Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2013 Earnings Conference Call. Today is Thursday, December 5, 2013. [Operator Instructions] This call is being recorded. [Operator Instructions] Now, I would like to turn the conference over to Ms. Mary Winn Pilkington, Vice President of Investor Relations and Public Relations. Ms. Pilkington, you may begin your conference.

Thank you, Lindsay, and good morning, everyone. On the call today are Rick Dreiling, our Chairman and CEO; and David Tehle, our CFO. We will first go through our prepared remarks and then we will open up the call for questions. Our earnings release can be found on our website at dollargeneral.com, under Investor Information, Press Releases. Let me caution you that today's comments will include forward-looking statements about our expectations, plans, objectives, predictions, anticipated financial and operating results and other non-historical matters. Some examples of forward-looking statements discussed in this call include our 2013 forecasted financial results and anticipated capital expenditures, our planned operating and merchandising initiatives for fiscal 2013, our share repurchase expectations, planned store openings for fiscal 2014 and statements regarding future consumer economic trends. Forward-looking statements are based upon management's beliefs, assumptions and expectations about future events and operating results. Important factors that could cause actual results or events to differ materially from those reflected in or implied by our forward-looking statements are included in our earnings release issued this morning; our 2012 10-K, which was filed on March 25; our first and second quarter 10-Qs, our third quarter 10-Q, which was filed this morning; and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call. We will also reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on dollargeneral.com. This information is not a substitute for any GAAP measures and may not be comparable to similarly titled measures of other companies. Now, it is my pleasure to turn the call over to Rick.

Thank you, Mary Winn. Good morning, everyone, and thank you all for joining us. Today, we plan to discuss the results of our third quarter, update you on our operating initiatives and share our store growth targets for 2014. Our third quarter sales increased 10.5% over last year to $4.4 billion, with comp store sales up 4.4%. Both traffic and average ticket increased for the 23rd consecutive quarter, with customer traffic contributing most significantly to our sales increase. As we expected, the addition of tobacco products resulted in strong customer traffic growth throughout the quarter. Consumables, which include tobacco and perishables, showed the strongest sales gains. For the second quarter in a row, we had comp sales growth on the non-consumable side of the business. Comp sales in both seasonal and home are positive, and we were pleased with our apparel performance. As part of our Phase 5 merchandising initiative to optimize square footage productivity, we reduced the selling space allocated to hanging apparel in over 4,000 stores. And in the third quarter -- excuse me, in the third quarter, and the results for meeting our expectations for both sales, and more importantly, increased profitability. October Nielsen data indicates that we continue to increase our market share of consumables in units and dollars over the 4-week, 12-week, 24-week and 52-week periods. Our market share in dollars continues to grow in the high-single digits. The third quarter operating profit increased by 8% to $390 million or 8.9% of sales. Our gross profit rate decreased 61 basis points to 30.3% of sales, with the vast majority of the rate compression relating to strong sales of tobacco and refrigerated items. In addition, we leveraged SG&A expenses by 40 basis points as we continued our focus on expense control. Adjusted net income increased 10%,…

Thank you, Rick, and good morning, everyone. Rick covered the highlights of our third quarter sales performance, so starting with gross profit, I'll share more of the details. Our gross profit increased 8.3% for the quarter. As a percentage of sales, gross profit decreased by 61 basis points to 30.3%. As expected, the gross margin rate was impacted by a higher mix of tobacco and perishables, which have lower initial markups. In addition, our inventory shrinkage rate was higher than last year and we incurred higher markdowns as expected. The margin compression was partially offset by a benefit from transportation efficiencies and lower fuel cost, as well as a favorable LIFO credit. SG&A increased 8.5%, significantly lower than our sales increase. On an average per square footage basis, SG&A increased about 1%. As a percentage of sales, SG&A for the quarter was 21.4%, an improvement of 40 basis points. Contributing to this favorability was retail labor expense, which increased at a rate lower than sales. In addition, decreases in incentive compensation expense, health benefit costs and workers' compensation and general liability expenses, contributed to our SG&A leverage. Costs that increased at a higher rate than the increase in sales include depreciation and amortization and fees associated with the increased use of debit cards. Interest expense for the quarter was $21.5 million, a decrease of $6.2 million, primarily due to lower rates resulting from the completion of our refinancing earlier this year. Our ratio of adjusted debt to adjusted EBITDA remains unchanged at 3.0. The third quarter effective tax rate was 35.6%, and includes a discrete tax benefit of approximately $6 million or $0.02 per share, relating to the reversal of reserves that were established in 2009. This reversal was associated with the expiration of the time period in which additional…

