Good morning. My name is Labrielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2014 Earnings Call. Today is Thursday, March 12, 2015. [Operator Instructions] This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. I would now 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, Labrielle, and good morning, everyone. On the call today are Rick Dreiling, our Chairman and CEO; Todd Vasos, our Chief Operating Officer; 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 issued today 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, predictions and other nonhistorical matters, such as our 2015 forecasted financial results and capital expenditures, our planned fiscal 2015 operating and merchandising initiatives, and our 2015 and 2016 store growth initiatives and our beliefs regarding future consumer economic trends. 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 2013 Form 10-K, which was filed on March 20, 2014, any subsequently filed Form 10-Qs 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. Where available, reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which I mentioned is posted on dollargeneral.com. The purpose of our call today is to discuss our performance for the fiscal Q4 2014 quarter and fiscal year and our outlook for the 2015 fiscal year. At the end of our prepared remarks, we'll open the call up to your questions on those subjects. [Operator Instructions] Now it's my pleasure to turn the call over to Rick.

Thank you, Mary Winn, and thanks to everyone for joining our call. Today, we reported results for the fourth quarter 2014 and the full year. 2014 was a unique year for Dollar General as we generated record operating results, but our strategic actions to acquire Family Dollar were unsuccessful. However, as our results and outlook indicate, Dollar General has a very promising future. Today's accelerated store growth plans for 2016 and expanded capital return plan for shareholders reaffirm our continued confidence in our long-term growth prospects. Returning cash to shareholders remains a top priority, and we plan to return approximately $1.6 billion to shareholders during 2015 through both share repurchases and the initiation of a regular cash quarterly dividend of $0.22 per share. I'm excited about another great year in 2015 as we look to capitalize on the numerous opportunities ahead of us. We have been and remain focused on Dollar General's core business, and we are confident that Dollar General is well positioned for sustainable growth, creating shareholder value going forward. Let's recap some of the highlights for 2014. Full year sales increased 8% to a record $18.9 billion, and sales per square foot increased to $2 -- $223. 2014 marked our 25th consecutive year of same-store sales growth as we delivered same-store sales growth of 2.8% for the year. Importantly, our trends improved as we moved through the year. Our same-store sales for the fourth quarter increased 4.9%, marking our fourth consecutive quarter of acceleration. In the quarter, same-store sales growth was balanced across both consumables and non-consumables. The non-consumables categories have had -- now had 4 consecutive quarters of improvement with notable strength in apparel and home. For the year, GAAP earnings per share increased 10% and adjusted earnings per share increased 9%. Net income in the…

Thank you, Rick. Moving on to 2015, our core operating priorities remain clear: driving productive sales growth, enhancing gross margins, leveraging process improvement in IT to reduce cost, and strengthening and expanding our culture of serving others. The team is focused, and we are excited about our initiatives for 2015. We continue to be committed as ever to providing our customers with everyday low prices they know and trust at Dollar General. Affordability will play a key role as we look to expand SKUs across the store at the sweet spot of $1 to $5. Growing transactions and item units will continue to be key to our market share performance as we build upon our track record of success. In anticipation of changes to the competitive landscape, we've been testing several different labor models to determine the potential impact on sales growth. The goal of the test was to strategically target labor investments to grow market share in a competitive environment while providing for positive financial returns. Our experience in this test and learn has been positive, and we are selectively investing in store labor this year. The store operations team has specific metrics and timetables for achieving results. The great part of this is that we can be nimble in making adjustments to the model as appropriate. While I won't go into more detail today, I look forward to sharing more specifics and results as we roll through the program in 2015. In addition, we have realigned our store operations management structure to optimize the scale of our divisions, regions and districts to improve accountability and maximize mentorship and teamwork, all while driving stronger, more sustainable results. We made the alignment changes based on feedback we received from our field teams and a strategic evaluation of our operational structure…

