Ladies and gentlemen, this is the Dollar General Corporation First Quarter 2012 Conference Call on Monday, June 4, 2012, at 3:30 p.m. Central Time. Good afternoon, and thank you for participating in today's call, which is being recorded by Conference America. No other recordings or rebroadcast of this session are allowed without the company's permission. It is now my pleasure to turn the conference over to Ms. Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations.

Thank you, Jeff, and good afternoon, everyone. On the call today are Rick Dreiling, our Chairman and CEO; and David Tehle, our CFO. A couple of things before Rick begins. This afternoon we filed our preliminary prospectus supplement relating to a potential secondary offering by several of our existing shareholders of up to 25 million shares of our common stock plus up to an additional 3.75 million shares to cover overallotment. No shares will be sold by the company. This offering is pending and there can be no assurances as to when it may be completed, if at all. We will not comment further on our prepared remarks regarding the offerings nor will we address in the Q&A session that follows. So in advance, thank you for not asking about the topic. Next, I'd like to remind you all of our upcoming investor conference in Nashville on June 25 and 26. If you would like to register, please feel free to call me or send me an e-mail, and we will give you the information. Now to the first quarter results. We will go first to our prepared remarks and then we will open up the call for questions. Let me caution that today's comments will include forward-looking statements about our expectations, plans, objectives, anticipated financial and operating results and other matters. For example, our 2012 forecasted financial results and initiatives, expectations regarding potential debt and share repurchases, debt refinancing and capital expenditures and comments regarding expected consumer economic trends are forward-looking statements. You can identify forward-looking statements because they do not relate solely to historical matters or they contain words such as believe, anticipate, project, plan, expect, forecast, guided, intend, will likely result or will continue. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our first quarter earnings release issued this afternoon, our 2011 10-K, which was filed on March 22 and the comments that are made on this call. You should not unduly rely on these statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call. We will also reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this afternoon's earnings press release, which can be found in our website under Investor Information, Press Releases. This information is not a substitute for the GAAP measures and may not be comparable to similarly titled measures of other company. Now it's my pleasure to turn the call over to Rick.

Thank you, Mary Winn. Good afternoon, and thank you all for joining us today. We had another record first quarter, and we are on track for a great year at Dollar General. Dave will provide more details on our financial results in a moment, but I want to share just a few highlights from the quarter. Our total sales increased 13% over last year to $3.9 billion. Same-store sales grew 6.7%. Both customer traffic and average ticket increased for the 17th consecutive quarter. Operating profit, excluding a $13 million litigation charge in 2011 and a secondary offering expenses in 2012, increased 15% to $385 million or 9.9% of sales. Interest expense was down $28 million and adjusted net income increased 29% to $215 million. Adjusted earnings per share increased 31% to $0.63 per share. Sales were strong in every department in our consumables and seasonal categories, and a positive sales momentum in home continued. We're very pleased with the sell-through of our holiday, seasonal merchandise, including Valentine's Day and Easter. Spring and summer seasonal sales had a strong and early start due to warmer weather and our improved product quality and assortment from our global sourcing initiatives. I'll talk more about our operating initiatives in a moment but now I'd like to turn the call over to David.

Thank you, Rick, and good afternoon, everyone. Rick covered the highlights of our first quarter sales performance, so I'll start with gross profit. Gross profit dollars increased 13% for the quarter with a 2-basis-point decrease in gross profit rate or essentially flat year-over-year at 31.5% of sales. This performance was better than we had anticipated going into the quarter for a number of reasons. First, we leverage distribution and transportation cost even though average fuel -- diesel fuel rates were up about 7% and we brought 2 new distribution centers online in the quarter. Also, year-over-year shrink was favorable and markups on beginning inventory were higher than last year. Finally, the LIFO provision in the quarter was $1.6 million compared to $3.6 million in the 2011 quarter, a 6 basis points favorable impact. These factors were offset by higher markdowns and a greater mix of Consumables. In part, the increased markdowns resulted from our new apparel strategy and were anticipated. We're very pleased with the gross profit rate for the quarter. Our 2 new distribution centers ramped up more efficiently than we anticipated and our category management processes have continued to be very effective. SG&A expense was 21.6% of sales in the quarter, a 20-basis-point improvement after excluding $1 million of secondary offering expenses in the 2012 quarter and $13.1 million related to certain litigation settlements in the 2011 quarter. The 20-basis-point improvement was primarily the result of our increased sales and more effective utilization in store labor, which was due to benefits from our workforce management system. Also, our mining for cost reductions mindset continues to pay benefits. For example, our cost-reduction efforts affecting store rent and other expenses contributed to the overall decrease in SG&A as a percentage of sales. Several expense items increased at a higher rate…

