Ladies and gentlemen, this is the Dollar General Corporation's Second Quarter 2012 Earnings Conference Call on Wednesday, September 5, 2012 at 9:00 a.m. Central Time. Good morning, and thank you for participating in today's call, which is being recorded by Conference America. No other recordings or rebroadcasts of this session are allowed without the company's permission. It is now my pleasure to turn the conference call over to Ms. Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations.

Thank you, Lindsay, 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 for the quarter can be found on our website at dollargeneral.com under Investor Information, Press Releases. Let me caution that today's comments will include forward-looking statements about our expectations, plans, objectives, anticipated financial and operating results and other non-historical matters. Our 2012 forecasted financial results and initiatives, expectations regarding share repurchases and capital expenditures and comments regarding expected consumer economic trends are some examples of forward-looking statements. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our earnings release issued this morning; our 2011 10-K, which was filed on March 22, 2012, and in the comments that are made on this call; and we encourage you to read them. 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. The information is not a substitute for the GAAP measures and may not be comparable to similarly titled measures of other companies. Now it's my pleasure to turn the call over to Rick.

Thank you, Mary Winn. Good morning, and thank you all for joining us today. We had another record second quarter, and we are on track for a great year at Dollar General as we once again raised our earnings outlook for 2012. David will provide more details on our financial results in a moment. First, I want to share a few highlights from the second quarter. Our total sales increased 10.4% over last year to $3.95 billion. Same-store sales grew 5.1%. Both customer traffic and average ticket in our comp stores increased for the 18th consecutive quarter. Operating profit, excluding secondary offering expenses in the 2012 quarter, increased 11% to $388 million or 9.8% of sales, up slightly from last year due to 17 basis points of SG&A leverage, offset by a 13 basis-point decrease in gross margin. Interest expense was down $25 million. Our adjusted net income increased 27% to $231 million, and adjusted earnings per share increased 33% to $0.69, which includes a benefit of approximately $0.04 from the cash settlement of an income tax audit. Same-store sales in all 4 major categories: consumables, seasonal, home and apparel, were positive in the second quarter, with consumables once again leading the way. This was the first time in 12 quarters that all categories comped positive, which we believe in part is attributable to the changes in our apparel, merchandising and pricing strategy. As we mentioned in our first quarter earnings call, there was some benefit in the first quarter that may have been a pull forward from the second quarter due to the early spring weather. With the quarters behind us, we now believe that, that pull forward was about 40 basis points to the first quarter, coming out of the second quarter. On a 2-year stack, we were up 11% for Quarter 2, which is essentially on par with Quarter 1's 2-year stack of 12.1%. And for the first half of the year, our same-store sales were up 5.9%. As we discussed at our Investor Day in June, our core customers are depending on us more than ever, and our base has broadened to include many more faithful customers with higher incomes than we've seen in the past. We continue to be excited about the progress we have made in attracting and retaining these customers as we build our brand across new geographies. For example, back in 2008, 23% of our customers viewed Dollar General as "not-for-me quality or image." Today, that number is only 7%. Our customer-centric business model drives our strategy. Knowing our customers helps us serve her better as she looks to stretch her household budget, and the most recent syndicated Nielsen data suggests that we are achieving success in this effort. Dollar General continues, yet again, to make impressive market share gains in consumables, with high single-digit growth in unit sales and dollar market share on a 4-week, 12-week, 24-week and 52-week basis. I'd like to turn the call over to David to discuss the details of our second quarter performance and our outlook for the rest of the year. I'll talk more about our operating initiatives when he's finished. David?

