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Family Dollar Stores Inc. (NYSE:FDO)

Citi's 2013 Global Consumer Conference

May 29, 2013 2:05 pm ET

Executives

Kiley F. Rawlins - Vice President of Investor Relations & Communications

Howard R. Levine - Executive Chairman, Chief Executive Officer and Member of Equity Award Committee

Analysts

Deborah L. Weinswig - Citigroup Inc, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

Welcome, everyone, to our fireside chat with Family Dollar. My name is Deborah Weinswig, and I cover the broad lines in food and drug retail at Citi. Today we're joined by Howard Levine, Chairman and CEO of Family Dollar. We also have Kiley Rawlins on the stage with us. Howard has been Chairman and CEO of the company since 1998 -- sorry, CEO of the company since '98 and Chairman since '03. He had overseen the transformation of the company into a much more powerful force in the retail industry. Kiley Rawlins, and we also have Kevin Powers from IR.

We have a favorable view of the dollar store channel, as many of you know. The channel has been gaining share significantly and still has a power of square footage growth ahead of them.

We've seen a real change from Family Dollar over the past 18 months. The company has improved its assortment dramatically with the expansion of Food and Consumables. It was the first Dollar Store, as well, to roll out tobacco, and we expect these actions to drive mid single-digit same-store sales growth this year and beyond. Today at the fireside chat, with that, I'll turn it over to Kiley.

Kiley F. Rawlins

Thanks, Deb. So before we get started, I need to get some of the legal requirements out of the way. So we hope to have a informative and productive discussion today. Some of our comments may include forward-looking statements, which are made pursuant to the Reg FD, I should know the exact term, security. I refer you to the risks outlined in our SEC filings and in our most recent press releases, for a better understanding of what may occur to -- which would result in actual results being different than our expectations.

I also want to say that we are not planning to give a business update today. We -- when we provided results for our second quarter, we provided guidance for the second half and our comments today will be tied to those comments. We're, again, are not planning to provide a business update.

So I thought, before we get started, not to steal some of your thunder, is to just quickly recap some of the things that we've been doing over the last year to improve the relevancy for our customer. We have really been investing to improve the productivity of our box through both renovations and the expansion of Consumables, as Deb indicated earlier, and we're seeing some nice results from that. We are, however, also seeing some volatility in our discretionary businesses, and I'm sure there will be some questions around that, that we'll take some time to address. But I think when we think about the long-term opportunity for this business, we're very excited about the growth opportunity, we're very excited about the progress that we're making on the Consumables front and excited about the opportunity we have to continue to expand our market share. So with that, Deb, I think you have some prepared questions?

Question-and-Answer Session

Deborah L. Weinswig - Citigroup Inc, Research Division

Sure. Let's kick it off with a question for Howard. So can you start by giving us your 10,000th view of the dollar store channel? And how does Family Dollar, at this point in the game, fit into that?

Howard R. Levine

Sure. And let me thank you, Deb, for having us. It's nice to be here, and good afternoon to everybody. I'm answering the questions. But if there's a real tough question, I'm going to ask Kiley to help, and, Kevin, if you want to cheer in, you can too, but thanks for being here and giving us an opportunity to talk to you. Family Dollar is in its 54th year, about to finish up the 53rd year of our business. And over the many years that we've been in business, the channel and our business model, as it continued to evolve to the point today where we're primarily in the Consumable business, things that people need and use every day and that's positioned us very nicely. We're relevant to a number of different consumer groups. Of course, our core low-income consumer, as well as this trade-in consumer, which is becoming more and more important to us. We've added a lot of stores over the last several years. We're right around 7,800 or so as we speak, planning to open up about 500 stores this year. Renovated about 850 stores, which means that we've renovated 60% of the chain to-date. We hope to complete the remainder of the next 3 to 4 years, and it's been a very important part of our shift in the way we position ourselves with our consumer. But we're gaining market share, the consumer is getting more and more comfortable shopping in the dollar store channel. The convenience, the small stores, the easy in and out has really given us a competitive position against some of the bigger box retailers out there, and that's something that we continue to believe will be an important part of the strategy. A lot of focus on our private brand to include a better assortment, a more robust assortment. Much improved quality where anything that we put our private brand name on is now tested and measured against brand name-equivalent items. Our Apparel and Home business, I'd say the same thing, we've really improved our quality and offering and as I say that's positioned us -- continue to position us well with our core low-end consumer, but also positions us very nicely for this trade-in customer. The last few years we've built out a global sourcing arm, a private brand arm, we now have a robust pricing group, continues to invest aggressively in the business and feel very good about our long-term prospects.

