Ladies and gentlemen, this is the Dollar General Corporation Third Quarter 2012 Earnings Conference Call on Tuesday, December 11, 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 over to Ms. Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations.

Thank you, David, 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, anticipated capital expenditures and our plans, operating and merchandising initiatives for fiscal 2013 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. We encourage you to read these. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call. We will also reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release. The information is not a substitute for the GAAP measures and may not be comparable to similar-titled measures of other companies. Now it is my pleasure to turn the call over to Rick.

Thank you, Mary Winn. Good morning, everyone, and thank you all for joining us. Today, we plan to discuss the results of our third quarter, update you on our outlook for the fourth quarter and provide a preview on some of our major initiatives for 2013. We are pleased with our sales and earnings for the third quarter. Our performance has been encouraging over the Thanksgiving weekend and start of the holiday season. However, we continue to be cautious for the remainder of the year. Our customer tends to buy closer to need and that tendency is even more pronounced around the holidays. I'd like to share a few highlights from the third quarter, and then David will provide more detail on our financial results. Our total sales increased 10.3% over last year to $3.96 billion. Same-store sales grew 4%, and both customer traffic and average ticket in our comp stores increased for the 19th consecutive quarter. For the 39-week year-to-date period, same-store sales were at -- were up 5.3%. Operating profit increased 16% to $361 million for a record for the third quarter of 9.1% of sales, up 47 basis points from last year due to 58 basis points of SG&A leverage offset by 11 basis point decrease in gross margin. Interest expense was down $11 million. Adjusted net income increased 22% to $210 million, and adjusted earnings per share increased 26% to $0.63. Also during the quarter, we repurchased 296 million of our own common stock, increasing our year-to-date repurchases to $596 million. These are very solid results, and I'm very pleased with our team's ability to produce sales, manage our operating expenses and improve our capital structure in what we view is an uncertain external operating environment. In the third quarter, same-store sales growth was driven by consumables, with the strongest gains in perishables, including beer and wine, candy and snacks, health and beauty. Performance in home decor and domestics continued the favorable trends we've seen all year, with strong results in bath and bedding. Within our seasonal categories, sales were strongest in stationeries, summer and seasonal events as well as in mobile phones, phone accessories and phone cards. Although sales of our fashion hanging apparel were disappointing, certain categories, including infants and toddlers, accessories and undergarments, were strong. Markdowns in apparel increased in the quarter as we continue to learn more from our apparel pricing strategies and improve our apparel inventory management. As to trends in the quarter, overall, the quarter started out strong, with August and September running between 4% and 5%. In October, we experienced a modest slowdown to 3%, as the competitive environment continued to intensify and we started to lap price increases in our highly consumable categories that we pushed off in early 2011. We started to pass through these price changes in the third and fourth quarter of 2011. The most recent syndicated Nielsen data indicates that we continue to make 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, consistent with the trend we have seen for the last 5 years. We continue to remain very focused on growing our unit sales and increasing our market share as we go forward. As David will discuss when he provides our outlook, we intend to make selective gross margin investments to ensure we continue to drive unit growth and build loyalty with our customers. We're making great progress on our efforts to optimize square footage productivity in our existing stores through our Phase 5 merchandising initiative. Year-to-date, we have optimized about 10,000 planograms, we have refined our strategy and accelerated our plans to impact a significant number of our legacy stores over the next 12 to 18 months. We continue to make progress in improving our in-stock levels. Over the last 2 years, we have reduced our number of out-of-stock items by nearly 50%. In addition to increasing sales, this improvement is continuing -- contributing to positive results in our customer satisfaction scores. Through our customer connection surveys, our customers indicate they are more satisfied than ever with our overall shopping experience as our scores continue to improve. And as we have for the last 4 years, we are on track to, once again, remove over $50 million in costs from our business operations that do not impact our customer service level. This program remains very relevant to the Dollar General culture of providing our customers with Every Day Low Prices. Now I'll turn the call over to David to discuss the details of our third quarter performance and our outlook for the rest of the year. When he's finished, I'll share in greater detail some of our operating initiatives and plans for 2013. David?