Thank you, David. 2013 has turned out to be another difficult year for our core customer. Consumers are challenged by ongoing high unemployment and underemployment levels, higher payroll taxes, reduction in staff benefits and uncertainties over health care insurance and insurance costs, as well as unemployment benefits. All of these factors are contributing to erosion in consumer confidence. Yet our business model, a strong value in convenient locations, is based on consistently serving these customers in good times and bad, and we will continue to help them meet these challenges going forward. Last quarter, I updated you on our major 2013 initiatives. We had completed our 2013 goals with regard to Phase 5 merchandising evolution and our cooler expansion, enabling us to expand our assortment of refrigerated foods. We are continuing to benefit from these efforts. As I said earlier, the addition of tobacco products has had a significant impact on growth in our customer traffic, which I continue to believe is the most important metric with regard to evaluating the success of our tobacco initiative. We're very pleased with the progress we made in building our market share in tobacco. Going forward, we expect both traffic and transaction size to build as customer awareness of tobacco products in our stores continues to grow. Looking at the fourth quarter, there are many moving parts making the quarter extremely difficult to read. Competition has gotten more aggressive on select traffic driving items, and consumers are overly cautious. All retailers will be dealing with the significant calendar shifts as the period between Thanksgiving and Christmas has 6 fewer shopping days, pushing sales closer to the Christmas holiday. Thanksgiving, which came a week later than the prior year, was essentially at the end of the month for our customer, a time when she…

All right. Lindsay, we'll take questions, please.

[Operator Instructions] Your first question comes from the line of Meredith Adler with Barclays.

I'll start with the sale-leaseback you're thinking about doing. I think this is the first time you've done one. Two questions about it. The first is, kind of what you're thinking about the rate that you're going to get? Is it comparable with what you do when you do a lease directly with a landlord? And then the other question would be, are there more properties that you would be able to do sale-leasebacks on?

Yes, great questions, Meredith. I think, we're pretty consistent in terms of the rates. For competitive reasons, I don't want to state numbers out there. But, clearly, as we thought about this transaction and looking at it, we believe it's going to be accretive to Dollar General to do it. And as we said in the release, a large part of that cash will be applied to additional share repurchases. As we look in the future, it's a little too early to call whether we'll continue to do this on an ongoing basis. We spent several years buying stores back and we knew at some point, we would turn them and we would do exactly what we're doing today, have a gain, create cash and then use that to reemploy in the business, to increase the profitability of the business. So stay tuned on that one, and I would just say we'll be opportunistic as we look to the future.

And then switching gears almost completely, you've talked about the competitive environment getting much more challenging. Could you talk a little bit about how you're responding, I think you talked about both media spending as well as actual prices that are being promoted. Can you talk about both of those?

Yes, I -- Meredith, I am a strong advocate of Every Day Low Price. I think when the market begins to get highly promotional, I think you're renting your sales rather than, really, driving people who are loyal to your operations. What we'll do is what we've always done, we're going to continue to focus heavily on Every Day Low Price, knowing that sooner or later the high promotional activity, sooner or later, runs out of steam. But along the way, we're not afraid to throw a few prices out there that we think will continue to help drive our already good traffic. In regards to incremental share of voice, we currently have a program that we run 2 ads in print through the course of the month. We invest basically all of electronic media back into our cost of goods, and focus on the retail. So we think we have a solid program in place that we intend to stick to. We think at the end of the day, EDLP wins and we're pretty comfortable with what our strategy is the back half of the year -- back quarter of the year.

Great. And I just had one more question. You did get some benefit this quarter from lower incentive compensation. Could you just talk about why the incentive comp was lower? And whether that was a significant benefit to SG&A or margins?

Yes, and it's predominantly SG&A where you see that. Basically, the way our incentive comp is set up, we have a budget that we set every year, at the very beginning of the year, that's approved by the board in January. And all our compensation is based off of that budget. So what this -- and it's an aggressive budget, obviously, that's set. And because we're missing that budget, we don't accrue as much compensation because we won't be paying as high of a bonus payout or what we call team share in the company at the end of the year. And yes, to answer your question, the fact that we're spelling it out here, as well as in our filings in the 10-Q, it's significant enough that we felt like we need to point that out.