Deborah L. Weinswig - Citigroup Inc, Research Division

Also there's a huge amount of opportunity around price and zone pricing. Howard, can you talk about where you are pricing earnings [ph] right now, and where you see the opportunity?

Howard R. Levine

Sure. In a nutshell, the way I think about pricing is get as much as you can in retail and yet have the best price perception that you can have with the consumer, and that's really been our focal point. And when it comes to zone pricing, something that we've been doing for many, many years, it really helps in some of these urban inter-city markets where you're in a position to price a little differently in core competitive market. We're in probably our fifth, sixth, seventh iteration of that, and trying to make sure that we're taking advantage of all those opportunities in terms of zone pricing. Our team of one is now a team of approximately 10. So we've really grown that area by working hand in hand with our merchants to ensure that we maintain our competitiveness. In fact, I will tell you that our price perception, as measured by our consumers, is still very strong. And, in fact, they believe that we do have as good, if not better, pricing than Wal-Mart today, which is not really what we're trying to do. We're actually trying to price a little bit higher than Wal-Mart on some items, on most competitive items, though, we do want to be pretty much right in line with them. But the point is we enjoy a very good price perception, and when you have the convenience without a price premium, it's been something that has resonated very nicely with the consumer.

Deborah L. Weinswig - Citigroup Inc, Research Division

I think one of the trends that has happened since the recession is that you've been able to attract, as you've remodeled your stores, a more affluent consumer. Can you talk about the trends there and what are you doing to also address the needs of that consumer?

Howard R. Levine

Yes. So affluent may not be exactly right to descriptor, but what we have seen over the last years is...

Deborah L. Weinswig - Citigroup Inc, Research Division

More affluent.

Howard R. Levine

More affluent, okay. What have seen over the last few years is what we call a trade down. So these aren't brand new shoppers. These are shoppers that may have shopped us once, twice, 3 or 4x during the year. A little higher income in the $50,000 to $60,000 range, compared to our core, which is $40 and under. I think it's been a nature -- it's just been the result of what's happened to our economy and what's happened in the world that those folks need value, those folks need convenience just as much as anyone. So it's been a nice set off from what -- that stresses us from our core low-income consumer, because if we hadn't broadened our appeal, we would be struggling. The fact that our core customer is still shopping with us, they're just not buying as much, has been offset by some of this trade down that we're dealing with today, which we think will only continue to grow as we renovate stores, as we continue to improve our quality and our merchandising and the shopability of our stores. So we're not going to lose sight of that core customer because everything we're doing is important to them, but we're also doing some things that we think position us very nicely with that trade-in customer, that higher-income customer.

Deborah L. Weinswig - Citigroup Inc, Research Division

And how you do see the retail landscape continuing to evolve, especially with -- I would assume that, from an e-commerce standpoint, it's not as big of an issue for you, but maybe you can just give us your view?

