Dollar General's (DG) CEO Todd Vasos on Corporate Investor Day - (Transcript)

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Dollar General Corp (NYSE:DG) Corporate Investor Day March 24, 2016 9:00 AM ET


Mary Winn Pilkington - VP, IR & PR

Todd Vasos - CEO

Jim Thorpe - EVP & Chief Merchandising Officer

Jeff Owen - EVP, Store Operations

Mike Kindy - SVP Global Supply Chain

John Garratt - CFO


Paul Trussell - Deutsche Bank

John Heinbockel - Guggenheim Securities

Dan Wewer - Raymond James

John Zolidis - Buckingham Research Group

Brian Cullinane - Wolfe Research

Stacie Rabinowitz - Consumer Edge Research

Ed Kelly - Credit Suisse

Vinnie Sinisi - Morgan Stanley

Scot Ciccarelli - RBC Capital Markets

Wayne Hood - BMO Capital Markets

Alvin Concepcion - Citigroup

Unidentified Company Representative

Ladies and gentlemen, please welcome to the stage Dollar General's Vice President of Investor Relations and Public Relations, Mary Winn Pilkington.

Mary Winn Pilkington

Thank you. Welcome to our 2016 Investor Day. And I'd also like to welcome those that are listening via webcast. So here's our agenda for the day. We have got a full time and we're going to take a break after Jim Thorpe makes his presentation and then we'll come back with Jeff Owen, Mike Kindy and John Garratt and then open up for Q&A. But first I have to get through my disclaimer here. So please note that today's presentation contains forward-looking statements within the meaning of the federal securities laws regarding our strategy, plans, intentions or beliefs about future or current results.

The actual results might differ materially from those projected in the forward-looking statement as a result of a variety of factors including those set forth in the risk factors section of our Form 10-K filed with the SEC on March 22, 2016. You should not unduly rely on forward-looking statements which speak only as of the day they are made. We disclaim any obligation to update such statements except as may be required by law. We will also discuss today the financial growth model that we announced in our March 10, 2016 press release. Today's presentations do not update any of the annual targets contained in the financial growth model as previously disclosed and do not update any other information regarding our outlook for 2016. Today's presentations also include sample calculations to demonstrate the possible results generated by successfully executing the growth model over multiple years.

These sample calculations are presented solely for illustrative purposes and should not be considered guidance regarding our expected future results or performance. Finally, today's presentations will contain certain information that has not been derived in accordance with GAAP. You can find reconciliations of such measures to the most directly comparable GAAP measures on our website located at under investor information, conference calls and investor events.

We're so excited you all are here with us. I hope you all enjoy the presentations and with that, let's get started.

Unidentified Company Representative

Please welcome to the stage Chief Executive Officer, Todd Vasos.

Todd Vasos

Good morning. How is everybody? Good. Well, a lot more people here than I thought might be after last night. Did everybody have a good time last night? Hopefully so. Dinner was good, the conversation was great and hopefully you got a chance to get out and see lower Broadway a little bit. So today I think you're really going to enjoy the program today because you are going to hear from my team about how we're going to continue to drive this business as we go out into the future and looking out to 2020. So real quickly, what I'm going to talk about to start is our strong track record of results, talk a little bit about that, talk a little bit about our addressable market opportunity, our operating priorities for growth as well as our vision for Dollar General as we go forward.

So let me start with that track record that I talked about. If you look, 26 consecutive years of same-store sales growth. I'm not sure who else has put those kind of numbers up but I bet it would be hard-pressed to find folks especially in consumable retail, that have put up this type of numbers. And the great thing here is over this 26 years, obviously there's been good economies and there's been bad economies. There's been recessions and great recessions and there's been a time of good activity but you can see we flourished through all of those times. And I'm really fond of saying that in good times our customers have a little bit more money to spend and in tougher times, they need us more. They need us because of our EDLP stance and because they know they can get the products they know and trust at Dollar General. The other thing that we really watch closely is our share both units and dollars.

You can see here for the last four years we have grown share and if you really dial the clock back even a couple years before that, we've grown share before then as well. But the important thing here is to remember that we like to see unit growth going faster or growing faster than dollar growth. That may be somewhat counterintuitive but when units are driving through the box, we know the sales will come and we're not concerned about trade down. I'd rather a customer walk out of our store if she comes in with $10 with five or more items versus one or two items. And so units are very, very important to our consumer to be able to get the value that she needs at the price she needs. So units should always grow a little bit faster than dollars. You can see in 2013 we had a little blip there. Many of you probably remember that's when we introduced cigarettes which had a much higher retail, higher than our average ring.

So it drove up those dollars. The other thing that we really watch is we're on our 32nd consecutive quarter-over quarter growth in both traffic and basket. That's pretty impressive when you look at that because again, this is about driving units through the box and trips to the store. What we strive to do is to make sure that when she gets into the store she finds what she needs and we have a profitable sale attached to it. A big piece of our success really lies in our pricing model.

Our pricing model has been unchanged for many years now and many of you have seen this chart in the past or have listened to us talk about this but we're very proud to say that our prices are at parity with mass, about 20% lower than grocery every day on the shelf and about 40% lower than drug. And again, when you look at what our consumer looks to at Dollar General, it is getting the item that she wants but at the price she can afford. So it's always about the intersection of value and convenience and it's hard to get your head wrapped around that sometimes especially when you don't live the life of our core consumer. But she is always looking at a way to stretch her budget and always looking to better her family in some way. And we offer that through the value that we create through our category management processes but also through that pricing model that we rigorously go after. By the way, we check prices every two weeks in our top 250 and we check prices across our entire 10,000 SKU portfolio about once a quarter against again all the disciplines you see here of mass grocery and drug.

So we know every two weeks exactly where we stand on retail prices on the shelf. And when you put all that together and the hallmark of our model is the strong financial performance that we have seen over the past years. Just got finished with a very nice 2015 but how we look at this is that it's our goal to be an EPS compounder. That is our goal with this model that we have here and this business model generates a tremendous amount of cash. You can see the amount of cash that we've generated from operations over $5 billion cumulative in the last four years and if you look at what we returned to our shareholders, about $3.5 billion, $3.7 billion over the last four years. So once again, consistency I think is important here and you can see we're very consistent in how we operate and how we return cash to our shareholders. The other thing to really keep in mind when you look at this is that this journey is really just starting. When you look at what the addressable market opportunity is and remember how we look at addressable market is anyone that sells what we sell is a competitor and is in the addressable market.

So the addressable market is almost $800 billion out there, a big, big number. But when you look at it, the drug channel by itself is only about 4.4% share of that very large pie, very large pie. But you can see over the years because of driving units, driving market share, opening new stores, being a leader in small box retail, you see we've generated a lot of sales. Since 2009, we essentially almost doubled the size of the Company and just crossed the $20 billion mark in 2015, quite a milestone for our Company. A big piece of that success comes in our real estate program and those of you that have been following us for a while probably remember we talked about in 2009 having about 12,000 opportunities to put a store, a Dollar General Store in the Continental United States. Not overseas but just again in the lower 48 if you will. Back then, we thought well that 12,000, that's a big number, that's a real big number and we started to open stores. We as well as the other part of the industry opened a lot of stores and you can see we've opened up about 8900 stores during the timeframe.

And then in 2013, we actually went and looked at the entire portfolio again. We have new tools that we use to layer on top of what we had already been very successful with and what it did was it opened up some new markets for us. It opened up trade areas that we didn't think just a few years ago could house a Dollar General Store. Between the new tools that we have in real estate and this economy that continues to create more of our core customer each and every year, we feel that today we have nearly 13,000 opportunities. So remember all the stores we've built when we thought we had 12,000, we still have 13,000 opportunities in the Continental United States. And if I was to wager, I would tell you that as we continue to move through the years, this economy is going to continue to create our core consumer and I'm sure we're going to see new and better opportunities start to emerge in our real estate portfolio that we don't even see today.

But for right now, we feel very confident and you'll see in a moment about these 13,000 opportunities to put a dollar store out there in the United States today. And when you look at what our share -- remember that 4.4% -- this is looking at our core consumer spending, the dollar channel has about a 5% share, a 4.9% share. And if you take a look, Dollar General has the lion's share of that, about 2.8% of that market share that is out there in our consumers' wallet today. Obviously we know she spends the majority of her disposable income at mass. We know that but when you look at when she does spend in the dollar channel, she spends it with us first and the most and if you break it all the way down on the far right-hand side, you can see for our core consumer we enjoy about a 56.5% share of her wallet. So again what she has available to spend, we're getting about 56% of that spend. Now, it still shows that we have a great opportunity. Right? We have an opportunity to take share over on the far left. We also have opportunity even within our own channel to continue to garner more share when she does shop the dollar channel that she comes to us more often.

So that's how we look at this. When she is spending 95% of her income somewhere else, there's a real opportunity for Dollar General to capture that. And when you look at where that capture can take place, I think what you will see is in some categories today we have a real good share. Like for instance, paper and chemical, we have about a 20% share of wallet today with our core consumer. That's a pretty healthy share. So when she goes out and spends with paper and chemical, she comes to us quite often. But as you start to look at other core categories such as health and beauty, food, candy and snacks and perishables, you can see that the opportunity is great, it is vast. She is not spending as much in our stores as she is in all other outlets in these areas. So in lies the opportunity. And you heard from us over the last quarter or so talking about in 2016 and 2017 and beyond, we're going to be taking a look at how we expand categories to drive that market share. We talked about the expansion and you'll hear from Jim Thorpe in a little while, on health and beauty. You heard us talk about the immediate consumption opportunities that we have out there.

And of course, you heard us talk about expanding our cooler presence, our freezers and our refrigeration. Remember, today, we're putting them in with our new stores and remodels at about 20 to 22 doors. Just a year or more ago, we were opening up 16. Our average today is only about 11 cooler doors a store on average. And there is the opportunity. And the great thing about really running after that opportunity is that we know what the consumer wants. Remember, between our market stores that have over 55 coolers in it, our Dollar General Plus stores that have 32 coolers and it, we know what the customer shops and how she shops the dollar channel. So we're not actually taking any kind of a flyer here, we know exactly what she's buying at Dollar General.

So we're just going to replicate from those stores into our traditional stores. So we feel very confident. And the other great thing is this initiative is backwards compatible meaning with our average store, our legacy stores probably with only about seven, eight to nine cooler doors in them, the opportunity is great. Before a remodel to come in, maybe put in another five or six doors to get them closer and closer to that 20 door set that we talked about. You'll hear that from Jim in a little while but the addressable market is very big for us still. Let's talk a little bit about the operating priorities that we have to garner all that share that we need to garner. The team has really rallied around these four priorities, driving profitable sales growth, capturing growth opportunities, enhancing our position as a low-cost operator and then lastly, investing in our people as a competitive advantage. I like to say our people are our secret sauce. We'll talk about that in a little while.

So let's talk a little bit about driving that profitable sales growth. Well, when you look at Dollar General, we have 10,000 core SKUs that we operate with each and every day. Much, much different than drug and grocery with 20,000 up to 40,000 and then the mass guys up over the 100,000 SKU type of number. So with 10,000 SKUs, every SKU has to work hard, has to be productive every day. And with our great category management processes that we put into place well over seven, eight years ago, I can tell you we have one of the best category management processes and teams in consumable retail today. They know who to our customer is and they know how to serve that customer. We show it every day in how we leverage category management against our sales. But as we look at balancing that growth, we need to make sure we're taking care of the customer both on consumables and on the non-consumable side of the ledger. You see all the work we've done in non-consumables over the last few years has really paid off. We've had now eight consecutive quarter-over quarter increases in our non-consumable categories, very good to see, very good to see.

Remember, when I said earlier if the consumer has a little bit more money she spends a little bit more with us if you give her what she wants and that's exactly what we have done here and through our category management processes. The other area to drive that profitable sales is being in stock. There is nothing a customer hates more than to come into a store, I'm sure we're all the same way -- to buy something just to get to the shelf and it's not there. That makes a customer madder than just about anything else you can do to them. About six to eight months ago, we launched a real initiative around to improve our in-stock position, our on-shelf availability as we refer to it. And our opportunity is to make sure that we have the products that are customer wants when she comes in a store and has it for her at the right price. This initiative really, the nuts and bolts of it started back early last year when you look at our sky shelf program. Putting the sky shelf program in first was one of the keys to that. But also another key to it is making sure that product gets out of the back room on a timely basis. The one important thing that our store managers have to do each and every week is to get the truck unloaded and onto the shelf. That's the biggest, the first and only biggest opportunity that they have each and every week and to get it up faster is the right thing to do.

So what we've done is we've put a process in place to work the truck faster and in the stores that are higher volume and have some other attributes as you know, we took about 3100 stores and gave them more labor last year and that labor was dedicated solely to making sure product was on the shelf. And I can tell you and you'll hear from Jeff in a little while that that initiative worked. It worked exactly the way we thought and here's why it worked. Think about it this way, this is the easiest way to grasp this is that today our stores on average take about three days to put the truck up from the time that lands at the back door to the time it gets all worked and onto the shelf. In these 3100 stores, what we've done is asked them to get it up and one less day. If you think about it, one more day of in stock to the consumer is a big deal. And remember the majority of our stores only get one delivery a week, one delivery from our warehouse a week. So if you can get the truck up a day earlier, there's more in stock for our core consumer, so more to come there. We think this is the right area to push on and we will continue to drive this into 2016. The other leg of this stool for us is owning EDLP. Now we've done well with everyday low price for quite a while but continuing to own it is what we're all about.

Again, as I said, we check prices constantly, constantly to make sure that we have the right price for the consumer when she comes in. But also on price, it's that balance of affordability and value. Our core consumer will tell you and we hear it all the time, you may have the best price on a national brand shampoo but Dollar General, I just can't afford that larger size. So having the ability to have a smaller size of a national brand at the right EDLP price gives her the ability to try it, the trial. It may be a small size, it's not a trial size like you would take on an airplane but yet it's probably half the size of a regular sized bottle of shampoo. But I can sell it to her for $1.50 instead of a $3.50 item as an example. And if I can do that and she trusts that she can buy it and not have to make a mistake because once again, our core consumer can't make mistake, they are scared to make a mistake because they don't have money to correct that mistake if they buy the wrong item.