Thank you, David. We had yet another great quarter, and we are focused on growing and improving every day as we continue to build loyalty with our customers. In our investor conference later this month, we intend to share some new insights into our customer, their spending habits and a few things that have changed in recent years. But the ultimate measure of customer trends shows up in our continued strong market share performance as measured in syndicated data. Over the last 12 weeks, 24 weeks and most importantly, 52 weeks, our Consumables consistently gained share in both units and dollars against food, drug and the mass retail channel. In our year-end conference call, we discussed our most significant operating initiatives for 2012, and here's a quick update. First, store growth. In the first quarter, we opened 128 new stores, including 8 Dollar General Market and 7 Dollar General Pluses, which are our new larger format stores. The DG Plus stores have an expanded cooler section for convenience, wider aisles for shopability and increased linear space for better in-stock position. This larger format layout is driving a higher basket as we [Audio Gap] for our customers’ both value and convenience. In addition, we remodeled or relocated 224 stores in the quarter, including 12 Dollar General Market remodels and 20 Dollar General Plus stores. We opened 11 new stores in California and also added our first store in Massachusetts. These new states are all off to a great start. At the end of the first quarter, we had 10,052 stores in 40 states. To support our stores, we opened a new distribution center in Bessemer, Alabama and another in Lebec, California in the first quarter. We're very pleased with how well these DCs are performing. Currently, we're shipping approximately 700 stores…

So, Jeff, we'll take the first question, please.

Our first question comes from John Heinbockel from Guggenheim Securities.

So couple of things. If you look at SG&A, so the run rate had been sort of in the high single digits, bumped up here in '12. So how much of that do you look at as timing and more transitory versus something that's more structural? And then I guess how much of that was the growth initiatives with the DCs in California?

Definitely, a piece of that has to do with the growth initiatives, both in terms of incremental advertising costs that we had in the quarter that will continue to have in the second quarter to support our California effort. And then the cost, as we mentioned before, as the distribution centers come up to speed before they start shipping, a piece of that cost goes to SG&A because it can't be capitalized in the inventory and that definitely hit in the quarter also. For the full year, our goal remains to leverage SG&A, as we've told you before. And again, we don't give specifically -- specific quarterly guidance on that. But clearly, there are a few items hitting there that we've mentioned that are causing SG&A to be a little bit higher that won't be there as we get on an ongoing basis more back to average run rate for the business.

Nothing has changed when you look at the various expense items, nothing has changed structurally?

That's correct, nothing has changed structurally.

And secondly, Rick, could you talk about DG Plus versus DG Market in terms of differences in returns, how you think about where you put a Plus versus a Market, distinguish the types of locations between the 2? And then do you think DG Plus has more potential when you look out over 5 to 10 years than Market would?

Yes, great question, John. It's still really early as far as the returns are, and we're continuing to work our way through them. I will tell you, I am pleased with the progress we're making on both the Plus and the Dollar General Market. I view the Dollar General Plus, John, as the opportunity where we anticipate doing larger volume. I think if you think in terms of a 7,300-square-foot store, that store gets really constrained when you start doing 1,000,007, 1,000,009 a door. And the DG Plus affords us the opportunity with incremental, refrigerated space, wider aisles, so 2 carts could get by and of course, additional linear footage to help us with our in-stock. The DG Market, we are still very excited about. We think that gives us the opportunity to differentiate ourselves in smaller, rural markets, as well as perhaps the urban environment down the road. So what we promise to do is keep you guys up to date as we move through the year on all of these.