Howard R. Levine

What I see happening in the retail environment is, over the long-term, there's going to be more higher-end retailers doing well, and the low-income consumer retailers, like us, are going to do well. Those that are in the middle, I think, kind of get squeezed out a little bit, and you can see that in some of the competitors even today or some of the retailers today. I like very much the way Family Dollar is positioned. When you think about what's happening to our country, low-income people need value and convenience more than ever. What's happening is even the -- as we were just talking about, even that next level of income is also in great need of the value and convenience that we offer. And I think it positions us very nicely because both of those segments are continues to grow. We are very much appreciative of that core low-income customer, but we realized that they're going to be stressed, whether it's the government cutting back all entitlements or lack of job growth or greater unemployment, all those things are real that we need to deal with, and the way we're dealing with that is, as I said, we're not doing anything offensive to that core customer, but the remodel program that we're going through, which unfortunately, we don't have any pictures, but I encourage you to go see our newer format, our newer stores and the renovated stores, they're doing extremely well with this trade-in customer. The fact that we're raising the quality, as I said, our private brand is name-brand equivalent. We used to be more of an inexpensive opening price point philosophy there. All those things position us very nicely. And I think the wealthier [ph] continue to do well, not necessarily our business and not necessarily our competitors, but with the stock market growth and with some of the things happening, they don't have the same rate of unemployment not even close as the core low income. So we think we're positioned well. We are in the discount business, and to be successful in that business you have to have figured out a way to compete with Wal-Mart, and those retailers that have not done so are not here. The fact that we have small stores, 10,000 square feet, easy in, easy out, basically have a streamlined assortment and still offer great value, which is appreciated by the consumer again, again positions us very well. I'd also add with the growth in our Food and HBA category, we're able to take share from food retailers today with our cooler program, the way we've set up our McLane arrangement. I think it's very nicely positioned us for the fill-in food trip which is so important to us. Hopefully that helps some, Deb.

Deborah L. Weinswig - Citigroup Inc, Research Division

And do you think that at this point there's an opportunity to offer different type of format, as you sail across the retail landscape, then it may or it may not be missing for your consumer? Maybe if you can think about what does and does not [indiscernible] needs right now?

Howard R. Levine

We're pretty happy with the size of box that we're with today. I like the fact that we do one thing. We're focused on one size box, one philosophy. We know who our core customer is. Clearly, we could open up bigger boxes if we felt we needed to. And I don't like to ever say never because there's always things that you might not think you'll ever do that you have to do. But given the new store opportunities and the fact that we think we can almost double the size of the chain in this country, doing what we're doing makes me feel very good about what we're doing in terms of the size store, the offering. We have a lot of opportunity to continue to enhance our assortment, improve our assortment. But we kind of like the small format that we're in today. We know that business, and for us to deviate from that, something else would have to happen to cause that. Right now, though, as I said we feel very good about what we're doing.

Deborah L. Weinswig - Citigroup Inc, Research Division

So as I mentioned in my opening remarks, you've obviously pioneered tobacco in the dollar store channel, can you just talk about it? If you take a step back, the idea behind that and just kind of [indiscernible] that?

Howard R. Levine

Sure. I don't know if I want to say we're the pioneer, but you probably are fair with that statement. So let me kind of take a step back and explain why we're in the tobacco business because we're not in the tobacco business because we felt there was some compelling reason to it. The idea behind tobacco was driven by our desire to use McLane to service our stores for our coolers. Previous to making our arrangement with McLane, which we have a 6-year exclusive with them, no one else in our channel can use McLane, we had a what I would describe as a disjointed supply chain in terms of the coolers. We didn't do it ourself, we had always outsourced and plan to continue to outsource that. About 70 to 80 smaller distributors who had a lot of trouble keeping up with our growth. It wasn't lack of sales. We were comping very positively in our cooler program, but when we look, our in-stock wasn't up to speed, our assortment wasn't as good as we thought it would be. So we began to study it several years ago to see what we could do to position the cooler assortment better for our consumer, and that we know we were going to adding cooler doors. We know it's going to be an important part of our fill-in food strategy trip. Yet when you're not in stock to the degree that you were and you don't have the assortment, we felt there was a gap there. We talked to McLane, we tried to figure out how we could get the drop size possible for them so they could make a little bit of money doing it without tobacco. We had a hard time doing that. The reason tobacco makes it work so nicely is if you're in that business you want to have small SKUs and high value. Tobacco is small and it's of high value, and that really bought the drop size large enough, to allow them to make weekly deliveries to our stores. So as a result, we've seen improved sales. And as I said earlier, this wasn't a decision that was made because we were disappointed or unhappy with sales. It had more to do with the fact that we sell tons of opportunity out there that was being met. So with the weekly deliveries, the fact that tobacco was part of that is only really a side benefit to the program. Tobacco was driving a lot of trips, that was the sole purpose behind the tobacco addition. And in addition to making McLane work, we knew it wasn't a high-profit category, we knew it was an overall category that was in decline. But we also knew that what many other merchandising items or assortment additions that we could make that skews so heavily to our core customer. Our customer is a smoker. And make no fact about it, we aren't growing that industry anymore, in fact you all know that industry is in decline, so we're taking share and trips from others. The basket that we talked about there has been very good and it's about 60%, 60% of the basket include another item which gets that average transaction up into the teens. Yes, it is a low-margin business, but this is very important to the overall McLane piece of the business and it's something that I think gives us competitive advantage over the years to come.

