Exhibit 1.2
2000 THIRD QUARTER
CONFERENCE CALL
November 6, 2000
Thank you for joining us for our discussion of third quarter results. With me
this afternoon are Cal Turner, Jr., Chairman and CEO; Bob Carpenter, President
and Chief Operating Officer; Stonie O'Briant, Executive Vice President of
Merchandising; Earl Weissert, Executive Vice President of Operations; Randy
Sanderson, Vice President and Controller; Wade Smith, Treasurer; and Kiley
Fleming, Director of Investor Relations.
Our comments will contain forward-looking information, which is provided in
accordance with the safe harbor provisions of the Private Securities Litigation
Reform Act. We believe our underlying assumptions are reasonable. However,
actual results may differ materially from our projections, due to the risk
factors identified in the company's annual report on form 10K.
The following comments contain references to years 2001, 2000 and 1999, which
represent fiscal years ending February 1, 2002, February 2, 2001, and January
28, 2000, respectively.
This afternoon, we will review third quarter results and discuss full year
expectations. I will also take this opportunity to review investments we have
made this year in the context of our long-term strategy.
First, we'll discuss third quarter results.
I. Earnings
For the third quarter ended October 27, 2000, Dollar General earned
$0.15 per diluted share, compared with $0.15 in the third quarter last
year. Net income was $51.0 million compared with $50.9 million last
year.
II. Sales
Total sales for the quarter increased 15.1%. Same-store sales for the
13-week period increased 0.8%. Sales by category are as follows:
o Total sales of Highly Consumable merchandise increased 24.4%;
same-store sales increased 8.9%, slightly below our expectations.
o Total sales of Basic Clothing increased 9.8%; same-store sales
decreased 3.9%, below our expectations.
o Total sales in the Hardware, Stationery and Seasonal category
increased 7.5%; same-store sales decreased 5.9%.
o Total sales of Basic Home Products decreased 2.0%; same-store
sales decreased 14.3%, primarily as a result of discontinued
merchandise.
Although we experienced softer than expected sales in some core
categories as a result of low in-stocks, we had better than expected
sales in other departments, including food, toys, Halloween and summer
seasonal merchandise.
While the average purchase was flat at slightly more than $8.00,
customer transactions increased 1% in the third quarter. The average
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purchase included slightly fewer items with a higher average price
point than last year. We believe these transaction trends reflect
stronger than expected sales of higher ticket, seasonal merchandise and
lower than expected sales of low ticket consumable merchandise, as a
result of lower than expected in-stocks of core merchandise in our
stores.
III. New Store Development
During the third quarter, the Company opened 184 new stores. In
addition, 53 existing stores were relocated or remodeled in the
quarter. This compares with 177 new stores and 102 relocations or
remodels in the third quarter last year. The Company also closed 14
stores during the quarter, compared with 10 closings last year. At
quarter end, the company operated 4,889 stores with a total of 33.1
million selling square feet.
Year-to-date, we have opened 168 preferred developer stores, 137 build
to suit stores and 169 small stores. This compares with 139, 143 and 40
stores, respectively last year. This year, we have taken advantage of
unexpected opportunities within our market area to open stores with
less than 6000 square feet of selling space. While small stores
generate less total sales revenue, the return on investment is higher
than the company average.
Year-to-date, the projected average annualized sales for new stores is
$800,000 compared with $847,000 last year. Excluding the effect of
opening more small stores than originally planned, new stores are
annualizing at 85% of existing store sales, comparable to last year.
In the fourth quarter, we expect to open 30-50 new stores and close
5-10 stores.
IV. Gross Margin
For the quarter gross margin as a percentage of sales increased 13
basis points to 29.37% compared with 29.24% last year, benefiting from
higher purchase markup. As a percentage of sales, lower shrink and
transportation expense offset higher distribution center expense and
higher markdowns in the period.
Year-to-date, transportation expense is slightly lower as a percentage
of sales, despite higher fuel costs. This improvement is a result of
better fleet utilization, continued benefits from our transportation
management system, and lower average stem miles.