Thank you, Rick, and good morning, everyone. We are pleased with our second quarter results. Across the board, it was a strong quarter for Dollar General. As Rick said, all 4 merchandise categories had positive comps. Consumables were strong. Home continued the favorable trends we've seen for the past few quarters. Seasonal sales were up as well, even with the early weather shift. And finally, apparel was positive, primarily as a result of very strong performance in accessories and ladies sleepwear and undergarments. Our gross profit rate was 32% for the quarter, down 13 basis points from last year's second quarter rate. Our mix of sales in the quarter continued to trend more toward consumables, which generally have a lower gross profit rate than non-consumables. Our price increases year-over-year were lower, and markdowns were modestly higher. Factors partially offsetting these margin pressures include higher initial markups; leverage on transportation expense, in part due to lower fuel costs; and the impact of LIFO, which resulted in a $0.5 million benefit in the 2012 quarter compared to a $10.7 million provision in the 2011 quarter. SG&A, excluding secondary offering expenses, improved by 17 basis points to 22.2% of sales. Leverage was primarily due to additional labor efficiencies enabled by our workforce management program and engineered labor standards, as well as the impact of our strong sales performance. Favorable results and benefits costs and workers' compensation and general liability expenses, in addition to various other cost reduction efforts, also contributed to the improvement. Costs that increased at a rate higher than our increase in sales include fees associated with the increased use of debit cards and higher advertising costs. We're pleased with our ability to effectively balance sales, gross margin and SG&A to drive an 11% increase in operating profit. For the quarter, operating profit, excluding secondary offering expenses, was $388 million or 9.8% of sales. Interest expense was down $25 million from the prior year to $36 million. We've made tremendous strides in reducing our debt over the past few years and further reduced our high interest rate debt in the second quarter. On July 15, we redeemed the entire $450.7 million outstanding principal amount of our 11-7/8% senior subordinated notes, funding the redemption with proceeds from the issuance of new 4-1/8% senior notes. The redemption resulted in a pretax non-operating loss of $29 million. Our effective income tax rate was 34.1% in the 2012 quarter compared to 36.8% in the 2011 quarter. This year's effective tax rate was lower due to a $14.5 million adjustment, or approximately $0.04 per share, resulting from the favorable cash settlement of income tax audits, partially offset by the expiration of the Work Opportunity Tax Credit and the favorable impact of the higher credits in 2011. Finally, our second quarter adjusted net income increased 27% to $231 million, and adjusted earnings per share increased 33% to $0.69 per share, including the $0.04 impact of the tax settlement. The reconciliation of adjusted net income and earnings per share to GAAP can be found in this morning's press release. Our strong operating performance resulted in cash flow from operating activities of $373 million year-to-date. Capital expenditures through the second quarter were $304 million, with a focus on store growth, relocations and remodels. As of August 3, total inventories at cost were $2.15 billion, up from the prior year by 9% in total and 3% on a per-store basis. Our inventory growth rate was lower than recent trends, primarily due to a shift of receipts into the third quarter. Inventory turns were 5.2x. Total outstanding debt at the end of the quarter was $2.89 billion. Net of cash, our ratio of long-term obligation to adjusted EBITDA was 1.4x at the end of the 2012 second quarter compared to 1.6x a year ago. Finally, before I go over our guidance for the rest of the year, today we announced a new $500 million share repurchase authorization. This authorization is on top of the $500 million authorization approved in December of 2011. That's a total of $1 billion our board has authorized in a year. We have executed $485 million of the original authorization for the purchase of 11.7 million shares, so we currently have $515 million authorized for additional purchases. We believe share buybacks continue to be the best way for us to return cash to our shareholders and further strengthen our capital structure. For modeling purposes, our guidance does not assume any additional buybacks in the current year. We are updating our full year guidance to reflect our first half performance and our outlook for the remainder of the year. As a reminder, last year was a 53-week year with 14 weeks in the fourth quarter. This year's fourth quarter only includes 13 weeks and, as a result, will affect our ability to leverage fixed costs to the same extent as in the prior year. Specifically, in the fourth quarter, we estimate that SG&A, excluding expenses resulting from the secondary offering in the prior year, will increase approximately 4% over last year's quarter, which will result in a notable deleverage of SG&A due to the 53rd week comparison in 2011. Excluding this impact, my expectation is that the underlying fourth quarter SG&A trend would be in line with the prior quarters of 2012. We are raising our earnings per share guidance. We currently expect adjusted diluted earnings per share for the 52-week fiscal year to be in the range of $2.77 to $2.85, including the $0.04 benefit from the favorable tax audit settlement in the second quarter. Our previous adjusted earnings per share guidance was $2.68 to $2.78, which did not include the second quarter tax settlement. We are assuming approximately 330 million weighted average diluted shares and a full year effective tax rate in the range of 37% to 38%, including the tax settlement. We currently expect total sales to increase between 8% and 9% over the 53-week 2011 fiscal year, or between 10% and 11% on a comparable 52-week basis. Same-store sales, based on a comparable 52-week period, are expected to increase 4% to 5%. We continue to expect gross margin expansion in the second half of the year for modest improvements for the full year. Operating profit, excluding this year's secondary offering expenses, is now expected to be in the range of $1.64 billion to $1.66 billion compared to previous guidance of $1.62 billion to $1.66 billion. Interest expense is expected to be in the range of $130 million to $140 million, a decrease of $15 million from our previous guidance due to our effective refinancing. Capital expenditures are expected to be in the range of $600 million to $650 million. For the year, we plan to open approximately 625 new stores and to remodel or relocate a total of approximately 575 stores, which is an increase from our earlier remodel and relo plan of 550 stores. The new store openings and relocations, we expect to have approximately 110 Dollar General Market stores and 125 Dollar General Plus stores by the end of this fiscal year. With that, I'll turn the call back over to Rick.