Kiley F. Rawlins

Just to add a little bit of color on the basket. So about 40% of our tobacco transactions are just tobacco alone. 60%, as Howard said, include some kind of attachment. The blended ticket to include basket just have tobacco, and basket that have some kind of attachment is about $13. So about $3 above our average transaction, which is about $10. When we just look at those transactions that have some attachment, as Howard said, that average ticket is close to the $17, $18, and that has been pretty consistent. We are just beginning to anniversary the tobacco rollout last year. We've rolled out tobacco between May and August in about 6,000 stores. So it's a little early, yet, to see sort of the comp trend we've been pleased with the rollout and that sales trend so far.

Deborah L. Weinswig - Citigroup Inc, Research Division

Has there been anything unexpected so far?

Howard R. Levine

In the tobacco business?

Deborah L. Weinswig - Citigroup Inc, Research Division

Yes.

Howard R. Levine

No. We had tested tobacco before we made the decision to make it part of the McLane program. Not from the standpoint of a sale, because we knew would sell a lot of it. It was could we control it from a shrink standpoint. And so, if there was going to be a surprise, it was going to be that we couldn't control it from a shrink standpoint. And we proved that during the test that we were able to control the shrink. We proved out since we've had it now for about a year that we've been able to control the shrink. So there's really not been any surprises. The business we knew we could do was just a matter of whether we could control it and we feel very good about how we've positioned the business.

Deborah L. Weinswig - Citigroup Inc, Research Division

All right and then in terms of the impulse fixtures, and can you talk about what that's done for your business as well?

Howard R. Levine

Sure. One of the programs that we added, and we're still evolving that whole checkout process, is we have what we call a drugstore checkout today in most of our stores, and as we renovate them, we continue -- that stores that don't have it get that drugstore checkout. But how could we enhance the merchandise selection as she's going to the checkout. And we felt that we had a lot of opportunity there, whether it was snack items or candy items which is very strong with our consumer. Other kind of knickknack items that they pickup, including magazine and other important SKUs that you typically would find at a checkout. So those are the new programs that are doing well. We're actually on our second, third iteration there to improve upon those things, and have some plans that we think will even be more productive than the way it currently sits.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then Kiley referred to in her remarks just some of the volatility in what you call the discretionary sector. Have you been surprised by the results? And I think you're probably one of the first, call it, pioneer in scaling back some of the square footage devoted to discretionary, which is probably led to less markdowns as a result as well. Can you talk about what you saw early on that led you to that decision? And what do you need to see, also, that you'd devote additional square footage there in the future?