Thank you, Todd, and good morning, everyone. Rick and Todd have taken you through the highlights and strategies. Let me now take you through some of the important financial details of the quarter and year as well as our outlook for fiscal 2015. Gross margin for the fourth quarter was 31.7% of sales, a decrease of 23 basis points from last year's fourth quarter. As compared to the prior year, the 2 most significant factors were the negative impact from the West Coast port slowdown and the LIFO provision that was made in the fourth quarter. Specifically, the West Coast port disruption led to an estimated $8.5 million or $0.02 per share negative impact due to the higher-margin inventory receipt not being received and incremental transportation costs. In addition, we recorded a LIFO provision of about $1.1 million in the 2014 fourth quarter compared to a LIFO benefit of $4.5 million in the 2013 fourth quarter. Total SG&A increased by 27 basis points in the fourth quarter as we were lapping last year's significant leverage in SG&A due to the reversal of incentive compensation in the fourth quarter of 2013. This alone contributed 34 basis points to the SG&A increase. In addition, we incurred $6.1 million in expense during the fourth quarter of 2014, or 12 basis points, related to the attempted acquisition of Family Dollar. We had good underlying expense performance that was favorable for both retail and admin functions. Our tax rate for the quarter was 34.8% compared to 37.5% in the 2013 quarter. This included a $9 million or $0.03-per-share benefit from the reenactment retroactive to January 1, 2014, of the federal Work Opportunity Tax Credit. This was in line with the outlook we provided on our third quarter call. The fourth quarter of 2014 also benefited…

Thanks, David. Before we wrap up, I would like to express my appreciation and gratitude to David upon his announced retirement. David has served for nearly 11 years as our CFO. He has been a trusted adviser, business partner and more importantly, a good friend to me. His financial acumen, partnership and steady hand at the helm of our financial strategy have been instrumental in transforming Dollar General and in fueling our impressive growth. While I will truly miss David's leadership and working with him on a daily basis, I'm incredibly happy for him. And I want to wish David, his wife, Mona, and his 2 sons, Nick and Tony, much happiness as they embark on this exciting new journey. Dollar General is a strong and growing business with tremendous high store-return growth opportunities that we intend to capture. Our long-term commitment to growth and shareholder value are unchanged. Even as the competitive landscape continues to evolve, we have a business model that is proven and resilient. Our business generates significant cash flow and we're in a position to invest in store growth while continuing to return cash to shareholders through consistent share repurchases and dividends. More importantly, I remain excited by the countless opportunities in front of Dollar General and convinced of its ability to capture them. My appreciation and thanks goes out to more than the 105,000 Dollar General employees that executed nearly 1.7 billion customer transactions in 2014 while fulfilling our mission of serving others. With that, Mary Winn, we would now like to open the lines up for questions.

Operator, we'll go for questions. Would you mind, repeat the instructions, if you would, please, for getting in the queue.

[Operator Instructions] And your first question comes from the line of Charles Grom with Sterne Agee.

Congrats, David, on your retirement. Just the first question on the 4.9% comp, could you share with us how it trended during the quarter? And any thoughts on quarter-to-date trends? And also just curious given your roughly 11% exposure to Texas, how the Texas market's holding in for you.

Yes, the comps just accelerated through the quarter, every period, getting progressively better. The weather the last couple of weeks has been a little funky again, but I would say the first part of the current quarter is performing as expected. And Texas continues to be one of the strongest markets we have.

Okay, great. And then just bigger picture with the FDO deal now in the past, can you give us a sense for what you think the company's longer-term store potential could be? And then as -- and as a follow-up to that, where you think the DG Market concept fits into the equation?

Yes, as we -- every -- like we do every year, Chuck, in January, we evaluate a number of opportunities that are out there. We still see over 13,000 store opportunities for Dollar stores in continental United States. As we committed, we're going to accelerate our store growth in 2016. We still believe store growth is the best use of our funds right now based on the returns we generate and how they comp after that first year. Dollar General Market is very much still, I would say, in the testing stage for us. As I've said before, I have grown up selling produce and meat, but teaching somebody to sell produce and meat are 2 entirely different things and we continue to work on that concept.