All right. And then one last thing, when you look at nonconsumables, do any categories jump out where you think you need to increase assortment, where you think there's a market opportunity, be it the housewares or toys? Or is there something that jumps out as a unique opportunity to add assortment in?

Yes. I would say, John, as I look across the nonconsumable side, I'm very pleased with where we're going at seasonal. We're doing a lot of hard work on it, again, as much improvement as we've made, hitting it really hard again towards the end of the year. And you have to say, what we're seeing in home decor, what we're seeing with window treatments, items like that, I'm pleased with what I'm seeing there. Our struggle continues to be hanging apparel, and we're still working on that.

Our next question comes from Charles Grom from Deutsche Bank.

Just on the -- I'm just following up from the last question on the DG Plus, where do you guys think the market potential is for the Plus stores? And just to clarify, are those remodels or they're actually new stores that you guys are opening?

Yes, great question. It's actually a combination of both. We have remodeled some higher-volume Dollar Generals to see if we get a bigger leap with the additional space -- or relocated them rather. And then of course some of them are out of the ground. And in terms of what is the long-term potential, we really haven't called that out yet, other than to say, Chuck, we're pleased with what we're seeing at this stage of the game.

Okay, fair enough. And then on the comp, can you give us a little bit of clarity on the traffic and ticket during the quarter? And also how it trended? And I guess my follow-up, given the strength, why not raise the comp guidance for the full year and keep it at 3% to 5%?

We saw traffic and ticket both increase through the quarter. The cadence to the quarter, as you can imagine with the shift in Easter, we had a good start in February, had a great March and of course, it's slowed a little in April. But if I put and added March and April together and divided by 2, you would say to yourself, you had a really good April and March. To be honest with you, we feel good with what we're seeing in May, but it's too early in the year to really step out and up the guidance. What I'd rather do is look at you guys at the end of the second quarter after we've got one more quarter and tell you, give you a feel for the year. There's just -- Chuck, there's so much chatter with the election. You saw what happened with unemployment. There's just a lot of noise right now, and I would just like a little more time.

Okay, that makes sense. And then just as a follow-up to that, any major changes on a competitive landscape, whether it's with FDO or with Walmart?

If I look at the overall competitive landscape, I would say it's actually a little calmer than we've seen the previous couple of quarters. You look at our numbers that we posted in the first quarter, where we're certainly doing -- controlling what we can control. So I feel pretty good about the competitive environment now.

Our next question comes from Deborah Weinswig from Citi.

So what inning do you think you are in with regards to improving out of stocks?

I would say we are probably -- probably to a football game, I'm a big football fan, I would say first quarter.

Okay. And then can you update us on your new apparel strategy?

We started the apparel strategy, we're doing the more promotional pricing. We are pricing very much like you'd see when you would go into a more traditional seller or product. I can say that we've seen some traction in the infants and toddlers. We're doing a little bit better in men's. The important thing is that we're seeing units improve. While we're still struggling on the overall sales number, we're starting to sell more of it. And I think we're going to have to give it a few more months, Deb, to unwind. And our new VP stuff doesn't really start to show up until September.

Okay. And then last question, how should we think about the current margin benefit from global sourcing?

We continue to work on our sourcing efforts, Deb, overall. The receipts grew in the first quarter versus a year ago. It continues to be one of our largest items in terms of where we're going to get long-term margin growth. We've opened up -- we're in the process of opening an office in Turkey and one in Northern China. We continue to work on ways to increase that effort. So I think we're getting a little bit more in the Consumables, also on sourcing. So we're pretty pleased with that effort right now.

Our next question comes from Aram Rubinson from Nomura Securities.

Two questions. First if you can give us some line of sight into fresh and how the supply chain is perhaps being reworked to allow that to over time to find its way into the 10,000 stores that you got out there.