Howard R. Levine

Sure. So maybe the best way to kind of talk through this is to take a step back for some of you that may not have followed us as closely. So our first quarter ended November, end of November. We finished November, the November quarter with a 6.5% comp, had a great Thanksgiving sell-through, had a great Black Friday event. Good comps. We felt very good going into the month of December. The month of December is our heaviest discretionary month. And we knew that it may not have been in the 6.5% to 7% range but we were expecting more, and so we were disappointed by what we saw in December. Our December comps were not up to the expectation. It was primarily a result of discretionary consumable business was very good. We didn't know what that was about because it kind of caught us by surprise. Whether it was the fiscal cliff conversation that was occurring and some of the negative impact on our core customer, that was being discussed as a part of that, impacted us, we weren't sure. But after the month of December, we really took a different approach to discretionary even more conservative than what we had before. Really cut back receipts going into the spring, and summer selling season to position a more conservative approach there. But as we walked through, we thought January and February would be improved and the first 3 weeks of January were fantastic, high single-digit comps. Then if you guys remember, we had this tax refund delay and something that really impacted us. We had a huge home event the last part of January, first part of February. And with the delay in the refund checks the next 3 weeks after the first 3 weeks of January, we're not good. We felt that had to do with some of the delay in the refund checks. We're concerned. Again, we were glad that we cut back on discretionary purchases in the remainder part of the year. We also took a hard look at expenses and got a lot of expense out to kind of readjust and reset the business. But as we continue to go through the quarter, we felt a little bit better in February. February was mid-single digits and felt that things were back on track and then we came to the month of March where we had a polarity in terms of weather from this year to last year if you all remember very warm last year very unseasonably cool this year, impact the discretionary even further. And so, at that point, if you're [indiscernible], then you're probably getting tired of hearing me talk about it because I get tired of hearing myself talk about it. But we felt there was a change. And we felt we needed to readjust our discretionary plans, given some of the challenges out there, and we've done so. So I feel much better about the way the business was positioned for the back half of our year. More cautious on discretionary, continue to see nice consumable growth and forecasted that for the third and fourth quarter. But they were tough, businesses. And if you understand our customer, they buy goods when they need it. So last March, when it was nice and warm, we sold a lot of fans, we sold a lot along the garden. We sold a lot of summer apparel. This March we sold heaters, we sold [indiscernible] fall and winter, and didn't get much and traction on lawn garden. And having been around this consumer in a while, that part wasn't as surprising to us with some of the issues that happened before that, but just given the volatility and uncertainty with that, we've kind of reset the business as it had gotten more cautious on discretionary. Continue to work on improving those things that we can control, so you all ought to kick me off the stage if I ever get up and say, "We've got everything squared away on our assortment." There's plenty of things we can do internally and that's where the energy has been on the company that really deal with some of those things that we can control, getting more focused on what's appropriate for our customer, they buy now, wear now, they use it when it's seasonally appropriate. So we need to continue to tweak and gear our assortment for that and feel very good about the way we've adjusted and positioned ourself for the remainder of our year.

Deborah L. Weinswig - Citigroup Inc, Research Division

[indiscernible] the margin opportunities. At the top of my head I can think about private labels, sourcing, technology, [indiscernible] and I'm sure there's [indiscernible] as well.

Howard R. Levine

Again, it's probably good to step back a little bit and talk about what we did before. So prior to about 4 years ago, global sourcing, we always have sourced good overseas, but it was done more on a buyer -- buyer-by-buyer. So if a buyer felt they needed to source globally, they would do so. If they didn't, they didn't. Same thing with private brand, whatever the private brand strategy was, it was more individual. Now there's a company-wide program where global sourcing is spread throughout the company, it's not optional in terms of where you go source your goods, the global sourcing team finds the factory, the global sourcing team makes the arrangement, checks the supply, it's not done on a buyer-by-buyer basis. Same thing with private brand. As I said earlier, it's name-brand equivalent, there's no exception to that. When we put our name, or our private brand name on an item, it's going to be as good as the national brand. And I encourage all of you to get in one of our stores and try it yourself, because I don't think there's any better proof than trying it yourself. Those 2 things, particularly sourcing and private brand, are really margin plays. Private brand is purely a margin play, it also offers our consumer a choice against the national brand, same thing with sourcing. Obviously, to deal directly with the factories is all a part of lowering our costs, giving us an opportunity to price our goods more competitively with our consumer, also to help us grow our margins. Those programs are fully up and running and they're doing quite well. Sometimes it's hard to see, given some of the lack of sell-throughs on the discretionary categories, but we can see in our PMU every month where we're getting improved PMU as a result of these programs and think that those will only continue to grow and will be a very important part of our overall strategy in managing and getting our margins back to where we want them.

Kiley F. Rawlins

So if I could add, just to put some parameters around our target. Today -- or at the end of fiscal '12, about 4% of our purchases were made directly from the factory. Our goal is to get that to 13% by the end of fiscal '15. So tripling, more than tripling, if you will, over the next 3 years, and we're on target with that. At the end of the second quarter we have increased that to about 6.5%. So we're very pleased with the progress that we're making there. On the private brand front, today our overall penetration is about 25% of our sales. But our discretionary businesses are mostly private brand. And so, our focus is really on the consumable side where our penetration today is 17%, 18% of Consumables. We think we can get that into 20% and then perhaps a little bit higher after that. So we have clear goals for private brand and global sourcing. We think that they will be help us claw back some of the margin pressures we've seen in the last year or 2, and we're on track with that.