Thank you, Rick, and good morning, everyone. As Rick said, we're pleased with our third quarter results. Total sales increased 10.3% to $3.96 billion, with same-store sales up 4%. Our total sales were impacted by later-than-expected store openings in the second and third quarters and resulted in slower ramp-up of sales weeks. Our gross profit rate was 30.9% for the quarter, down 11 basis points from last year's third quarter rate and slightly below our expectations. Higher markdowns, lower price increases compared to last year, a higher consumables mix and higher shrink all pressured gross margin. These factors were partially offset by higher incoming markups and improved transportation efficiencies. Actual fuel rates were up about 6% from last year, and we achieved leverage on transportation from a reduction in stem miles and improved cartons per truck. Our LIFO charge this quarter was nominal at less than $100,000 versus an $11 million provision in the 2011 third quarter as we've seen moderation in cost increases this year. Another notable item affecting our gross margin was our shrink performance. While our total shrink units per store improved, our financial shrink increased due to an increased loss of SKUs greater than $5 at retail. While they're experiencing greater shrink, overall, these high-value SKUs are driving increased sales and higher margin dollars. In the second half of 2013, we expect their trend of shrink improvement to resume as we roll out our new merchandising strategy such as defensive fixtures and labeling and we expand existing tactics to combat shrink. SG&A improved by 58 basis points, with 21.8% of sales, with most of this due to increased retail labor efficiencies. Workers compensation and general liability expenses increased at a rate lower than the increase in sales. The decrease in incentive compensation also contributed to the overall decrease in SG&A as a percentage of sale. SG&A results also reflect the favorable impact of our ongoing mining for cost reduction programs as well as the 10.3% increase in sales. Fees associated with the increased use of debit cards partially offset the improvements. For the quarter, operating profit was $361 million or 9.1% of sales, a strong improvement over last year. We continue to be pleased with our ability to balance sales, gross margin and expense leverage. This quarter, Dollar General once again exhibited our commitment to control what we can control. Interest expense was down $11 million in the prior year to $28 million, due primarily to lower average interest rates. Our total outstanding debt balance is approximately $300 million higher than third quarter last year due to our share repurchase activity. Our effective tax rate was 37.4% compared to a rate of 37.1% in the third quarter of 2011. Finally, our third quarter adjusted net income increased 22% to $210 million, and adjusted earnings per share increased 26% to $0.63 per share. A 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 $691 million year-to-date, up 14% from last year. Capital expenditures through the third quarter were $454 million with a focus on store growth, relocations and remodels. As Rick mentioned, we've repurchased $596 million of our common stock in fiscal 2012. Of that, $296 million was repurchased in the third quarter, including $250 million purchased from Buck Holdings associated with the September secondary offering and $46 million was repurchased on the open market. This last December, we have repurchased $781 million or 17.6 million shares and we have $219 million remaining under our current board authorization. As of November 2, total inventories at cost were $2.33 billion, up 11.5% in total from the prior year third quarter and up 5.5% on a per-store basis, with most of the increase in consumables. We're comfortable with our inventory levels and the quality of our inventories. Through the third quarter, we've opened 479 new stores this year, including 34 Dollar General Markets and 24 Dollar General Plus stores, our new larger format, with expanded coolers and wider aisles. We also remodeled or relocated 591 stores, completing our remodels and relocations for the year. Out of these, we remodeled 25 Dollar General Markets and relocated or converted 82 stores to the Dollar General Plus format. We're encouraged by the top line results of these formats and are optimistic about their potential as we continue to work on increasing their profitability. At the end of the third quarter, we had a total of 10,371 stores in 40 states, including 101 Dollar General Markets and 113 Plus stores. Our new stores in California are a combination of traditional Plus and Market stores. The 32 stores opened in California through the end of the third quarter are meeting our sales projections, and we are on track to open a total of 50 stores in California by the end of the year. We broke ground on our 12th distribution center in Pennsylvania in November. This DC is expected to be fully operational in the first quarter of 2014. Now for an update on our 2012 earnings guidance. Based on our year-to-date performance and our current expectations, we're updating our full year adjusted earnings per share guidance in the range of $2.82 to $2.85. Our guidance includes a $0.04 per share benefit from a tax audit settlement in the second quarter. As a reminder, last year was a 53-week year with 14 weeks in the fourth quarter. This year's fourth quarter includes only 13 weeks and as a result will affect our ability to leverage fixed costs to the same extent as in the prior year. For the year, we currently expect total sales to increase between 8% and 8.5% over the 53-week 2011 fiscal year or between 10% and 10.5% on a comparable 52-week basis. Although we are on track to meet our target of 625 new stores, our total sales for both the fourth quarter and the full year will continue to be impacted by the delayed ramp-up in the sales weeks that I've previously mentioned. Same-store sales based on a comparable 52-week period are expected to increase 4.5% to 5%. Same-store sales for the fourth quarter are expected to increase 3% to 4% as we are lapping a 6.5% same-store sales improvement in Q4 of 2011. Strong comp growth in the fourth quarter last year benefited from 2 items that we do not expect to reoccur this quarter. First, like most other retailers, we have to overcome extraordinary performance in January of 2012, when comps were up nearly 9% as spring sales were pulled forward due to the exceptionally mild winter. And secondly, this is compounded by an approximately 200 basis point inflation headwind that we called out last year. For Dollar General, the fourth quarter is also very difficult to predict this year because of the current operating environment, including continued high unemployment; uncertainty on the fiscal cliff and increased taxes; unpredictable weather in January, where 1 or 2 bad storms could significantly impact sales; and the competitive environment. We expect gross margin to be flattish in the fourth quarter for a few reasons. We expect an ongoing mix shift to consumables, and we anticipate slightly higher year-over-year shrink. Consistent with our strategy, we are in the process of implementing certain gross margin investments in pricing as we make selective strategic moves to continue to drive unit growth. These investments include lowering prices in certain categories, strategic expansion of zone pricing and incremental ad activity. This strategy is part of our goal to build customer loyalty of staying true to our Every Day Low Price commitment. We estimate SG&A expenses for the fourth quarter to increase about 4% over last year's fourth quarter. This will result in deleverage of SG&A primarily due to the 53rd week comparison. Operating profit, excluding this year's secondary offering expenses, is now expected to be in the range of $1.630 billion to $1.645 billion. We are assuming approximately 335 million weighted average diluted shares and a full year effective tax rate of about 37%, including the second quarter tax settlement. Interest expense is expected to be in the range of $130 million to $135 million. We are now well positioned for the company's migration to an investment-grade capital structure. We're committed to managing our leverage ratios to achieve and maintain investment-grade ratings. As such, we are currently targeting an adjusted debt-to-EBITDA ratio of below 3.0x, which we believe will provide our most efficient capital structure. At the same time, if circumstances in the debt and equity markets are such that we deem it prudent to temporarily increase or decrease our debt levels, we may do so. Capital expenditures in 2013 are expected to be in the range of $600 million to $650 million. We plan to open more than 140 stores in the fourth quarter for a total of 625 new stores for the full year. We expect to have approximately 110 Dollar General Market stores and more than 120 Dollar General Plus stores by the end of the fiscal year. As we do typically, we plan to provide 2013 financial guidance when we release Q4 2012 earnings in March of next year. As you build your models for 2013, some of the factors, such as weather and inflation that we have discussed, that impact the fourth quarter of 2012 will carry over into the first quarter given that we'll be lapping strong comp growth of 6.7%. With that, I will turn the call back over to Rick.