And it's the sales budget that's being missed?

No, it's really profitability. It goes to the bottom line profitability of the company.

So in spite of the year we're having -- in spite of the good year we're having, it just kind of tells you that we entered the year with incredibly higher expectations.

[Operator Instructions]

Your next question comes from line of Charles Grom with Sterne Agee.

Rick, could you speak to the progression of the comp in the quarter? And any thoughts on November? It sounds like it's been a little bit choppy. And then, Dave, if you could quantify what the lift was from tobacco and also what the corresponding hit was from these apparel reductions?

Yes, as I looked at -- as I look at the quarter, our sales trends, the first part of the quarter, were very solid. I think as traffic driving initiatives in regards to price started to take place. We saw our sales in October a little bit lighter than they were in August and September. However, I still want to, Chuck, bring out that every week of the quarter, we had positive comps and every period we had positive comps. So while we saw an increase in competitive activity, we still felt pretty good where we were at. November, Chuck, I think all of retail is going to be looking at a very, very choppy November and December. We chased the calendar all through the course of the month in November. I think you had Thanksgiving come a week later. I think also, we have to be careful there was a pay period Black Friday. So I think that might have spurred some results on also. But saying all that, we had a good Thanksgiving and we had a good Black Friday. But we're just -- the calendar is very hard to read. And remember what's going on here with those 6 fewer days, everything is getting pushed closer to Christmas. And so we are -- we're optimistic on our plans, but we're being real cautious as we look at the month. And David, I think you should talk about cigarettes.

Yes, well, first, on the markdowns, the markdown -- if you remember, we had a timing issue between second and third quarter and we spelled that out that we actually had a plus last quarter from some apparel markdowns that we moved into the third quarter because of -- for weather reasons, we wanted to give the product more time to sell. And basically, those markdowns came in about where we thought they would come in. In terms of the impact, we don't -- Chuck, we don't actually -- we're not going to spell out the exact dollar amount of the basis points, but I will say that, again, they were up there. They were lower than tobacco and lower than shrink in terms of the impact that it had on the quarter. But again, they're high enough for us to be calling out. On the cigarettes around the tobacco, again, we continue to be pleased with what we're seeing there, particularly the impact on transactions, driving people to come into the stores, which we're very happy to see. And again, we're not going to be specific in terms of the impact on the comp. But again, we're pleased with what we're seeing based on our model and what we thought cigarettes would do for us.

Chuck, I'll give you one more piece of information on the tobacco. When we started the tobacco journey, 1/3 of our cigarette sales were by themselves, 1/3 were what we would call a smoke and a coke, where they would grab a cigarette and maybe a soda or a chip. And then 1/3 is where the cigarettes were actually going into a basket that was beginning to grow. We're now at the stage of the game that back 1/3 where cigarettes are going into the actual basket is now at 44%. And cigarette purchases only are declining to 26%. So we're beginning to convert the cigarette customer into a shopper.

And I guess that supports your optimism for continued benefits from tobacco then?

Yes. And remember, we talked, Chuck, about transactions that it drives. It's driving people into the store, then it's our job to convert it.

Great. And then my final question, just -- Rick, you've done a great job and so 7 [ph] improving sales per square foot back with the Phase 1 through 4 programs and on shelf heights and then more recently with Phase 5 on some of your legacy stores. When you think about the opportunities from here and the white space that you have, could you, maybe, flesh out some of your early thinkings for us?

Yes, I think as we move into 2014 and beyond, it's now about SKUs and really understanding their productivity. And now what we're doing is we're beginning the process of evaluating not only those SKUs but the categories that we have in the store. And the idea here now, and my favorite example is picture frames. When I got to this chain, I mean, we had 12- to 16-foot of picture frames. We're now down to 8-foot, which has allowed us to add an additional category. And now the challenge for us is where are picture frames going to be in another year or 2? And maybe we want to get ahead of the curve and do something that's more productive now. So now the journey is about maximizing SKU productivity for the next couple of years.

Next question comes from the line of John Zolidis with Buckingham Research.