Thanks, David. We had a strong second quarter, and we have an exciting second half of the year plan to build upon our momentum. We are pleased with the start to the third quarter, including a very solid back-to-school performance. Through the second quarter, we opened 295 new stores, including 21 Dollar General Markets and 18 Dollar General Plus stores, our new larger-format with expanded coolers and wider aisles. We also remodeled or relocated 416 stores in the first half of the year, including 25 Dollar General Markets and 46 stores converted to a Dollar General Plus format. These formats continue to be a test for us and while it is still early in the process, we are evolving the concepts and getting more experience in order to improve sales productivity and profitability. I like the top line results we are seeing, and I remain excited about the potential role these formats have in our store growth opportunities. At the end of the second quarter, we had a total of 10,203 stores in 40 states, including 90 Dollar General Markets and 70 Plus stores. Our 27 stores in California at the end of the quarter are off to a great start. Our entry into California so far consists of 4 traditional stores, 14 Dollar General Plus stores and 9 Dollar General Markets. These stores are turning in strong sales performance, consistent with our projections. We are on track for a total of 50 stores by the end of the year in California. Our new distribution centers in Bessemer, Alabama and Lebec, California are ramping up. And in June, we announced plans to build a 12th distribution center in Pennsylvania to support our store growth in the Northeast. We expect this new DC to be completed in the fourth quarter of 2013. We're making great progress on implementing Phase 5, our initiative aimed at optimizing shelf space to reflect demand in the stores based on geography, demographics and actual store experience. We believe this initiative can have a meaningful impact on our square foot productivity over the next 2 to 3 years. Year-to-date, we have touched approximately 570 stores or about 6,500 different sets to ensure that they have the right planograms that fit their demographic profile. Results have been very favorable in the stores we've impacted. As you know, we have increased our emphasis on the $1 price point over the past year or so. We now have our $1 value valley in over 8,000 stores, and the nice thing about these offerings is that they are completely different from what's already in the store, and sales from this section are incremental to the basket. We will continue to add new merchandise and new categories for this section of our store to keep our customer engaged. During the second quarter, we had strong performance in many of our non-consumable departments such as hardware, stationery, home decor and domestics. There were several positives in apparel as well, including accessories and everyday basic apparel such as men's workwear and ladies sleepwear and undergarments. While ladies hanging apparel was disappointing, we do see some bright spots, and we are optimistic that our fresh approach to apparel merchandising and pricing will gain further traction in the second half of the year. We continue to make progress in improving our in-stock levels. Out of stocks through the second quarter were down 25% from a year ago and 45% from 2009. This improvement is contributing to positive results in our customer service scores as we believe that our focus in this area can continue to drive additional sales growth. We are also moving forward with the implementation of our new supply chain system, which we expect to complete over a multiyear time frame, with the goal of reducing costs and increasing efficiencies. As we are in the process of installing the new modules of our supply chain solution, we are running both the new and legacy systems in parallel to help prevent inventory disruptions or service level disruptions. This investment in our supply chain will enhance our ability to ensure that we have the right product at the right time, in the right quantity and at the right cost to meet our customers' needs. So to wrap it up, we're very pleased with our second quarter and the first half of 2012, and we believe that we are well positioned for the second half of the year. At Dollar General, we remain focused on controlling what we can control and delivering strong financial results for our shareholders. I am confident that we have significant opportunities for sustainable growth, at the heart of which is our commitment to convenience and our everyday low price strategy, which continues to resonate strongly with our customers. Before I close, I would like to give my sincere thanks to over 90,000 Dollar General employees who are responsible for serving our customers and delivered yet another great quarter. So with that, Mary Winn, I will turn it over to you for questions.

Okay. Lindsay, we can go ahead and get started with the questions, please.

[Operator Instructions] Our first question comes from John Heinbockel with Guggenheim Securities.

I want to start with pricing. So how stable do you think the environment is right now? And then as you look out to '13 and inflation coming, how do you think that's going to play out? Do you think that will be a rerun of 1Q '11 in terms of how quickly it gets passed through?

Yes. Let's address pricing first. I think, as I look at the price checks and the ad activity, I think pricing is relatively stable, much like the second quarter. I do think, John, you're seeing people value proposition more in print and more in radio and more on television. So I think while pricing is relatively stable, people are really touting their message much harder in the various types of media that are out there to do that. In regards to inflation, I would look at you and say I anticipate we'll probably see very much the same thing we saw in the first quarter, if that happens. But at Dollar General, once again, we're committed to unit growth. And we're going to do everything we can to protect unit growth, which ultimately leads to share growth.

Because -- I mean, if you look back to 1Q '11, you guys made a conscious effort to delay, postpone some of those price increases, which served you well in the long term. So I assume that would be the MO again. And I don't think we're going to see as much inflation as we did in '11, but that would be -- you would think it’d work. That would be the approach you would take, correct?

Yes, we are -- we believe the story at Dollar General, John, is units. And we have a merchandising organization that's as committed to that as I am. And we believe, when we drive units, everything else will take care of itself eventually.

If someone goes -- chooses, as you say, to advertise, market their price differential as opposed to lowering price, so how do you combat that? For a lot of guys, I guess it wouldn't make sense to lower price. I guess you would fight fire with fire into your own marketing, but how do you attack that versus actual price cuts by somebody?

Yes. I mean, the -- I could take a basket of items and give you a great comparison against anybody, any day. What I will tell you is we do a very good job of tracking where the big-box operators are. We're very, very comfortable where we are. So it's kind of the little things, you can say what you want to say. We're very comfortable where we are, and I'm very pleased that we continue to maintain a very large gap with drug and grocery.

All right. And then finally, just thinking about California, so where is Lebec now in terms of how many stores are coming out of the facility? And do you -- generally speaking, as you build these new facilities and supply chain economics improve over time, do you think -- does pricing generally come down in those new areas over time as your economics improve? Or is it more your pricing is where you want it to be and your margins get better?

Yes. A couple of questions there. First of all, approximately 120 stores are coming out of Lebec right now. And remember, we'll have 50 stores in California at the end of the year. We're servicing New Mexico, Phoenix and Arizona out of there. In regards to pricing, obviously the advantage on the margin comes from reduced distribution and transportation costs, and that obviously puts us in a position to be more competitive if need be or translate into higher margin improvement.

Our next question comes from Matt Boss from JPMorgan.

So your gross margin forecast assumes modest improvement for the year, which implies improvement in the second half. How should we think about some of the embedded components such as LIFO, mix, markdowns? Any color there would be great.