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

Congrats, David, on the retirement.

Thank you.

Staying on that, Rick, David, you've been quite a duo here for some time. Can you just discuss the timing of your departures a bit more in detail? 2015 is becoming quite a big transitional year for Dollar General. Just why should we be extremely confident in DG's ability to continue to perform in what's an ever-changing competitive and consolidating marketplace? And also, why has the board not yet announced a successor for you, Rick? And what are the qualities that are being sought out?

Yes. I think, Paul, that's very fair, and I'll let David weigh in here. Quite honestly, one of the things that we worked incredibly hard on in this company over the last few years has been the depth of our bench. And I think what should give all of you -- make you feel all really good is while David and I might be departing, there's a tremendous amount of strength behind us that manages this company on a day-in and day-out basis and actually, has been advising David and I for a very long period of time. If you think about -- there has been change over the last few years, and the bulk of that change has been satisfied by the bench that we have developed that we've been able to promote from within. In regards to myself, I can tell you the board is actively engaged in the search and the board is making solid progress. And I would anticipate that my successor, over the course of the next short period of time, will probably be identified. David, did you...

Yes, I just -- obviously, retirement is a personal decision. I'm at the age where most people start to think seriously about it. This gives me a rare opportunity to spend lots of valuable time with my 2 teenage sons as they finish their last years of high school. And now I'll be able to make it to all of their events, which is something most fathers don't get to do. Over the past 11 years, particularly over the past 8 years, I've lived every CFO's dream. I was part of the team that took this company private in 2007, took it public in 2009 and had been able to participate in one of the most spectacular retail growth stories in this decade and it's continuing, as we announced today with our square footage growth for 2016 in opening 900 new stores, again, that's nothing short of spectacular. I believe I'm leaving one of the finest finance and accounting teams in retail today. So the company is in good hands in that respect, and I wouldn't be leaving if I didn't feel that way. So the experience has been great for me. I believe it will continue to be great for our shareholders and our employees as the Dollar General story keeps moving on.

I appreciate the color. Just to follow up on the remaining bigger picture, maybe just a bit more detail on how you came up with the capital return plan, some of the discussions you all had to decide to initiate the dividend and just how we should think about you guys managing the leverage ratio going forward? Is the plan to maintain this 3x kind of adjusted debt-to-EBITDA ratio on a go-forward basis? Are you willing to be more aggressive at times and go above that? Just how should we think about the balance of capital returns going forward?

David?

Sure, I'll jump in here. And please, Rick or Todd, anything else you want to add here. I think probably the better question is why didn't do we a dividend earlier. 85% of companies in the S&P 500 pay a dividend, and until today, we were the largest retailer not paying one. So we clearly were an outlier on the dividend. As we looked at this decision, in this low interest rate environment, the dividend is highly valued by investors that are trying to find yield. And obviously, it's hard to find yield in the debt markets. I think this also sends a positive signal to the market of our confidence in future profitability and cash flow of the company. As we look at the share buyback, again -- and we went through some of these statistics. We've already returned $2.1 billion through the share repurchases since we went public in 2009, and we're guiding another $1.3 billion in 2015. That's 62% of what we bought back over the last 5 years, all being bought back in 1 year in 2015. So we are consistent in our share repurchases over time, and that investment-grade rating is important to us. We've talked about that in the prepared comments. We believe from our research is that's our optimal capital structure is to be at that lower rung of investment grade, and it provides us with flexibility for growth and ultimately, shareholder return. At the same time, and I've said this for many years, our #1 priority in terms of investing is investing in our stores, store growth, and then having the infrastructure in place to support that. And as I just mentioned, we're growing stores at a greater rate now than we have probably any time in the history of the company as we move forward into 2016, at least in the modern history of the company. So we'll continue to make that a priority. In terms of the leverage ratio, again, right now, because of our view that the optimal capital structure is going to be at that lowest rung of investment grade, our intent is to stay somewhere in that range. Clearly, the management team and the board will continually review this on an ongoing basis and so stay tuned on that. But right now, we're very happy with where we are and what we're doing.