A question on the long-term store opportunity, raising it to 14 additional -- 14,000 additional locations for the industry from 10,000. Can you give us a little more color on what's driving that increase in the potential store count? And are you taking into account changes from what competitors are doing with their stores?

Yes, John, it's a couple of things. Number one, there's no doubt the environment is creating more of our core customer. I mean, that's number one. But number two is we have a new software program that is allowing us to literally identify the corner of such and such where we can locate a store. Historically, we have gone in, and we've had several square box -- blocks where we can go. But now, so, what happens is you have this piece of software that allows us by taking into account competitive positioning where our customer is, being able to go in and take a look at the demographics, being able to go in and look at traffic patterns, how they flow, being on the going home side, not putting yourself at risk and it just, quite frankly, has swelled to 14,000. So a lot more analytics more than just demographics and it allows us to literally pinpoint where we can go. And it's all automated, which is really fascinating. It takes all the guess work out of it.

And as a follow-up to that, you discussed the lower CapEx budget and it sounded like it came out of some of the spend on new stores. Can you just talk about how much it's costing you to open a new store and the efficiencies you're gaining there?

Yes, I think -- and again, on our total budget, $25 million isn't a huge decrease when you're talking about the numbers that we're looking at. I think it's just a matter of doing a variety of things differently and driving some better procurement in terms of the vendors that we're dealing with, getting some better deals and things of that nature. So I don't think it's anything revolutionary. It's just doing the right thing every day and driving better relationships with our vendors.

And John, if I could piggyback on that, we centralized our procurement operation the back half of 2012, and we're starting to see the benefits of that as we are -- we have one piece of the organization, particularly buying things that don't relate to what the customer is actually purchasing. And then we also have an initiative in place where we're actually taking some of the costs out of our new business -- out of our new stores, which we're very pleased with.

Your next question comes from the line of Matthew Boss with JPMorgan.

So on the gross margin front, how should we think about this line item longer-term in the P&L algorithm? Any opportunities with shrink and on the discretionary side into next year, just kind of larger picture, how you're thinking about this line?

Yes, I'll start and certainly Rick will jump in. I mean, as we go forward, and we've talked about this previously, we continue to believe that our private label, what we're doing in private label, as well as foreign sourcing, will continue to provide benefits to our model. Shrink, clearly, we've gone the wrong way on shrink this year and there is opportunity for that to turn overall. I think tobacco will be a negative next year because keep in mind that we only started selling cigarettes in the second quarter this year and they really started to kick in, in the June and July time frame. So in terms of some pressure, we'll be dealing with that next year, also. But I think we've got a lot of levers that we can pull long term on gross margin in terms of helping increase it and get some leverage out of it.

Great. And then on the nonfood side, on the more discretionary, we've seen some more encouraging trends recently, do you guys think this is something that's sustainable? Do you think that part of this is trade-down? Or is it assortment changes that you've made?

Matt, I would actually answer it's a little bit of both. I think the trade-down customer is getting more comfortable with the quality of the products we're putting out there. I think so -- also, I think we're doing a much better job on the merchandising selection here. I have to say Todd and his team, our Christmas assortment, as an example, this year, is the best I've seen in 5 or 6 years. I think we're doing a much better job in positioning the product in the store. And I think we're doing a much better job on the labeling of the product, which makes it look a little more upscale and still having that great price in it.

Your next question comes from line of Stephen Grambling with Goldman Sachs.

You had mentioned customer concerns over healthcare, specifically. How are you seeing that reflected in your results? And how should we be thinking about the impact of Affordable Care Act on expenses longer-term?

Yes, I think, I don't have anything really definitive, where we've done any market search [ph] on it. But I think everything you read and everything you're hearing about is -- the number of customers who have had low coverage policies that are basically more catastrophic, moving into the healthcare network and finding out, while they have more complete coverage, it costs a lot more. That customer that has that catastrophic coverage, a lot of that is our customer. And they're going to be dealing with that going forward. And I think it's one of those new things that has entered into all of this, this dynamic, where people who make $50,000 or less per year are starting to deal with what I'm calling dinnertime economics, right? I mean, they sit down at that dinner table at night and, Steve, they've got -- if you make $50,000 or less per year, you've given up $1,000 worth of disposable income with the change in the payroll tax. Have high unemployment, a lot of the unemployment benefits that we're getting are in higher skilled jobs. And what I've been saying for long periods of time, my concern is underemployment, that people are going back to work, but they're making less per hour and getting less hours. I think there's uncertainty, future uncertainty over unemployment benefits and I think there's uncertainty about the cost of healthcare. And recently, we've had the introduction of the change in staff benefits. And I think, if you think about this, you have our core customer sitting at the dinner table, she still has to put dinner on the table for her family and she's wrestling with all of these things. And I think that is the value that Dollar General brings to the table and always has is that we're always there with Every Day Low Price for our customer, regardless of what's going on. In regards to the Obamacare next year, David, I'll let you [indiscernible] that.