Yes. I think as we look at the back half of the year, we definitely see a positive impact from LIFO. If you remember last year, in both the third quarter and the fourth quarter, we had fairly sizable LIFO hits. In the third quarter, it was around $11 million and in the fourth quarter, it was $22 million. And right now, for the full year, our best guesstimate on LIFO for the full year is that it will be around $2 million. We also see some potential favorability out of our transportation and distribution. Some stem miles reduction and some efficiencies in carton per load, although we do watch diesel prices pretty carefully. Diesel has been increasing over the last 6 to 8 weeks and is actually above where it was a year ago at this time. We'll see what happens now that Labor Day is behind us. And then on the DC side, we do see some efficiencies coming out of those new DCs as we get over the learning curve for those 2 DCs. So that's really how it plays out.

Okay, great. And your top line performance, more on the discretionary side, was really encouraging. Can you speak to some of the in-store initiatives underway to keep this momentum going? And also, was this performance maintained in August as well on the discretionary side of the house?

Yes, Matt. I have to tell you, I think the merchants over the last year have done a wonderful job of improving the quality of the product and maintaining the retail price and the cost for that matter. And I think what's happening is that people are recognizing that we're offering up values now that are pretty consistent on a day-in, day-out basis. I will tell you how it's translating into August. I mean, our back-to-school was up high single-digits, and we're very pleased with what we're seeing. And the interesting thing, as you recall when I talked to you about back-to-school last year, I talked about it being more needs based. People were buying pencils and papers and notebooks. This year, they're breaking down and buying the backpack, and they're buying the things that kids hang on the backpack. And again, I attribute that to -- I think we've done a much better job on being more relevant.

Our next question comes from Meredith Adler with Barclays Capital.

I thought -- this Phase 5 that you're working on, the targeted assortment at the stores, is really very interesting. Can you talk a little bit about how you're going about it and what you're observing as you roll it out? As you test it in some places? What are the learnings from it?

Yes. I mean, the obvious thing is -- what we're doing is we're looking at categories that should be good that are less productive in some stores. And that's really what led us to the fact, and it's not a very good example but I like to use it all the time, is the diapers versus the incontinence product. We're doing well in diapers. So the question is why are these 1,500 stores aren't doing, which leads you to go to those stores, take a look at that stores and go oh my God, they're building an area where the customer base is a little more mature. And that is the process that the merchants are applying across the organization. Why does beer do better here than wine? And that's the process that's taking place. Some of it's driven by -- obviously by demographics. Some of it's driven by the economic environment that the store is in. I don't know if that's hopeful or not, Meredith.

Well, you had mentioned like 570 stores, but a much larger number of sets. Is that -- the 6,500 sets I think you mentioned, that means for specific parts of the store?

That's correct. I mean eventually, you'll touch every store in the chain. But in some stores, you might touch 2 or 3 sets. In some stores you might touch 9 or 10. And that's why we're trying to equate this not to just do in the stores. We're trying to equate it to the number of categories that we'll touch long term. And Meredith, that's why we're so bullish, like Phase 1, 2, 3, 4, that this has runway, because it's going to take us to get through -- time to get through it.

And are there downsides to this? I mean, I don't know whether it changes your buying or makes it more complicated for the distribution centers. Or is that -- those costs just not meaningful?

Bell [ph], and that's a very good question. And when we talk about doing this, we're not talking about adding a bunch of incremental SKUs. What we're talking about is adjusting the phasings that guarantee an in-stock position. So this is an indivisible transition to the distribution center.

Got it. And then my -- just my final question would be about the Plus stores. You sort of have enough of them to have a judgment. What sells differently? What works differently in the Plus stores than a regular store?

Yes. I would tell you, number one, the perishable side of the business does much better because of the incremental cooler space. But I think what we're seeing at this stage of the game is the wider aisle is increasing the shopability in the store, and the additional square footage is helping us with the in-stock. So you're seeing a nice lift basically overall. And I can't say enough, the incremental footage gives us more seasonal presence, which helps us with the margins in the store.

Our next question comes from Colin McGranahan with Bernstein.

Two quick ones for you. Just looking at the non-consumables categories, the home category especially and the apparel categories. The growth there was solid, but a little bit of a deceleration from the first quarter. Was that the pull-forward effect? And then how do you get positive comps in apparel when total category growth is 4.2% relative to square footage growth of around 7% and store growth of 5.8%? Is it just that new stores don't do much apparel business?

Yes, that's a really good question, and you hit the number right on the head on the back half. It takes a while for that presence to ramp up, and people get comfortable with the quality of the products you've got. When I look at the non-consumables and particularly apparel, accessories, I think the merchants have done a great job of aligning us with Foster Grant. You now have Foster Grant sunglasses and readers, which is by the way name recognition again, great for the trade-down customer because we've got a great price on those and they relate to that quality. We saw improvement in men's, particularly in workwear. We had a great quarter in underwear. When I look at ladies' undergarments, we did very well there. And even, to be frank, the -- why we had some drag in women's hanging apparel, there still was improvement there. The drag wasn't as bad as it's been. And as I look at -- I don't want to forget about kids, excuse me, the work we have done on positioning kids and creating a center. What we're trying to do very hard, Colin, on the non-consumables side is what we've done on the consumables side, we're trying to lift all the boats. And we're starting to see that more even lift. And while I am no way trying to imply that we've crossed the finish line, but I feel for once we can see it from here.