So it gives her the trial she needs and then as she gets confidence in that she trades back up and as she trades back up, she will buy the larger sizes when she has the money. So again, we're not worried about trade down here. We're worried about making sure our customer gets what she needs and we have that whole value equation well in hand. The last leg of this is enhancing our gross margin. We have been talking about this for many years. The opportunity is still out there in all of these areas of category management, in shrink. As a retailer, you are always working on shrink. Shrink will always be there and will always be most likely our largest opportunity in gross margin. Distribution and transportation, you will hear from Mike Kindy in a little while talk about the efficiencies there that they've been able to garner over the years and what they've got coming up that helps drive that gross margin for us. Our global sourcing efforts, Jim will talk a little bit more about that, private brand and of course, our non-consumable efforts to make sure we balance that mix.

Number two is capturing those growth opportunities. With 13,000 opportunities out there, we opened up 730 stores last year, we're opening up 900 this year and I'm sure many of you saw we announced yesterday we're going to open up 1000 stores in 2017. That's aggressive growth but it's growth that we can manage and when you look at the returns, I don't know about you, but I would give my personal investment money to anyone that tells me and show me that I can get an 18% to a 20% return on my money and that's exactly what this new store profile does for us. And you will see in a minute we've got some of the best returns that I've seen in consumable retailing out there. But when you can return at a fast rate and you can build the stores as inexpensively as we build them, that's why we're opening more stores. That is how we're going to get market share in a lot of these both metro areas and in our rural areas. You couple that with our aggressive relocation and remodel program. We've got a lot of opportunity, 3500 opportunities today to remodel and relocate stores. With 12,500 stores and knowing that you want to touch your assets every seven to 10 years, there's always going to be a pipeline, always going to be a pipeline of remodels and relocations to work on.

I'm going to show you in a minute how our market planning team and our real estate team look at both our new store's relocations and remodels in conjunction with each other and then new concepts. We're a leader in small box retailing and we're a leader also in new concepts. If you take a look at the concepts that we've put together over the years, our Market Store concept, our Plus Store concept, of course our traditional box continues to generate huge returns for us and that we even continued to refine that. And those that will go on the store tour today will see some of that out there which is very exciting, what we call our DG16, but also looking at new ways. We talked a little bit on the last conference call this little bit of a smaller store that we've been testing.

We tested 30 stores in 2015 with exactly the right mix between smaller areas in metro, smaller stores and metro and smaller stores in our rural communities. Between those 30 stores it was pretty balanced between the two areas and what we saw is exactly what we thought we would see and that is the productivity in that box we can drive the sales we need, the margins we need to be successful. And in metro, it really heightens our capture rate. In metro, it's a little tougher to find enough real estate to pop our 9100 total box or 7200 square foot store but it's a little easier -- we found it to be a little easier to find locations, great locations, for this 5700 square foot store. The other thing it does in rural communities, it touches areas that we did not look at before because the households were too small, not enough rooftops in the area. As a matter of fact, in a lot of these rural areas, these aren't even towns or municipalities, they are more like crossroads in the very rural communities. What we're finding is as we put a store in these crossroads, the customer is finding us and driving five to 10 miles to us like they used to do to mass back in the day. Probably the closest mass retailer to most of these consumers is probably 40 plus miles away when you look at it. The closest Dollar General in many cases to these stores are 10 miles plus away.

So these are very rural communities. So we think as we continue to move forward that we can open up stores with the smaller box and be more productive in those low household areas as well as metro. We're going to test 80 more this year out of our 900 that we're building. But make no mistake, that traditional store, that very productive 7200 square foot salesforce store is our go forward store and will be the lion's share of our development in 2016. Let me give you a little bit of a flavor on how we look at real estate. How we look at it is this. We start with all these seed points out there in the Continental United States. There's probably about 800,000 seed points out there. Well, you are not going to put 800,000 stores. These are areas where people congregate, whether it be churches, post office, shopping centers, so it's where people congregate. What we do then is take those 800,000 opportunities and we start to boil them down. We layer on our demographic and segmentation work and we know that customer better than anybody. We layer that on top of those opportunities.

We then layer on top of that what is the density in those areas, how much competition is in those areas, what is the competition make up in those areas? It boils those numbers down and then we lay our proprietary data on top of that. So our customized Dollar General data and that's how we get to that 13,000 opportunities, those seed points, if you will, that are out there in the Continental United States today. And it has served us well, it has served us well. If you take a look, our average new store investment has stayed pretty steady over the last few years. Our real estate team has one motto. It is a zero sum game. If we want to add investment into the store like more coolers, we have to find a way to make that investment pay so what we do is look for ways to take cost out of the building whether it is the building material, whether it is the way we build it, the size of store. Whatever it may be, we look at ways to make sure that if we add costs, we're also taking out costs. And you can see over the last few years, we've done just that because it has stayed pretty steady. We can get into a store for about $250,000 a door.

Our new store sales have really kept pace nicely. This is an index to what we forecast 18 months out in many cases of what those sales are going to do. And you can see over the last couple of years, we've over indexed. We have about 2% over what we thought we would do. And the EBITDA contributions are running exactly the same, about 2% over where we thought they would be. Again, that's with expanded store growth. That's why we feel confident in the 900 we're going to build this year and the 1000 we're going to build next year. The economics are fabulous in a box like this. Our first year, new IRRs, look at that last year, almost 21% after-tax IRR. Again, I don't know but I don't know very many out there that can claim that and that's why again we're very confident in that real estate model going forward. If you take a look at the payback, less than two years, 1.7 years last year and you can see it has stayed pretty steady, it has stayed pretty steady. Here's where I want to really show you how our real estate team and our market planning teams work together to look at different markets. This is a real market I'm going to show you.

We're going to call it a small town, we really don't want you to know where the market is but it's a real market. You can see back in 2009, that market was defined by about a 24 to 30 mile radius, had nine stores in it. We did $16 million of business out of those nine stores but here's the important factor that we look at. The sales per household was at about $371 a household, here is that trade area on a map and here are those nine stores in 2009 that I talked about. So what our real estate team does is -- and there's hundreds, hundreds of these trade areas out there -- they go through these trade areas each and every year, hundreds of them and they look at where's our store position today, has the demographics changed in these areas? If competition is going to come into this area, where would you think they would come and what we should do to blunt that entry? It could be another store, could be relos or remodels, whatever it may be. And then lastly, how do we capture more of that household spend, remember that $371 I showed you. So if you look at this trade area, between 2009 and 2012, there were nine more opportunities to build a store.

We saw nine more opportunities to build stores. We took advantage of -- as you can see, four of those in the last couple years. We also remodeled and relocated six additional stores, so three each actually. So we had 13 projects that we've done in the last three years in this trade area alone. By doing this, we're capturing more of what that consumer spend is in this trade area but we're also locking out the competition at the same time. So you look, we then layered on end of 2012, remember I told you in 2012 and 2013 we had some new tools that we put into place and you can see that it showed us where we don't even have enough stores. There's nine more additional opportunities for a store to put out in those areas. Well since 2012, we've opened up four of those and you can see where they are at. We still have five more yet to go but you can see where we've blanketed this trade area now. We have made it very difficult for someone to enter and we've been able to now make sure that our consumer can be waited on in a very convenient manner without having to drive too far and have a Dollar General close by.

So let's see what now it looks like. So these are real numbers from a real trade area. So remember our store growth? We have nine of them back in 2009, we're now up to 17. We still have a few more to build out but take a look at the sales. We've almost doubled our sales since 2009 and by 2020 our goal is to open the rest of those stores and we will be taking about $44 million out of that trade area. Here's the real number to look at because a lot of people say well gosh you are cannibalizing yourself. Here's the real number right and that is that sales per household, $371 remember back in 2009, look at it today, almost double today and it will almost triple by the time we open up those stores by 2020. This is how we look at every single market. This is why we're confident in that real estate portfolio that we talked about and this is why we're confident that we have cannibalization well in hand.

And again, I would much rather open up stores in these trade areas than to have someone else come to do it first. We talked a little bit about that small format store. Stay tuned, there's more to come on that. We're in the infancy stage. Again we've worked with 30 of them last year, we've got 80 of them on the board for this year. Just stay tuned, there's more to come on that small store because we think there really is something there that we can take hold of and be able to leverage in both metro and that is very rural areas. I love this map. I have this map in my office. That's a pretty cool map. This is everywhere we have a store today and where those opportunities lie today. And you can see where all that green is is where those opportunities lie. While we won't get all 13,000, it is our goal to get the lion's share of those 13,000 and to get them in the areas where first to market matters in trade areas where you probably only need one store for the next seven to 10 years. I'd rather it be a Dollar General and that's how we're looking at our portfolio as we go forward. Enhancing our position as a low-cost operator, you heard me talk a little bit about this.

John Garratt is going to come up and talk to you about zero-based budgeting in a few minutes as well but the great thing about this is being a low-cost operator is in our DNA, it's part of who we're, it's part of who we're. Over the last few years, we've been doing a lot of work around mining for cost reductions. We put in centralized procurement a few years ago that's paid big, big dividends for us, save millions of dollars. Mike Kindy and the supply chain team took over our fleet maintenance, truck fleet maintenance not out long ago, a few years ago to save millions of dollars just to name a few things that we've done. And remember when we talk about reducing costs, its costs that the consumer doesn't see. They don't see that kind of stuff which is fabulous, you can take cost out of the system. The other thing we've been doing and working very hard and continue to do and we're accelerating is work elimination and simplification. This is more geared toward our districts and our stores. This is a simple business and we need to treat it that way. We need to make sure that our store managers have the tools they need to be able to service the customer, get that truck up like we talked about and not have to worry about other things.

Our teams in conjunction with operations, merchandising and supply chain and of course our IT because technology plays a big piece of this, working hand-in-hand to take work out of the stores both to simplify the work they do but also eliminate some of the work that they do. One of the hardest things to do when you create something is unwind it. It's easy to unwind it if you didn't create it. It's hard to unwind it if you created it and that's why this cross functional team is so important because what might have worked three, four, five years ago may not work as well today. It may just be adding additional cost without the benefit really being there. And so we're looking at everything that we do, everything we ask our stores to do and at times we're unwinding things that we did just three to four years ago because again it's not as productive as it used to be. Then you layer on top of that zero-based budgeting. We instituted zero-based budgeting, started the initiative in earnest back in September of last year and it is alive and well.

Again, that zero-based budgeting is back office, it has nothing to do with our stores, our district managers. It has to do with our back office functions and how we operate. The great thing is that there's always opportunity. In 2015, our leverage point on SG&A, our same-store sales leverage point was about 3.5%. If we didn't do anything, it was rising. You can see it was on the way up. Over the next couple years, it would have been closer to 4% than it would have been 3.5%. I think that is not sustainable long term. All the work that we've done in the last few months has taken out leverage point down to 2.5% to 3%. And by the way, that's after a pretty hefty investment back into our stores. We took a lot of the savings that we already have seen and will be seeing in 2016 and have returned a lot of it to our stores, to make sure our stores are neat and clean, that they are staffed properly, we get the truck up, all those things.

So, more to come on zero-based budgeting and more to come on that leverage point because I truly believe that leverage point where you see it today can even go a little bit lower as we continue to work through the next couple years and then lastly, investing in our people as a competitive advantage, I said it earlier our people are our secret sauce. Our secret quite frankly when you go into our stores is our employees are our customers and vice versa. They are one in the same, they are one in the same and that's what's important. The great thing about Dollar General is and you look at it, we've got 9000 store managers today that have been internal promotes to store manager.

A lot of district managers, regional managers, the tenure is very good at Dollar General. I think that speaks volumes to our culture and it is all about culture. When you look at our store manager and I'm really fond of saying that most of our store managers start out as an hourly clerk in our stores and they probably started out with a job and ended up with a career. That's how we look at it at Dollar General. You start out with a job but you end up with a career. Where else in less than three years could you start as a clerk on average and be a store manager? Here at Dollar General you sure can. And many, many, many, many of our store managers have done just that. But also investing in them in the future, training. Training is so important both for our district managers and our store managers. You will hear from Jeff Owen about all of our training programs and what we have been doing and how we've revamped our training over the last year or so both for our districts and our stores but reinvesting at all times into training is very important.

And again, I think we're being recognized for that as well. You can see we were ranked number 18 in the top 125 from Training magazine last year on our training programs. So again, that was up I think from about 25th the year before. So a lot of good work here but it's an investment that really pays off long term. And then building that leadership bench, succession planning, is very important here. You see it in the senior ranks, you see it in our office and you see it all the way down to our stores. Two to three times a year we meet as a group and we talk succession planning and not only talk about it, we actually put together action plans for our people and we put together not only action plans but also for our high performers, we put together plans for them to take on additional responsibility to do things a little differently to ready them quicker for the next step. I believe this succession plan is another part of our success here at Dollar General in that we do like to promote from within any time we can. And speaking of a pretty talented team and having it I've got one of the best teams in consumable retailing today, our senior team. You can see the tenure is fabulous not only at Dollar General but also in retail. A great team of people and you're going to hear from a few of them today.

So as we look at what that vision for Dollar General really looks like, everything we do centers around that customer, everything. I mean everything we do. Then you layer on top of that our people, our competitive advantage, that secret sauce. You layer our people on top of that, that's a big piece of the vision. And then working with a sense of urgency to make sure that speed to market is there. We're going to move faster than ever not only in new store growth but also in the delivery system into our store, also how we get product out in the hands of the consumer faster. We're going to work quicker on new formats and ways to make sure we serve the customer best in certain areas. This is not a one-size-fits-all any longer chain. We need to make sure that the mix inside of our stores marry where our consumers are shopping and that sometimes matters differently by demographic as well as by region of the company. And then you look at it, we're going to capture that store growth.

We're going to capture it, we're moving fast, 1000 stores next year, 900 remodels and relocations next year, huge number, huge number. I'm real fond of saying low cost always drives out high cost. Say that again. Low-cost always drives out high cost. No matter if it's retail, no matter what discipline it is, if you are the low-cost leader, you are in the catbird seat. And our goal is to continue to be an even more so a low-cost operator.

And then lastly, we're going to be a leader in our channel. We have been and we will continue to be. When I look at Dollar General for the future, I see a lot more stores, I see a company that continues to service the customer better than any retailer out there and understands the consumer better than any retailer out there. I see that when you couple our people, our processes and the ability to return at a high rate back to shareholders. This is a company that is just starting out, we're just starting. We've got the best years ahead of us and I think what you will hear today as you listen to the other speakers, you'll hear that we've got a real plan, a real strategy and a long term strategy and now a framework that we operate under.

So enjoy your day, take it all in and then I'll come back up to close it and also to answer questions. Thank you.

