Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2017 Earnings Call. Today is Thursday, March 15, 2018. [Operator Instructions] This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. I would now like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Ms. Beugelmans, you may begin your conference.

Thank you, Jennifer, and good morning, everyone. On the call today are Todd Vasos, our CEO; and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. Our earnings release issued today can be found on our website at dollargeneral.com under Investor Information, News and Events. Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other nonhistorical matters, including, but not limited to our fiscal 2018 financial guidance and store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, future economic trends or conditions and the anticipated impact of U.S. corporate tax reform. Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, optimistic, objective, outlook, will, believe, anticipate, expect, forecast, estimate, guidance, plans, opportunity, continue, focused on, intend, looking ahead or goal, and similar expressions that concern our strategies, plans, intentions or beliefs about future matters. Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under risk factors in our 2016 form 10-K filed on March 24, 2017, and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, except as may be otherwise required by law. During today's call, we will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure are included in this morning's earnings release, which, as I just mentioned, is posted on dollargeneral.com, under Investor Information, News and Events. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions] Now it is my pleasure to turn the call over to Todd.

Thank you, Jennifer, and welcome to everyone joining our call. I'm pleased with our strong fourth quarter performance, and the continued momentum we saw in the business. For the full year, we delivered healthy same-store sales growth, driven by an increase in average transaction amount and positive traffic, all while effectively balancing gross margins and exhibiting good underlying expense control. During the year, we continued to make progress on the implementation of our key initiatives as we seek to capture growth opportunities over both the short and long term. Our SG&A investments in 2017 were focused primarily on increased compensation structure and additional training for our store managers, as they play a critical role in our customers' experience and the profitability of each store. We also continue to make proactive and targeted investments in support of key strategic initiatives that we believe will help further differentiate us from the competition over time. I'll provide additional details on 2 of these initiatives pertaining to the digital and nonconsumable strategies later in the call. Now let's recap some of the financial results for fiscal 2017. Full year net sales increased 6.8% to $23.5 billion, compared to net sales of $22 billion in 2016. As a reminder, net sales for 2016 included $398.7 million from the 53rd week. When comparing our fiscal year net sales on a 52-week basis, the fiscal 2017 full year growth rate will be higher by approximately 2 percentage points. Same-store sales for the year increased 2.7% over the prior year, marking our 28th consecutive year of positive same-store sales growth. Same-store sales for the fourth quarter increased 3.3%, over the prior year fourth quarter, driven by positive performance in both our consumables and nonconsumable categories with stronger growth in consumables. Our highly consumable market share trends in syndicated…

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through the highlights of 2017, let me take you through some of the important financial details of the fiscal quarter and year. I will also spend some time discussing our 2018 guidance. Gross profit, as a percentage of sales, was 32.1% in the fourth quarter, an increase of 43 basis points from last year's fourth quarter. This increase was primarily attributable to higher initial inventory markups, lower inventory shrink and a reductions in markdown, partially offsetting these items were a greater proportion of sales of consumables, which generally have a lower gross profit rate than other product categories, sales of lower-margin products comprising a higher proportion of consumables sale and increased transportation costs. SG&A expense increased 159 basis points over the 2016 fourth quarter to $1.3 billion or 21.9% of sales in the fourth quarter. As a reminder, SG&A as a percentage of sales in 2016 was favorably impacted by higher net sales resulting from the fiscal 2016 53rd week. The 2017 fourth quarter's results reflect increased occupancy costs, increased retail labor expenses given our previously planned investment in store manager compensation and training, and increased incentive compensation costs. We also recorded $28.3 million of additional pretax expense related to 35 incremental store closures in the quarter, most of which were in the form of SG&A expense associated with the remaining lease liability on these stores. Partially offsetting these increased expenses was a reduction in advertising costs. Our effective tax rate for the quarter was a benefit of 18.9%, as compared to an expense of 36.8% in the fourth quarter last year. The reduction of the federal corporate tax rate due to federal tax reform resulted in a material positive impact on our effective income tax rate…