V. SG&A
Although expenses were below plan, lower-than-expected sales prevented
the company from achieving operating expense leverage. As a percentage
of sales, total SG&A increased 101 basis points to 21.61% from 20.60%
last year, primarily as a result of higher health insurance expense,
rent expense and payroll expense.
VI. Interest Expense
Interest expense increased to $4.9 million compared with $2.3 million
last year as a result of higher average borrowings to support higher
capital expenditures.
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VII. Inventories
Inventory management is improving, thanks in large part to
contributions from technology and distribution investments. Despite the
operation of 724 additional stores, total LIFO inventories increased
only 6.1% to $1,173.3 million compared with $1,105.5 million last year.
Average LIFO inventory per store increased 3.7% to $193,000 compared
with $186,000 last year. This small increase in store inventory
reflects the impact of increased seasonal purchases in anticipation of
fourth quarter sales.
We continue to see improvements in our distribution center inventory
levels as a result of the implementation of our new DC replenishment
system. At the end of the quarter, we had $100 million less in
distribution center inventory than last year! Average LIFO DC inventory
per store this year was $47,000 compared with $80,000 last year, a
decrease of 41%.
VIII. Capital Expenditures
Capital expenditures for the year-to-date equaled $209.4 million
compared with $112.4 million last year. This increase was primarily the
result of store development projects and distribution investments.
For the full year, we expect to spend approximately $240 million in
capital expenditures, slightly less than our original expectations
reflecting fewer than expected openings of preferred development
stores. (The initial capital investment for preferred development
stores is $600,000-$700,000 per store compared with $70,000-$80,000 per
store for a conventional lease location.)
IX. Balance Sheet
Cash and Other Current Assets
Regarding the balance sheet, certain reclassifications have been made
to the 1999 financial statements to conform to the 2000 presentation.
These reclassifications relate to investments that are not liquid cash
equivalents and are considered `other current assets.'
Accounts Payable
Accounts payable decreased 11%, reflecting: (1) a greater sales mix of
highly consumable items which have shorter payment terms; and (2) an
increase of import purchases in anticipation of fourth quarter seasonal
sales.
Deferred Income Tax Liability
As in the second quarter, deferred income taxes increased over last
year due to the accelerated depreciation of certain assets for tax
purposes.
X. Review of 2000 initiatives
We have undertaken a significant amount of change this year. In our
enthusiasm for the strategic opportunity that exists, we took on too
much change too quickly. However, while our short-term results have
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been adversely impacted, these investments are critical to our
continued long-term growth.
In real estate, our primary objective this year was to open 675-700 new
stores and to open them earlier in the year for more sales
contribution. Year-to-date, we are proud to announce that we have
opened 643 stores compared with 501 stores last year--that's more than
2 stores every day! Further, a full 93% of our planned openings in 2000
are ready to serve customers now as we head into the holiday season.
That means more sales contribution from these stores and less
distraction for our operations group in the fourth quarter.
In August, we opened our new distribution center in Alachua, Florida.
Developing quickly, Alachua now serves 560 stores. Our new Zanesville,
Ohio distribution center is on schedule to open in the 1st quarter of
2001. In September we closed the Homerville, Georgia distribution
center without any material disruption to our stores. While we will use
the Villa Rica, Georgia warehouse to support new store openings for the
rest of 2000, the investments we have made in technology and in
distribution capacity will enable us to serve new stores opened in 2001
from our full-service distribution centers.
Improving inventory turn to four times a year is one of our five-year
strategic goals, and this year we are creating the platform for that
improvement through our investments in distribution and technology.
We have installed a new distribution center replenishment system and
now fully utilize our merchandising system to manage all domestic and
supply purchase orders. These systems have contributed significantly to
our improved inventory performance year-to-date. New information
systems implemented in the last 90 days will give our DC managers
planning tools to increase cross-dock utilization, laying the
foundation for the next improvement in DC inventory turn.