Jim Thorpe

Good morning, everyone. I'm Jim Thorpe. It's a pleasure to be here today. Now I was fortunate enough to join Dollar General in 2006 and returned in 2015 after a brief retirement and I'm extremely excited to be back working with Todd and the team here at Dollar General. We have a lot of great things happening. We're on a great trajectory. We have momentum and I want to share a few of those things here with you today. Our customers need us now more than ever and as a result, we're attracting new customers and we're growing productivity with our existing customers and we're investing in our mature stores again with initiative that will drive sustainable comp store sales increases.

We're opening 900 stores this year, 1000 stores next year. We have two new store formats that will support our strategic growth initiatives and unlock many more real estate opportunities. And we have the most talented merchandising and marketing team that I've had the opportunity to work with. They are passionate about our customers, they are focused on delivering results and I'm very proud of what they've been able to accomplish. So let's get started. These are the topics we're going to cover today. I want to begin with an overview of the economy and its impact on our customers because this is important in understanding why our low prices are so important to our shoppers and why they need us to survive. I'll introduce you to our new customer segments and the actionable insights that are at the cornerstone of our company including our category management process. And then we will review our merchandising priorities and go a little deeper into a few of our 2016 initiatives and then we'll finish with an update on our pricing and marketing strategies.

So there is a common misconception among many that the recovery has benefited everyone but as I'm about to show you, our core customer continues to live in a recessionary environment and understanding the challenges of our customers and what they face and how it influences their shopping behaviors and attitudes allows Dollar General to serve them better than anyone else. Now it's true our customers are benefiting from some economic tailwinds. There's been some minimum-wage increases but that only helps customers who have a minimum-wage job but it could also cost jobs too. Unemployment is coming down. Last month we added 242,000 jobs to the economy but our customers they may be saving a few dollars at the pump with lower gas prices but what you'll see is these savings really haven't shown up in their spending. And that's because we believe our customers face much stronger headwinds in this economy than tailwinds. And one of the biggest challenges that our customers are facing is that inflation is simply outpacing total wages and we'll talk about that a little bit later.

There were no cost of living increases this year and that particularly hurts our SNAP and Social Security recipients especially hard. And healthcare costs and rents continue to rise which also impacts our customers more than higher income households. This has resulted in the majority of Americans living on the bubble of economic uncertainty. 60% of Americans don't have a savings safety net of $1000 and 20% don't have a savings account at all. So as you will see, our customers simply haven't received the benefit of the economic recovery. Now the yellow bars in this chart represent wages, the green lines, the consumer price index and as you can see over the last decade, wages have simply not kept up with rising consumer prices and the gap has actually widened since the recession. And households earning less than $52,000 have experienced negative wage growth.

Now these are our core customers and only households in the top fifth quintile have seen any real income growth since the recession and most of that's being driven by the top 5% of earners. So you can see that our core customers who were financially strapped before the recession are even worse off today. And unfortunately, this trend isn't projected to improve anytime soon. Negative income growth is projected to continue through 2020 for the core Dollar General customer earning less than $50,000 with very nominal income growth up to $100,000. So this is why our customers need us now more than ever and our everyday low prices that will help them stretch their shrinking budget. So, one of Dollar General's core strengths is our deep and actionable understanding of our customers. We know who they are, where they shop, how they shop, what they buy, how much they spend but more importantly we know their attitudes and their behaviors. And we get this through our integrated and actionable customer segmentation process.

Now this knowledge is certainly at the core of our category management process and it drives all of our merchandising and pricing decisions but it also guides decisions across our entire organization including how we market and brand to our customers, how we design stores and in our site selection and actually how we operate our stores each and every day. And we recently re-segmented our customers which is the first re-segmentation we've done since 2012 and it's based on a trip projection methodology that Nielsen is piloting in their Homescan panel and it provides a much more accurate representation of our customer spending and significantly improves our customer insights. Now Dollar General is the very first retailer in America to launch customer segmentation using this new trip projection methodology. So let me introduce you to our new and changing customers. Now our core customers fall into two categories, our BFFs and our friends.

Now our BFFs are our most productive customers and they weigh highly in our decision-making. Now they shop us more often, they have the highest annualized spending rates so we get the highest share of wallet with them. Now in 2012, we had two BFFs. They represented 21% of sales of shoppers and 43% of sales. They are older budget stretchers who relied on government assistance to get by. Now in 2016, our new re-segmentation, we have three BFFs, Tiffany, Sylvia and Virginia, now representing 34% of shoppers and 66% of sales but still only earn $40,000 a year, very budget conscious but many still having to rely on government assistance to get by. Now they spend about $774 a year with us, shop us three times a year and when they shop they spend about $20. We now have a new millennial African-American segment as one of our BFFs, Tiffany.

Now these are our most productive customers and they are growing. Also very important to us and a core customer are our friends. Now on average about half as productive as our BFFs. In 2012, we had two friends, 31% of shoppers and 37% of sales. Price-sensitive but more of a treasure hunter. So let's meet our 2016 friends, Paula and Stan, our new male shopper segment. 27% of shoppers and 27% of sales, slightly higher household income of $57,000. Now these are trade down customer segments but also on a limited income. They will spend $432 a year with us, shop us about twice a month and spend $18 each time they visit our store. Now Paula and Stan shop us to save money. They are thrifty because it's smart and to maintain their lifestyle. And here's the comparison of our shopper productivity between 2012 and 2016. 61% of our shoppers are now considered core customers, 34% now falling into our very best BFF segment.

We're shifting less productive customer segments to more productive customer segments. So our acquaintances are becoming friends and our friends are becoming our BFFs. We believe we understand our shoppers better than anyone else and from that, we're improving our core shopper productivity with an expanded group of core customers that now represent 92% of sales. We're attracting new segments including younger African-American millennials in our BFF segment and older male middle income customers in our friends segment. And we're retaining higher income trade down friends and acquaintances. Now these new and expanded and growing customer segments unlock many new category management opportunities that will drive key merchandising decisions and strategic initiatives targeted at these specific segments.

But now I would like you to hear from our core DG customer segments.

[Video Playing]

I hope you can see that we're passionate and committed to our customers. We've been doing it and serving our customers for over 75 years and we will continue to meet their needs each and every day in their Dollar General.

Now I would like to briefly look back at 2015 and look forward at our strategic initiatives and our priorities that will drive sustainable growth. So in 2015, we delivered a strong 7.7% total sales growth and a 2.8% comp store sales growth. Now that's an 8.3% CAGR over the last three years and sales were balanced across both consumables up 7.9% and non-consumables up 7%. Now this is the most balanced growth that we've had since 2011. Now our goal at Dollar General is to grow consumables at the same pace as non-consumables. And this balanced sales performance resulted in a similar mix to 2014 with 75% of our volume coming out of highly consumables and 25% coming out of seasonal home and apparel. And as store productivity continued to improve, sales per square foot across the chain grew $3 to $226 and the result was a 6% growth in market share to 3.4%, another very strong year at Dollar General.

So we talk a lot about our category management process and how it differentiates Dollar General from our competitors and it is the engine for delivering sustainable sales growth and nobody in consumable retailing does it better than Dollar General. Now three things drive our excellence in category management. The first is a discipline item level understanding of how we make money, the true profitability of each and every SKU and it includes all related costs and expense structures which can impact profitability. Now the second is that intimate understanding of our customers which is at the center of all of our merchandising decisions. And the third is our talent. It's the people behind the process. So I would like to take you through the five steps we go through in our category management process. The first step is a storewide analysis that determines the productivity of our assortments and it utilizes a sales and profitability heat map of the entire store.

Now this drives assortment size changes and level optimization recommendations that support our strategic initiatives. Now this is how we become more productive in the same size box and even a smaller box. The second is the strategy review and it's an external and internal assessment of our assortment. Now this step is where we incorporate the customer segmentation insights that drive the assortment strategy. Now the third step is the business review and it's an item level review of the merchant's recommended assortment and it assesses how well we achieve the strategies that we identified in the previous exercise. Now every single item in the assortment is forecasted at a units per store per week level and includes all details and all related cost and expense structures to assess the true contribution of each and every item. Now it rolls up to an assortment pro forma and we continually monitor and hold ourselves accountable for each and every item's contribution.

Now the final recommended assortment and financial performance is reviewed and approved by senior level management including our store operations team and ultimately set in the store by the store operations team or a third party. Now three months after the planogram is actually set in the store we have a postmortem and it's conducted by all stakeholders involved, store operations, supply chain, merchandising and it looks at every level every item level performance versus its forecast. Issues are addressed, midcourse corrections are taken and then the cycle starts all over again for the following year. Now the average tenure of a Dollar General buyer is over seven years. They understand our category management process, our customers and are the most financially disciplined merchants that I've had the opportunity to work with. Now the process improves every year as we incorporate new data analytics and customer insights and our tenured group of merchants are who continually drive this improvement.

Now I would like to review some of the key merchandising priorities that will drive sustainable growth and they fall into four areas. The first is to attract new customers and grow trips. The second is to capture a higher share of wallet with our existing customers, customers shopping our store today. The third is to develop optimized store formats that support our merchandising initiatives and unlock unique real estate opportunities and finally, we're going to leverage margin opportunities to continue our momentum of profitable growth. So now let's look at the who, why and how we'll grow new customers and trips. So our new customer segmentation identified new customers and trips historically that were not in our primary line of vision, our new BFF Tiffany and friend Stan. Now they are time starved, they often eat on the go and they substitute snacks for meals. Now they want healthier food items but they index very highly in carbonated soft drinks and salty snacks. Now they shop DG often, Tiffany three times a year, Stan, twice a year, but they found that we didn't carry the assortment of cold immediate consumption beverages and snacks that they wanted.

So this slide identifies the opportunity that we're missing, not just with Tiffany and Stan but with many of our customers. Now today, we capture nearly a 5% share of the take home carbonated soft drink market. Now those are 12 packs, 2 liters, Coke, Pepsi and Mountain Dew. It's a strong trip driving category for us. Now as well as we do in take home, we only capture a 2.6% share of the much higher immediate consumption market. We simply don't have the high profile cooler capacity to carry the assortments and inventory necessary to capture a higher share. Now closing the gap to take home is worth well over $100 million a year at significantly higher margins. So in 2016, we're going to invest in both new and existing stores to expand ready to consume offerings in high profile areas across beverages and snacks. We'll be adding 36,000 immediate consumption cooler doors including two new innovative end caps from Coke and Pepsi that can assort both high volume take home packs and warm and refrigerated single-serve beverages. We'll also expand our ready-to-eat assortments within our perishable coolers at our checkout and we will be expanding cold beer.

Now these initiatives address a gap with our new and existing customers in a profitable segment of the business that will drive incremental trips and baskets. Now these investments and initiatives impact a much greater percentage of our existing store base than previous years driving comp store sales increases. Our second priority is investing in category expansions to capture additional share of wallet with our existing customers shopping our stores today. Now while we're attracting new Dollar General core customers Tiffany and Stan, we still have a significant opportunity to capture higher share of wallet with our existing customers, BFF Sylvia, Virginia and our friend Paula. Now underpenetrated target areas for growth include health, beauty and perishables and thing consumables but also non-consumables like party, stationery and home. Now through optimization of our mature store layouts and redesign of our new store formats, we're able to expand these categories to offer Sylvia, Virginia and Paula the items she's looking for at affordable prices at Dollar General.

Now this highlights the opportunity we have in several areas and Todd showed you this slide earlier. Now our customers spend over $800 in home cleaning and paper each year. Now $175 of which she chooses to spend at Dollar General, now we're capturing 21% of her annual spend and that's a big number. Now she spends almost twice as much in health and beauty each year, but we're only capturing 10% of that. And in perishables, the gap is even wider where we get only 3% of the $4400 she's spending annually. Now we have initiatives in place to expand each of these categories across mature, new and remodeled stores, but I want to briefly touch on perishables. It's the largest opportunity. So we've been investing in perishables over the last several years and we're starting to get results.

Over 21% of baskets now contain a perishable item and with 1.8 billion transactions each year, that's a large and growing number and a basket is 74% larger when it contains a perishable item. Perishables drive trips and baskets. Now perishable sales have grown 15% per year and as a result, our share has increased 50% over the last three years, but still only 1.2%. We're capturing only 3% of our customer's annual spend. So there's a significant opportunity to drive growth in perishables, but we need cooler expansion, SKU growth and assortment optimization. Now, over the past several years, we've been opening and remodeling stores with 16 cooler doors, but with limited investment in cooler door expansion in our mature store base. Now that's going to change in 2016. Todd mentioned we will be opening new and remodeled stores with 22 cooler doors and that supports up to 50% SKU expansion, but we will also have investments to expand perishable doors in select mature stores as well. So by the end of 2016, our average cooler doors across the chain will grow to 16. That's up from only 10 in 2012.

Now perishable growth is complex and really difficult to duplicate. It comes with distribution challenges, capital intensity and infrastructure requirements to be able to put coolers in stores, but Dollar General is clearly ahead of the competition across our channel and we will continue to distance ourselves in perishables and win. So our third priority is to develop an optimized customer-centric store format that supports our merchandising initiatives and unlocks real estate opportunities. Now Todd talked about the 13,000 real estate opportunities we have in front of us. So we have four current formats that capitalize on specific customer and market demographics. Our traditional store is our predominant store format. It opens with 22 cooler doors and it's primarily in rural and small towns. But, as Todd mentioned, we're rolling out a new smaller format, less than 6000 square feet, but it also opens with 22 cooler doors and has all of our strategic initiatives, but with edited assortments. It adds a compact shaped building to the portfolio allowing for site selection flexibility and it reduces costs both in building and in site.

Now stores are coming online now and we're learning and optimizing the assortments and we will continue to evolve the format across the real estate opportunities that we have. So we also have our Plus stores and our Market stores. Plus stores have the expanded perishables assortment, predominantly utilized for relocation and then our Market stores with the expanded food and perishable assortment. But today I want to focus on the traditional format and introduce you to our new DG16 concept. So our traditional formats have evolved across the years based on customer segmentation insights, merchandising initiatives and real estate opportunities. The DG16 is our latest and go-forward version and we're utilizing it for all new stores, remodeled stores and relocated stores. It opens with 22 cooler doors, it has six additional merchandising sections to facilitate category expansion and has a new redesigned Q line checkout area driving higher trips and baskets.

So these are the objectives that we set out when we designed the DG16. We wanted to improve customer traffic flow and line of sight. We wanted to feature our traffic-driving categories like perishables and immediate consumption. We wanted to increase exposure of affordability and value, our new and expanded dollar sections, elevate exposure of non-consumables, primarily our seasonal assortments, and also optimize assortments and expand high opportunity categories like perishables, health, beauty, party and stationery. We wanted to improve the checkout process all while driving larger baskets all incorporating a new fresh decor package, highlighting our new and updated brand messaging. We think our new DG16 traditional format accomplishes all of these objectives. Now we're going to have the opportunity and many of you are going to have the opportunity to visit these stores in the new DG16 format this afternoon, but let's take a virtual look now.