Deborah L. Weinswig - Citigroup Inc, Research Division

Howard, could talk about some of your key technology initiatives right now?

Howard R. Levine

Sure. The role of the technology place in the business of our size, obviously, is very important to us. A ton of investments made and everything to support our global sourcing initiative, technology to support our private brand initiative, technology to help measure and manage our price opportunity. We're on our third generation of POS to ensure that we're staying up-to-date with our POS technology. We're in the process of refreshing all of our financials and HR, and then after that it will be our retail component of that. So technology has been a very important part of our success, helping us manage our scale, helping us get more effective and efficient, and I would only expect that to continue as time goes on, a very important part of the strategy, though.

Deborah L. Weinswig - Citigroup Inc, Research Division

What are you doing in the workforce management side right now?

Howard R. Levine

Workforce management is something that's critical to us also. When you have small stores, you have limited number of people, so a large part of our workforce is fixed, unlike big box retailers that may have a couple hundred people, we may have 5 or 6 people. So there's not a lot of options in terms of how you manage that, other to ensure that we get the task done that we want to get done. So there's technology out there where we have a portal that manages the task that a store is supposed to do every day, so when markdowns are supposed to be completed by the end of the day, we'll know, as a chain, where we stand in terms of execution, the store teams know what their expectation in terms of what to do. We've had the technology to help manage our California growth, as some of you know, that's almost like a foreign country in terms of the way you have to manage breaks, et cetera. We've got great technology to help manage that. But our labor is critical to us and the technology we're using there is helping us make sure that we're getting the labor, not only in the right place, but during the right hours of the day, and that we're providing enough labor to get the tasks done that we want to get done in our stores. So a completely different labor model in our kind of environment than in a big-box retailer, and it's something that we continue to evolve and figure out how we can be more effective and efficient there. This year, we're also kicking off an effort to try to simplify the workload in our stores. So we're looking at ways as to how we can more efficiently process the plate that comes into our store. A store gets about a thousand cartons a week and it's the store teams that have to put that up. So anything we can do to take time out of that effort is going to be critical, and we're testing and working on a number of things there. In addition to that, we're looking at all of the tasks that we've done, because we've added some things to our stores. Even the McLane arrangement now has required a little more work from our own store teams. So we're looking how we can use technology to help us there as well, and think that those will be some benefits to us in the next couple of years that are going to help make our store managers' job easier to run. Easier.

Deborah L. Weinswig - Citigroup Inc, Research Division

Can you talk about the opportunity in shrink?

Howard R. Levine

A lot of opportunity in shrink. I think when you look at the kind of business we run and the kind of market that we're in, our shrink is probably higher than some of the other kind of retailers out there. We're up a little bit. We think a lot of that is driven from our manager turnover increases, which has been driven by a lot of the initiatives. We really worked our teams harder than last year. I talk about the fact that we did 2 years' worth of work basically in 6 months when you list all of the initiatives and things that we did. And one of the side effects of that was the pressure on turnover, which I think, in turn, pressure shrink. I like another month or 2 before I start to say that manager turnover stabilized, we're about there. It looks like it's peaking, which is a great lead indicator for shrink and also a great overall indicator in terms of the way our stores operate. If we can get managers to stay with us longer. They've been through a holiday. They've been through some of the things that we have to do in managing a small box, the company's metrics are better across the board there. So along with shrink, we think the overall operability of our store is better as we get turnover down. And, as I've said, we did some things to impact that, we're looking to call that back and get that back down to where we think is a more appropriate level.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. I'll ask one more question and turn it to the audience. Can you just talk about the idea of a transactional website?