And then just second question, new store productivity is, we calculated, came in at about 75%, which is a little lower than where it's been. And I would have thought it might have been higher given the impact of DG Pluses and DG Markets in the mix. Is there anything going on in that number?

Yes, that's another excellent question. To be honest with you, we got behind on the number of new stores we opened in the quarter, and we didn't get as many new store weeks as we've historically seen in the quarter.

So they just opened a little late in the quarter?

Exactly. Rather than the store getting 7 or 8 weeks in the quarter, it got 2 or 3.

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

First question is can you size the incremental expense impacts from running the dual supply chain system, as well as the incremental costs associated with the move or really the growth in California? I'm assuming that's a more expensive market to obviously kind of make headway in?

Yes. In regards to running the 2 platforms simultaneously, I would look at you and say very little incremental cost. I mean, I would say it's negligible. We are doing that mainly as a safety valve, Scot. What you don't want to do is commit to a new program until you're 100% convinced it's going to be functional. While we're making a lot of great progress there, we're being very cautious because what we don't want is a supply chain disruption. In regards to California, obviously it's going to be a little more expensive to operate. However, we're going in there with much higher volumes than we historically see in traditional markets. So in terms of the overall profitability of those, long term, we think we're going to be just as solid in California as Alabama, Mississippi or Georgia.

And that was the reason, of course, for opening the distribution center in Lebec, was to cut down the stem miles so we didn't have to make those shipments out of our Ardmore facility in Oklahoma.

Got it. That's helpful. And then you talked about, with the reset, some stores down the road might have 2 or 3 touched, some will have 9 or 10. How many store sets are there? How many sets are there in the store, just so we know that's -- kind of what percentage?

Yes. Off the top of my head, if I was guessing, anywhere from maybe 310 to 343, somewhere in there, depending on the size of the store.

Our next question comes from Dan Wewer with Raymond James.

A follow-up on your comments about pricing and the growing divergence between your Every Day Low Pricing and Every Day Value Pricing that some of your competitors are using. Are you finding that your customers will actually cherry pick between the 2 formats and perhaps go to one store if they have a hotter price on carbonated beverage for that weekend and then shop Dollar General for the other items?

Yes, we have, there is no doubt. And I think every competitor would tell you, you have a subset of your customer base that will always cherry pick, right? And we have that in our base as well. The interesting stat for us, Dan, is that we tend to trade more customers with the dollar, the pure dollar segment, than we do with people that would be more traditional for us. Hence, that's why we put the focus on the value valley over the last 1.5 years. And I would also like to throw out, too, when you think about this, I was actually talking to someone about this the other day, Dan, there is a lot of white space out there. This really isn't about the deep small-box discount channel, which is just 5% of all this consumable retailing out there. We're trading customers across an over $800 billion world out there. And that's the exciting thing that we've discovered at Dollar General over the last 4.5 years, is we can effectively compete not only with our like competitors, but with drug and grocery, en masse as well.

That was my follow-up question. When you look at the market share capture between drug and supermarket, which one is proving to be the most vulnerable to Dollar General?

Yes. Our share gains are coming from drug first; grocery, second; en masse, third.

Okay. And then just a final real quick question. On Phase 5, are you able to implement that in all of your new stores? Or do you need to have some operating history for a new store before you have the data to start customizing inventory for that location?

Yes, that's another outstanding question. We have enough knowledge when we go into a market area. The store gets set properly when we go in.

So all new stores have Phase 5?

That's correct.

Our next question comes from Deborah Weinswig with Citigroup.

So in terms of apparel, if I go back to last quarter, you had talked about being much more promotional in terms of the approach to pricing. How key do you think that was in the success in the quarter?

I think, quite frankly, it's was very successful. I think, Deb, I told everybody we arrived at the conclusion that the consumer is more used to seeing apparel promoted rather than Everyday Low Price. They're used to seeing it 20% off or 50% off or buy one get one free. And we really believe that we are moving in the right direction with that. And we'll see more in the back half of the year.

And then I thought of something really interesting that you gave in your prepared remarks where you talked about, I think it was back in '08, that 23% of people said that Dollar General is not-for-me, and its quality and the percentage goes down -- now down to 7% or 8%. Can you talk about how does that change where you put your stores in terms of locations and how that changes your product? I mean, how does that just change the potential future success of Dollar General?

Yes. I think, quite frankly, Deb, it opens up the potential for Dollar General in a lot of markets or even trade areas that we would probably have been afraid to go into in the past. I mean, there's been a radical change in the mix of products inside our stores over the last 4.5 years. I have to say, we signed Foster Grant. I mean, think about Foster Grant. That's a name you all know, and we have a fabulous retail on it. I'm very excited. We designed a Dreyer's ice cream contract where we'll have Dreyer's or Edy's ice cream, yes, through Nestlé. And those -- that brand recognition is making us relevant. And it puts us in a position where we can demand maybe a little higher initial opening store sales when we build a new store, which gives us the ability to go into a little more upscale market than we've dealt with in the past.

Okay. And then final one, in terms of looking at the SG&A improvement in the quarter, how do we think about what inning we're in with regards to workforce management? And just how much more opportunity is there going forward?