We're in the midst of wrapping up our open enrollment period here for healthcare coverage and clearly we will have a headwind from this in 2014, but its bouncing around on us a little bit right now, we have to see how many people sign up and at what levels they sign up on and that sort of thing. So we'll update you more on that. But like most companies in America, it will be a headwind for us next year.

And then another quick follow-up on the new distribution center that's opening. Is there any impact that we should be thinking about on the P&L, both in the near-term and then longer-term as it ramps up?

Yes, I think in the -- generally, when we bring on a DC, there is some -- again, all this is included in our guidance that we have for this year and will be in next year's guidance when we give it. You do have some impact of inefficiencies when you start up the DC, and it takes a few months before it gets up to capacity and starts operating efficiently. So we'll have a little bit of that. But again, we're pretty good at working through that. We've shown that as we've opened DCs. As a matter of fact, the prior year we opened 2 DCs at once and worked through it pretty well overall. So -- but, yes, absolutely, there are some inefficiencies when you open up. And then, as it gets downstream, it gets more efficient. And then you get -- the real help you get is from your stem miles, you reduce your transportation costs by having this new location.

Your next question comes from the line of Paul Trussell with Deutsche Bank.

Just wanted to circle back on the implied guidance for the fourth quarter and just make sure that I'm thinking about this correctly. Is it fair to say that kind of the midpoint of the top line range is suggesting a similar comp, about 4.5% or so, for the fourth quarter, with gross margins sequentially decelerating? And just also to that, if that is the case, if you can just kind of give some of the puts and takes on gross margins in 4Q versus what we've seen the past 2 quarters. And then lastly, maybe I missed it, but did you reiterate the $600 million for buyback figure for this year?

Paul, it's Mary Winn. We actually said $620 million for share repurchases in total for this year.

Yes, I'll comment on this and certainly, Rick may want to jump in. As we look at the fourth quarter, there's a lot of ongoing uncertainty in the macroeconomic environment. And the potential for more promotional and competitive retail and climate that we're dealing with. And as we said at the beginning of the year, the fourth quarter is our toughest comparison. We're going to be lapping the highest quarter, particularly from a gross margin percent point of view that we had last year. The other thing we're up against, and again, this is last year, we had a $0.02 benefit in taxes from [indiscernible] because we had a retroactive impact that we took in the fourth quarter and again, we spelled that out in our press release last year when we released earnings. So I think as we look at it, probably, the best I can say is, look, we think it's prudent to be somewhat cautious in our outlook for the remainder of the year. Now, I want to point out we did raise the low end of our earnings per share for the full year to $3.18 from the $3.15 that it was. And again, our range now is $3.18 to $3.22 for the full year.

Okay. And then just in terms of door growth for next year, the 700 doors, is there any plans to accelerate the rollout of the Plus or the market format as a part of that?

Yes, the Plus is part of our relocation program. We will increase the number of Plus stores next year. And the Dollar General Markets, Paul, are still very much experimental for us. We want to make sure, when we're dealing with a concept that's a little more elaborate than what we do on a day out and day basis that we're doing it the right way and we're spending our time on Dollar General Market right now, thinking about new things that it doesn't have that we think it might have, like the fuel that we put in, in Alabama.

Your next question comes from the line of Dan Wewer with Raymond James.

So the addition of cigarettes and perishables, obviously, benefiting your same-store sales quite a bit, Family Dollar had a similar experience when they rolled that out a year or so ago. But it was interesting, once they reached the 1-year anniversary of cigarettes and perishables, based on their forecast, same-store sales thawed out pretty quickly. So when you think into like the second and third quarter of next year, how should we be thinking about what happens with Dollar General sales momentum, once you anniversary those 2 programs?