Thank you, John. As I've shared with you over the last several quarters, we are investing in and building momentum behind certain strategic initiatives that we believe will ultimately drive strong sales and profit growth in the years ahead. Today, I'll provide an update on our digital and nonconsumable initiatives, which represents 2 of our more near-term strategic opportunities. Starting with our digital initiatives. We are strategically investing in our business to help our customers utilize digital tools and resources for a more personalized and convenient in-store shopping experience. With nearly 75% of the U.S. population currently within 5 miles of a Dollar General, we have a unique opportunity to help shape our customers' digital shopping behavior, all while leveraging our more than 14,500 brick-and-mortar stores to help them save time and money. Our efforts are all about making things easier for customers and further enhancing our strong value proposition, providing a unique combination of value and convenience. Our insights indicate that our customers are utilizing digital more to plan their visits and lot more options on how they engage with us in store. These insights have helped to shape our digital strategy, which we have accelerated. Earlier this week, we launched a customer pilot of our new shop and scan mobile app service in select store locations. This mobile app allows customers to scan items while they shop and pay directly with their phones, allowing for a faster and easier checkout experience. Not only does shop and scan help customers save time it also makes staying on budget easier. Customers can see the price of individual items as they scan them, along with a running total. In 2018, we have plans to expand this service to additional stores as we continue to enhance our overall value proposition for our…

[Operator Instructions] Your first question will come from Vinnie Sinisi with Morgan Stanley.

This is -- it's actually Michael on for Vinnie. So wanted to ask, actually, about that reinvestment rate, which I think kind of averaged out to around 20%, 25%. So that rate is maybe bit on the lower side compared to some of your peers in retail and obviously, you guys have been way ahead of the curve with investments in stores and labor. So wondering, kind of, about the thought process how you came to that number? And then also, is that kind of incremental spending or kind of pull forward of future, kind of, planned investments?

Yes, so as Todd mentioned, as we come into the year because we've been proactively investing all along, we feel we're in a great spot. When you look at the investments we made last year in store manage -- store manager pay it's performing as we expected as we see higher applicant flow, higher staffing levels, lower turnover and we're seeing the financial benefits of that with better customer satisfaction, better sales and start to see the lower shrink. We're well positioned also on pricing. So as you look at those areas we feel we're well positioned. We really saw this as an opportunity to continue to accelerate strategic initiatives in high return projects. So in addition, as you look at how we're breaking that down this year, in addition to investing in 2,000 real estate projects, both the high return new stores as well as the remodels with additional cooler capacity, which is driving great the sales benefit and the supporting infrastructure, we see an ability to accelerate the strategic initiatives as Todd mentioned, digital and nonconsumables, to mention 2 of them and other high-return projects like EAS, which is helping us so much with shrink, expanding our private fleet to help mitigate risks around transportation costs and LED lighting, which helps to save utility cost. So we a lot of opportunities to accelerate these, help the business and feel we're very well positioned and are comfortable with the allocation here. And it allows us to return a considerable amount of money back to the shareholders in the form of a competitive dividend and share repurchases.

Great. And actually just a quick follow up on, kind of, just mentioned about the, kind of, increasing transportation cost. Wonder if you could may be kind of quantify that, or if you kind of -- what you see the cadence of that headwind looking, kind of going through 2018?

Yes, we didn't quantify the impact of that, but what I would tell you, as you look at our guidance for the year around overall operating margin, that is factored in. And that is one of the key headwinds that we're overcoming, but still we see ourselves in a position to despite headwinds like that and the targeted investments we talk about keep our operating margin rates level. We have offsets within that and within gross margin overall. The good thing is there's a lot of levers within gross margins. Within transportation costs, as we mentioned, we're reducing stem miles, we're optimizing our loads, we're expanding our private fleet to help mitigate that as well as other productivity initiatives in the distribution center. And then, of course, we have other levels -- levers within gross margin such as shrink, very pleased with the shrink performance there, 5 consecutive quarters of shrink improvement as the process improvement, the store manager pay and the investments we've made pay off. And the team does a phenomenal job on our product's category management and see continued opportunity to expand private-label penetration, form-sourcing penetration, as well as grow our nonconsumable. So we see a lot of opportunities to help offset that pressure.

Your next question is from Robbie Ohmes of Bank of America Merrill Lynch.

I -- actually there's 2 of them. The first was just, you guys in the press release called out that traffic comp was slightly negative and if I recall, it was, I think it was accelerating in the third quarter. I was hoping you could maybe tell us on, was there a change in trend in the fourth quarter, or maybe discuss that with us a little bit.