Thank you, David. Looking forward to 2013, we're putting plans in place that continue to build on our commitment to our 4 key operating priorities: driving productive sales growth, increasing gross margin, leveraging process improvement and information technology to reduce costs and strengthening and expanding Dollar General's culture of serving others. We're still in the process of wrapping up our plans for 2013, but I wanted to share a few of our more significant initiatives with you today. Let's start with our first priority of driving productive sales growth. The returns on our new stores remain some of the best in retail, thanks to the capabilities that we have developed in our real estate model. In 2013, we expect to open approximately 635 new stores, including another 50 stores in California. Our pipeline for new stores is full and ahead of where we were last year. At this point, we do not anticipate facing in 2013 the delay in new store openings and the lag in the store sales weeks that we faced this year. We also plan to continue our remodel and relocation program with an additional 550 stores in 2013. In total, we expect square footage growth of approximately 7% for the fourth consecutive year. We currently expect that about 20 of our new stores in 2013 will be DG Markets and 40 will be Dollar General Plus stores. We are excited about the unique opportunities that these formats provide us. 2012 has been a year of learning for these concepts and we continue to like the potential and flexibility to capture growth in the marketplace that they provide. These additional new stores will provide us with more experience as we look to drive the sales productivity and returns of these formats and to determine the appropriate role they should play going forward in our store plan growth. Additional key initiatives to drive productive sales growth include the following 8 initiatives: ongoing category management efforts, the rollout of tobacco and cigarettes, significant expansion of Phase 5 to legacy stores, further cooler additions, continued rollout of beer and wine, the addition of more than 150 private brand items, further leverage of zone pricing and a continued focus on reducing our out-of-stock position. Let me provide you with a little more detail on each of these sales initiatives. We plan to roll out cigarettes and tobacco to the majority of our stores by the end of the second quarter of 2013. We did initial -- an initial test of cigarettes and tobacco in Nevada beginning in 2011 and expanded that test further to Florida in 2012. As we have used our test-and-learn approach to this launch, we have given this initiative time to develop. While the category is in structural decline and is low margin, we know that our core customer overindexes with tobacco and cigarettes, and we expect the category to drive traffic. We have secured an exclusive distribution agreement with Nash Finch that does not require us to sacrifice margin from other categories such as candy and health and beauty aids to subsidize the distribution of tobacco and cigarettes. The competitive environment has changed and I view this as a response that will allow us to get our fair share of this traffic. One of our most exciting opportunities is the ongoing expansion and refinement of Phase 5 of our merchandising evolution to about 4,200 legacy stores. This objective is to implement our most productive planograms at the optimal linear footage with the right SKU set based on sales per square foot across the chain. This initiative has been tested in 2012 with strong results. This multiyear project will affect stores that have not been remodeled or relocated. For example, these planogram changes will allow us to expand high-sales and high-margin categories, such as health and beauty aids, where we are underpenetrated, and in laundry, where we clearly know the best-performing planogram set. Additional categories impacted include auto, hardware and apparel, to name just a few. In our legacy stores, we'll be able to set the most productive planograms with the optimal SKUs. In total, over time, we expect this optimization to add up to 300 SKUs across various categories. In addition, we will also be further expanding our SKU count in health and beauty across the balance of our store as we optimize other areas. Based on our initial experience, we expect a strong sales lift from Phase 5, and our store teams are excited to implement this program. Additionally, we plan to further expand our cooler presence. Currently, our new stores are opening with 16 coolers, and we plan to install additional cooler doors in approximately 2,200 existing locations to better serve our time cost-conscious customer. 2013 will be our third consecutive year of increasing the cooler sets in our existing stores. In 2012, we've increased the number of coolers in 1,300 stores, still leaving approximately 4,300 of our stores today with 8 or fewer cooler doors that may still have cooler expansion opportunities. Fresh and refrigerated foods help us drive customer traffic and increase basket size by serving a greater share of our customers' needs. When we expand cooler doors in a store, we typically see a lift in our average basket from about $11 to more than $17 when perishables are in the basket. We've made great progress on the rollout of beer, which we currently have in over 4,100 stores, including 3,300 stores where we also sell wine. With a target to have beer or both beer and wine in 50% to 60% of our stores in total, there continues to be a comp sales lift opportunity for us over time. Adding beer and wine to a store has typically added about 100 basis points lift in comp sales to that store. We're very pleased with our partnership with Gallo, who produces our private brand wine, Spring Creek, which we are now selling at a rate of over 1,400 cases per week. Additional sales driver includes the expansion of 150 private brand and Rexall SKUs across the consumable category, bringing our expected private brand penetration up to about 25% near term with continued opportunities for growth. These SKU additions build upon our very successful private brands and proprietary brand programs like Rexall that are margin enhancing. We expect to exit 2013 with a total of private brand SKUs of nearly 2,300, an increase of about 8% with new product introductions in candy, snacks, food, perishables, paper, home cleaning and health and beauty aids. With this increased private brand offering, we will have more than doubled private brand SKUs over the last 5 years. As demonstrated by our record of strong unit growth, our pricing capability has become a key competency of Dollar General. We work very hard to make sure our prices are right for our customers every day. For the last 12 months, we have significantly improved our capability and understanding of zone pricing and markdown optimization with the conversion to DemandTec. DemandTec has provided us with more robust analytics and more comprehensive understanding of our shoppers and categories. Going forward, we will build upon this experience to use zone pricing as a strategic competitive tool and to strengthen our position as an Every Day Low Price operator. I believe this will give us more flexibility in the marketplace. We will continue to take an aggressive stance toward improving our store out-of-stock position. This is a never-ending effort which requires focus on store-level perpetual inventory as well as improved execution across ordering, fulfillment, stocking and delivery. Our goal is to reduce our average number of out of stocks by another 25% in 2013. Our compelling sales initiatives for 2013 will be complemented by a real estate model that we expect to provide us with 150 to 200 basis points of comp annually. This lift is driven by our strong new store maturation curve and the sales increases from relocations and remodels. We're very excited about -- we have accomplished to drive sales productivity over the last 5 years from $165 per square foot to $215 today. I believe our 2013 sales initiatives will resonate well with our customers. Going forward, we also believe we have the opportunity to expand gross margin. By the brand expansion, innovative and new sourcing strategies, shrink optimization, distribution and transportation efficiencies and our focus on relevant non-consumables should all contribute to gross margin expansion over time. However, in 2013, we expect the rollout of tobacco and cigarettes to pressure our gross margin for the year. Our goal is for our gross margin initiatives to reduce some of that pressure. As David mentioned, these initiatives should also give us the flexibility to invest in those things essential to our model: driving units and staying true to our Every Day Low Price promise to our customers. Overall, our performance over the Thanksgiving weekend and start of the holiday season has been encouraging. However, we continue to be cautious for the remainder of the year given the competitive environment, the significant comp overlap we have in January and the growing near-term pressures impacting our core customers' confidence and spending. Like most retailers, I have rarely seen weekly sales fluctuate as much as that we have seen recently. It is my belief that our core customer is concerned about her financial outlook, which is resulting in a dynamic that is driving the current competitive environment to be more promotional. As a result, I believe our quarter 4 sales outlook is balanced given the uncertainties we are facing. We made great progress due to our strong retail discipline across merchandising, store growth and operational execution. More importantly, we have a clear path for ongoing improvements and sustainable long-term growth. It continues to remain to be an exciting time at Dollar General. Before we open for questions, I want to extend my sincere thanks to over 93,000 Dollar General employees that are exemplifying our mission of serving others everyday as they strive to help our customers save time and money in the current economic environment. Mary Winn, I'll open the call up for questions now.