[Video Playing]

So we're excited about our new format, but more importantly our customers are excited about our new format. Now early results of new and remodeled stores are beating our expectations and many of the key changes that you see in the store are backwards-compatible into our prior DG13 format. Now we'll all get the opportunity to see this DG16 in our visits this afternoon. Now our fourth priority is to leverage margin opportunities to continue the momentum of profitable growth and three areas I want to cover here today are non-consumables, private brands and global sourcing. We had balanced growth across non-consumables in 2015 with mid to high single digit growth across all key categories. Now we doubled the growth rate in seasonal with strong performances in hardware, summer, sundries and holiday.

Our holiday programs accelerated throughout the year culminating with a very strong Christmas season and that was driven off very strong product offerings and competitive price points, including expansion of items $1 or less. It all resulted in higher sell-throughs. In home, we had balanced growth across departments which strengthen our core product categories like mops, brooms, plastics and housewares and bed and bath in domestics. We also had strong seasonal results in our home decor department. In apparel, we continue to improve the sales and profitability of our hanging apparel departments within the optimized space that we've allocated within the stores. Now in 2016, we're going to continue this momentum in categories where our new customer segmentation gives us relevance. In home, we will continue to optimize our core assortments in basic household and family needs. Now these core everyday items represent over 2/3rds of the volume of our home departments and they are growing at twice the rate of non-core, more discretionary items and they come at the same higher margins. Now in seasonal, we'll further expand our party and stationery assortments as we continue to become more relevant to our customer segments in these key areas. In apparel, we've made significant progress in the performance of our hanging apparel categories. In 2016, we're going to place focus on improving the productivity of our basic apparel assortments. That includes underwear, socks, hosiery and accessories.

So we plan on building on the eight consecutive quarters of year-over-year improvement in non-consumables. So, private brands play an important role in driving profitable sales growth. They come with significantly higher margins, they provide flexibility from a price point, inventory and size standpoint and they overindex with our budget-stretching BFF customers, Tiffany, Sylvia and Virginia. Now while we lead other channels in private brand penetration within our store, the channel penetration is still below mass and grocery and that presents opportunity for continued growth as we attract new customers open to buying private brands. Now our new customer segmentation also uncovered further opportunities for growth in private brand. 82% of Dollar General Customers want to eat healthier and pay attention to nutrition, they just can't afford to.

In 2016, we'll be introducing a new better for you private brand, Heartland Harvest. It will be offering healthier food choices, but without the premium price. And healthcare costs are continuing to take a larger portion of our customers' budget and they are looking to affordable over-the-counter solutions for health and wellness. Now this creates energy around our health and beauty initiatives. That will see a further expansion of our DG Health and Rexall brands. Now Rexall is a success story growing from zero to over a $170 million brand in a few short years. We see continued opportunity for Rexall as it fills the gap between DG Health and the much higher national brand prices.

So now let's talk briefly about global sourcing. Our goal is to source product at the lowest price, highest quality regardless of country of origin. Now for some products, it often leads to an import, but not always. For example, we strategically moved a portion of our hanging apparel business to domestic in order to reduce risk, improve trend and the results were higher sell-throughs and higher overall profitability. So our focus is to utilize people analytics and process improvement to understand the optimized sourcing methodology and invest resources to maximize these opportunities. Now it's not just offshoring product, but improving the profitability of everything we source. Now we're making good progress in our global sourcing efforts across the organization with significant opportunity remaining, especially in consumables.

Now in 2015, we grew our non-consumable import receipts by 13% with a 55% increase in our consumable imports. While still a smaller percentage of our imports, the major opportunity for expansion remains our consumable categories -- food, near food, health and beauty and we currently ship out of 59 ports across the world and rank in the top 20 of retail importers. Now we recently opened an office in Shenzhen, China with plans to establish additional presence in Europe and South America. We'll continue to evaluate and allocate our sourcing resources in continents that align with our product priorities.

Now I would like to briefly cover our pricing strategy which remains unchanged with a strong commitment to everyday low prices, but with several new tools that will provide expanded capabilities to our pricing teams. Todd showed you this and he covered it. It's our strategy of value and convenience. Todd says we have four key priorities, price, price, price and convenience. So we're priced competitively with mass, 20% below grocery and 40% below drug. Now our relative price index are based on items that our customers buy most. We're committed to our everyday low pricing strategy and we continually monitor our price position both externally using competitive price shops and internally utilizing sales basket transaction and share of wallet analysis and we monitor both known value items, as well as our top 250 selling items.

Now these are the items that disproportionately drive customers' price value perception and are the first products that will drive store switching if in fact we're not aligned. Now we're in the process of implementing new and expanded capabilities and systems to further improve our EDLP zone, clearance and promotional pricing strategy. Now these strategies leverage state-of-the-art internal systems utilizing the Revionics pricing tool with new external syndicated data from Nielsen to provide a much clearer lens to improved focus. We're expanding our syndicated data from 13 to 24 markets to provide a much broader approach to competitor zone pricing and we're leveraging Revionics to help best understand where we need to be competitive and sharp and dial in on specific KBIs. In addition, we're utilizing APT to aid us in continual improvement and enhancements to our clearance, advertising and promotional pricing effectiveness. We continue to place an emphasis on affordability with our sweet spot of $5 and under. More than 25% of our items are priced $1 or less and items $5 or less generate more than 75% of our sales.

Now we're committed to maintaining our price positioning. We're getting smarter and we will continue to invest where needed. Now I would like to finish up and take a moment to update you on our marketing strategies. Now our marketing mix spans both traditional circulars, but with an expanding investment in digital. Now many of our Dollar General core customers rely on traditional marketing vehicles, the Sunday circular that they get every weekend. Now 60% regularly look at circulars and they remain the number one marketing medium for reaching these customers. But she's also connected, 92% of our customers have a mobile phone and 66% use it to access the Internet and for many, it's their only access to the Internet.

Now we've been strategically growing our digital engagement to reach more customers and that includes over 175 million emails, 500,000 text message subscribers and over 3.2 million Facebook fans. Now our most rapid expansion has been in mobile and now accounts for over half of all website visits and more than 1 million customers using our app. We know that digital, including email, mobile, social media, will play a much larger role in connecting with all of our customers and a must for engaging our new younger millennial shoppers and DG digital coupons has been a big success. We launched digital coupons in the fall of 2014 and it has been well-received by our customers with very strong engagement from our vendors. Now this is the future of couponing.

At any given time, there are over 175 offers averaging $1.40 discount. Now many of these offers are exclusive to Dollar General and we have an aggressive target to more than double enrollment through enhancements to our mobile sign-up process and in-store sign-up initiatives. Now we recently reduced the time it takes to enroll from five minutes to less than 60 seconds and DG digital coupon customers are more productive and they have much larger basket and as customers use the program, we can provide personalized offers to them to create loyal DG customers. More clips means more trips. And digital is an important and growing part of our marketing toolkit and we will continue to invest and grow our digital presence as new and existing customers migrate to a digital platform.

So let me leave you with a few key takeaways here today. Now more than ever, our customers need Dollar General to survive. We're growing productivity with our existing customers and we're attracting new younger millennial customers that we will leverage through our category management and our customer segmentation insights and our intimate knowledge of our customer is what makes our category management process successful and we're investing in mature stores again to drive sustainable comp store sales increases. We'll have initiatives to both attract and grow new customers, as well as capturing our higher share of wallet with our existing customers. Now these initiatives impact many more mature stores this year than in the past. And we're launching two new store formats that will be more productive, convenient and appealing to our customers and many of the changes that you'll see in these stars are backwards-compatible and can drive increases in productivity improvements in future years and will further enhance our price leadership and investments in affordability with new tools, analytics and capabilities.

And finally, our new and changing customers require us to talk to them differently. We will continue to invest in our digital and social marketing initiatives that are more impactful, productive and efficient and we're leading the way in digital coupons and we will continue to grow sign-ups and engagement in 2016. I hope you are as excited and optimistic about the future of Dollar General as I'm. It's why I'm here and I think it's why you are here. We've got momentum, we're on a great trajectory and I'm grateful to be back with Todd and the team here at Dollar General on this journey. I want to thank you for your time here today. It's been a pleasure and I look forward to seeing some of you on our store tours this afternoon. Thank you.

Unidentified Company Representative

Our general session will now recess for 30 minutes.


Unidentified Company Representative

Please welcome to the stage the Executive Vice President of Store Operations, Jeff Owen.

Jeff Owen

Thank you and good morning. I'll tell you what, I'm very excited to be here today and talk to you. Had a lot of fun talking with many of you last night. And looking back, some of you I talked to four years that go and I can't even remember what I did yesterday sometimes and you guys were able to remember what we talked about four years ago, so that was interesting. But as Todd talked to you today, he outlined a very aggressive growth plan. And I have to tell you, as the leader of the real estate team that finds our sites and selects where we're going to put stores and the leader of the team that operates the stores every single day, we're extremely excited at the opportunity to deliver this growth. We're poised and we're ready to do this.

We've been refining our strategy and our processes and our technology for quite some time to provide us with the intel and the know how to get this done and deliver it very seamlessly. We have got a tremendously stable foundation to deliver this and what makes us unique is we have this relentless pursuit of continuous improvement and so that gives us a lot of confidence in the ability to deliver this. We're never satisfied with just maintaining the status quo and so we have introduced a lot of interesting and new and innovative things that are going to help us to continue to deliver. What I would like to share with you today and talk about are some of the foundations that drive the operating team. So we call them our strategic imperatives and these are the things that we're focused on every single day and every single day we're trying to improve to deliver on these three important things. And when you think about it, before I get to the imperatives what I want to share with you is the solid foundation we have got in place. This isn't something that we decided overnight to start accelerating our growth or build a foundation for trying to accelerate our pace.

We have been doing this for a long, long time. This is not something that we just started to do and I think the most intriguing and the most exciting thing for me is the fact that we're investing more for the future and we're not just satisfied with the investments we have made in the past. So we have some exciting things that are coming that are going to continue to help us deliver and I think you will be interested in seeing those a little bit later in my discussion. By building this foundation what it allows us to do is continue to grow this Company and make it big. It allows us to manage this Company on a macro level if we need to, but also we're able to make a really large company feel really small. We can manage right down to the single store if we need to. When we think about the imperatives that drive the operating team, I mean these are probably not a lot different than many of the companies that you are covering and many of the companies you are familiar with. We will always focus on our talent, our execution and the customer experience. But I think the main difference at Dollar General from other retailers that you may be familiar with is our approach. We have a tremendously disciplined approach and it allows us to deliver with consistency and speed.

One of the things you heard Todd talk about earlier is we have a conscientious effort to not focus on everything that we could focus on inside the operating environment. You see, we're intentionally not going to focus on everything, we know exactly what are the most correlative drivers of performance and those are the things that we spend most of our time on. And what we're able to do with this and the way we approach it is we don't rely on averages or gut feel or just mere opinion or experience. We provide and we employ a data driven statistical approach to operations. We really have a scientific way that we execute and make decisions out in the field. And for those of you familiar with the term Moneyball, that is kind of the approach we take to our operating environment. And when you have as many outlets as we do it is very important, it allows us to deliver with a lot of consistency.

And most importantly, the results that we achieve are not surprises and they are not new to us. We know what we're going to achieve before we ever implement. I'm going to talk to you about a lot of things today, but when you think about operations and you think about what we do here at Dollar General, it all starts and ends with people. Our over 100,000 associates that we have, they are the face and the voice of our Company and that is why for me the talent component is the most important, that is why I want to start with that today. I often get this question asked to me. They say wow, all this growth that is in front of you, does that keep you up at night? How are you going to find the people to be able to deliver on your model when you are adding all these stores? And I can tell you that is certainly not something that keeps me awake at night. At our Company the key to our business is a good store manager that stays with us. That is first and foremost the most fundamental variable to our success and we have two deep pools of talent that we can go to attract these folks. We have outstanding training programs and processes that allow was to teach the right person our model in a very quick fashion.

We have over 1 million external candidates that meet our income profile and meet our qualifications that we're looking for to be a successful store manager, because we know the attributes that make someone successful. And there are many of these, but we really boil them down to -- and they sound fairly cliche, but in our model we need somebody that wants to win. We need somebody that has the ability to inspire people so people want to follow. And finally, it is very important here that you want to grow. Because growth at Dollar General is the single greatest benefit that we have and probably I would argue the greatest benefit that any retailer has and we lead the pack in this particular environment. So when you think about the external, we will always maintain a balance. But we also put a very, very strong emphasis on our internal balance, our internal bench. And we have a very, very strong pipeline of talent.

Again, when you think about the growth that we're trying to achieve over the next five years, we have a tremendously, tremendously strong pipeline of people that are ready to step in and deliver. When you think about the density of our network, what that allows us to do is we have a lot of familiarity built into our network already. We have people that work in stores today and with our fill-in strategy we don't have to teach a lot of people the uniqueness of our model. And by going internal what we're able to do is we're able to provide people with an opportunity to grow in our Company in a very, very fast pace. We don't worry about seniority, we don't have a particular seniority-based system that drives our talent decisions. We play the folks that have talent. And so, where else can you -- as Todd mentioned earlier, you can come in as an entry-level associate, in less than three years you can be a store manager running a multimillion dollar business. You can be an assistant manager in our model in less than 12 months, that is what the average is right now and a key carrier in our business, you can achieve that level in less than six months. We have a regional director in our Company today and just 2.5 years ago this individual was an assistant store manager at our Company.

Our internal pipeline of talent is strong and I can tell you that from personal experience because I'm a product of this internal pipeline. I started at this Company 20 years as a store manager right out of college. I went into a store and I managed five different stores and over the course of my career the Company has allowed me and developed me. They put me in every single facet of this business, whether it be distribution or transportation, finance, IT, HR, I have done it all through this Company and that is the type of development that Todd is talking about when we invest in our people. And I'm someone that is a perfect example of what anybody can achieve. And I'm very excited to find more of those types of people and you would be amazed at the talent we have out there in our midst. When we talk about internal talent and I mentioned to you earlier a good store manager that stays is key to success. Low store manager turn, that is a critical component to that success and I'm very, very proud of the progress that we're making. And the reason we focus so much on internal promotion is because the data would tell us that they stay longer and they perform better. In fact, our internal promotions -- our internal promotes, they stay 29% longer than our external hires and I'm very, very excited that 77% of our store managers today, they're products of internal promotion. And you see, to the customer what that does is that provides that level of consistency and a seamless transition as we open more and more outlets across the country. Because we're folks that come into our model and they know already how the model operates. They know the uniqueness of what we do inside those four walls. And they are not unfamiliar at all with the amount of product and the amount of moving parts that happen inside the four walls of this 7,200 square foot box. In fact, when you think about it and I talked about growth, almost 40% of our store managers today started at this Company as an entry-level minimum-wage associate.