I think if you look at the quarter, Deb, we definitely had favorables from workforce management that came forward in retail salaries. And I think we probably have a couple more quarters in terms of favorability there. Obviously, it's been going on for a while now and at some point, it'll start to diminish. We also had favorability in the quarter from our lower benefit costs, as well as lower worker's compensation costs. If we look at our mining targets over this year and next year, I mean there are a lot of things on our agenda in addition to workforce management, which has been a tremendous opportunity for us. We have opportunities, other ways in labor to reduce costs. We have damages that we're looking at, supplies, rent, maintenance in the stores and then all kinds of things going on in transportation and efficient SKU movement. So again, I want to stress how important our mining for cost-reduction effort is at Dollar General, and it's definitely -- has a lot of legs yet in terms of the future.

Next question comes from Charles Grom with Deutsche Bank.

At what point do you think the discretionary category could begin to help you guys on the margin front? And with regards to your second half gross profit margin outlook for a modest improvement, if LIFO over the years is going to be $2 million, that alone is going to give you about 30 to 40 bps in the second half per quarter. I'm just wondering what other headwinds you guys are going to face, because that guidance for a modest improvement looks pretty conservative.

Yes, I'll take the first half because the back half is a little harder. I'll leave that for Tehle. In terms of -- I think that I am, Chuck, getting very bullish on the non-consumables side. However, it's a little early yet and I think it'll play out as we move through the second half. I think our strategy in terms of how we're pricing the product, we've done a much better job of buying the product and there's a little more margin there. So as I look down the road, I think as we move through the back half of the year, we're going to see some improvement.

Yes. I think as we look at the pieces of the margin, definitely there's some mix issues continuing to go on. We watch that very carefully, particularly as we get into the fourth quarter as we get into the holiday season. That's always a little bit difficult to call in terms of what the holiday is going to look like. We also believe we're going to have fewer markups than we had last year. Now some of that is an offset from LIFO, obviously, but that's something that we track carefully. And then we're watching the diesel costs, as I mentioned earlier, in terms of the impact that'll have on transportation costs. And right now, diesel costs are above where they were last year. So we put it all together and that's where we came out on it, Chuck.

Okay. And then just a follow-up on Matthew's question earlier, was the high single-digit strength in just the back-to-school categories?

No, we're pleased with what we're seeing in non-consumables.

Okay, so just across. So it's -- but it's not across the store, right? It's just in the non-consumables side?

Yes, that's exactly right. I wasn't trying to send a message that, that was the comps where we're at. No. I was just talking about the back-to-school.

Right, right. Okay, good. And then of the 3 formats you've rolled out in California, which of the 3 formats are you most happy with so far?

Yes, that's another really good question. I am a big proponent of the Dollar General, the traditional store. I think it's our bread and butter. It'll always be our bread and butter. And those stores are performing exceptionally well. I'm very happy with what we're seeing in the Dollar General Market. We've entered the Stockton market with 3 stores and with -- they're all Dollar General Market, Chuck, and we're very pleased with what we're seeing there. And the Dollar General Plus? Again, the higher volume stores, particularly in California with the density we think it's going to be a good play, too. But again, I want to reinforce it's all about the Dollar General traditional store, and that's our bread-and-butter.

Our next question comes from John Zolidis with Buckingham Research.

Two quick questions, one on the SG&A growth in the quarter. It was a little bit lower on a percentage basis year-over-year than 1Q, and you didn't call out expenses related to the new distribution center. So could you just talk about whether or to what extent those are adding incremental expenses? And then my second question is on transfer payments. I believe the latest data shows that the SNAP benefit payments kind of flattened out relative to a couple of years ago. And certainly, unemployment payments are down dramatically. Does that impact your business and your customer?

John, the first part of the question, we definitely had -- as the DCs came off, that didn't hit SG&A anymore in the second quarter. But again, when we prioritized the items and give what the biggest hitters were, the workers' comp, the benefits and the retail salaries, workforce management were larger than the impact of the D.C. So that's why it specifically didn't get called out. On the SNAP piece of it, I'll say a little bit and I'll let Rick comment, too. It stays pretty steady at 5% of our business, and it's been that way for a while.

Yes, that's just basically it. Yes. Our customer tends to go somewhere else first and use us as a fill in.

And our next question comes from Joseph Parkhill with Morgan Stanley.

A lot of my questions have been asked, but I figured I'd ask a little bit about inventories. I think you mentioned something about some timing issues. But if I look at a category perspective, it looks like the biggest change in category is home. It's up about 16%. So I was wondering if that's just a timing difference or anything to do with some newer merchandise initiatives that you have.

Yes. I mean, our home business continues to do well as we mentioned. The timing difference we were talking about was we had -- it was mainly apparels that we thought we were going to get in the quarter that didn't come in the quarter and will hit the third quarter. And that made that per-store amount a little bit lower than we have been running traditionally. Again, we're pretty happy with our turns that we have. 5 2 turn versus a 5 1 that we had a year ago on inventory. So we continue to be pleased. And as always, we try to balance our inventory turns with our in stock and again, the customer experience, what we're trying to do for the customer in the stores.

Okay. And then just quickly, I mean, wondering if you have any contingency plans in case there's a strike on the East Coast port? And if that were to happen, how should we think about how that would impact your overall business?

Yes, what we'll do is we'll -- we have a consolidation center on the East Coast as well as the West. And what we would do is move that product there and then ship it into the stores. So we feel pretty good that we've got it covered.