I actually think that's a very fair question, Dan. We're on our sixth year on the perishable journey and we continue to comp in the double-digit range for 6 years consecutively now. I think that our category management process, particularly on perishables where you're dealing with an outside vendor, is very rigorous because you have to have the right items. And as I think about what we've done in perishables over the last 6 years, we've actually evolved with what I would say would be the grocery channel and mass. I can remember when we had 1 shelf of pizzas, now we have a whole door of pizza. I've watched the evolution of more, what I would call, ready-to-eat quick serve meals, where that's gone from basically a shelf to a whole door and maybe even 1.5 doors. And I think, as you look at us, what we have historically done is taken something and continued to build on it over a period of time. In regards to the cigarette thing, my view on the cigarettes is not what it does for comp sales. It's what it does for traffic. And the fact that it brings in incremental traffic and then it's up to us, through our offering and the way we manage our stores, to turn that into a bigger basket. And again, if you think about it, if you look at our sales per square foot, if you look at our transaction growth and look at our basket growth, we have been very good on building on those for a very long period of time. So I see no reason for caution, the fact that we're lapping cigarettes.

Okay. It's just that -- one other question, on the 14,000 incremental stores for your industry, I'm assuming you're including Family Dollar and Dollar Tree, but not the drugstores?

That would be correct. I'm thinking just to the -- talking just about the dollar channel, Dan.

And so out of that 14,000, how many of those would belong to Dollar General? And then also, if you could talk about the portion of those that are going to your virgin markets in the Western states and how much would be fill-in into your legacy markets?

A fair question, Dan. The 14,000 -- I mean, that's up for grabs, right? It's our ability to get out there and get as many as we can and what I try to do is to find what the total opportunity is. And obviously, how I would look at this is if Dollar General has opened 700 stores a year, there's a lot of growth opportunity out there for a long time to come. In regards to, is it more in the markets we're in or new markets, kind of -- I would kind of like to leave that one open and what I would rather say is we're continuing to be excited about the new markets we're entering. And a piece of these are in new markets, but a piece of them are also backfill opportunities in the markets we're in.

Your next question comes from line of David Mann with Johnson Rice.

If we could go back to a question about shrink, can you just let us know how the rate of increase in shrink in this quarter compared to the last couple of quarters? And given the defensive moves that you've taken, when do you expect the shrink increase to moderate, or perhaps no longer be a headwind?

Yes, the first thing I want to say, while our shrink is up, it's still way below the 2007, '08 and '09 levels. And we're making progress on our initiatives here. Our #1 priority right now, David, is to stabilize the shrink number. We will begin to cycle, in the first and second quarter, the defensive merchandising steps that we have taken. We have gone in and randomly inventoried some of those stores, and to be honest, we have seen some progress there. I don't want to declare a victory here yet. But we certainly have the plans in place. And we're hoping, as we move through the year next year, that we should see -- begin to see, not only it stabilize, but see it begin to move in our favor.

Great. In terms of the macro environment, you called out, obviously, a variety of items that are headwinds. I'm just curious with the lower gas prices that we're seeing, I mean, historically, that's been a nice tailwind for your sector. I'm just curious if -- what your thoughts are about that? And if you're hearing anything about lower gas prices when you're talking to your consumers?

We love lower gas prices because it gives our consumer more money to spend. I do think that the consumer today is incredibly value-conscious. And I think they are really and truly looking for many different ways to stretch their budget and I think the gas prices will help them do that -- lower gas prices.

And then, I'm just curious, on the fueling station test, is that something that will likely be confined only to the DG market? Or do you see a white space for that across the entire chain potentially if you like what you see?

David, that is actually a very fair question. It's a little soon to tell you that. We got one and I will tell you, it's pumping gas at the rate that a convenience store would. So we're very, very pleased with what we're seeing, but a little soon to lay that one on the table.

The next question comes from line of Matt Nemer with Wells Fargo Securities.

Two quick questions. The first is on SG&A per foot, the growth has been very low, kind of in the 1% range for a number of quarters. What's a reasonable assumption for SG&A per foot growth going forward, assuming a neutral impact from some of these transitory issues like incentive comp? And then secondly, your new store opening growth will be a lot lower this quarter than the last few fourth quarters and I'm wondering what kind of impact that might have on SG&A?