So again, the opportunity we have at Dollar General is second to none. And I mentioned they stay longer, but they also perform better. Again, you can see the numbers speak for themselves. Our customers see those stores where we don't have any turn, where we have that stability, they have an 8% higher customer satisfaction rating. Sales volume are higher, our shrink in those stores is 31% lower than a store that experiences any turn. And then finally probably the one that I'm most excited, we have an 11% increase -- we have an 11% improvement in operating profit in these stores. So again, internal promotions are a key to stability. We do it very, very well and they stay longer and they perform better. And so, when we think about, okay, how are we going to keep people to stay longer, one of the things that we've made a lot of progress in is really understanding what drives someone to leave and when do they leave.

So what we know is year one is absolutely mission-critical to getting a store manager to stay at this model. And you know, as you can see, if we get them to stay we can achieve world-class turnover. These folks will stay for a long, long time. What we do know is that in that first year, whether you are an internal or an external, you are twice as likely to leave us in that first year. So, everything that we're doing right now -- and I mentioned a progress we're making and the continuous improvement that we have, it is all about getting that store manager past the one year mark. And how we're doing that -- one aspect of how we're doing that is we're leveraging the advancements we have made in our training programs, we have got a very, very strong track record of training innovation. In fact, as Todd mentioned, Training magazine ranks us as that the 18th most innovative training organization, we're up from the spot of 23 just last year.

So we're being recognized for the things that we're doing. And in fact we had a pretty solid district manager training program, but we found that we thought we could make it even better. And so last year we redesigned this program and we were recognized as one of five organizations to be awarded with the Training Innovation Award around this particular program. But more importantly, the statistics show that the district managers that are going through this program, they are performing better than the ones that went through the program before and that is a very positive sign. So we're going to do the exact same thing. What we're doing right now with our store managers is the exact same thing. You see I mentioned that first year is so critical and so what we know is we know the exact behaviors and the exact skills that the store manager needs to get to that first year. We call them survival skills. So in the past what we would do is try to teach them five years of retail in the first six months and that is not the way we need to do it.

So what we're doing right now, we're taking a military approach similar to what you would see if someone joins the military, they don't learn how to command a nuclear submarine in the first year. They go to boot camp and they learn those survival skills, the history, the processes, the disciplines that allow them to be successful over time. And then over time you continue to invest in the skills that transform them into an entry-level soldier into that commander of that sub. And that is exactly what we're going to do here and we have some outstanding programs that are really, really going to pay dividends in this arena. One of the things I said, so we prepare them to the training program, but I was on some store visits when I first got back to the Company. I was on some store visits and it hit me within the first week I was here. What hit me was I was traveling, I met a store manager, she had just been promoted maybe two months into the job, this is her first opportunity to take on a leadership role. She was an assistant manager before. She is going to be a really good store manager. I was traveling, I asked the district manager, I said tell me a little bit about your store manager. And he said, oh, she is going to be great. She's just been here two months and I noticed as I looked around the store it was extremely busy. I would consider a very complex store. In fact the average sales volume in this store was three times higher than our average store.

So, a very productive and complex store for us and when I talked to the district manager I said and it looked to me that she was struggling to get her feet under her in this particular box. And I asked him, I said, so when you think about it, how does this store rank in your district in terms of complexity? And he said to me, this is the most complex store I have. And I said, okay, who's your best manager in the district? He said, that is in the store we're going to go to next, it is just a mile and a half down the road. I said, okay, so that is your best store manager. He said, yes he wants to be a district manager.

I said, well, tell me about that store. That is the easiest store I have in my district and he just stopped mid-sentence. This is a true story. Stopped midsentence and he is like, wait a second, I probably should have put my best manager in my most complex store and maybe I should have put with this person and allowed her to understand the role before we put her into this complex store. So immediately what we determined was we need an objective statistically driven way to match talent and need and so we have developed that model. So now across the entire network we know the complexity rating of every single store in our chain. And what happens with the district manager now, we call it horizontal lines. It gives them a tool to use to look at the complexity within their district, take out opinion, take out gut feel and just let the numbers speak for themselves.

So they are able to look and match their best player in their most complex situation. And again, that helps us get people to stay longer when you put somebody in a situation to be successful. Now that store manager I met, she is going to be successful and she will eventually be in and she'll be able to step into this more complex store. So what it does for the store manager, gives them a progression and a career ladder. That is going to be a pretty, pretty powerful tool for us. The other thing it does, it allows us to look at our districts. So if you have got a bunch of complex stores you have to make sure you don't have too many complex districts. Because one of the components of getting people to stay is the relationship they have with their leader. And if you have a district that has had too much complexity the district manager doesn't have enough time to spend with the people inside the store, they're constantly fighting fires.

And so again, we employed the same exact model to districts. And entering into this year had we not done this we would have had 14% of our districts that fell outside of what we determine a complexity tolerance. It would start to degrade the performance of the district. So we're able to eliminate them. And now by using this, when you think about our growth going forward, it allows us to be one year ahead of any store we open going forward so we ensure that we're setting up each year with our growth and eliminating complexity and allowing the district manager to be successful with their store managers. Now that we have got the people in place we will always be focused on strengthening our execution machine.

At this Company we have a very, very strong, stable and scalable execution machine. This model was built for growth. Our product flow, I've talked to many of you about this. Years ago a process that even some retailers today are still doing, this processing every single week is the most important event that happens in our 12,000 boxes across the network and it will be like that for the rest of our Company's existence. Because that is what gets the product on the shelf for the customer when they come in and it is available for them to purchase. And what used to have a lot of variability in this process, I did it myself for two years, what had a lot of variability in the process now is consistent across our entire network. What used to take 16 hours or 20 hours and four to five people to unload this box by box by box we now do with one person -- rolls the merchandise off the truck and does it in 90 minutes. This is a very consistent way for us again to just eliminate noise and distraction inside the store and the product that comes in on those rolltainers, it is sorted, it is sorted where it goes inside the store. And most importantly, there isn't one box that comes in the back door of Dollar General store that doesn't have a home inside our four walls. There is no guesswork to where a product goes.

We match the box with the label with the place on the shelf so that the store manager again can spend more time just executing the process and it allows us to be more successful regardless of your tenure. Our performance management, we're able to identify and adapt and course correct around trends very, very fast. And I said earlier, we spend our time on the trends that matter most in the business and through dashboard reporting and exception-based reporting that allows us to get straight to the heart of the matter faster and spend more time solving and less time studying and then finally, this is all about being in the stores. Our district managers, the first thing I did when people asked me last night what is the one thing that you put as your highest priority when you came back. I said get our district managers in the stores more. Eliminate anything that gets in their way from not being inside the stores, coaching and training and developing those store managers.

We have some exciting things that are coming. In fact I want to show you the KPI app that we're coming. So one of the things that the district managers told me and every time I go on store visits, I've visited over 35 regions since I've been back -- I meet with district managers in surrounding districts every angle time I'm out there. We call it our power hour and this is where we find out tell me what is working and what is not working. But most importantly, it is all focused on what is keeping you from being inside the four walls of the store. One of the things they talked about was the office day that we have, the ability to analyze and understand where you need to spend your time and you know what, we found that we have a way to streamline that process and allow to help them get to the point faster.

So this KPI app that we have got, it leverages a proprietary business intelligence system that we have and it has a Microsoft based user interface that the district manager can basically get the health of their district, the key areas they need to focus on right in the palm of their hand. We believe that this will help us eliminate office time for the district managers and we think will give them back at least one month to be inside the stores that they weren't in in previous years. The DM's love it because it allows them to focus where they're going to get the greatest return for their effort but, most importantly, it is completely aligned with their bonus potential. So now they know exactly where to go fish and it gives them the opportunity to get a bigger payout at the end of the year. So this is kind of how it looks.

So a district manager, as you can see, in the palm of their hand they have got -- they follow the colors. It is simply a color-based system, red, yellow, green, like a stoplight. You go where the opportunity is. In operations it will always be about sales and shrink and the district manager knows that they are going to spend time today -- those two red boxes will be the greatest return on their investment. So once they get to the store it gives them the prioritized opportunities that are most important in that particular store and it ranks them, it color codes them and it is all built on a winner's profile. They can drill down, every single aspect of this has drill down capability.

So in this particular case that store in that district that he saw, those two stores -- in those two stores the biggest opportunity was the comp store sales. So they drill down and they see exactly where in the store they need to spend their time, again sorted. And then also they can continue to drill down. In this particular example the pet sales and the perishable department, that is where the district manager can get the biggest bang for their buck. So again, they have spent more time solving, less time studying. We're not sitting here analyzing this and this gives us, regardless of district manager tenure, gives us the opportunity to channel their energy where we know the data tells us we get the greatest return for their time spent. A lot of times when they go and they are trying to drive sales what they are going to find is being in stock is one of the key drivers of driving our comp store sales and that is something that we're squarely focused on here in the operating world at Dollar General and we're focused on those items inside the store that aren't on the shelf. And if you're going to focus on in stock, the first thing you have got to correct and the first thing you have got to have, you have got to have an accurate perpetual inventory. Pretty straightforward, but the replenishment system is only as good as the accuracy of the inventory inside the store.

So we have got a really solid foundation here. As you can see, we outperformed the industry in our perpetual inventory accuracy. And in those categories that are the higher-margin, slower turn items where you have to be exactly on the money on your match in order to get the replenishment system to send you what you need, we also outperformed the industry. But what we know is there is a tremendous opportunity here. What we know is stores with the lowest out of stocks, their comp store sales are three times higher than the stores with higher out of stocks. So there is a real sales benefit to this and I'm very proud of the progress that we're making on this initiative. We have reduced out of stocks in our stores by over 26% and I think that the important thing to understand here is this is a completely third-party random measurement of success. This is not self-reporting, we don't do that here. This is not an open book test. I will always be about the customer and the way they view our operation. And so what we do here is we use random audits to understand where we're performing and where we're not performing. The customer is seeing it as well. In fact, as you can see here, our customer satisfaction rating around in-stock is at a three-year high.

The other aspect of operations I mentioned is shrink and shrink at Dollar General is really rooted in a process that we call the Optimize Shrink Process inside our company. This is something that we have developed and it is a proprietary statistical predictor of shrink. So unlike some retailers we don't react to shrink, we don't hope that we're going to have a good result, we're able to see out in front in order to course correct and make changes in order to improve the result. So the statistical base Optimize Shrink tool takes every single store in our chain and it compares them to stores just like that store. So you don't compare with yourself or the store down the street or the store in a neighboring county or a metro store compared to a rural store, you compare stores that are in the same attributes we use when we employ the real estate site selection process. These attributes allow us to build a winner's profile and really have a great opportunity to drive performance in these. And it is rooted in the way we select stores. This model is rooted in the postmortem that Jim talked about on our category management process. And it helps us understand exactly where to focus operationally as well because what we do is we combine this tool with exception-based reporting to send district managers the reports and the exceptions they need in order to get to the root cause of the opportunity fast.

So again, as Todd said earlier, it is a very large opportunity for us and will continue to be and has been as long as I have been at this Company. It is going to be a great opportunity for us to further enhance margin. So when you think about those exceptions it is pretty simple. The fewer exceptions you have the better shrink you have and that is what we're trying to focus on. And so again, I mentioned earlier about simplifying this role so that we can spend less time studying and more time solving. One of the things that we're going to rollout this year that will help the district manager get to the point faster is we're going to integrate probably the most important component to solving shrink and that is we're going to integrate the video aspect of behavioral exceptions and we're going to be able to integrate that right into the exception-based reporting tool and put that in the palm of the hand of the district manager, similar to what I just showed you. So here is kind of what it looks like.

Again, district manager has it in the palm of their hand. Red, obviously you've got two opportunities in this particular store. That is where you need to spend your time. When they go to the store it's got all of the root causes, all of the information they need to get to the root cause extremely fast. And so then it breaks it down into the behaviors. So again, this is all as the district manager is walking into the store. They don't have to prepare, they don't have to analyze, they just simply have to follow these particular exceptions. And when they do this they simply click on this icon and in this particular case what they will see is this particular exception was saying we have a situation in this store where people might be sliding merchandise. And so, it goes directly to this video and as you can see here, unfortunately our associate did not scan that product over the scanner. And in our world that is what we call sliding. That is internal theft, allows the district manager to get directly to the root cause and solve the situation fast. They have been spending hours and hours and hours searching for this video in the past and now it is going to be right there in the palm of their hand. So with our execution machine in place everything we do, just like Jim and Todd mentioned, is all about the customer.

So we focus on the customer and everything that we do revolves around her. And as you know, our employees are our customers. So we have got an amazing base of folks that we can learn and get to know very well in the 100,000 folks that are operating our stories every day and so, what we have focused on in operations is what are those attributes that the customer wants that will make them choose us over other competitors. And as we grow, as we expand, as we open these 1000 stores we know that she is going to have more choices. And so, what we wanted to figure out is by employing strategic labor investments were we able to exceed her expectations in those most important attributes of what she wants and will that make her choose us and affect her purchasing decisions.

And so what we were able to do was, we said these are those four areas and by strategically investing labor inside these stores what we saw was we could make her choose us and we could drive her purchasing behavior and we could compete at even a higher level than we do today and gave us great confidence to expand this. So we put this in about 700 stores, we ran it for a period of time, we monitored the results, we saw that our customer satisfaction rating was 20% higher in this store. And as Todd mentioned earlier about getting product on the shelf, we were very specific on the areas we wanted to utilize this labor and we were able to improve the in-stock customer satisfaction by 80%.

So it is very, very impressive results and the sales followed. So as you can see, our 2014 on the left side of this chart, you will notice we were able to see the sales lift. And I think the thing that is most important is that our sales got better over time and we comped our comp in our test which gave us the confidence to expand this. And we expanded this, as you know, to over 3100 stores today and we're very encouraged at the results that we're seeing. They are following the exact same pattern that we knew they would and that we saw when we tested this and I think the key that I want you to understand is that we know exactly be type of stores that fit the profile to get this return. This is not a one-size-fits-all approach. We know which attributes are out there in our network today. And as this continues to deliver we're very, very encouraged at the operating margins that it is delivering is profitable for us. And we're already well in the process of identifying what that next wave might look like to continue to capture where we invest, we test and we know the result and we're able to deliver a consistent initiative and drive sales inside our box and gives us a lot of confidence as we go to more markets where competition will be more and more apparent.