This year, we began the implementation of the largest store technology
initiative in company history. It includes the installation of new
point-of-sale scanners in all stores, the introduction of a new
shelf-ordering process and the launch of a new register retrofit
program. Year-to-date, we have installed new POS scanners in all stores
and have installed new IBM registers in 2400 stores. We will replace
registers in 2000 stores in 2001, and finish the installation in early
2002.
We have developed and tested systems to support taking inventories by
UPC (rather than tracking inventory in terms of department dollars).
However, we have decided to delay the store implementation process
until 2001 to allow our teams to fully digest the changes we have made
in our stores this year. In early October we began testing automatic
replenishment of all core merchandise in three stores, and we'll share
our learnings at year-end.
Finally, supporting our objective to increase sales productivity, we
implemented a new store layout that positions us well for stronger
sales. While improving our opportunity for sales per square foot of
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core products, we have increased our space allocation for seasonal and
promotional merchandise by 50%. The new placement of higher-turning
items and the wider aisles will improve customer flow as sales volume
accelerates.
Recent customer research has revealed enthusiastic customer acceptance
of the new layout. Our customers tell us that they like the wider
aisles and that stores are easier to shop (and therefore, more
convenient). Our customers also say the stores are bigger, brighter and
more inviting.
So, the question I think you are interested in most is "what is going
on with sales?" We have made a significant effort to better understand
that question ourselves so that we can address the challenges that are
preventing us from fully realizing the benefits of the store reset.
While there has been much discussion in the industry about the impact
of fuel prices and a potential slowdown in consumer spending, I want to
focus our comments on those issues we can affect. We believe our sales
are lower than expected because our average store in-stock percentage
of key items is lower than last year. This years' out-of-stocks have
had a greater impact on sales given that they are high demand, core
items. Our store teams are working hard to ramp up the learning curve
on ordering. While some store managers still need additional training,
many store managers have mastered the new process. In fact, 42% of our
stores reported same-store sales increases greater than 4% for the
third quarter, and 22% of our stores posted double-digit same-store
sales increases. This month we are implementing a "training blitz" for
those stores needing additional support, and we expect significant
improvement in store in-stocks very soon.
Now, I want to quantify our expectations for the fourth quarter and
full year.
XI. Earnings Guidance
Because our Company has adopted the Retail Federation Reporting
Calendar, our fiscal year ending February 2, 2001, will include 53
weeks of sales and expenses compared with a 52-week period in 1999. To
avoid confusion as to comparable periods, the following earnings
guidance reflects only the comparable 52-week period. When we report
the full year in February 2001, we will disclose the impact of the
additional week.
We expect an intensely competitive retail environment in the fourth
quarter as many retailers react to a less enthusiastic customer with
more promotional advertising (certainly a risky treadmill to ride!).
Further, we believe our target customer will continue to feel the pinch
of higher fuel costs. Therefore, we are taking a more conservative view
of sales in the fourth quarter. For the fourth quarter, we expect total
revenues to increase 16-19% and same store sales to increase 2-5%. For
the full year, we expect total revenues to increase 15-16%, and
same-store sales to increase 1-2%.
For the full year, we expect gross margin, as a percentage of sales, to
increase 20-25 basis points compared with last year, reflecting better
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transportation expense as a percentage of sales and better purchase
markup. Despite a difficult shrink comparison, we expect gross margin
as a percentage of sales to be comparable with the fourth quarter last
year. Last year, the fourth quarter benefited 100 basis points from
better than expected annual shrink results. In the fourth quarter this
year, we expect better markup resulting from higher sales of seasonal
merchandise to offset higher shrink as a percentage of sales.
We expect SG&A as a percentage of sales to increase 90-110 basis points
for the full year and increase 120-170 basis points in the fourth
quarter, reflecting both the impact of lower same-store sales and the
potential increase of two unique, one-time expenses. First, during the
transition to a new health insurance provider this year, they disclosed
certain health insurance billings and reimbursements that were not
current. While clearly we expect better results from our new provider,
bringing those billings and reimbursements current will likely result
in a significant, one-time increase in health insurance costs this
year. Second, we are experiencing an increase in workers' compensation
expense associated with prior year claims. Reflecting higher annual
costs, these two unresolved issues could add 40-50 basis points to SG&A
expense as a percentage of sales in the fourth quarter. But, I want to
re-emphasize the one-time nature of these expenses, and we expect that
next year these operating expenses will once again be in line with
historical trends.