Thank you, Rick. And operator, we will now take the first question, please.

[Operator Instructions] Our first question comes from Charles Grom with the Deutsche Bank.

It's actually Matt for Chuck. He's on a plane. I was hoping we could talk a little bit about the cigarette rollout. It's obviously an important initiative. And just kind of the impact on margins, you said, obviously, it will pressure margins, but some of the puts and takes with how you believe you can execute in terms of gross margins going forward.

Yes. Let's talk about cigarettes and what we think is going to happen. We have it in a pretty large test right now. We anticipate the sales comp lift will be greater than what we've seen with beer and wine. We're going to take about 2 quarters to roll it out. You have to remember, we have over 10,000 stores. It's going to take time to get the licenses being done, and we want to do it the right way. In regards to the margin, it is a low-margin category, and we believe that we have initiatives underway that will help offset that. But we'll see margin pressure through the course of the year because of the cigarette rollout. David, I don't have anything...

Yes, the only other thing to say is clearly because of the sales increase we'll get from cigarettes, we should -- it should obviously help us on the SG&A front in terms of SG&A leverage as we look at the year 2. So clearly, impact on margin, negative, but a positive impact on our SG&A and our ability to lever our expenses.

Our next question comes from Matt Boss with JPMorgan.

Could you just walk through your gross margin guidance for 4Q, particularly the underlying markdown and mix impact? You talked a little about competition. What are you seeing that's different from 3 months ago that seems to be adding some incremental caution here?