Sure. As you look at the fourth quarter, we strategically look year-over-year at our promotional activity. The main driver of the little bit of the slowdown that we saw in traffic was really a little bit of a pullback in our promotional activity. And quite frankly, it was in one big promotion that we ran the year prior in November, leading in to the baking season before Thanksgiving. So when you factor that in, and then our position, that we'll continue to work all levers and deliver profitable sales growth, we saw a little bit of a slowdown there. But again, it was intentional and quite frankly not completely unplanned. So we feel good about the long-term prospects of driving traffic. As we look at our 2018 initiatives, they are as robust as ever. And I would tell you that I'm very excited about our strategic initiatives and especially, the 2 that I outlined in the call today to help continue to drive that traffic for many years to come.

And just, the other question was in the fourth quarter, maybe it's related to the pullback in the promo activity, but I was curious where you're seeing less markdowns in the fourth quarter versus last year.

Yes, it really stems from the promotional activity. We've gotten very targeted on the promotional activity, and as particularly as we see the headwinds ease, and the initiatives performing well has just been very targeted around our markdown.

Your next question is from Scott Mushkin with Wolfe Research.

So I want to talk about your sales, I think you guys are guiding to the mid-2s in relation to, kind of, all the initiatives you have going and what looks like probably a little bit stronger inflation backdrop. And I just wanted to say, are you -- you're kind of being conservative there? I mean, just trying to gauge, it seems like every company is baking in additional costs related to the tax cut but no one is really talking too much about sales. I'm just wondering if you could give us -- how are things going and what are you thinking about that mid-2% guide?

We're squarely focused on driving that top line, and we believe over the long term 2%-plus is definitely where we can drive. And the 2.5% that we're guiding to is our best estimate at this point, as we look for the whole year. In saying that, we always strive, we're retailers, we always strive for more and we'll continue to drive that top line and again, balance that with profitable sales growth at the same time. So stay tuned, but as I said earlier, I'm very encouraged on our 2018 shorter-term initiatives as well as those longer-term initiatives to sustain a nice comp as we move out into future quarters and years. So stay tuned, but I can tell you that our merchant team is squarely focused on driving as much comp as we possibly can as we move through 2018.

So my follow-up question, along the same lines. I know you guys are expanding -- health and beauty care is one of the key initiatives and of course, the treasure hunt. I was wondering if you could actually size a little bit for us, the health and beauty care expansion, how many stores this year will be -- have the larger set? And then on the treasure hunt, I think you said 700 stores. When does that start? Could you size it from an SKU perspective?

Yes, sure, I'll try to size it up. On the health and beauty front, this is the second year of this initiative. And this initiative really goes across the majority if almost not all of our stores. It will touch pretty much all of them as we move through 2018. And we have a unique position here, we have created a very nice niche for ourselves for our consumers in both health and beauty, especially on that health side of the equation. And I can tell you that our prices are very, very favorable compared to other classes of trade there. And our private brand penetration is amongst the strongest in some of those categories that we see across all of our categories that we have private brands in. So it's going to be an initiative that will touch all stores. As we look at our longer-term initiative of the nonconsumable initiative you mentioned, the 700 stores, that initiative will kick off middle of the year and we'll continue to put stores in as we move towards Q3 as well. But as we continue to see momentum in that, which we anticipate, we'll be able to take pieces of that initiative early on and start to implement them in the chain itself as we start to see things start to materialize in a real positive way, again, which we anticipate seeing. I could tell you, on a SKU basis, there'll be hundreds of new SKUs that will be in this. It is a whole different way of going about our nonconsumable business. And I think it's very smart because as you look at how the consumer is shopping today, and you know us pretty well, we've always been on the forefront of changing as the consumer changes, she's looking for more of a treasure hunt. She's looking for something new and unique in her shopping experience, especially as it relates to nonconsumables. And we believe that this will deliver exactly what she's looking for. So stay tuned, more to come, we'll tell you, as time goes, how that initiative is progressing. But we're looking for some big things out of this as we move forward.

Your next question is from Greg Melich with MoffettNathanson.

I just wanted to follow up on gross margins. You have mentioned some of the drivers that could help this year and going forward, private label, foreign sourcing. Could you give us an update on where you are right now, percentage of volume or sales that is private label, and also what the import percentage is? And call out China, in particular, especially what you might do if tariffs come into play?