Yes, in regards to the fresh items, we're still using the outside companies that we have dealt with before. While we're moving a lot of products overall, it's still a small amount of product on a store-by-store basis. And we use 2 companies to help us. We use Armour-Eckrich in the base stores and the Plus stores and we use Nash Finch On the DG Markets.

And so in terms of rolling that forward into the core Dollar General stores, we're still not quite at that point where we're ready to roll out fresh into that assortment?

Yes, sir. That's correct.

And then just a follow-up, if you can give us a little line of sight into LIFO. That was a little bit more favorable than it's been. Any idea on how we should think about full year there?

Yes, so the LIFO charge in the quarter was $1.6 million versus $3.6 million in the prior year. And right now, and again, this changes obviously every quarter, it changes depending upon what vendors are doing on prices. But our best thought process is it's somewhere between $8 million and $10 million in total for the full year.

Our next question is from Matthew Boss from JPMorgan.

You guys mentioned earlier that the mix of $1 price point items has increased 150 basis points since 2011. What would be the total mix today? And what's been the initial impact on the overall basket?

Yes. We're in about slightly north of 26% now. And in terms of the change in the basket, I can't -- I don't know what that is off the top of my head. I can tell you this though, that we added the $1 items and we are not suffering any kind of cannibalization with the items we added in. So to give you an example, we put in anywhere from 12 to 16 foot with a $1 HBA and assorted items, and it didn't erode our margin and it didn't cost us any sales. So it's all incremental. So our feel is it's a purchase we weren't getting.

Okay, great. And then second question, can you talk about the initial performance from your California store -- your California store rollout?

Yes, we have right at 10 stores in California, and they are exceeding our real estate pro formas. So we're doing much better than we thought we would be doing.

Next question comes from Dan Wewer from Raymond James.

I wanted to follow up on your comment about the market share capture from the drugstores, big retailers and the mass market. So in thinking about the drugstores, you're obviously winning on a pricing advantage, I'm assuming breakeven on the convenience niche. On the other hand, when you're taking share from the mass market, you're probably winning on convenience, breaking even from prices. Is that the way you think about it? And of those 3 channels, which one do you think is most vulnerable to yourself and your competitors?

Yes, I think you called it perfectly to be -- yes, I think you called it perfectly. If you look at the Nielsen data, we're gaining share from grocery first, drug second and mass third. So that would be kind of how I would look where it's coming from.

And grocery, winning on the convenience niche?

I would think on grocery, you're winning on price and convenience, to be honest with you. I could see both.

How do you see those 3 channels responding to your success? I can't imagine it's just going to sit there and not do anything to defend their market share.

I think the issue is we deal -- if you look at all of consumable retailing, it's an $800 billion pie. And I think what's going on is that, Dan, we're taking a little bit from a lot of different spot, and it's really hard to really focus on just us. So I think when we -- as long as we stay true to what our formula is, which is every day low price and convenience and don't get into the trap of going to high, low, I really believe that we're going to be able to move the business.

And then the last question I had is on the sales productivity of the Plus and the Market stores. When you think about the extra 2,000 to 3,000 square feet in a DG Plus, are you seeing any diminishing return on sales per square foot? Or is it actually increasing because the space you're devoting is primarily in Consumables?

Yes, the sales per square foot is going up. And it's a question now of us managing our way through what the cost to build them, and the marketing team is continuing to work on the mix. So it's a matter of fine-tuning the vehicle.

Our next question comes from Joseph Parkhill from Morgan Stanley.

I was just wondering if you can maybe talk about your comps accelerating over the last 12 months. Where do you think from an income level perspective that's coming from? Are you seeing incremental trade down from a higher income consumer? Or do you think the lower income consumer is feeling a little better? And maybe talk about paycheck cycle, if you're seeing how that compares to the prior years.

Sure, Joe. I would say we are still growing our share of wallet with our existing customer, and there's been no change and the fastest-growing customer segment we have is $70,000 or more per year. So I would say you're continuing to appeal to your core customer. And at the same time, the changes we've made are -- that we've made over the last 4 years are continuing to be recognized by the trade down and trade-in customer. And I apologize, I forgot the second part of your question.