Let me -- I'll discuss the environment and, David, I'll let you take them through the margin. When we went into quarter 3, as I look at the first 2 periods of the quarter, the value messaging, the intensity of the value messaging was increasing. People running more ads, bigger ads, where the actual physical vehicle was larger, trying to attract attention. We saw promotional activity in terms of more coupons, limit 1, limit 2, though with great retails in them. What happened in the last period, we saw outright price increases start showing up in the ad -- decreases, excuse me, show up in the ad. So in other words, the competitive environment in regards to pricing got hotter in October. And as David brought out and I'm going to leave it up to him now, we've made the decision in the fourth quarter, we want to protect our unit growth and we intend to respond to that.

We've said we're going to be flattish in terms of the overall results. We are going to be investing in price strategically, so we will have some selective price decreases. We're relying heavily on zone pricing. We've had zone pricing for a couple of years and we've been fine tuning it. And I think it's becoming more and more of a tool for us to help develop what we want in the model here. And then we will have some increased ad activity overall too. I want to keep in mind here, our overall goal in terms of why we're doing this is for the long-term benefit of Dollar General. We want to drive units and customer loyalty. And again, we believe that driving units and staying true to our EDLP strategy, our EDLP pricing, is very, very important. We've said this many times. We talked about this at our analyst meeting this past summer that those 2 things are going to trump just about everything else in our model. And we're going to stay true to that because we truly believe that will ultimately drive the most shareholder value for Dollar General and quite honestly, the most customer loyalty.

Matt, if I could throw one thing on the table too, we're anticipating a sales mix shift in the fourth quarter also. And we talk a lot about the competitive environment, but I also think there's a change taking place in the customer environment right now. I think the customer's fatigued, they're tired, they're scared. Every time you turn on the television, there's a bunch of guys in a suit who are frowning, telling you that the world's going to go over the fiscal cliff. And as that happens, I think the competitive environment heats up in response as we all try to hold on to the sales that are out there.

Great. And then, real quick, as we look to next year with some of these incremental investments on the table, can you speak to capital allocation priorities and your appetite for potentially increasing share repurchases next year? Is that not something we should be thinking about?

Yes, I think we want to wait a little bit on that. Obviously, we're going to give full guidance as we get out into March of next year when we release our fourth quarter earnings. I will say that our priorities remain the same. As we've said before, our #1 priority for capital is investing in the business because we believe that's the best return for our shareholders, opening new stores, remodeling stores, doing relocations and then building the infrastructure that's necessary to support that. And then our #2 priority remains share repurchase, as you mentioned. So we'll have a little more clarity on that when we give full guidance in March.

Our next question comes from Dan Wewer with Raymond James.

So Rick, I was under the impression that the company was reducing inventory purchases heading into the fourth quarter, yet inventory per store at 5.5% entering the fourth quarter is higher than your comp sales guidance. Does this reflect the softness in October and just caught with a little bit extra inventory? And then also, can you talk about the inventory growth we should be thinking about in 2013 with the addition of tobacco and some of these other initiatives?

Yes. Well, first of all, let me talk a little bit. When I communicated that we were buying down on our inventory, I apologize if I led you to believe that was across the board. We had made a conscious decision to control the buy of seasonal merchandise because we were -- we've been talking for about a year that we think Christmas could be a little tight. And we wanted to maximize our sell-through. It's what we're trying to do is raise our sell-through and lower our markdowns. So I apologize if I misled you that we were buying down on everything. As we move into the fourth quarter, as I look at the inventory, we have a lot of new planograms coming, so we're going to -- that inventory will start arriving in the fourth quarter for next year, also we're buying around the Chinese New Year's. We learned a couple years ago, we want to be very careful with that and not put ourselves in a position we're short to the consumer. Along with those changes in planograms, we also have this change in Phase 5, which is going to add a little bit of inventory. Now in regards, David, to 2013, I don't know that we've necessarily put our arms around the cigarette impact yet.

Yes, I think we're still figuring that out and trying to figure out what the investment in inventory is going to be. And of course, part of that will depend upon how quick we get this initiative executed. So I'd rather hold off on that. I do want to point out though that in the quarter, our total inventory turns were at 5.2x than -- versus last year's turns of 5.1x. So again, we continue to be fairly pleased with what we're doing on inventory. And again, we were up 5.5% on a per-store basis on a 4 comp. But again, that wasn't that much out of line and we continue to watch the inventory turns very, very closely. That's probably the #1 thing we look at. And most of that increase we saw in the quarter was in consumables and, again, items that are -- that continue to move pretty well.

And then David, in your comments, you had indicated that the shrink issue maybe continues through the first half of 2013 and then begins to improve in the second half of that year. But you would also be completing the rollout of tobacco by the second half of 2013 and tobacco has a higher shrink rate than the house average.