Sure. On our private brands, we continue to see penetration rates between that 22 and 24 percentage points, and that's overall. Some category is much higher than that, obviously. But we still see it right in that wheelhouse, and we feel good about that amount of percentage. We're always looking to increase that. And again, I think as we look at 2018, the initiatives around private brands are as strong as I've seen them in the last couple of -- 3 years. So we feel good about being able to add to that. As far as global sourcing is looking at, we still believe we've got somewhere in that $4 billion to $5 billion opportunity, on a cost of good basis to bring more goods in through our 4 sourcing efforts. We, like most, are still predominantly China-centric. I wouldn't say all, but I could tell you that over the last 3 years, our reach into other countries has grown tremendously. And we're now in double digits in the amount of countries that we actually export out of. And that will continue to grow over time because we see the opportunity to move some of the goods out of China into other areas that have a very competitive price, and have the infrastructure available to meet our needs and to get the goods over here on a timely basis. So more to come there. But I can tell you that our global sourcing folks are squarely focused on moving the needle on our percentage and on the amount that we bring into the country.

Your next question is from Michael Lasser with UBS.

Todd, can you give us -- can you quantify what you assumed for an average wage rate, maybe an average fuel price into your guidance? I think there's going to be a lot of debate as the year progresses, if you see the wage environment speed up and diesel prices start to put more pressure on your transportation costs. Might you have to make some additional investments above and beyond what you finished -- originally planned for, so it would be helpful to kind of help frame that.

Yes. As we look in 2018 and our guidance reflects what our current thoughts are, and where we think the business is headed, we feel very good about where we are on wages today. When you look at the investments that we made last year on our store managers and by the way, the investments we made last year even in our hourly rates, not only the 16 to 18 states and municipalities that mandated a different rate, but also to stay competitive in certain markets we have upped the rates across the board, we feel that we've been able to manage those very well. And we believe we can manage that in 2018 very well. Our applicant flow is at the highest we've seen in many years and with our turnover being down and at the lowest rate that we've seen in the last 5 years, we feel very, very confident that, and very competitive in our wage structure and rates and be able to staff our stores appropriately. So right now we don't see a large need to invest heavily, but we will always invest where we believe we think we need to, to continue to stay competitive. As we look at gross margin, especially as you indicated with our fuel price is on the rise and the carrier rates on the rise, our team has done a great job in supply chain over the years in anticipating, because let's admit it, fuel prices overall, while up recently, they're still not at their highs that they were a few years ago, we know that fuel rates are going to rise. And our teams have been always proactive about ways to mitigate those fuel cost rises. And the team is really doing a nice job. Now we're not going to be able to mitigate all of it but a portion of it. And then again, with our private fleet and the expansion of that, we feel that taking advantage of the private fleet will also give us a distinct advantage in some of these carrier rate increases that we're seeing. So more to come, but again, in our guidance, we feel that we've nailed it pretty good right now, but like we always say, we always reserve the right to invest where we need to, whether it be pricing, whether it be wages or others to continue to drive this business.

That's very helpful, and I have one follow-up on your guidance. You're looking for a mid-2% comp this year. That would represent a slowdown from what you saw in 2017, the full year basis. Despite the fact that last year you did -- you were dragged down by deflation and some of the changes to the SNAP program. So why wouldn't this year be better than last year, particularly as you see traction with some of your initiatives?

As you -- as I mentioned earlier and you look at our comp, we're very happy where comp came in, in Q4. And as we look to 2018, we gave our best estimate to what we thought full year '18 is going to look like. But again, we're retailers and arguably we're one of the best out there driving that top line and balancing the margin components of that as well. So we'll continue to try to strike that fine balance, but we'll always try to drive that higher comp as we move through the year.

Your next question is from Paul Trussell with Deutsche Bank.

Regarding SG&A overall, you highlighted, I believe, 20 basis points of deleverage in 1Q, and you called out occupancy and still needing to lap the store manager compensation increase from last year as the factors driving that. But -- so should we assume more flattish levels of SG&A rate as we move through the balance of the year? And specific to 1Q, are there enough GP -- or gross margin tailwinds to more than offset that aforementioned 1Q SG&A headwind?