So in closing I hope you get the energy and the excitement that I have for the growth that we have in front of us. We have an amazing, amazing rock solid foundation to do this. I have been at this Company and I've been a part of opening over 11,000 stores. We have averaged over 500 stores open a year every year I've ever been at this Company, that is all we know. It is in our DNA and our execution machine is built for this type of growth. We have a tremendously deep bench of talent, both internally and externally. We know exactly the attributes that we need. We know who will be successful. We have succession planning that goes all the way down to the store level so we know who that next generation of leaders already are. We already know, we're already developing them.

We have an amazing opportunity to drive sales by increasing the on-shelf availability inside our stores, we're making very strong progress there and I know that we will get even better. And then our margin opportunity through continuous shrink improvement, that is another opportunity that gives me great excitement for the future. And then finally, as we mentioned in our merchandising, we know what the customer wants, we know what specifically are those attributes that she values most. And I guess the most important encouraging thing I know of is that we have proven and successful methods to capture it. It isn't an accident here and that is what gives me a lot of excitement about the future.

So I appreciate your time today. Thank you for being here. And I'm really excited about the future of Dollar General. Thank you.

Unidentified Company Representative

Vice President Global Supply Chain, Mike Kindy.

Mike Kindy

Good morning and certainly thank you for the opportunity and allowing me to come and speak about the supply chain today. So as you have heard, we have aggressive growth plans and within our supply chain I'm confident that we have built a solid base, developed technology platforms and distribution and transportation capabilities and have assembled a top-notch leadership team. Our supply chain is in sync and ready for the growth of Dollar General. I thought I would just share a few data points that show the magnitude of our current operations. In 2015, systems and people supported the shipment of over 720 million cases from our distribution centers to our stores. Our outbound carriers drove over 125 million miles from our distribution centers to our stores. Just for a comparison there, that is equal to five roundtrips to the moon every week.

We contract and manage over 75 million miles of inbound shipments and we have over 7000 distribution center employees that are working accurately and efficiently to service our stores. So take a look at these numbers, in 2015 our stores had over 1.8 billion customer transactions. Our demand chain managed over 840 million store SKU combinations and our distribution centers totaled over 13 million square feet. We manage transaction volumes and store SKU combinations comparable to retailers much larger than us and this level of complexity is handled seamlessly by our systems, infrastructure and people. So Jeff talked a little bit about the rolltainer process and the advantages of the delivery. We implemented the rolltainers a few years ago, it was a strategic decision that allowed us to streamline our delivery process. It reduced our delivery time, it minimized our unload time, we saw improvements from the store standpoint, as Jeff talked about, from a productivity standpoint. We saw morale improve, we saw store turnover reduce and we saw Workers Compensation claims go down.

So as Jeff talked about, prior to the rolltainers what would happen is stores would have to schedule extra hours, extra people, they would risk inefficiencies if the truck arrived late and then they would spend hours unloading. Today the truck rolls up, the driver unloads the truck himself with little interaction from store personnel and much less time than it took before. So in addition to the savings that we're seeing on the delivery side, we've also seen improvements through the rolltainer process in our distribution centers. We're seeing improved productivity, as Jeff talked about. We're able to sort rolltainers by area of the store. So we load it on the truck, gets to the store, goes right out to a specific area of the store for unloading. We have also been able to reduce our dependency on mechanization. We're picking directly into the rolltainers now and so what that has allowed us to do is improve our storage capacity in our distribution centers. It is also allowed us to increase our flexibility for SKU and volume growth.

So technology is really critical to supporting the growth and we've been focused on designing and implementing solid reliable systems that not only can handle our future volumes but are driving improvements in our demand and inventory planning as well as in our distribution and transportation operations. So we really have three key systems on the supply chain side. The first is our Supply Chain Solution, this is an ERP that is scalable to our future growth and it supports store and distribution center replenishment order processing, forecasting, scan based trading, PO management and other attributes. We rolled this out in the fall of 2015, it was a multi-year project that was very complex and so we made sure that we took a lot of care and diligence to ensure that we didn't impact the business as we were implementing.

Our Transportation Management System, we upgraded this system in 2015, it is a Tier 1 system that is focused on inbound and outbound transportation and really driving better cost efficiencies and improvements. Our Warehouse Management System is really the brains behind moving millions of cases from our distribution centers to our stores. As the years have progressed and as the complexity has changed and the volumes have changed, the mix has changed in items we have had to go in and make modifications to our system so that we continue to stay up with the growth. And what we have seen with that is, in addition to adjusting and handling that growth, we have also been able to drive improved productivity and reduced cost through our distribution centers.

So within our Supply Chain Solution we have functionality that allows us to better manage inventory and deliver better in-stocks and improved sell-through. We have replenishment programs that are configurable, so it allows us to be more surgical in our replenishments to stores by accounting for variations in sales. We can have store specific allocations for add-in events. So, in the past we would have to go out and cluster these add or event replenishments. And so, what we would have is a big group of stores that would all get 20 cases. Today we can go in and we can have an individual obligation for every single one of our 12,483 stores. We can also forecast seasonal demands. So when we have a specialty store like a beach or lake store we can account for seasonal spikes and be prepared for holiday weekends. Our Transportation Management System -- previously, before we did the upgrade, our system would route based really just on outbound miles and today we're routing, the system is routing on a complete route based on total cost, not just miles.

So within one systemically integrated route we can make a delivery to multiple stores, we can go to a vendor and pick up product, we can then stop at a store on the way back to the distribution center. So, what we have seen through the upgrade of this system is we're actually making less-deliveries to our stores, we have fewer loaded exceptions, our on-time delivery performance is better and that is driving better in-stocks in the stores. We're also using the system's ability to manage carrier billing in-house reducing a third-party dependency that we had previously. Our Warehouse Management System, this is really, like I said, kind of the control tower of our 13 distribution centers. It allows us to timely ship millions of cases and thousands of trucks every week to our stores. It integrates the three key systems.

Our DC mechanization, this allows us to manage the timely flow of product quickly and easily over 120 miles of conveyors that we have in our distribution centers. It integrates the voice technology. We have employees that wear headsets and the system basically dictates their tasks to them through the headset and they are able to respond affirmative or completion of the work. And what we're seeing through that is we have got improved flexibility, we have seen increased productivity and while prior to the use of voice we had really great accuracy, shipping accuracy, we have actually seen our accuracy even improve from that standpoint. It also integrates to our labor management system. This allows us to accurately set productivity expectations for employees and fairly track their performance. I put the chart up here so you could take a look and see what we have done over the years. We're leveraging our technology improvements and process improvements to continue to reduce our impact on costs within Dollar General. So to help support the growth, reduce cost and improve customer service our distribution and transportation teams are focused on two areas.

First, building and managing a distribution center network which maximizes the capacities and efficiencies of our distribution centers while also allowing for changing dynamics such as store, SKU and volume growth. We're also managing our transportation to ensure that there are no disruptions occurring during our delivery process, allowing us to drive the lowest operational expense. So a key driver to our success is where we place new distribution centers. We leverage a modeling software that allows us to forecast out and project growth as well as the store locations and we then do a lot of analytics. So I thought I would just walk you through the process that we go through in deciding where we place a distribution center. First, we work with our real estate team and we get the current and potential locations and volumes of stores. Then we plan out five years to understand where the most immediate impact is going to occur and then we look out 10 years to ensure that we assess the long term impacts of where we place a distribution center. Each selection that we make impacts the next distribution center that we look to place or source.

So once we take those store plans than those store projections we go then and we seed 100 potential locations across the United States for where a DC might have potential. These include our current distribution center locations as well as in areas that we don't have a high density of stores. The goal is really to reduce overall cost. So, I thought I would just show you kind of an example of a decision that we made back in 2012. When we first opened stores in California and Nevada we serviced those stores from our Oklahoma distribution center. The length of haul was long, the transportation expense was high and our on-time delivery performance was not great. We made a decision to go out and lease a distribution center in California that met the growth plan, reduced our transportation miles and cost and improved our delivery service. So once we then go out -- we talked to about the 100 seeds.

Once we take the seeds, we do the modeling and we determine really which seeded location drives the lowest overall cost, we then engage with a commercial real estate firm to go out and find locations that meet our acreage requirements in that general area. And so, in this example the seed location that provided the lowest cost was in the upper Midwest and we got together with the commercial real estate firm and we went out and we visually assessed locations that they had selected for compatibility. We're out there and we're taking a look at are we near highways? Not highway miles cost money, we want to get on the road, get moving. We need to make sure that there is utilities nearby. It can be very costly and time-consuming to get gas, electric or power brought to the site. Are there wetlands or nuances that could make the property inefficient? Wetland mitigation can be costly and take years. Nuances in the property can then affect our efficiencies that we will pay for years to come.

So once we get done and we get out there we narrow the group to a smaller group of locations that kind of meet our requirements, then we remodel those locations to determine the cost impact of each one of the locations. We then work with labor consultants to go out and do an assessment of the area to ensure that there is a good labor pool available for us to staff our distribution centers, doesn't do us a lot of good really to find a great location that could save us a lot of money if we can't find people to work there. So in this case we chose Janesville, Wisconsin and we have actually begun construction and we expect this distribution center to be shipping in early 2017. So as we mentioned, we have aggressive growth plans and we have to have an aggressive network to be able to support that growth. This process certainly is not new to us. Up until 2012 we were able to make adjustments to our distribution centers, improving throughput, increasing our storage capacity that allowed us to support the store growth without adding distribution centers.

Since 2012 we've opened four distribution centers and, like I mentioned with Janesville we have a fifth under construction. Our DCs typically cost upwards of $100 million, that includes the land, the systems, the building, the material handling equipment and they service over 1200 stores. So, placement is critical and we want to make sure that we're making the best decision possible. So with that being said, we continue to work with our real estate team and we're proactively planning where our next DCs may be needed. What I really want you to walk away with here is that we're accustomed to supporting this growth, modeling our future needs and opening new DCs when needed. So we also talked about transportation as being a focus for us here and our goal is really to drive the lowest overall transportation expense while still servicing our stores.

So we focus in two areas, first our inbound. We're looking at how we can be more aggressively utilizing all modes of transportation. We use ocean, we use rail, we're intermodal, we're LTL, we're full truckload. Jim mentioned earlier that Dollar General is in the top 20 largest retailers in the United States for containerized -- the importing of containerized freight. From an outbound standpoint we really focus on stem miles, stem miles is the average distance from a distribution center to our stores. Very simple math to me is miles equal money. And as we reduce those stem miles we start to save money. And we're reducing those stem miles by adding distribution centers, working with our distribution centers to ensure that we can continue to improve the throughput through those buildings so that each store can be assigned to the most optimal distribution center.

As you probably are aware too that the driver market over the past few years has been very volatile and in order to maintain our flexibility here we're moving into operating a private fleet starting in San Antonio, Texas with 40 drivers. We're leveraging a tremendous amount of internal knowledge about private fleet. We have got a lot of good people that have strong backgrounds in managing private fleets and we're moving forward. With that being said, we're taking a very methodical approach to our expansion and we're evaluating our opportunities to leverage our size and scale to optimize the savings. We also have strong partnerships with our other carriers and, even with our venture into private fleet, they are integral to our success. In the future we envision a shared network with private fleet and external carriers. Stay tuned, there's more to come. So we talked a lot about our store count is growing, we talked about our volume is growing, we just talked about our distribution center network is growing. We need to make sure that we have leaders in place that are ready to step up when these opportunities arrive. It is critical that we keep our pipeline full.

We're focused on investing on our leaders through internal training and development. We're leveraging succession planning. We're recruiting at top logistics universities. We're building relationships with the schools to ensure that we understand the demands and needs of the leaders of the future. And we seek external talent. While we have a great group of people inside our Company, we know that bringing in other perspectives and ideas only continues to drive our improvements. So, I thought I would just share some information about our current management team. This is our distribution management team. You look at these numbers here that -- almost 50% of our management has been with Dollar General over five years. Over 75% of our management has been with Dollar General more than two years. And remember too that we have opened four distribution centers in the past four years and that San Antonio just began operations last month. The other point that I talked about on the previous slide was our internal development. We made a decision a few years ago to put together an operational and leadership development course that takes place in Nashville.

We have had all of our distribution and transportation leaders come through the training process. It is a five-day program. And while the feedback on the training has been great, probably be best benefit that we have walked away with is the peer-to-peer interaction and relationships that have been developed. Now when a distribution center has a problem or a supervisor has a problem they have got relationships with other people in other buildings that they can call and talk to about the same situation. Also talked a little bit about Janesville, Wisconsin and the fact that we're starting up this distribution center and the fact that we have our San Antonio distribution center really just ramping up right now. We have been able to really leverage a very strong startup methodology. We go out and we build these training teams and what we have done is we have been very proactive here. We go out and we look for the people that are not just good at operational or system aspects of running a distribution center, they are great teachers. So I thought I would just share two recent industry acknowledgments from supply chain insights and Gartner for supply chain excellence. These accolades would not have been possible without the strong leadership, commitment and performance of our supply chain teams.

So I'm going to wrap up here and I want to leave you with four things from the supply chain presentation today. First, our supply chain is productive and continues to remove cost. Second, we have made significant investments in technology. Third, we have a proven methodology to locate and open new distribution centers. And fourth, we have kept people as our core foundational point and they are proving invaluable. All this to really say I feel really good about the tools, the process and the people our supply chain needs to support the growth in the coming years.

I want to thank you for your time this morning.

Unidentified Company Representative

Welcome to the stage John Garratt.

John Garratt

I'm delighted to be with you today and very excited to talk about how everything you're heard this morning comes together to deliver compelling shareholder returns over the long term with the growth model. I will start with a quick recap of the strong track record of performance we have delivered. I will then outline the key drivers of our growth model, how we're investing to grow the top line, the opportunities we see to continue expanding operating margin and our principles to deliver compelling shareholder returns. As I said, we have a proven track record at Dollar General delivering on both the top line and the bottom line. If you look over the last four years, we have grown our top line over 27% from $16 billion of revenue back in 2012 to over $20 billion last year and this growth has been balanced across all categories.