Yes, I think the whole SG&A question really has to do with our mining for cost-reduction efforts in the company. And we continue to look for ways to take costs out, whether it be our workforce management, damages, stem miles, procurement, supplies, you name it. I mean, we're working on a whole variety of things and we always will be. Every year we're going to have a mining for cost reduction effort in the company. We like to look at it in terms of what does it take to lever SG&A and we're still locked in at that 3% to 3.5% comp in terms of leveraging SG&A. So in terms of looking at it on a square footage basis, I'd rather answer it by saying that we still see it levering at 3% to 3.5% in a normal environment. So I mean, we'll continue to work on it. We've been very pleased with how we've been able to lever it the past few quarters. We have a lot of efforts going on in the company. And again, we have a lot of levers to continue to pull on SG&A.

And then in terms of the lower store growth rate, is that a significant item potentially in Q4?

I don't think it's that significant overall. And again, we'd be comparing to the same thing for Q4 last year, consistently in terms of the leverage that we'd be seeing. Every year, our store openings are always lower in the fourth quarter. That's kind of a normal thing.

Your next question comes from the line of Mark Montagna with Avondale Partners.

A question on tobacco. Is it fair to view, and I know it's kind of early, but is it fair to view that tobacco maturity cycle is probably being similar to just your typical store maturity cycle?

Yes, I mean, I would think the maturity of tobacco would be like any other category, quite frankly, or you can look at it in terms of store cycle, sure. I think that -- the back half of next year it's going to be about capitalizing on that transaction growth and converting that customer.

Okay. And then second question, just dealing with hanging apparel, did you face markdown pressure on that, or had you planned those 4,000 stores in advance of the third quarter?

Yes, that was all planned, Mark. That was part of our plan when we announced our initiative, the end of last year, the first of next year about the 4,200 stores.

Okay. Could we see further scaling back next year? Or if you do, is it just simply fine-tuning it? And then how do you fuse [ph] those stores?

Yes, I think that's a fair question. It's a little soon to tell. We're very happy with what we're seeing in this block of stores and what we're very happy is with the profitability. And I think you have to give us a little bit of time. We're going to continue to fine-tune the initiative. But we'll get back to you the first part of the year next year and let you know for sure.

Were you equally happy with the performance in apparel of the other 7,000 stores?

Yes, I think we -- I think the difference between the other stores and the 4,000 stores is the profitability, right? And what we're trying to do is maximize our profitability per square foot.

The next question comes from the line of Scott Mushkin with Wolfe Research.

This is actually Brian Cullinane on for Scott. You guys talked about an increase in the competitive environment. Just wanted to -- maybe a couple of questions on that. Has it picked up at all since the end of the quarter into Thanksgiving and into December? And are you seeing it from a particular channel or a particular competitor, that increase?

Yes, I would say the uptick in competitive activity started in October and it's about the same as it was in October. And it's spread across every channel.

Every channel, okay.

And again, I want to make sure, Brian, that I reinforce here, that we're seeing it in select items that are designed to drive traffic, like soda, for example. I don't want to lead anybody to believe that I think the market has gotten irrational, because that hasn't happened yet.

Okay, that's fair. And do you think that the competition is just -- is it more of a -- is it in response to a weaker consumer, I guess, is it the consumer, or is it that people are fighting for volumes. Any thoughts there?

Yes, well, I think the weaker consumer is part of the macro environment and everybody is fighting for sales. It's about driving traffic and that's why people are selecting these high-traffic driving items, right? So again, Brian, as you think about us, I mean, we are intently focused on Every Day Low Price. It's my belief, if you get too promotional, all you do is rent those sales for a matter of time. And we continue to be relentlessly focused on getting the best value every day to the customer.

Okay. And then in terms of, maybe just a little bit on inflation, is there any -- what do you guys see for the next few months in terms of inflation? Is there any chance with some of this competition and promotional stuff -- from other people, is there any chance of outright deflation? And what does that do to your model?

Right now, I would tell you, we have seen virtually no inflation this year and we're anticipating none next year. And in regards to the competitive activity, I mean, we're going to have to let that play out. I can't give you a view on that one.

Sure. But any view on is deflation in play? I would imagine there's probably some categories specifically that are, but...