Next question comes from David Mann with Johnson Rice.

Going back to hanging apparel, given the struggle you've been having there, can you talk about, in the back half and into '13, some tactics that you might use to try and jumpstart that? Or should we continue to expect that to struggle?

Yes, we are -- like I said, while we had some drag on hanging apparel in the second quarter, it was not as bad as we've seen in the previous couple 3 quarters. And we think 2 things are going to happen. Number one, our pricing strategy, which we've seen some positive movement on across apparel in general. And now what's happening is the fall and winter product is starting to finally come in. And that's our Cindy Long, our Vice President, that's her first real buy. And I have to tell you, we showed the board the product at our board meeting last week, and they were encouraged in the quality of the product we're going to have out there. So it's soon. It's very soon, David. But I do think we're making the right -- we're taking the right steps.

Great. And then an earlier comment I think David you made about markup perhaps being a little bit more modest in the second half, can you just clarify why that might be? And also an update on what you're achieving on global sourcing.

Yes. On the markup comment, a lot of that has to do with the LIFO. And again, I threw out some fairly large numbers last year that we took on LIFO in the third and fourth quarter and that had to do with cost increases that we were taking from vendors. And as we've mentioned, we selectively did have to take some prices up because of the cost increases that we got. So that really is why we had the markups and the markup comment. And with LIFO being lower, obviously we don't have as many of those markups. On the foreign sourcing, right now, on a year-to-date basis, foreign sourcing is about 9.7% versus 8.5% last year. We've added new items in stationery, back-to-school, home, domestics and toys. We now have very small satellite offices. And by satellite office, I mean a computer, a phone and 1 or 2 people. So it's minimal capital investment but still doing us a lot of good. Satellite offices in Vietnam, Istanbul, Monterey, Mexico and West Central China. We did, in terms of the -- if you look at the quarter, the receipts were a little bit higher on foreign sourcing, about 11.4% versus 8.4% last year. And we did have some early receipts in toys and stationery. And again, I think the year-to-date number is more representative of where we see the foreign sourcing. So again, a lot of effort going on there and seeing impact in the current year because of it.

The next question comes from Mark Montagna with Avondale Partners.

Can you give us an update as to what percentage of consumable sales are now private brands?

Our penetration hit an all-time high. In the second quarter, it was 24.3, I believe, or 24.2?

Yes.

Okay. And then what about the dollar items? Where is that penetration now?

About 26%.

About 26%.

Okay. And then higher markdowns you had, was that all related to apparel? Or were there any higher markdowns elsewhere?

Some of that was in the consumables area, also. Some consumables and then the apparel, too.

So what drove the higher markdowns in the consumables area?

Just a little more promotional in terms of what we were doing.

Okay. And then are those promotions shared with vendors through some co-op advertising? Or is that...

Well look, we always try to partner with our vendors appropriately on these types of things. And sometimes we're successful with that, and sometimes we're not.

Mark, this falls back to our commitment to unit growth, right? We're going to keep the units moving. And we really believe that that's the foundation of our success last year and going into this year.

Okay. And then going back to some of the questions where you had mentioned that drug and grocery customers, that's where you're seeing a lot of market share gains. Are you seeing anything specific where drugstore customers come in more looking for HBA and the grocery customers are more looking for the food items?

Here's what I would say. It's a really good question. As I sit here and reflect on it, what I would say is we were underpenetrated in HBA, and we made a conscious decision a year ago to go in and expand those categories. So I can't specifically say to you, "Yes, I'm getting that from the drug customer or my consumables. That's coming from the grocery channel." But I think if you look at the power of what we've done with Rexall, particularly on the HBA side, that brand recognition, I think we've just elevated the quality of the product at a great price, and we're just -- it's coming a little bit from everywhere, Mark, if that makes any sense.

Sure. And just lastly, accessories within apparel did well. Is that a new initiative that you expanded the assortment in that little category?

Yes. We have expanded the assortment, and I also don't want to sell short this commitment we have with Foster Grant now. Again, that's no different than when we brought Tide in. That's a big deal.

Our next question comes from Aram Rubinson with Nomura Securities.

Can you tell us a little bit about the composition of the comp, specifically about how much ticket was up roughly?

We don't break that out separately. They both contributed to the comp, and transaction was higher than ticket. But really, they were both favorable and we were happy to see that.

Okay. And so maybe let me kind of try and just ask more holistically. It seems that you've cited a lot of initiatives to drive your average ticket. You even quantified a lot of them at your Analyst Day. But there's still not a lot of movement I guess generically in the channel and in your business as well. Can you weigh in on how fixed you think the average ticket is in your channel over time? And even if you looked out 5 years, are we still in the $10 range? Or where do you think that evolves to?

Yes, I think we can't ever lose focus of the sight that we are the fill-in shop or a bigger shop that takes up space someplace else. And as I think about it, the importance of driving traffic, I think, is the #1 thing for us, right? Our customer goes and spends their money somewhere and then they only have so much left, and I think they will continue to spend more with us when there's less economic pressure on them. So as I think about the basket, I think we'll see modest growth through the years. But we're committed to driving footsteps, which we think ultimately will be the win for us. And Dave, I don't know if you have anything to add on that or...