If you could comment on just the paycheck cycle if you're seeing it, how pronounced it is?

Yes. I would tell you the paycheck cycles are as pronounced as they've been the last 18 months, and there's been no change in that. Every indication is that our customer is still very much affected by what's going on and there's been no change in their sentiment at all, Joe, just to be straight.

Okay. And then just a little bit on how do you feel the weather impacted 1Q? Do you think it pull forward a little bit of demand? How are you thinking about that? I mean I...

Yes, that's a great question. We have felt all along that a couple of things happened, January, February, particularly number one is the warmer weather. I think while the warmer weather also put more money in people's billfold because they didn't have the big heating bills. So I think you had -- the customer had a little more money and I think they spent it. And I have said for some time here, Mary Winn is getting tired of me saying it, I think as we look at sales in May and June, that's really going to tell everybody what's going on.

Our next question comes from Meredith Adler from Barclays.

So a couple of questions for you. Just following on kind of the last set of questions about the consumer and the paycheck cycle, you do expect -- accept food stamps in most of your stores, are you seeing any increase in the utilization of food stamps?

Meredith, we accept food stamps in all of our stores. And the growth we've seen in food stamps mirrors that growth that's taking place in the country. It's not like it's growing significantly faster than anything else in the stores today.

Okay, great. And then you talked a little bit about 4 specific planograms. I was wondering if you could talk a little bit more about that. I'm wondering whether you're talking about just allocating space differently to the same product, maybe not having some products in the stores, are you -- or are you actually buying unique products that will only go into some stores? And what do you think that means for the efficiency, especially the distribution centers and the buying process?

Yes, to answer your question, it's one and two and not a lot of three. We are going in, and I've used the example of when you build a store in a more mature neighborhood, you would expand the incontinence and contract on the diapers. Basically, the bulk of the set is the same. You take the slower moving out and expand on the faster moving and perhaps, even add additional couple of SKUs. We are also looking at the fact that there might be some categories that we don't need in certain stores. But in terms of going in and altering the mix and really changing the number of SKUs, that would be a logistics nightmare, if you did that.

Okay, great. And can you comment on sort of customer reaction? I guess to some extent this would go with the in-stock efforts you got, right?

Yes. And actually where we're seeing, where it gets done is improved in-stock numbers. That's exactly right. And Meredith, what's been fun about it all is that the store managers are excited about it. Every time I go into a store that's been done, the store managers is like, "Oh my gosh, why did it take it so long to get it done?" It's pretty neat.

That's great. Final question is just about the real estate in California. Are you seeing any changes? Is it difficult to get the size of store that you want? It sounds like you do buy some real estate and build your own stores. Is that more the case in California or less? Maybe just comment on changes in costs as well.

Yes, I mean the real estate program -- the surprise we've had in California has been the price of real estate, just to be -- which I think we've said a couple of times. And in terms of build-to-suit programs and all that, it's very typical of what we're doing in any other market. There's no significant difference there.

When you say price, then the price -- you mean high?

Low.

Low?

Yes, there's an abundance of real estate out there that's small, which is what we want.

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

Can you talk about any changes in your inflation expectations given conversations with the vendors at this stage?

Yes, it's definitely come down. If you remember in fourth quarter, we were at like 200 basis points hit on inflation and now it's more like 50 basis points, so for the full year, like 0.5%. So it's definitely come down.

Scot, and we're seeing it broad, across a lot of commodities, too, sugar and flour and oil. Everything's coming down.

Okay. And your reaction, will you actually -- how will you react? Are you trying to lower the price point or increase the value to the consumers?

Yes, that's a case-by-case item. But I will tell you, I want to reinforce, we're really committed to EDLP thing. So we'll do what we need to do.

Got it. And then the second question is regarding the new DCs in the quarter, were they a drag on a net basis? And as they ramp up, should we -- how should we think about the financial benefits that they should deliver?