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

So 2 things just on the long term. How many stores can the organization handle annually? Right, if you think about that 7% number, obviously, it gets bigger as the base gets bigger, when do you get to a point where you worry about execution? And then you're basically assuming for this year, if I look at your guidance, roughly flat EBIT margin. Is that the right long-term algorithm? Or do you think there's room for margin improvement, maybe as shrink goes down and you leverage G&A and things like that?

Tell you what, John, I'll let Todd handle the first part. And David, you can take the second part on that one.

Thanks, Rick. John, and we've said it many times, we look at our store openings and the projects that we can do, we look at it from the respect of capacity and the capacity of our folks to be able to deliver the high-quality sites that we've been come to known to deliver over the many years. So we continue to reevaluate that. And as you've heard and you've seen, we've stepped it up to 730 this year and into 900 the following year. So we'll continue to look at ways to continue to do more projects as we move forward, but we're committed to square footage growth in that 6% to 7%.

Yes, I think as we look at our operating margin, clearly, we do expect better performance than we saw in 2013 and 2014 given some of the product category headwinds we had from tobacco in those years. As we look forward, I think as we look at shrink and category management and foreign sourcing, again, we still think we have room to expand the operating margin. Now we've got to make a decision, and I've said this many times, in terms of how much of that to let fall to the bottom line and how much to invest back in our pricing because ultimately, our #1 goal remains selling units through the box and making sure that we continue to grow our transactions. So -- but again, there's still room there, particularly when you look at shrink, category management and foreign sourcing.

And then, Rick, just as a follow-up on DG Market. When you look at what Aldi's doing, Lidl coming, does that format hold greater importance to you strategically than it might have a couple of years ago? Can you -- before you leave, can you kind of get it on the right track? And then is it -- do you see more -- the impact will be more in -- and if you do go forward with it, more in the format itself or learnings that you take back into the core dollar stores, be it produce, expanded food? Or we're not really going to see that?

Yes, I think as I look at what we do best and probably, I would say, John, right now, the best format we have, when you mention competitors like Aldi, is our 7,500-square-foot box. Yes, there's some -- Aldi has some more consumables in it. But you have to remember, we're a convenience shop. We're not a destination shop. And I think that 7,500 box, when you look at that producing $223 a foot, you look at where it has come from, we believe that is the best piece we've got. When I think about Dollar General Market, I think you hit the nail on the head. I think that learnings are what we're extracting from that. And the fact that some of those learnings eventually are going to work their way into that 7,500 highly productive box.

And your next question comes from the line of Dan Binder with Jefferies.

David, we'll be sorry to see you go, but congratulations on your retirement.

Thank you.

My question was related to expansion this coming year. And then as you step it up to 7% square footage growth next year, is there a particular regional focus that you'll have?

Dan, that's a great question. The store base is going to expand pretty much uniformly all the way through United States. Obviously, we've just entered Oregon, Rhode Island and Maine. So there's probably a little bit more emphasis there, but the idea is to spread it out across the United States.

And you cited this focus on price investment. Just curious if you could comment on what you're seeing in the competitive landscape this past quarter and early this quarter?

Good. Todd, you want to take that one?

Yes. Sure, Dan. What we've seen is in our channel and really across retail, it's always competitive. But what we've seen is a pretty rational competitive set, if you will. When you look at it, definitely much more rational than it was in fourth quarter of 2013. But there's pockets here and there we see, depending on the format that we see out there, that there are some competitors that may get a little hotter than others. But I -- we are committed to ensuring that we drive units and that we look at our share very, very intently each and every week to ensure that we're staying very competitive. But I think the biggest thing to take away is we are squarely EDLP focused, so everyday low price focused in everything we do.

And your next question comes from the line of Meredith Adler with Barclays.

Lots of luck to you, David.

Thanks, Meredith.

