you that we are evaluating several scenarios and looking at what the impact is going to be. But again, I don't think it'll necessarily impact 2014, and it's going to impact everybody. And I'll tell you what I've always said to everybody on these calls.

We are just a retailer, and whatever costs you can't remove from the system eventually gets passed on. .

Okay, great. I may follow up with you guys off-line about that in a little more detail. I want to actually move to a second one as we're long on the call. Just wanted to understand the, as you view it, Rick, the kind of the competitive advantage of just basically the dollar business.

It's all about -- it's always been about convenience but also certainly price. It seems that the price component is fading a little bit. I know you, to Meredith's question, talked a little bit about gross margin you didn't chase.

But it's hard not to notice the people like Delhaize, Dow Liquids [ph], the Food Lion, their volumes are now strongly positive. And in our own proprietary pricing surveys, we don't show the dollar business necessarily generally being priced much lower than some of the other competitors out there that also offer convenience.

So just like from your point of view, I mean, where does this lead? I mean it seems like everyone is kind of around the same place right now.

And how does a dollar business generally fit in with this new environment?.

Yes. I think the competitive landscape has suddenly decided that the dollar channel is a viable channel that can't be ignored any longer, and I think there's a lot of work being done on that. I will tell you, though, at the end of the day, what we bring to the table is the true value proposition.

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

And I'll also tell you the work that we're going to do in 2014 is all focused around that value proposition and giving the customer even more choices on those particular items. And again, I would look at everybody and say the environment has gotten very competitively intense. That does not sustain itself for a long, long period of time.

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

So operator, thank you very much. And thank you, everyone, for joining us on the call today. Emma Jo and I are around if you have any other questions. And we look forward to speaking to you soon. Thank you. .

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..