Yes, I know, that's right. And obviously, that's something we have to play into our models. Let me tell you some of the things we're doing on shrink that we think will gain traction as we get in to the back half of the year. And I touched very briefly on this, but we're investing more in defensive merchandising, fixtures, spiral pegs, flip-up windows, the anti-theft labels that are on the product that seem to be very, very effective. We're going to the next phase of our exception-based reporting. We're doing more point-of-sale work with that and system tracking to make sure that everybody is using this as they should be. And a preliminary look-see at that in the small test we've run is that's going to be very effective. And then we continue to develop our optimized shrink model on a store-specific basis to data-driven analysis, looking at what individual shrink should be for each of our over 10,000 stores versus where they are today and then taking appropriate action. So I think we've got a lot of things going on and we see traction taking place. And certainly, we hope some of this will offset some of the incremental shrink that we might see out of cigarettes. And you're right, we're well aware that, that's a high-shrink category, and that's all been played into our estimates and our modeling as we've looked at taking on this product.

Our next question comes from Colin McGranahan with Bernstein.

I wanted to start kind of big picture. Just in terms of the environment you're seeing in demand, looking at the fiscal cliff but looking at your category sales. In Q3, you actually looks like you saw a little bit of improvement in the seasonal and in home and even in apparel versus consumables that slowed down a little bit. So I guess, first question is how much of that do you think is the uncertainty and what's going on in the demand environment? How much of that is competitiveness in the consumables category specifically?

Yes, I would look at you and say it's probably a little bit of both. I think people are spending closer to need. But I also think, Colin, it's the easiest to garner sales on the consumables side. Promotional activity tends to go there first. And as a retailer, I mean, I'm not telling you anything you don't know, there's 4 or 5 items, you could pull the trigger on and drive a lot of traffic very quickly. And I think that's what we saw as we moved through October, more and more focus on a handful of key consumable items across the marketplace.

Okay, that's fair. And then in the fiscal cliff specifically, what are your expectations about how that might impact your actual customer in 2013 at this point?

That's -- I mean, that is the million-dollar question. What I have to fall back on and -- what I had to fall back on is we've got 23 -- we're on our 23rd year of same-store sales growth. In tough times, our customers have needed us more. And in good times, they historically have a little bit more to spend. And I think if it does get bad, the customer's going to truly need us, and I think we'll continue to just broaden our base.

Our next question comes from Joseph Parkhill with Morgan Stanley.

Sorry to belabor this, but just the change in [indiscernible] thinking about cigarettes. Is that -- is it just that your test markets performed better from either a sales or profitability standpoint than you were generally thinking? Or are you also seeing some type of competitive dynamic where stores that overlap with other retailers that are offering cigarettes are performing weaker than the rest of the chain?

Joe, that's a really fair question. And the first thing I'll say is in regards to the sales, they're responding. They're performing about what we thought, maybe a little bit better. I will tell you, the turning moment for me, I spend a lot of time in the stores, was 5 weeks ago, as I'm visiting stores, and between our customers and our store managers that are asking us, "When are we going to put cigarettes in?" And I view this as a response to the needs of our customer and our store managers are communicating they need it, and we made the decision to go forward with it. It is a dying category. It's a category that is going to feel really good for about a year. We've done a really good job of controlling the supply chain. We've done a really good job of managing the flow of the cigarettes into the store and getting them out the door. So we're doing it based on the wants and needs of our store -- what our store managers are telling us our customers want.

Okay, great. That's helpful. And then just as far as the deceleration in October in general, have you been able to look at if that's coming more from a lower-income consumer or you're getting less trade-down or anything changing there?

Joe, I can't tell you that. I don't know. I will tell you that we did see an increase in the ad activity through the month of October.

Our next question comes from Meredith Adler with Barclays.

I guess I would like to talk a little bit about this decision to invest in advertising and pricing promotion in the fourth quarter. You talk about that benefiting the long term, but I kind of feel like I've been around a while and it doesn't always do that, that it just sort of -- it's a spiral where everybody starts to beat each other up. How can I get some comfort that, that's not going to happen this time?

Yes, I think if you want to get some comfort, I would go back and look at the tail end of 2010 when we made the decision as an organization to sacrifice some margin and invest it back into our pricing. And you have to remember, when I talk about investing in our pricing, I'm not saying that we're going to take weekly items down. We're talking about investing in EDLP, taking -- we've seen sensitive items like perhaps coffee or cereal and investing in that category. We're not talking about running coffee here at $1 a can. We're talking about making strategic investments in categories and items on an EDLP basis that are important to our customer. Now we are talking about it running an occasional more ad or so. But again, I want to reinforce our commitment is the EDLP, and if you want to look, if you look at our sales trend, this is very similar to what happened to us a couple of years ago. And you can look and see what immediately happened when we made this commitment in 2011, where the customer responded greatly to it.

Okay, great. And then a question about apparel. I think you have been very cautious about the amount of hanging apparel, especially women's apparel, that you have in the stores. Are you feeling like sales are slowing or are weaker even than you had anticipated when you put that inventory in place? And what is your outlook, because you're obviously -- have made some decisions for spring and [indiscernible] already? What is your view and what have you done in terms of orders for spring apparel?

Yes. I would think, in regards to where we are in apparel as I look across the inventory, we might actually be just a little bit better. The promotional cycles that we're running through, I can't tell you, Meredith, but the customer is responding to the promotional cycles. Again, we have to get them to respond when it's not being as heavily promoted. As we look into spring and summer of next year, I think we've pretty much taken the approach we took last year, pretty consistent. We have bought the inventory down, but we bought the amount of inventory we think we can sell.