Yes, I would look at you and tell you right now there's absolutely no indication of any deflationary pressure.

Your next question comes from the line of John Heinbockel with Guggenheim Securities.

So 2 things. One, discretionary relevance in 2 different areas. When you look at categories or subcategories that you're in, on the discretionary side, are there some that you shouldn't be in because it's hard to be relevant assortment wise, or share-of-voice-wise? And then secondly, this time of year, when you think about what's going on with Black Friday, getting hotter and earlier, how do you maintain a competitive share of voice this time of year, right, with mass and Best Buy and others? Or is that just going to be harder to do over time?

Yes. In regard to the discretionary question, I mean, the name of the game is SKU productivity. And what we're constantly doing, John -- we have a very, very -- under Todd's guidance, a very robust category management process. And the discretionary side, quite frankly, is all about being relevant and the advantage we have, we have a small amount of SKUs, a small SKU base, and it allows us to be a little more surgical in what we choose to promote and we can stay a little more relevant. In regards to your question about Black Friday turning into a week of Black days, which I think is quite fair, I didn't -- the first thing I would say is we're not necessarily a destination for Black Friday purchases. We are -- we're the fill-in to all that. We're the I forgot the stocking stuffer or I forgot this. We do particularly good on the consumables side during the Black Friday process. So -- and again, I still believe, as long as we stay focused to our mantra, being focused on EDLP, all of this chatter and all this noise is going to play out over time.

So you think on discretionary, you can be an item merchant, pick a good apparel item, pick a good home item, and if the price is right, that makes up for breadth?

That's exactly right, in fact, by the way, that is our strategy that we've really been trying to focus on in the last 18 months. I need to have whatever the best-selling sweater is if it's blue. But we don't need the red one and the green one and the gray one and the cream one. We just sell the best one and that's the whole idea.

All right. And then, I know with Todd's promotion, right, so you're going to spend incremental time on other things. What might those be? And I thought one of them might be DG Market, given your food background?

Yes, I think that with Todd stepping in to spend a lot more time on the day-to-day stuff, it gives me the opportunity to spend my time thinking about broader pictures, and more importantly, where we want to be in 5 years. And rather than standing up and saying, this is exactly what I'm going to do, I would say, John, it gives me the opportunity to be a little more reflective and provide a little bit bigger direction for the company.

Your next question comes from the line of Patrick McKeever with MKM Partners.

The last call, there was a question on what you thought might happen with the reductions in SNAP assistance. And I think you gave a similar response to what you just said about Black Friday, in that you're not the primary destination for that particular purchase, more of a fill-in. So now that, that has -- and the bigger guys, the grocers, would be the ones that would lose out more. With the reduction having gone through at the beginning of November, I know it was a choppy month, November, but do you feel like what you were thinking would happen has happened there, and that there hasn't been a significant impact from the reduction in food stamp assistance?

Yes, I think what we thought was going to happen has happened. The bulk of that shop goes to the big-box retailers and the grocers. I mean, I will -- I do believe, Patrick, we will feel something, but it's going to be minimal compared to everybody else. And the only thing I want to be cautious about, it's one month and you've got to remember, we had Thanksgiving in there. But I would think that I'm very comfortable with what we said.

Okay, got it. And then, this doesn't come up much, but you do have an e-commerce business. So -- and you've got Cyber Week savings all week, this week, and it is -- I guess it is Cyber Week. And e-commerce, of course, is really in focus right now, as we move in to -- or as we roll through the holidays. So could you just give us an update on what you're seeing with your e-commerce operation? Is there a material impact there to same-store sales? Is it more oriented -- the purchases, are they more individuals or small businesses?

Yes, our e-commerce site has a very small base. So while we were up tremendously on that day, on Cyber Monday and this week, it's on a very small base. And Patrick, it does not affect our same-store sales number. And by the way, in relation to whether it's businesses or individuals, it tends to be more the individual. And the one thing I will say is the electronic items that we have do very well on the e-commerce side.

Lindsay, it's Mary Winn. We've let the call go a little bit longer, so I think we ought to just go ahead and cut it off here. I do just want to tell everyone thank you for joining us today. I am around. So if you need anything, please don't hesitate to give me or Emma Jo a call. And I look forward to talking to you soon. Thank you.

This concludes today's conference call. You may now disconnect.