I got a couple of questions. And when David was talking about the things that would drive the operating margin, he didn't specifically mention higher sales of discretionary items. Even though I know that your apparel and home business is doing well, but do you see, as the customer feels better, that there is a potential to drive more high-margin sales?

Again, I think the answer to that is yes. We've worked really, really hard on the non-consumables side, Meredith. And I have to be honest, it took us a little longer to get there than we wanted. But I'll tell you what, the team that Todd and David assembled down there are really clicking now. And that's really encouraging about the non-consumables side is the rate of sell-through. And we're seeing a much larger -- a much higher sell-through on those goods, which, to your point, brings out the incremental margin, helps us with the incremental margin.

Great. And then, I guess, my other question is maybe just a little more technical for David. But you continued to invest capital in stores that you're building yourselves, and I'm sure the economics of that are attractive. But I'm wondering whether there is an opportunity to do sale leasebacks, rates are low. And then if you were to do that, first, I don't know, maybe you could tell us how much -- how many stores you own at this point and whether you could generate incremental capital that could be invested or given back to shareholders?

Yes. And of course, last year we did do sale-leaseback and we used those proceeds to buy back stock. So I don't -- it's something we'll definitely take a look at. It's always on -- we don't have any plans right now to do it. It's always on the radar screen and certainly, it's something that we'll take a hard look at. And then the -- how many owned stores we have? Yes, we have between 500 and 600 owned stores right now.

Yes, about 5%.

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

Can you help break down the components of your 3% to 3.5% same-store sales guide? Particularly, I know you guys benefit on the real estate side from the new store waterfall. It sounds like you have a lot of traffic-driving initiatives, and then maybe just touch on the expectation for nonfood, given the recent acceleration.

I think Todd wants to take that one.

Yes, when you take a look at it, what we -- we definitely, from our new store maturation, we see 1.5 to 2 percentage points of comp. Of course, category management plays a big piece in our comp as well. So between category management and execution at the store level, we really make up the balance piece of that. But affordability continues to be a key focus of ours to continue to drive the sales, as well as our focus on private brands. And then, lastly, you heard, we are doing a lot of remodels. We did a lot last year and we're -- we continue to do those in 2015. And updating that base out there of existing stores really makes a difference as we start to look at these remodels and adding to the comp. So when you put it all together, we feel pretty good about that 3% to 3.5% comp range.

And I would piggyback on that, Matt, and Todd did a great job of talking about it, but his work on the affordability issue, the fact that over 75% of our SKUs in sales now are targeted between $1 and $5, that has a lot of broad appeal across a lot of income stratas. And we are continuing to work on that very hard and see upside on that initiative in '15 and beyond, to be honest about it.

Great. And then on the stores front, Rick, can you just elaborate on the return profile and the payback period on new stores? And any changes you guys have seen in productivity levels at some of your more recent openings?

Yes, I will. Our stores still open up at about 85% of our average store volume. 99% of our stores continue to be four-wall EBITDA positive, and the payback is roughly 1 year, 1.5 years, in that window.

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

Well, we hate to see you young guys retire from the company.

Actually, I was hoping for someone to say I'd been carrying David for 11 years.

I just wanted to ask on the stepped-up expansion rate in 2016, if you could talk about the type of real estate projects, particularly in terms of geography that you'll be pursuing that you would have perhaps passed on a year ago. And thinking specifically when you think about suburban, urban and rural markets, if we're going to see it change in the pace that you opened in those 3 type of geographies.

Yes, I think Todd has a thought on that, Dan.

Yes, Dan. As Rick said earlier, it is going to be broad-based across everywhere we are actually already operating stores in. We continue to look at all areas that we operate in. California continues to be an opportunity for us. We know that someday there will be over 1,100, 1,200 stores in California. So that continues to be an opportunity. But when you look at it in 2016, our balance between metro and rural is going to be about where it's been over the course of the last few years. And then as we go into outer years, we'll continue to leverage our learnings that we've got moving through on our metro stores and build and open up more of those as we move into '17, '18 and '19.