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

Rick, your comments that you've rarely seen weekly sales fluctuate as much as they have recently, a pretty strong statement given your pretty consistently cautious comments on the consumer for a couple of years here. Is it actually more volatile than what you saw in say, 2007, 2008 or is there another period to look at? Or is it just you guys really haven't seen as much volatility historically?

I will tell you that we, historically -- well, we've seen pay cycles changes. As I look at the weeks, and I work at -- look at the periods within a quarter, they flow pretty evenly. And what we're seeing now is vacillation like I've never seen before. The first will be incredibly strong and then the sales will weaken, and then we'll pick up on the 15th and then they'll weaken and it's just a much stronger cycle. And I think, Scot, it's being driven by -- there's so much uncertainty, the customer's trying to hang on as long as they can. And we've actually coined a phrase here, there's more days than there is dollars, it appears like all of a sudden for the customer.

Okay. And then your comments regarding the competitive environment, any more color on where it's coming from? Is some of it from the changes Wal-mart's made? Is it drug, is it grocer? Is it just kind of coming from across the board?

Yes, I think it's more or less across the board. And certainly, when you look at the weekly inserts, they're more promotional than we've seen in the first quarter and halfway through the second.

Next question comes from John Heinbockel with Guggenheim Securities.

So a couple of things. The price investments you're talking about, largely consumables, is that right?

That would be a fair assessment.

Okay. Is that a function -- and you said more everyday price. Have you become a little less happy with where you're positioned on a basket? And if so, is that more that others have moved down or -- I don't imagine you guys have moved up too much.

No, I think it's more driven by the fact that we want to protect our unit growth. We're very, very satisfied with unit growth. And what I have told you though is we're looking across all kinds of categories. And if we see unit growth slow somewhere, particularly in a sensitive category, we're going to reinvest back into that category. And our pricing position is consistent as it has always been. We are approximately 40% below drug, 20% below grocery and pretty much have parity with the big-box operators. I view this, John, as Dollar General is doing much what we did 2 years ago and we want to protect what we have.

Fine. And if you look at markdowns and shrink, which of those 2 was more of an issue in the quarter, hit gross more year-over-year?

In the third quarter, it would have been markdowns, John.

Okay. And when you look at those 2 things then, you guys have been buying down to minimize markdowns and I think buying down every subsequent season. When do you think we get to a point where you've bought down enough that, that kind of goes away, the spring? And then on shrink, is -- are there things to be done prior to maybe midyear, more blocking and tackling that can drive some improvement before then?

Well, I'll take the shrink piece of it. We're doing it right now. I mean, all those items that I mentioned, the exception-based reporting, the defensive merchandising fixtures, the optimized shrink model, those are things that are being worked on as we speak right now. And we just think it will take a little time for us to get traction on those items. So that's why we're saying we think the bigger impact on that will take place at the back half of the year.

In regards to the markdowns too, John, not all markdowns are just on the non-consumables side or the apparel side. I mean, we've been doing some investing along the way on consumable items as well. I do think that we are getting better and better on the non-consumables side. While we still have opportunities in hanging apparel, we are making a lot of progress in home and decor, stationery, a lot of those categories we're doing much better in.

Our next question comes from Ed Kelly with Crédit Suisse.

Rick, I wanted to ask you a follow-up on tobacco. Your competitor gave some pretty good stats on tobacco and the benefit to basket, that type of stuff. Can you maybe give a little bit more color on what you learned in your test markets?

Yes. I mean, I'll tell you that what we've seen is the basket increases, goes from about $10 to almost $14. By the way, that's a little bit less than the price of the cigarettes. That tells you they leave an item behind to get the cigarettes. We have seen increases in traffic and we're seen a -- add a nice bump in the comp that goes with it.

Any sense as to the percentage of people that are buying tobacco in those stores that are actually new customers to Dollar General?

Okay, that's another good question. It's a little soon for me to know that yet. But I can tell you, we've seen increased traffic.

Okay. And you say that tobacco a one-time bump. Why wouldn't tobacco sales build over time now?

Yes, I think it's in, Ed, it's in decline. Units are declining every year. The only reason you're seeing an increase is because of price increases for the customer. So my -- yes, and my theory is you're going to get a nice bump for a year, then that bump's going to moderate over time.

Okay. And just one last question for you. On the gross margin, as we think about next year, if we were to exclude tobacco, so pretend that you're not going to launch tobacco, it seems like the gross margin might still be down because the LIFO charge could end up being a little bit of a headwind again. You're talking about investing in price, shrink's not better until the back half, is that the right way to think about it?

Again, we're not giving specific guidance at this point on next year. All I will say is that the tobacco is the overriding factor on what we mentioned on gross margin.

Our next question comes from John Zolidis with Buckingham Research.

Question. Thanks for giving us the monthly cadence during the quarter and also on the guidance, the color around January. I think I'm right in assuming that your guidance for 3% to 4% comp in 4Q assumes a lower comp than that during the month of January. So my question is about your comment on volatility and competitor price actions during the month of October in the context of your characterization of November as encouraging. So in November, did you see a continuation of that volatility or did comps reaccelerate back towards the higher end of that 3% to 4% comp plan, given the difficult comparison in your assumption for January?