Yes, so as we mentioned in our call, in Q4 and going into Q1, there was some noise putting some short-term pressure on our SG&A. But the way we look at it, our goal remains to leverage SG&A at a sales comp of 2.5% to 3% over time. As we indicated in our guidance, we really look at operating margin overall, looking to manage all the levers within both gross margin and SG&A, team does a great job of making the right trade-offs there. And as we said in our guidance, we see that overall being even for the year, and we do see as we work through some of the noise of Q4 and the front half of Q1, SG&A normalizing.

And on the gross margin for 1Q?

Yes, so we didn't call any specifically around gross margin, but we just -- again we focus on the long term and making the right trade-offs. But again, in our guidance for the year, when we look at the 2 in total, we see our ability to keep that rate even with last year, while making targeted investments, offsetting some headwinds with all the levers at our disposal, we feel comfortable with the guidance we've provided.

Fair enough. And then lastly, from me, just circling back to same-store sales. Just want to be clear on what drove the strength in ticket in 4Q. It certainly sounds like there's a little bit less of promotions and also had some markups, but still a big number. If you can touch on that. And then just going forward, as we think about same-store sales in 2018, do you have an expectation that traffic in the home and apparel categories will positively contribute?

So as you look at our sales, we were very pleased, as you indicated, we came out with a very strong comp in Q4, and that was primarily driven by our initiatives. And those initiatives will continue to carry on as we move into the first half of this year, and you couple that with our new initiatives in 2018, that's what gives us the confidence as we move into '18 in that 2.5% plus range. So I think it's really -- everything that we've always done here, and that is having strong initiatives leading into the year, and then leveraging those as we move through the fiscal year. I see it no different for 2018. And as you look at it, it was really comprised of those initiatives. Inflation actually was up very flattish, if not down a little bit, in Q4 for us. So it really wasn't inflation that drove that. And then when you look at the transactions as well as the traffic, when you look at transactions, we've been doing a lot to move the needle on getting a fuller shop for our consumer. While we're still very convenient based, and it's definitely a fill-in shop, having her be able to pick up an additional item through our offering is starting to pay off, and we're seeing that within our numbers. And she's been able to do a little bit of a fuller shop as she comes to us. You couple that ability with the little bit extra money in her pocket that she has, and that's usually a winning combination.

Your final question will come from John Heinbockel with Guggenheim Securities.

This is Ryan Kilbane on for John. So the strength in traffic generating categories seems like it's not really translating into the sale of more discretionary items. So I'm just wondering is that a function of merchandise content, value or execution? And is this something you guys expect from your strategic initiatives from the treasure hunt to help drive?

As you look at our nonconsumable business, we always have said that consumables will drive the traffic and will round out the basket with the nonconsumable goods. And that played out in seasonal but didn't play out in the couple of the other areas in Q4. And that's where we're squarely focused both in our short-term initiatives, leading into 2018, but also those longer-term initiatives, that nonconsumable initiative that I talked about. It could really have the juice to really move the needle long term as we move through '18 and then into '19 because of the different type of the shop that we're really moving after in nonconsumables. Always remember, the consumer changes and her preferences change over time. And we retailers that recognize that quickly, as Dollar General does, and then moves quickly as we do can take advantage of that. And that's exactly what we're doing over 2018. And then moving into the long term '19 and '20, we believe we've positioned ourselves well to capitalize.

Okay, and then -- and there's a quick follow up. Initial productivity seemed to fall a little bit in the quarter, kind of relative to historical levels. Can you talk a little bit about that? And then what might be driving, I guess, the implied step up a little bit in 2018 in terms of the implied productivity?

So we continue to be -- we haven't seen a material change in the performance of the stores. We -- as we've said before, we follow a basket of metrics. We continue to see the new store productivity in that 80% to 85% range, continue to see the stores' sales and returns perform as hoped, continue to see our returns at the high end of the 18% to 20% range and now with the benefit of tax reform that would be more like a 22%, continue to see a quick payback, continue to see cannibalization as expected, relatively level and less than one would expect, just given the proximity of the shop. So -- no, we feel great about the performance of the new stores and we're very excited about that full pipeline of new 900 stores we'll open this year.

Thank you, ladies and gentlemen, for joining today's Dollar General 2017 Fourth Quarter Conference Call. You may access the replay for today's call by dialing 800 585-8367, and using conference ID 5996418. Thank you. You may now disconnect.