Clearly, any time you're opening up a new distribution center, there's going to be somewhat of a drag because it's just not efficient when you first -- when it first starts out. As we get down the learning curve and as we add more stores to each of the distribution centers, they will get more efficient and ultimately -- obviously, the reason we did it is it helps us, particularly on our transportation cost, cutting down the transportation, cutting down stem miles. So yes, it will absolutely help us in the long term once we get over the initial start-up period.

And how long does that typically take?

It varies by individual DC. As we go...

6 to 8.

Yes, probably 6 to 8 months. And again, we opened these in the February, March time frame.

Our next question comes from John Zolidis from Buckingham Research.

I had 2 questions. One, you just mentioned that inflation seems to be coming down, yet comps have been accelerating for 5 consecutive quarters. What do you attribute the sequential improvement in comps to?

I think, John, we have been relentlessly focused on unit growth. And I think it's translating into more customers, more trials. I tell you, this time last year, we made a pretty big call, and I think it's worked out as I look back the last year.

And by unit growth, do you mean the items that people are putting into their basket?

Well, what I mean is if you go back and you look at the last year, John, you had all of this inflation taking place and people were passing it all on to the customer, and it's slowed their unit growth. We recall, we took our price increases a little bit at the time and actually didn't pass them on and we kept our unit growth going, which created more market share for us.

And then my second question is on SG&A. I don't know if you can give us any more color regarding some of these other items you cited in the press release, the debit card usage, the preopening costs, on the higher workers' comp, general liability insurance, advertising, all of these items that served to dampen the SG&A leverage in 1Q. I wonder if you can quantify those. And then secondly, going forward, are there any of those that don't continue?

I think, again, we really don't give that granular in terms of quantifying individual line items with SG&A. When we started the year, we made the comment that for the full year, our goal is to leverage SG&A, and that remains to be our goal. As we go through the year, we really don't -- we don't see that changing. The one item that goes away in SG&A is both DC costs that we talked about. Again, as you're starting up a distribution center and you're not shipping yet, SG&A does take a bit of a hit for that, and that will go away.

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

A couple of questions. One, your seasonal business had a nice acceleration and you called out some nonconsumables categories like summer seasonal and toys. How much of this do you think is attributable to weather? And maybe how much could be the early results of Phase 5?

Yes, good question. I think the weather, no doubt, affected particularly the summer seasonal sales. I think we had a good Easter, we had a good Valentine's. But I will tell you, there's also been a serious change in the product mix again this year, not only in terms of what we've got, but the quality. And we've managing to hold the retail on it. We are still seeing really good seasonal sales as we move through the quarter.

Okay. And then secondly, could you give us an update on some of your new merchandising -- merchandise categories, beer and wine, maybe an update on the tobacco test in the Las Vegas market? And one of your competitors announced a deal today, the rollout of video rental machines in their stores. And I'm wondering if there's an opportunity for vending or other type machines in the front of the stores?

Yes, we're actually doing some work with Redbox, as we speak also. And we have been working with it for a few months now. We're happy with what we see. It does take a lot of transactions to make the Redbox thing work. I can tell you that. In regards to beer and wine, we are at about, oh my gosh, 5,000 stores?

3,900.

3,900 stores, excuse me, with a goal of trying to get to 5,000. It's on track. We're still pleased with what we see in regards to what happens in the basket and we're pleased with what we see -- how it affects total store comp. With regards to cigarettes in Nevada, I would say it's unchanged. We're seeing what we've seen since we've been doing it in November. We continue to work with it. But again, we'll wait until it plays out a little longer.

Our next question comes from David Mann from Johnson Rice.

My question -- couple of questions. On the comment you made earlier about SG&A, can you just clarify in terms of the advertising deleverage, was all of that due to the increased spend in California? Or are you doing some other increased spend throughout the company?

No, the vast majority is due to what we're doing in California.

And at what point in time would you expect that to not have the deleveraging impact?

Well, we continue to grow California and experiment. So I guess it's a little early to make that call yet.

David, when you enter a new market, the money you spend out of the chute is going to be the least expensive long term. And we really want to come out -- we have a lot of thoughts in California. We're trying to come out of the box really strong there.