We have added 19% to our store count over this time frame adding about 2,000 stores and we have added 20% square footage growth, while also continuing to consistently deliver sales productivity gains in our existing stores. We have also grown our operating profit over this time frame by 17% and adjusted EPS over this time frame has grown 36% demonstrating our track record as an EPS compounder. We have also delivered over $5 billion of cumulative cash from operations while returning $3.6 billion back to our shareholders in the form of share repurchases and dividends. Jim mentioned our consistent track record with sales. Over the last four years our net sales have had a CAGR of over 8% and we have delivered same-store sales growth of 3%, also while delivering 26 consecutive quarters of same-store sales growth. We then convert this consistent top-line growth into consistently strong cash generation.

With strong operating performance coupled with double-digit earnings per share growth and effective working capital management we have become a cash machine at Dollar General with annual cash from operations growing each and every year from $1.1 billion in 2012 to nearly $1.4 billion in 2015 and again cumulatively $5 billion over this time frame with free cash flow yields of about 4%. 2015 marked another year of very strong financial performance for Dollar General. We grew total sales by nearly 8% and same-store sales nearly 3%. We successfully balanced the multiple levers within gross margin and SG&A to deliver operating margin expansion and grow our operating profit over 9%. This coupled with our share repurchases delivered adjusted EPS growth of over 13%. With our strong cash generation we were able to return as projected $1.6 billion to our shareholders in the form of share repurchases and the dividend we initiated last year, all while not only protecting our investment-grade rating but earning a ratings upgrade from S&P and being placed on positive outlook by Moody's.

With strong earnings growth and disciplined capital management we continue to deliver outstanding ROIC with ROIC coming in at 19.1% last year compared to our peer average of 15.9%. And as usual, it was anchored by the high return investment in new store growth which has delivered 18% to 20% returns and actually has beaten that recently. When you combine all the drivers together it adds up to a very compelling long term model and puts us in the position to deliver double-digit earnings per share growth and total shareholder returns each and every year. The first element of this growth model is driving profitable sales growth. It starts with 6% to 8% square footage growth each year and, as Todd mentioned, this draws from the 13,000 organic opportunities we have before us. We also look to deliver 2% to 4% same-store sales growth each year with 150 basis points or more coming from real estate and the balance coming from the many exciting initiatives that Jim and Jeff discussed today in merchandising and operations.

We next look to leverage our operating margin managing all the levers within gross margin and SG&A. With the strong operating profit growth coupled with consistent share repurchases we look to deliver double-digit earnings per share growth each year. And with the strong net income growth coupled with diligent working capital management, deliver robust operating cash flow. And with that cash available reinvest 2% to 3% of sales back into the business in the form of capital expenditures. And with the remaining free cash flow and debt capacity return that to the shareholders in the form of a growing competitive dividend and consistent robust share repurchases. The investment in new store growth at Dollar General is a compelling one. Our new store investment has averaged $250,000 all in, that includes both the CapEx and the net working capital and it has yielded consistent improving results and improvements in both net sales contribution from these new stores and EBITDA contribution.

With a low-cost to build and a low-cost to operate we continue to see very strong and improving IRRs which have climbed nearly 21% this year and paybacks that continue to accelerate below 2 years coming in most recently at 1.7 year payback. With such compelling store level economics we continue to accelerate our new store growth. After opening 730 units last year we expect to open 900 new units this year with the pipeline completely full. We're now well on our way to filling the pipeline for 2017 where we expect to open 1000 units. We have also accelerated square footage growth along the way going from 6% square footage growth last year to 7% square footage growth targeted this year and 7.5% square footage growth targeted for 2017 with those 1000 units.

We also continue to execute about 900 relocation/remodel projects each year as we look to touch all the stores over a seven-year cycle and continue to see similarly compelling returns from these projects. If you look ahead to 2017 with the 1000 new units and 900 remodels and relocations that is 1900 total projects that year. We also continue to see opportunity to continue expanding our operating margin leverage in both gross margin and SG&A. In gross margin we're very pleased to have delivered four consecutive quarters of gross margin expansion and we see continued opportunity in the drivers that have delivered that. These drivers include strong data driven category management, as Jim mentioned, leveraging defensive merchandising, technology and process rigor to continue to reduce shrink over time, as Jeff mentioned, driving efficiencies in distribution and transportation with the various initiatives Mike just walked you through.

And as Jim mentioned, we continue to see opportunities to expand our global sourcing penetration, private label penetration and to continue growing our non-consumables business which has had eight consecutive quarters of improvement and, as you know, carries with it a higher average margin. We have implemented zero-based budgeting, leveraging our cultural heritage of thrift and further solidifying our leadership as the low-cost operator. We wanted to do this proactively and thoughtfully from a position of strength as we look to lower our leverage point for 2016 and the years beyond. And as we did this we looked at everything through three filters, the customer, our strategic priorities, and risk mitigation. Prior to implementing this our leverage point for SG&A was 3.5% comp. With the actions now in place we're in a position to leverage SG&A at sales comp levels of 2.5% to 3% while still allowing for targeted reinvestments back in the business. To deliver these savings in 2016 and the years to come we have formed cost package or category teams with executive sponsors and leaders.

Setting aggressive but achievable targets based on benchmarking we focused mostly on discretionary spending in the areas mentioned to the left, preparing bottoms up budgets, putting actions in place to deliver these targets. And we have begun working on a pipeline of future savings, reinforcing this with linkage to our incentive compensation plan not only for the traditional department budget owners, but also this new group of horizontal cost category leaders driving savings across the Company. We also have a strong balance sheet and efficient capital structure. We're very committed to maintaining our investment-grade rating and with a proven consistent financial policy, maintaining a debt to EBITDA ratio of 3 to 3.1. We will do what it takes to maintain this investment grade rating because we know it provides us with a low cost of capital and the financial flexibility and liquidity to execute our capital allocation strategy which has driven such compelling returns.

With this strong cash flow and disciplined use of our debt capacity over the last four years we have been able to reinvest $2 billion back into the business in the form of CapEx and return $3.6 billion to our shareowners in the form of dividends and share repurchases. With the strength of the model and the tremendous cash flow we intend to continue executing our capital allocation principles which have serves our shareholders so well. By delivering at the midpoint of the growth model targets that we have talked about we would generate nearly $10 billion over the next five years in cumulative cash from operations. Reinvesting 2.5% of sales back into the business in the form of CapEx would still leave us with around $6.5 billion of cash available before factoring in additional anticipated debt capacity without putting our investment grade rating at risk. This all adds up to substantial cash available to return to our shareholders in the form of growing competitive dividends and consistent robust share repurchases and our capital allocation priorities to put this money to productive use remain unchanged.

Following these principles we will continue to drive outstanding ROIC with value enhancing projects. First and foremost focusing on the high return, low risk organic growth opportunity and making disciplined investments in our infrastructure to continue supporting this growth. We're committed, as I said, to maintaining our capital structure. And with the available free cash flow available as well as debt capacity, returning value to our shareholders in the form of share repurchases and dividends. When you put it all together it adds up to a very compelling growth model and investment proposition.

Our growth model calls for the following annual targets, 7% to 10% annual net sales growth with 6% to 8% coming from square footage growth and 2% to 4% coming from same-store sales growth, operating profit growth of 7% to 11%, 10% to 15% earnings per share growth, cash from operations at a rate of 7% to 8% of sales, capital expenditures at a rate of 2% to 3% of sales and total annual shareholder return of 11% to 17% with EPS growth and dividend yield combined. In conclusion we have a proven and sustainable track record of results here at Dollar General and a resilient business model that has performed well in all cycles of the economy. We have compelling new store economics and growth opportunities and significant runway to deliver long term profitable growth over time.

We have numerous levers available to expand gross margin, we have implemented zero-based budgeting from a position of strength to lower our SG&A leverage point. And we have a very strong balance sheet and cash flow to invest in compelling growth opportunities while returning substantial cash to our shareholders resulting in a consistent and sustainable return of 11% to 17%.

I'm extremely excited about the opportunities at Dollar General and thrilled to be a part of it. Thank you for your time.

Todd Vasos

Coming down to the wire here. So thanks for hanging out with us for today. Hopefully you got some pretty good information. I know that the team is really energized and for us I think we're well-positioned. I don't know what you think, but we feel we're well-positioned to get our sales number to fit right in the framework that we have recently put out. When you look at our sales number it is all about that 6% to 8% square footage growth. It is about driving profitable sales through that box, through unit growth and through traffic growth. And again, as you heard from Jim, through our new segmentation work, we have got a couple new segments there that we're pretty excited about in that mail segment as well is that millennial segment. So, a long runway to get our sales and we feel good about where we're at. On that margin line, we have all the levers that we need to pull and we continue to work each and every one of them every single week here at Dollar General. And you heard from Jim and you heard from Jeff, we have got some real opportunity -- and from Mike Kindy -- real opportunity to continue to deliver gross margin expansion as we continue to drive that top-line sales. And again, that is a fairly unique in this marketplace. In our SG&A line and, when you look at it, our operating margin, we have great opportunity in SG&A not only through zero-based budgeting, but the initiatives that we have got in place through mining for cost reduction. And again, don't underestimate the work elimination and work simplification piece, because those are some of the keys to continue to make our stores most productive and to be able to leverage that SG&A point at that 2.5% to 3% and working to get it even lower than that. And then on that growth model, that growth model is going to be our guiding force going forward and we hope you see that the same way. This is a long term goal for us. We're looking at this business long term and we want you to look at the business long term. And if you do, we're looking at that EPS of 10% to 15% grower, that is a pretty solid growth. And we're looking at the shareholder return of 11% to 17% when you couple the EPS growth and that dividend together. And again, that is strong performance over the long haul and that is how we're looking at this. So, we have got an experienced management team here that is energized and ready to take the hill. We're working it hard. Moving fast, we have got a real big head start and we're going to continue to work this all the way until we hit numbers that we feel are sustainable long term. If you take a look at our track record, we have a great track record of being able to perform. We're an execution machine here at Dollar General at all levels. Whether it be in the stores, our regions and our back-office work we're an execution machine and we're squarely focused on executing the plan to a tee. We have got significant opportunities for that high return, low risk organic growth, 18% to 20% IRRs on all the new store projects and about the same on our remodel and relocation products. We have got a long runway to open stores here and to remodel and relocate stores. This model generates a tremendous amount of cash, as you know and we will continue to do that. With that disciplined capital allocation, when you couple all that together you have got that 11% to 17% shareholder return per year as we go out. So I hope again you are as excited about the future of Dollar General as we're. And with that I believe we're going to bring Mary Winn back up and we're going to have some time for some questions if that is okay. All right, Mary Winn, you want to come out?

Mary Winn Pilkington

Good deal. Thank you, Todd. So let's see, Laura and Erin actually have the mic. There is Erin back there and so they will be running with the mic, if I could ask you to please state your name and affiliation and keep it to one line of questioning so we plenty of time to get to everybody. And of course as you can tell from the tone today we'd really like to stay on strategic topics, it is not about the quarter for us.

On a couple of housekeeping matters, we will have boxed lunches, they will be set up outside the room here shortly. Feel free to bring those back in, but we're going to have the buses leave very promptly at 12:30. And the buses will be downstairs by the Omni entrance where Bob's Steak House is. But I would ask you to be on the bus pretty promptly at 12:30 because those buses are going to roll. Our goal is to get everybody back to the airport by 3:15, 3:30 so that -- plenty of time to catch your flight. So with that I think John and Todd are going to join me on stage because you all get to hear me answer questions all the time.

So Laura, I think we have got one right here from Paul.

Question-and-Answer Session

Q - Paul Trussell

First of all, great job on the presentation today. I appreciate the color and detail. Historically, in this discount and dollar store model, there is investment needed in gross margins to drive the top line in order to leverage SG&A. And you are trying to flip that a bit on its head and do all of the above.

Can you get us a little bit more comfortable with the enhancement of gross margin plan that you have, particularly the extent that you are taking into account and consideration of eventual or growing price investments from Walmart, especially given some of their recent endeavors on the supply chain side to lower their private-label cost, as well as help us get comfortable with the non-consumable business and those categories growing at the same pace as your consumables, because that certainly has not been the track record?

Todd Vasos

So Paul, when we look at the levers of gross margin and you saw the presentation this morning, we feel pretty comfortable that there is still a lot of opportunity there. And I think we have a track record over the years of being able to grow both that top line and that operating margin line, especially that margin line. When we introduced cigarettes back in 2013, we had a little blip there, but once we got past that and we got past the CVSs coming out of cigarettes, we were able to start to grow margins again in a sales environment that was still growing. So we feel that we have a lot of levers to pull.

We feel good where we're in our pricing as well. Our pricing is very competitive and continues to be. And as we continue to grow, we will continue to have more and more leverage. We're a $20 billion company now with a goal, when you work the framework math, to be a $30 billion company in 2020 and with that comes additional leverage and work with the vendor community to lower cost. But when you look also what our private brand offering that is really where some of our opportunities really lie, especially as you look at Smart & Simple which is our lower tier, if you will, private-brand offering, mainly in our consumable categories. And it offers the consumer a lower price than even our basic private brand and really competes well with some of the offerings that are out there from other retailers as well, as it gives our customer the choice of even a lower price.

And then when we look at our non-consumable businesses, we feel pretty good at where we're. The team has done a great job through category management and offerings that are just trend-right for our consumer. You look at our track record over the last eight quarters of quarter-over quarter increases in our non-consumable categories, it gives us great confidence that we're on the right track there as well. So I think we have a lot of tailwind right now, both on the sales line as well as on the margin lines.

John Heinbockel

John Heinbockel, Guggenheim. So, Todd, you talked about private label. When you think about the private-label architecture going forward, how do you think that will look like in two, three, five years out? How much more space do you allocate to it? Because I imagine Smart & Simple will get bigger and so will [indiscernible]. I don't if there are other brands coming beyond those, beyond what you've already announced. And where does the space come from if you are giving more real estate to private brand?

Todd Vasos

John, private brand to our consumer is very, very important. We have some of the highest brand penetrations, for instance, in health and beauty today and health for sure, especially with our Rexall brand. And you saw we got those same questions, if you remember, when we introduced Rexall is where is that space going to come from. And I think you have seen from us, we're very willing to work with our vendor community to make sure that case pack sizes are right for our stores.

We still have a lot of opportunity to reduce case packs. And while I don't believe we're going to go any higher on our shelf heights today, I believe that case-pack reductions will help be able to introduce some additional private brands, as well as depending on where the customer moves. We have always said we will service the customer where he or she wants to be serviced. We won't push them into a private brand or a national brand. But if we see that customer moving more and more to private brands, then we will offer her more private brands and we will find the space within those planograms.