Yes, the only thing I'd add is that we do use the non-consumables to drive the basket, as we've said before, and we're pretty happy with some of the new trends we're seeing in non-consumables.

So you think 5 years from now we're still in the $10 range?

I don't want to answer that one. I wish -- I hope it's bigger than that, but we'll have to wait and see. I think you're dealing with a channel that's becoming more relevant. And I think the one thing that we are demonstrating is we're broadening the appeal to a much different client base than we've had in the past. That certainly could take you somewhere where you could see some growth.

Our next question comes from Anthony Chukumba with BB&T Capital Markets.

Just had a quick question on California. I know it's early, but it seems like you have a lot more the DG Market, the DG Plus there than you do traditional stores. Then you also remarked that traditional stores it seems like -- are really kind of the ones that are performing the best. So I mean, how do you think about, 5 years down the line, what is the breakout of stores between the 3 formats in California?

Yes. I think, Anthony, as you look at it, it has to do right now with the availability of real estate when we rolled into that market, and it was slated more toward a bigger footprint. And we made a conscious decision, since we had that bigger footprint, to put in the DG Pluses and the DG Markets. Long term in California, like the rest of the chain, our commitment's to the Dollar General, the traditional store. And we do believe, though, like other areas of the country, there'll be opportunities surgically to drop a Plus store or a Dollar General Market. So long term, our commitment in California is to the DG traditional store.

Our next question comes from Denise Chai with Bank of America Merrill Lynch.

You seem to be increasing the number of DG Plus stores that you're going to be opening this year. So if you could just comment a bit on the early performance that you're seeing in these Plus stores in terms of maybe sales per square foot, basket size, basket components, this kind of thing compared to a traditional DG or a DG Market store, that'd be really helpful.

Yes. In regards to the number of them opening, we said about almost a year ago we'd have 100 open by the end of the year, and I believe we got approximately 70 open now. In fact, I actually might have said 100 to 125, somewhere in there. Right now, it's a little soon for me to be talking about basket size and mix and all of that. But I will tell you, Denise, the preliminary indications are we feel good. It's a bigger box. It's going to require a little more effort in regards to mix, the cost of the facility, and we're working on all of those issues now. And what I have said is after we get them open and we have a little runway with them, then we'll give you some updates on where we're at.

And just one thing I want to clarify, on August back-to-school, did you say that you comped up by high single-digits?

That is correct, and I was just talking about back-to-school. I'm not talking about the entire quarter. Just back-to-school. We're real pleased with what we've seen.

Our next question comes from Patrick McKeever with MKM Partners.

A question on e-commerce. I think you've had your e-commerce business for -- up and running for about a year now. What does the -- I mean, I guess maybe you could just give us some broad idea as to how big a business it is. What does the mix of sales look like? Are you doing -- are you selling more individual items? Or are you selling a fair amount of bulk merchandise? And then I guess is this an incremental customer to you?

Yes. I think I'll kind of start at the back rather than the front. What's been fascinating about the e-commerce side is it's a customer that's coming from states we're not even in, which we find fascinating. And I think what's going on here is, Patrick, that people are trying us out through the e-commerce side. What it has done -- by the way, we're selling more unit items than bulk items. It skews more towards our electronic promotions, more towards HBA, those sorts of things. And I think what it has done is it has forced us to do a much better job of upgrading the site. We now have the store locator program on there that I think is very robust. And again, it's -- maybe even items like baby diapers, bulk items, right? In terms of the amount of business it's going to do long term for us, I don't want you to think it's going to be a $200 million business because it's never going to be that. But it's an opportunity for us to expose ourselves, continue to refine it and hopefully use it as a communication vehicle to the customer.

And then just a quick one on the back-to-school merchandise or back-to-school categories. I mean, what percent of your business, let's say in August, would you consider to be back-to-school related?

Yes, Patrick, I don't have that kind of granular information in front of me, other than to say that we were very pleased with it. Very pleased.

Our final question will come from Joe Feldman with Telsey Advisor Group.

The one thing, just more forward thinking that I did want to ask you about was have you guys given any thought to what the impact of the different outcomes of the presidential election might mean on your customer? If the Republicans win versus the Democrats and how that might impact social funding? And I know you said SNAP is still only 5%. But what does that do to your core customer, just in general, if anything at all?

Yes. I think as I reflect on it here, when I think about our core customer, I think no matter who wins the presidential election in the course of the next 60 days, I think there's going to be continued pressure on that customer for a very long period of time, whether it be if programs are going to come, what programs will come, how much they are. I think at the end of the day, regardless of who's president, people still need jobs, and we all know that the pressure on the economy is going to keep that forefront -- front and center for everybody for a long period of time. So what I will tell you, Joe, is we started this journey as a team here by focusing on what we can control. And while I can't control the political environment, I certainly can control what we sell, how much we sell it for and when we sell it for. And that's what we'll stay focused on. And hopefully, that'll pay the same fruits 4.5 years from now like it has the last.

One final comment, Rick, that I want to make. It was pointed out in my opening comments, I might have said the wrong number on the weighted average diluted shares, and the right number is in the press release. Our revised guidance is based on approximately 337 million weighted average diluted shares, just to avoid any confusion there.

Thank you, David. Mary Winn?

With that, that concludes our call. I'm around all day if anybody has any questions, so please don't hesitate to call me. And thank you for your interest in Dollar General.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.