Yes, I think the competitive activity continued in November. We are right where we feel we should be as we're moving through the quarter right now. And again, my concern, Ed, (sic) [John] is the really high comp number we have in January.

Okay. So at a minimum, we're definitely running a little bit better than 3% to 4% with the January expected to be lower than that?

Well, yes, as I said, I'm running right where I thought I would be at this stage of the game and I anticipate the pressure will come in January. We're very comfortable with our guidance of 3% to 4%.

Our next question comes from Aram Rubinson with Nomura.

Your question -- your comment about competition kind of intrigued me. Competition can come from other channels. It can also come from yourself. Wondering when you -- if you can talk about cannibalization, kind of with the historical perspective of where it's been, what it's running now, how you measure it. And I guess the bottom line, as you mentioned, there's maybe too many days for the dollars, are there too many stores for the dollars in your view?

Yes, I'll take the last part of that question, and I'll let David handle the tough part. Actually, I don't think there are too many stores. I mean, our research model shows us we can double the size of this chain. I mean, there's over 10,000 opportunities for dollar stores out there. I think it's more a function right now that the consumer is very tight-fisted. I think they're making the purchases they need to make, and I think what we're seeing right now is they're just holding on. And I think it's also fair to say the higher end continues in retail, and it continues to do quite well right now. We're starting to see the other end starting to feel a little bit the pressure on the customer. Again, I always fall back to, even though that pressure's there, that's usually when our customer needs us more. They have less, they need a better bargain and when they have more, they have the ability to spend. David, you want to talk about the cannibalization?

Yes. On the cannibalization, when it occurs, it's usually somewhere around 8%, and we have that played into our models as we open stores and we do all our returns on it, and we haven't seen much change in that overall.

And our new stores are still opening up at the rate they have opened over the last couple of years.

And as you look over the years, can you give us a sense as to the proximity of stores that are opening to one another? And is 2013, let's say, greater proximity or more remote?

That's a good question. I really don't have that kind of information in my head. But I would look at you and say I would imagine it's very similar to what it has been in the past, with a nice mix of rural locations as well as some metro locations coming up.

Our next question comes from Matt Nemer with Wells Fargo Securities.

Just a quick follow-up on your 2013 sales drivers. Could you just comment on the marginal productivity of the next 2,200 cooler additions versus kind of the impact of cooler additions that we've seen over the last few years? And then secondly, can you quantify the Phase 5 lift to comps?

Yes, the qualifying -- the Phase 5 lift to comp, it's a little soon yet. But I will tell you, we are as bullish on it as we were Phase 1, 2, 3 and 4, particularly Phase 1 and 2. And we're bullish on it, Matt, because you're adding SKUs, and more importantly, you're getting the best planogram into our legacy stores, which should be worth some legs too. And I can't remember what the first part of his question was. I just [indiscernible]

The productivity of the next 2,200 cooler additions, how does...

Yes. What we've called out was the increase in the basket that we see. And I believe that basket, as I recall, goes from $11 to $17. So again, it's kind of hard to go past that, but we see a nice, nice basket lift.

The next question comes from Deborah Weinswig with Citigroup.

Just some of the wider -- so if you compare and contrast the discretionary and non-discretionary quarter -- categories as you progress through the quarter, how did you see changes in those, especially as the competitive environment seemed to have heated up?

Yes. I think that's another good question. I think that as we move through the quarter, the -- we saw more pressure on the consumables toward the end of the quarter as the ad intensity increased and again, I want to reinforce, that's the easiest place to go to drive traffic when you're a consumable retailer. It's also fair to say, as we move through the quarter we saw the non-consumable side, the performance start to lift.

All right, and then last one. You've really been working very hard on the apparel category for a while. What do you think it will take to get that category to work for your customer base?

Yes. I think that we have made progress in certain pieces of apparel. We're very happy with accessories, we're happy with the underwear program, we're seeing improvement in infants and toddlers and some improvement in men. I have to tell you, we have struggled in hanging apparel for women. And as we move through calendar 2013, those will be the kind of decisions we're going to be looking at.

And what is it that -- obviously, on the home side, that category has ticked up for you. What do you think it is -- and obviously, others have -- apparel's worked, but what is it that you think has worked so well in home and what is it that you've learned there that you can take over to some of the more discretionary categories such as in hanging women's?

Yes. I think when you look at, I'll use home, bed and bath, we are much more relevant today than we were 2 years ago, even a year ago, Deb, to be honest about it. And I think that has to do with the fact that we're doing a much better job of sourcing that product now. We've broadened where we're looking, broadened where we're going, we're not just China-concentric anymore. And I think that's playing out in the quality of the product and I have to give the merchants credit. They've done some exciting things with the quality of the set. I think the difference with hanging apparel, quite honestly, you have to hit. You got to be right on color, you got to be right on pattern. I think we're doing a lot of good things in regards to using separates rather than outfits, allowing the consumer to mix and match the different pieces. But while we've made progress, we haven't hit on all cylinders on it yet.

Great. Thank you, operator. That will conclude our questions. Thank you to everyone for joining us today and your interest in Dollar General. Please feel free to call me with any questions and I look forward to speaking to you. Thank you.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and have a wonderful afternoon.