If I could piggyback back then on, Dan, as we move further and further deeper into the 13,000, we're going to introduce more metro stores. And the team is looking at lots of different alternatives here in terms of the size of the box. We've actually been -- I think we've really done a great job on the mix that's in the stores. I do think that we have figured something out that we're going to test in '15 that could really guide us, really help generate incremental return in metro.

When you say metro stories, I'm assuming you're including suburban with urban. I was curious how would you just characterize Dollar General's success in suburban markets, which might have higher income levels than the company has targeted historically?

Yes, I -- go ahead, Todd.

I'm sorry, did you...

No. You go ahead, Todd.

Yes, so when you look at it, our suburban stores, we're happy with the performance of those stores as -- but as Rick indicated, we're testing some things, both in suburban and metro, that we really feel can benefit us as we move through '15 and beyond, both from a labor perspective and a merchandising perspective with our technology that we've got moving in merch, to ensure we have the right mix of products as well as the right gross margin that is generated from that. So we feel pretty good about where we are, but there's always more learnings yet.

I think it's fair to say that we're getting sophisticated enough now that we're able to alter the mix.

That's right.

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

And David, everyone's saying congratulations. I've got to say maybe I'm just a little envious. I have teenage kids at home. So congrats, I guess. It'll be nice to spend a lot more time with them.

Well, thank you.

I don't know, Scott. I raised 2 kids. I don't know if being home when they're teenagers is a good thing or not.

So I guess, I want to get to labor cost, what you're thinking of as we look through the year. Obviously, a competitor raised their labor rates, but with labor markets getting pretty tight and how that affects your business, what you're seeing in store management turnover?

Yes, I'll take that one. And then, Todd, if you want to lay any color on it, that would be fine. I know we're talking a lot about the minimum wage thing and what has happened with one of the larger big-box operators out there. A couple of things I'd like to lay out, Scott. Number one is we don't have a single full-time employee that's making minimum wage, not one. About 12% of our employees, all part time, are at the minimum wage rate. But the fascinating thing is the way our structure is in the store, after about 5 months, they are in a position to be promoted to what we call is a key carrier. And our average key carrier makes $9 an hour, approximately $9 an hour. So it's pretty safe to say that we -- our whole workforce is not making minimum wage and there is some sort of grand or fearful expense that's going to be there. And when I'm talking about minimum wage, I'm obviously talking about the federal minimum wage. What we are going to do though, I think it's fair to say the labor market, conceivably, is tightening up. We're going to keep our eyes. We're going to continue to monitor the landscape and we'll assess or make any adjustments that we need to make. But right now, in terms of what we're paying our people, we feel pretty comfortable that we're there. Our store manager turnover, quite frankly, is operating where it had been for a period of time. We are looking at it in terms of -- we look at it, excuse me, in terms of voluntary turnover and involuntary turnover. And obviously, there's a big difference between the 2. And when you add those 2 up, our turnover is around approximately 30%, which is a little high, quite frankly, for retail. I'd like to see that number down in the mid- to low 20s. But also I would tell you that our turnover has been improving over the course of the last 6 to 7 months, and it's continuing to move in a solid direction. So...

All right. That's perfect. And if I can just follow up one and maybe -- I know there's transition going on with the leadership and everything, so maybe it's just -- it's too strategic but, obviously, you went for Family Dollar. It didn't work out. When you think about acquisitions or when you think about capital deployment, is acquisitions part of what you consider? Or is it really not -- just kind of one unique situation and not something we look at?

Very fair question. And I will tell you, Scott, David and I have always looked at everything. So the answer is nothing is ever off the table. We want to look, we want to understand what we could do to maximize value for our shareholders. And if that opportunity raises itself down the road, I'm sure the management team is going to want to look at it.

And your next question comes from the line of Matt Nemer with Wells Fargo Securities.

David, I'll add my congrats as well. I've actually got one question on the quarter, which is I'd love a little bit of color on the seasonal business. It looks like sales per foot were down about 1%. The 2-year stack was down about 6%. Is some of that related to the port? Or are there some other issues there?