Howard R. Levine

Sure. As it relates to our business, we think there is definitely technology that helps us communicate more efficiently with our customer. Today I'm not sure I see a profitable model where we sell goods over the Internet that could be an evolution that says they can order it over the Internet and pick it up at our store. I think, in our kind of business, that makes more sense when you think about if you need Tide to do the laundry today, first you need it today so you can't wait for it. Secondly, I would tell you I think it costs as much to ship it as it did to buy it in the store. So I don't view some of the Internet shopping threats that are talked about in some of the other channels as important to us. It's something that will see evolve and something that we're going to watch closely. Where I do think there is an opportunity for us, and we're doing it today, we have the 3 million Facebook followers partners, we've got a huge database of e-mail and phone numbers to text and distribute specials and things of that nature. In fact, I get them -- got one Sunday, so what we had on sale so a consumer can more effectively see what's happening. So with the addition to what we're doing in terms of circulars to communicate specials and deals and offerings, and think that the technology there is going to be very efficient and cost-effective. So that's where I think most of our opportunity is in terms of Internet utilization.

Deborah L. Weinswig - Citigroup Inc, Research Division

Thanks. And now we'll take a few audience questions.

Unknown Analyst

I got a few questions. Number one, you mentioned with your remodeling program, what percentage increase are you seeing in the sales in those stores once they're remodeled? That's the first question.

Howard R. Levine

Great. Where are you? I can't see you.

Kiley F. Rawlins

We're back here on the left.

Unknown Analyst

And then the second question. With the exception of McLane and your tobacco suppliers, what are the top 3 or 4 vendors that you buy products from? And then lastly, what in the -- do you think Obama Health Care coverage is going to have, in terms of [indiscernible] costs in the company?

Howard R. Levine

Okay. So I'll -- let me start with the last one and then I'll go backwards. And Kiley, if I forget, you have to help me. So in terms of the health care plan, it's something that we're in the midst of figuring out right now, what I can tell you is fortunately for us our fiscal year starts in September so we'll be -- we'll have 4 months under what I'll call health care program that we're currently in today, and 8 months where it's going to be this new deal. So we're able to almost split it up a little bit so the impact in one year won't be as dramatic as we initially thought. But it is going to be increased costs to us. It's going to cost our team members more. I frankly don't see a lot of benefit in terms of what it does in affecting Family Dollar, and it is not a concern to us what it does to the overall environment and the overall economy. And all of the uncertainties and all of the questions that have not been answered yet, when this program is about ready to start in another 6 months, is mind-boggling to me. And so I have concerns about it, Family Dollar will execute and be fine, but it is going to be a lot of work and a lot of distraction and a lot of challenges for us. So we're preparing for the worst, hoping for the best and think like a lot of things that we'll get through it just fine. Your second question?

Kiley F. Rawlins

Top vendor.

Howard R. Levine

Oh, we deal with all of the major consumer product companies. I think our largest vendor, as stated in the 10-K last year, was Procter & Gamble, but between Procter & Gamble, Kimberly-Clark, you name them. We do business with all of the major consumer product companies out there.

Kiley F. Rawlins

And then with respect to sales lift from renovation, we have -- we started the renovation back in fiscal 2011, and we have seen about a double-digit list to the store in our first year of renovation. We see some obviously slower growth as we anniversary-ed that, but we've been pretty pleased with what we've seen in year 2 and in year 3.

Unknown Analyst

You see double-digit lift, 15%, 10%?

Kiley F. Rawlins

It's closer to 10%, and that's lift, not comp. Right? So if you had a store that was running at 2% before the renovation, it would have probably been closer to 12% after the renovation. Howard, do you want to talk about the brand importance of that -- of the renovation?

Howard R. Levine

Yes. Thank you for that question, Kiley. When I talk about our renovation program, I really think that's the biggest change that -- and improvement that Family Dollar can make for our consumer. When you look at a newly renovated store or you look at a brand new store and how that unpacks the consumer shopping experience compared to the traditional store that has not been remodeled, it's like night and day. So that's also aiding the chain, one of the things that we're doing today. We really never talked about Family Dollar as a brand like Coca-Cola is or Dial soap or Clorox is. We now talk about Family Dollar as a brand and what we want that brand to stand for and what we don't want it to stand for. And that is really incorporated tremendously into the new stores and the renovated stores. Something that's new and different and I think it's really going to help improve the perception that, not only Family Dollar has with the consumer, but the overhang that the Dollar Store channel has with the consumer and really bringing us up to scale, not being -- as I said, I put our new stores and our renovated stores up against the best in terms of the appeal, the shopability, the assortment, and it really has enhanced our view of -- with our consumer today. So it's something that's really important to our future. And even if the returns -- what I say is the returns are okay, but even if the returns were not okay, I always worry about what would happen if we didn't do this. And I think the fact that we are doing this positions us for the future, we're not in the categories of Kmarts and JCPenneys and some of those others that have waited and have not invested in their chain. And so again, I think it's really important to us and something that we're really excited about.