As we expect to see additional contribution from our investments in
distribution, technology and merchandising, we expect inventory to
increase less than total revenues for the full year.
Interest expense as a percentage of sales for the full year could be
10-15 basis points higher, reflecting both higher borrowing balances
and higher interest rates.
The Company expects that the tax rate for the fourth quarter and full
year will be 36.25%.
XII. Additional Comments
In closing, while the positive results of our initiatives this year
have been masked somewhat by a "slump" in sales, we have made
significant improvements in our Company that will serve our customers
and shareholders better in the future. Our stores now have a terrific
platform for sales development, and we believe we will see the benefit
of our hard work in increasing sales once we overcome these short-term
hurdles.
Our long-term strategy of being a "customer driven distributor of
consumable basics " is right and has all the ingredients to deliver
sustainable growth and exceptional profitability.
This concludes my prepared comments. Operator, we are now ready for the
question and answer session.
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Summary of question and answer session:
1. What are the Company's store opening goals, planned capital
expenditures and earnings expectations for 2001? We will provide
guidance for 2001 when we announce results for 2000 in February 2001.
2. What is the earnings impact of the extra week (53rd week) this year?
Dollar General adopted the Retail Federation reporting calendar in
1996, and this is the first year the Company has experienced the extra
week in a fiscal period. We believe that a fair representation of
operational productivity requires the comparison of equal periods.
Therefore, we will provide guidance for a 52-week period compared with
52 weeks last year. We will report the impact of the 53rd week when we
report results for the fourth quarter and full year.
3. Why was distribution expense as a percentage of sales higher than last
year for the quarter? Factors driving the year over year increase
include: the operation of an additional distribution center for part of
the quarter; and expenses associated with the Zanesville distribution
center, expected to open in early 2001. Although total distribution
expense was slightly lower than plan, lower-than-expected sales in the
quarter increased the impact on gross margin.
4. In the third quarter, accounts payable leverage declined. Will this
continue? Accounts payable decreased as a result of: (1) a greater
sales mix of highly consumable items which have shorter payment terms;
and (2) an increase of import purchases in anticipation of fourth
quarter seasonal sales. The timing of imports is a seasonal issue and
should not impact our accounts payable at year-end
5. Do you see any material difference in the build-to-suit stores or
preferred developer store performance relative to your other new
stores? On average, preferred development stores generate higher annual
sales volume but require a higher capital investment. On average,
build-to-suit stores have higher than average sales, higher rent
expense and longer lease terms.
6. Is the preferred development program something to which you remain
committed? Yes. However, because of the capital investment required, we
will be very selective with the program.
7. Your rapid store growth over the last several years has dramatically
increased your need for new store managers. Given these recruiting and
training challenges. Do you think you will need to cut back on next
year's expansion plans, at least for a year, to `catch up' on store
managers training? Every year we work diligently to determine the
balance of new store growth and same-store sales growth opportunity.
While we may consider reducing our expansion rate in the future, we
haven't made that decision.
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8. In addition to the one-time impact of the increased health insurance
and workers' compensation expense, what other items are impacting the
expected increase in SG&A in the fourth quarter? As we implement our
training blitz in the fourth quarter, we expect to commit extra payroll
to the stores to support our store teams. Therefore, we do not expect
payroll to be lower than last year as a percentage of sales.
9. You have indicated that you have increased your seasonal purchases this
year. Can you give us any more information? This year, we increased our
toy purchases by 35-40%, and our Christmas purchases are up nearly 70%.
Though it is early in the season, we are seeing good results in toys
and Christmas merchandise. We believe we have a strong seasonal
position this year, and we don't think we will sell through our
assortment as early as we did last year.