But when you look at all of our private brands to include Heartland and some of the other ones coming, we feel to be able to compete in the marketplace and give the consumer the offering they need, we need to continue to foster those private brands. You are going to see more and more and more from us. Again, I would rather do that and bolster that margin than anything else. So it is a win-win for our consumer.

Dan Wewer

Dan Wewer, Raymond James. Can you give us a bit more detail on the internal rate of return calculation on new stores? You called that out at 21%. Is that a cash-on-cash return or are you capitalizing the operating leases and adding the rent back into the numerator? And then also in the example you gave, we're expanding from I believe it was 8 stores to 15 or whatever number of stores. What happened to the internal rate of return on the last batch of new stores that opened in that market?

John Garratt

In terms of the calculation, we do capitalize the leases into that calculation. And it is based on basically running out the cash flows anticipated based on the pro forma sales which the team does an amazing job predicting and the cost structure for that store and then updating that as we go over time and that is an after-tax IRR as well. I think the question was, why did we see that dip a few years back?

Dan Wewer

In existing market, did you see any diminishing IRR on the last two or three stores that opened?

John Garratt

No, we have not seen -- the IRRs continue to be as strong as ever. We continue to see improvement there and I think it is a real testament as to the phenomenal real estate team we have, the process rigor we have, the technology we put to use. They do an amazing job finding the best markets, finding the best locations and the predictive capability in hit rate of opening these stores is pretty amazing. So as we've accelerated development, we have not missed a beat.

John Zolidis

John Zolidis, Buckingham Research. So you are opening 900 stores this year, 1000 stores next year. You have given us a target for 13,000 incremental locations. So my question is, what does that assume for competitive openings when you are looking at the market and the market opportunity for Dollar General? And then kind of as you discuss that when you look within some existing markets, are there any current markets where on a local basis you are seeing saturation or you see the market under pressure because competitive openings have increased the supply greater than demand? Thanks.

Todd Vasos

John, when you look at the 13,000 opportunities that we talked about, now we know we won't get all of those opportunities. That is what we consider to be able to house, if you will, a dollar store chain. But because of the way we're going about opening stores with the 900 this year, 1000 next year, we feel that we're going to get our lion's share of that 13,000. And it is contemplated into that long term model that we put out of that 6% to 8% square footage growth.

But as I said in my prepared remarks earlier, this economy continues to create our core customer. And I know it is hard to understand that, but until you see that happening right before your eyes -- and this new segmentation work is a perfect example of that, of the customer that we're now attracting so much different than that customer that we were attracting just three to four short years ago. We haven't yet put that new segmentation work into the model yet. I mean, it is so new, our real estate model and once we drop that in, feel pretty confident that we will actually see some new real estate opportunities probably come out of that model.

And then to answer your last question, I think you saw we look at every trade area and remember the little example that I gave. And every trade area is examined every year and there's hundreds of them, thousands of them, when you look across the U.S. And there are some areas that are a little more developed than others, but there's always opportunities even in those for relocations, perhaps a very productive Dollar General moving to a Dollar General Plus. So there's opportunities even within markets that are currently, let's call it, 80%, 90% built out, there is always opportunity to expand the footprint for Dollar General.

Brian Cullinane

Brian Cullinane, Wolfe Research. Just a question kind of following up on the store expansion, you talked about the new customer segments. Where do you see some of these customers coming from? Where do you think, as you look at 13,000 new stores, where do you see some of that share coming from?

Todd Vasos

When we look at the segmentation work that was just done and then the past segmentation work and knowing where our customer is at today, we see that there is some -- we're taking some share from grocery, some from drug out there. But we're taking a little bit of share in a lot of different spots. And I don't think as you look at it, there is one in particular area where that share is coming any heavier than others. Now it does change by location. So geographically across the U.S., the contributor of share may be heavier in grocery in some areas and may be heavier in drug in others. But overall, it is pretty well-balanced, the share that we're actually getting and continue to gain.

Stacie Rabinowitz

Stacey Rabinowitz, Consumer Edge Research. On the point about the new segments, can you go into a little bit more detail about how those segments shop differently when it comes to private label and promotions?

Todd Vasos

Yes. When you look at, for instance, Stan and you saw -- he works, he has a pretty decent job, he is not on the lowest income level that we serve. But Stan is the kind of person that doesn't like to shop around very much and he wants to get in, get out and he will buy a private-brand item if he can trust the quality of it. I can guarantee that based on the information that we have gotten. So we feel that private brand is going to play a pretty big part in Stan's piece. But also the mix that we put in in recent years, I think the one reason that we have got more Stans today than we thought we did was the introduction of beer, the introduction of tobacco and some of that real convenient type items.

Stan was probably going to the local convenience store in a lot of cases to do some of that shopping and we're now seeing that Stan is starting to come to us more and more. When you look at the millennial piece, that is the one that is very intriguing because millennials today, it is a totally different shopping experience for them than what we're used to. I've got four daughters and they all fall within that millennial age group of 20 to 29 years old. And I can tell you that brands don't matter to them, whether it is clothing brands, whether it is the brands that they shop to feed their families and/or use to wash their clothes. What they are looking for, quite frankly and they're the most proud of is to go and find a real deal. And they talk about the deals they find socially and it is interesting to me to watch my younger daughters as an example shop for clothes.

They make a trip to Goodwill on a weekend and shop and try to put together a real eclectic wardrobe and they are proud of that. I mean they come back and showing everybody what they were able to put two together and it is a fun, it's a treasure hunt and it is a whole different clientele than what we're used to providing for. But what we're there for her with is a good offering of private brand and good prices. And again, she wants to be able to walk out and say, you know what, I got all of this for $10 or I got all of this for $5. And I think we're set right in a perfect spot to capitalize on that shopper.

Ed Kelly

So two questions but interrelated. One related to the comp guidance. You incorporate 4% at the upper end of the range. That is a level that you haven't been at in a few years. So I guess my question there is, as you were contemplating the guidance, what were the drivers that you thought about that would get you to that level? And then also related to the outlook, you don't incorporate much in terms of operating margin expansion despite the fact that you seem bullish on the gross margin and you have zero-based budgeting. So if you could just help us understand that dynamic as well.

John Garratt

Sure. We thought about several drivers around the comp growth. The first one I mentioned in my presentation starts with real estate. That delivers 150 to 200 basis points between the new units, the relocations and the remodels net of cannibalization. As we ramp up the development, you could see that move toward the higher end of that range over time with the maturation of those new units and the accelerated development. The other big piece obviously that comes from that is the numerous initiatives you saw today in merchandising and operations, some pretty exciting things in terms of just the science that is going into optimizing the SKUs, the new format, a lot of excitement. The areas where we see ourselves underserved in categories, growth categories, we see that as big opportunities for us.

The other thing that could help you over time is we have been fighting a slightly deflationary -- we have not had any inflation on the top line. So if you get that combination of the development really kicking in, these numerous initiatives around the merchandising assortment, the layout, not to mention the ops initiatives that is driving sales, coupled with a little bit of inflation, that can push you up there. But the thing I will note is that the model, the beauty of the model, it works very well anywhere within that range. And we have taken steps on the cost side to make sure it works well within that range. So we feel very good about where we're at there. And then the second question was on operating margin expansion. So we did build in, as you saw, the operating profit growth exceeded the net sales growth. So we do build into that operating margin expansion and we continue to believe that there is room for operating margin expansion, both in gross margin as well as SG&A, to drive that growth. We really look at these in tandem.

We don't focus on one versus the other and it is a balancing act each and every year in terms of where the opportunity is, where we may need to reinvest over time. We've said, as over time we may need to reinvest in everyday low prices, for instance. So what we're really focused on is the bottom line in that 11% to 17% from a total shareholder return. Operating margin expansion is one lever of that and we do believe it is a lever that has a lot of potential over time. But we're really looking at all of the levers and we want to make sure at the end of the day that we have a sustainable growth model that can deliver that 11% to 17% and that is really where we're focused.

Vinnie Sinisi

Vinnie Sinisi, Morgan Stanley. Just wanted to go back to more the assortment opportunities. It sounds like, obviously, we will see some of this I'm sure at the store this afternoon. But in terms of getting more of the underserved categories, expanding the SKUs, the expanded coolers, private label, etc., you name it, can you give us just a little bit more perspective on within your given size boxes, where is space either coming from, going to? Should we expect over time any real change to your SKU count or shelving height, etc.? That would be helpful.

Todd Vasos

When you look at our category management system and I said it earlier, we have one of the most robust category management processes that there is out there. I think you have seen from us over the years, last seven to eight years especially, we have expanded and contracted categories all along, depending on where the consumer was in her shopping and, quite frankly, where she was in the economy and how much money she had and where she wanted to shop. And we continue to do that and we do that each and every year. When we look at expanding some of these immediate consumption areas, the perishables, health and beauty, yes, there is going to be some fallout from that.

And we contemplate that within the total sales box and the margin. But the majority of the fallout that we see right now, some of it is coming in some of the apparel areas, some of it coming out of some of the home and houseware areas. But when you look at some of the food areas as an example, there is even opportunity there where we're actually contracting certain categories that we may have been pretty large on in the past that currently the consumers' appetite for it has been reducing. For instance, dry cereal. Dry cereal is a category that is in decline, secular decline everywhere.

We continue to optimize within each of the categories as well to open up space. So it doesn't come from just one area, it comes from a multitude of areas every year. And when you look at SKU expansion, we don't see a big SKU expansion happening. We have got around 10,000 everyday SKUs, give or take 10%. I think that is going to be a fair number to look at. We don't see us, again, putting a lot more SKUs in the store without eliminating SKUs. But again, all of that is put into this category management process that we talked about and we feel pretty good about those sales numbers that will be derived from it.

Scot Ciccarelli

Scot Ciccarelli, RBC. It sounds like the whole mix between consumables and discretionary and the relative stability we have seen there has been a pretty big supporter of the gross margin performance in the last several quarters. As you guys continue to accelerate the expansion of cooler doors, how do you keep that SKU from getting too far away from you? And in addition to that, how far can that mix vary and you guys can still maintain or even expand gross margins?

Todd Vasos

That is a great question because we look at that all of the time, is what is that fine mix because our goal is to try to run consumables and non-consumables at the same rate of same-store sales. While we haven't done that over a long period of time, we have spent a tremendous amount of time readying ourselves to be able to do it and you are starting to see the fruits of that. But one thing that I didn't mention earlier that I think is important is that when we talk about what we reduce inside of a store and what we expand, is not a one-size-fits-all and our ability now to go in, look at it store by store is pretty important and in some stores we reduce as I said, we may reduce on apparel and other stores that sell apparel well, we don't.

So what we're trying to do is really optimize where we don't sell things as well, to expand the areas that we do. If you do it that way instead of peanut butter and across 12,500 stores as an example, the outcome is much, much different. And we did some of that last year and we saw good success. The early indications, because we've already started planogram season this year, is that we CapEx sustain our sales number without having to only rely on either consumables on non-consumables. But the good piece of the mix is that as we continue to work our way on a journey to $30 billion, we get more leverage as well from the vendor community.

So, the more that we can drive that topline sales, I think there's still margin expansion opportunities for us as we look to put in the consumable goods. And remember, not every consumable item is created equal either. When you extend health and beauty, it has as good of margins in some cases as many of my non-consumable categories have, perishables maybe not so much. So it is a fine mix, but we put it all into that model to make sure we can mix out pretty well.

Wayne Hood

Wayne Hood, BMO Capital Markets. I had two questions, one with the expansion of coolers. The good news is you can do that. I guess over time as you think about it strategically, do you ever get big enough to where you bring that back in-house or does it introduce a level of complexity that the stores really could never handle, given what the challenges are today? And if you can't bring it back in-house, looking at the growth that you will have the next few years and even over the long term, how do you ensure you get the slotting allowances for those categories by region that are going to be growing to make sure you are in stock and you can't deliver on the numbers overall? Then I have a follow-up.

Todd Vasos

When you take a look at our distribution today, as you know, we really don't distribute anything that is in those perishable categories. We have looked at it. To your point, it does introduce a level of complexity, not only in our supply chain but also within our stores. We continue to look at it, but we have real good partners today in SpartanNash, in Armour-Eckrich and many others across the U.S. that we rely on.

And once again, these companies as well as your CPG companies are looking for companies with growth. And I think as we have demonstrated here today and they see it every day is we're a growing company. And that allows us the ability to ensure that whether it is a slotting allowance, whether it is cost of goods, whatever it may be, we're able to obtain what we need to make sure we hold our margins.

Now, I think long term I think we continue to monitor, we look at it. And we always look at where that intersection would be where it doesn't make sense somewhere down the road to bring that in-house. And there may be a time down the road, not in the near future but sometime down the road, where we may want to do that.

Alvin Concepcion

This is Alvin Concepcion at Citi. Just a question on the 13,000 unit growth opportunity, I'm wondering does that contemplate the smaller store format. And if not, is there upside to that number if it proliferates? The second question is on the payback period. It has been coming down since 2013, it looks like. Is there room for more upside there or what gives you comfort in at least maintaining that level?

Todd Vasos

I will take the first part, John, if you want to take the second part. The first part is it does not contemplate fully that small store, especially as it relates to the rule opportunity that that small store may possess as we go forward.

So I think that is why I said I was pretty confident in that as we continue to look at our real estate model, whether it is our core consumers that are changing, whether it is the model that we're building and format that we're doing, that that 13,000 opportunities will continue to grow over time. So I think there will be some opportunity to continue to see growth there, especially in those deep rural areas where the rooftops are not nearly as large as what we're used to today.

John Garratt

I would say on the payback and we have been very pleased with the performance and the trajectory of that. I think anything under two years is phenomenal and with the returns approaching 21%, that is phenomenal. Soaks I won't predict or say that we're going to improve upon that. But if we can continue to deliver that, we feel really good about that.

And as I said before, as we look at what we have in place with just the amazing job the team is doing, finding the best sites, the predictive -- not only finding the best markets but the best sites, the predictive nature of the sales, the cost structure and the hit rate that we have with these stores. They also do a phenomenal job engineering costs out of these stores, as evidenced by the latest reduction in 20% of square footage to our stores. It is something that despite rising construction costs, they seem to continue to find ways to engineer cost out of that to keep it such an efficient investment and continue to find great markets to deliver these compelling returns.

So I don't see that changing in the near term. It is possible it could get better, but I would say if we stick with where we're at, we feel very good right now.

Mary Winn Pilkington

That sounds great. Well, thank you all very much. With that, boxed lunches will be out. Buses, again, downstairs by Bob's and at 12:30 sharp out at the buses. Thank you all very, very much for coming today. We appreciate your interest in Dollar General.

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