Todd, go ahead.

Yes, Matt, this is Todd. So when you look at our seasonal business, first, I want to say it's very healthy. Now when you back down and take a look at the components, the majority of the components are doing very well. The one structural piece that we, as well as probably other retailers, are fighting and battling every day is the toy business. The toy business is embedded in our seasonal business. And structurally, as we all know, that business had been very, very tough over the past few years with electronics and computers and video games and everything else being where -- much more prominent to kids these days than the toys. But we're very happy when we look at seasonal. The team has done a tremendous amount of work on affordability within seasonal. We have about 26%, last year, more $1 items that we had the year before. I can tell you they were squarely focused on the buy this year, which is now complete for holiday of 2015, and that number has been stepped up even more. But our sweet spot, as we said before, is really $1 to $5. But in seasonal, $1 to $3 is really where we play and we do very well in.

Great. That's helpful. And then, secondly, I was looking to see if we can get some more color on the labor model that Todd mentioned, the new labor model. Is the primary goal to speed up checkout? Or is it more about maintaining the store? Love to get some more color on that and also whether that would be baked in the guidance if you decide to roll it out more broadly this year.

Yes, Matt, thanks for letting me answer that one. I could tell you that the labor model that we have currently existing in our stores, we look at it each and every day to make sure that, that, in fact, is the right model. Now what we've seen is that in certain geographic areas, we can spend a little bit more time inside of our stores stocking and ensuring the customer experience is at the highest level that it possibly can. So what we've done is strategically taken a group of stores on a test and tested that theory. It tested out very well. And we are in the process, as we roll through 2015, to roll that test broadly out to a large group of our stores over 2015. Once again, it's very targeted to certain stores, but it is a large group of our stores.

And your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

So during the conference call, I think it was you, Rick, that mentioned you do anticipate changes in the competitive landscape and obviously, Todd just talked about some of the changes on the labor model. Can you provide some color regarding what kind of changes you're expecting? And is this just on the pending -- any pending changes with Family Dollar, now that's going to be in new hands, or are there other elements that you were referencing?

Yes, a fair question, Scot. I think that obviously the #1 thing on our radar screen is the change that is taking place between Dollar Tree and Family Dollar. Once again, the big-box guys are now announcing more initiatives. And what we're trying to do is just stay focused on absolutely everything that's out there. Now while we can only control what we can control, we have -- the beauty of our model is it takes a little bit from a lot of different spots rather than having to grab everything from one spot. So consequently, we stay focused on what absolutely everybody is doing. And yes, I didn't mean to send any unjust or unneeded fear or anything, but we're staying very focused on what everybody is doing. There's a lot of moving parts out there right now.

So just a general expectation that it's going to be a dynamic competitive environment?

Yes, just the fact that there's a lot of new faces managing new assets, right?

Yes. Okay. Fair enough. And then my follow-up is any -- I guess, David, you talked a little about the EBIT margin opportunity down the road. Can you provide a little bit more color why you're expecting EBIT margins then to be flat to down this year, what -- versus what, frankly, seems to be a bit of an easy comparison following 4 straight years of kind of 10%-plus EBIT margins? Is it some of that's labor investment? Or is it just the continued mix shift on -- impact on the gross margin, et cetera?

Yes, the biggest piece is clearly the labor investment that we're making in our SG&A line, and that really is the bulk of the story there. Again, we expect better performance than we saw in 2013 and 2014 on the gross margin, given some of the product category headwinds we had from tobacco in those years, cycling over that. And then I mentioned we continue to like what we're seeing in shrink, getting some improvement there, and then category management and foreign sourcing helping us. But it's the investment in labor that we're making.

All right. I think that will conclude our call today. We have a new member of our IR team in Matt Hancock, and some -- I know some of you had a chance to meet Matt. If you haven't had a chance to meet him, I look forward to introducing to -- you to him. And we'll be around today for calls, so I know we will left some people in the queue, so please feel free to give me a call. Thank you. Operator, that will now conclude our call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you would please disconnect all lines.