That's great. And then in terms of gross margin, on the last call you talked about seeing a slight gross margin contraction in the first half. Given the results of the first quarter, how should we think about that comment now with the second quarter ahead of us?

Yes, still a valid comment. For the full year, again, our goal remains to leverage gross margin. I want to be clear on that. Don't see that happening in the second quarter because of the depreciation and some other expenses for the 2 new DCs that are going to impact the margin in Q2. And again, as we talked about on the call in Q1, some of these expenses hit SG&A because they were preopening expenses from a timing perspective. Also for Q2, there'll be a full quarter depreciation hit for the DC. They weren't opened the full first quarter. They will be open the full second quarter. So we will have somewhat of an impact there. I do want to stress again that once the new DCs get up to full capacity, their efficiency improves quite a bit and ultimately, this will be a positive for Dollar General down the road. But we clearly still see that margin hit the first half of the year.

And then one last question, the gas prices. Obviously, in the latter part of the quarter you saw this continued ramp up, now they're coming down. Can you just elaborate? Any change in consumer behavior as that was going on that you could parse out? Or is -- not to impact you too much?

Yes, Dave. I'd say I have looked at this really hard over the last 4 years, trying to ascertain that when gas prices go up, does it affect our business or when they go down. And all I can -- all David and I can come up with is when gas prices are high, people need us more often; and when they come down, they have more to spend.

Our next question comes from Emily Shanks from Barclays.

I have one question, around the hanging apparel mix, where do you think it is that you guys are missing? I recognize this has been volatile category for you for a number of years. Do you think it's a competitive issue? Do you think that your consumer just isn't buying? What are your views there?

Yes. I think, Emily, that we're going to need a little help with the economy before we really get that piece going. I can tell you, when we look at our market research, our customer buys for their child first, their husband second and themselves third. And I think it might -- since we're seeing a little bit of improvement now in infants and toddlers and men's and boys' that might actually be bearing out. So we have worked really hard on getting a little more fashion relevance, which we'll see in the spring and -- or excuse me, in the fall. I can tell you, we brought in some shorter shorts and some capri pants, and we saw those blow out of the stores. So I think it's a little bit about mix and it's a little bit about the economy.

Great. And just one last follow-up on that. What is your outlook for inflation in that category in the back half of this year?

Cotton is down significantly now, and we're not looking for any inflation at all on apparel this year.

Our next question comes from Trey Schorgl from Crédit Suisse.

We were just wondering, we've been seeing one of your primary competitors doing a lot of promotional activity, a lot of 2-for-1, a lot of buy one get one, 50% off. So we're interested in your comment about the competitive intensity. And we're just wondering, do think your different price messages as far as your focus on EDLP versus high-low, do you think it's making your value proposition more meaningful for your customers?

Yes. I -- we're real committed to everyday low price. That's been the backbone of this company for all of the years it's been here. And I think if you listen to customers today, while they do recognize certain prices, they're getting a little ornery about not knowing what the price is going to be when they come in because of promotional activity. So we're focused on EDLP. We think that's the right way to go, and we think our numbers in the first quarter show that this is a successful strategy.

We are taking a question now from Joe Feldman from Telsey Advisory Group.

Just one more thing that I wanted to ask was about freight cost actually. Have you guys seen any issues there in terms of increased trade expenses and is there any pressure that you're seeing? Or is it just being offset by the distribution infrastructure?

Our freight costs have actually been down if you look at where we are as a percentage of sales from the prior year. Now some of that is due to our efforts, reducing stem miles, improving cartons per load and things of that nature. But we've also done a very good job in negotiating our contracts, and feel pretty good about where we are in freight right now.

Jeff, I don't think we have anybody else in the queue.

Ma'am, that was our final question.

Okay, great. Well, thank you, everyone, for joining us today and always we appreciate your interest. And hopefully, we'll see many of you in Nashville at the end of the month, and please call me if you have any questions. Thank you.

Thank you. This does conclude our teleconference for the day. You may now disconnect.