Unknown Analyst

So could you talk a little bit about your competition? Based on what you said, you will have about 15,000 stores very shortly, that would mean that in the United States you'll have 40,000 dollar stores, based on -- your competition, maybe 45, tell me about what you think about this statement and also the fact that what does your competition today offer you? As the -- how strong is the competition?

Howard R. Levine

Yes. Well we're in a channel that has some of the top retailers in the country today. And -- so I like being compared to the best. And before I move on, I'd have to say while they're most like us, our largest competitor is Wal-Mart. When we compare ourselves in terms of where our consumer shops today. The question of saturation has come up for many, many years when I talk about Family Dollar. It usually happens when there's a slower period like we're in today. And the confusion that it's saturation versus, maybe, macro or maybe company-specific execution issue. But the reason I believe that we're going to continue to see that growth is when I look at the consumer today and I look at what I think is going to happen over the next, say, 3 to 5 years. I was talking about this earlier, hinting to this a little bit earlier, is I don't think there's any doubt that there's going to be more people in this country that need value and need to save money, and I don't think there's any better place where they can do that than in our sector, and I'm going to speak specifically from Family Dollar because I think we're doing what we need to do to position ourself for that. Whether the government is going to put additional entitlement pressures, whether it's unemployment going down, or food stamp utilization going down, or probably the most important thing that I'm concerned about is creation of jobs for low-income folks. When you look at the low income consumer, who at best has a high school education, and the unemployment rates there, it's unbelievably high, it's in the teen. When you look at college-educated folks, it's in the low-single digit. So I'm concerned about that. But a part of me says that positions us very nicely because those people really need the value and the convenience that we offer. We're located in the neighborhood. You can take a bus to our store we're conveniently located to where our consumers live. In fact our average trip is less than 2 miles. I think that positions us nicely for that fill-in food trip. I think it positions us nicely for a lot of fill-in food trips, and HBA trips as well. I'd also say that from a pricing standpoint that we enjoy a very good price perception out there. In fact, while it's not true, our price perception is better than Wal-Mart. That's what the consumer tells us. Now we don't intentionally try to price that way, but we know we have a great price perception out there. And the last thing I would tell you, and I hinted about this earlier, is I think there's going to be a large part of population and we're starting to see that today that's 40,000-, 50,000-, 60,000-range customer that is also going to be shopping with us more. The appeal or the negative appeal of Family Dollar in the dollar store segment is slowly going away. The fact that 60% of what we sell is national brands today. I mean, we -- and people today still think, "Well that's tied in the same tie that Wal-Mart sells." So we still are fighting that up to [indiscernible], but it's starting to slowly go away with the improvement in our quality and our shopping conditions and the overall appeal of our store. So that -- and then there's one other thing I would like to spill out, the fact that our population is aging. And I can get around in the Wal-Mart if I wanted to, but older folks don't want to park in a large parking lot, don't want to deal with a large store, particularly when they got to pick up 5 or 6 items. So that role in the shopping experience for the consumer is only going to continue to grow. So I believe those numbers will hold true. I believe that there is that kind of opportunity to grow the channel that much, and feel that we have to execute to get there didn't [indiscernible] I think we're going to -- as we were talking about, we've got some great competitors out there. They're not going away, but we think we're working on the right things. We think we're doing the right things to position ourselves for that and we feel very good about it.

Deborah L. Weinswig - Citigroup Inc, Research Division

Great. Well thanks so much and we have to wrap it up here. If anyone has a question, I think they can follow Howard out. Thank you.

Howard R. Levine

Thanks. Thank you, all. I appreciate it.

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