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Dollar General Corporation (NYSE:DG)
Q4 2017 Earnings Conference Call
March 15, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2017 Earnings Call. Today is Thursday, March 15th, 2018. All lines have been placed on mute to prevent any background noise. 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 Miss Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Miss Beugelmans, you may begin your conference.

Jennifer Beugelmans -- Vice President of Investor Relations and Public Relations

Thank you, Jennifer, and good morning, everyone. On the call today are Todd Vasos, our CEO, and John Garratt, our CFO. After our prepared remarks, 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, news, and events.

Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including but not limited to our Fiscal 2018 financial guidance and store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, future economic trends or conditions, and the anticipated impact of US corporate tax reform.

Forward-looking statements can be identified because they are not statements of historical fact or use words such as may, should, could, would, optimistic, objective, outlook, will, believe, anticipate, expect, forecast, estimate, guidance, plan, opportunity, continue, focused on, intend, looking ahead, or goal, and similar expressions that concern our strategies, plans, intentions, or beliefs about future matters.

Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under risk factors, in our 2016 form 10-K filed on March 24th, 2017, 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 except as maybe otherwise required by law.

During today's call, we will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure are included in this morning's earnings release, which, as I just mentioned, is posted on dollargeneral.com under investor information, news, and events.

At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessarily.

Now, it is my pleasure to turn the call over to Todd.

Todd Vasos -- Chief Executive Officer

Thank you, Jennifer, and welcome to everyone joining our call. I am pleased with our strong fourth quarter performance and the continued momentum we saw in the business. For the full year, we deliver healthy same-store sales growth driven by an increase in average transaction amount and positive traffic, all while effectively balancing gross margin and exhibiting good underlying expense control.

During the year, we continued to make progress on the implementation of our key initiatives as we seek to capture growth opportunities over both the short and long-term. Our SG&A investments in 2017 were focused primarily on increased compensation structure and additional training for our store managers, as they play a critical role in our customers' experience and the profitability of each store.

We also continue to make proactive and targeted investments in support of key strategic initiatives that we believe will help further differentiate us from the competition over time. I'll provide additional details on two of these initiatives pertaining to the digital and non-consumable strategies later in the call.

Now, let's recap some of the financial results for Fiscal 2017. Full-year net sales increased 6.8% to $23.5 billion compared to net sales of $22 billion in 2016. As a reminder, net sales for 2016 included $398.7 million from the 53rd week. When comparing our fiscal year net sales on a 52-week basis, the Fiscal 2017 full-year growth rate would be higher by approximately 2 percentage points.

Same-store sales for the year increased 2.7% over the prior year, marking our 28th consecutive year of positive same-store sales growth. Same-store sales for the fourth quarter increased 3.3% over the prior year fourth quarter, driven by positive performance in both our consumables and non-consumable categories, with stronger growth in consumables. Our highly consumable market share trends and syndicated data continue to exhibit strength with mid to high single digits, shared growth in both units and dollars over the 4, 12, 24, and 52-week periods ending January 27th, 2018.

For the full year, diluted EPS was $5.63 and adjusted diluted EPS was $4.49. Fourth quarter diluted EPS was $2.63 with adjusted diluted EPS of $1.48. In 2017, we generated cash from operations of $1.8 billion, an increase of 12% compared to the prior year, while returning $863 million to shareholders through the combination of share repurchases and quarterly cash dividends. We continue to deploy capital to invest in new stores, relocations, and remodels, while continuing to provide compelling returns. We also invested in infrastructure, such as new distribution centers that support future growth.

During the year, we celebrated the grand opening of our 14,000th store and opened a record 1,315 new stores, which includes the acquisition of nearly 300 store sights in 2017. We also remodeled or relocated a combined 764 stores. In total, we completed 2,079 real estate projects exceeding our initial target of 1,900 total projects.

We continue to be pleased with the returns and performance of our real estate program as our new stores are overall yielding returns of 20% even prior to the benefit of federal tax reform. During the fourth quarter, we completed a strategic review of our real estate portfolio. As a result, we closed an incremental 35 underperforming stores, the majority of which were part of our mature store base or stores that we generally define as having been opened five years or more.

The decision to close stores is always difficult as it impacts our store associates and the communities we serve. Fortunately, we were able to place a majority of impacted employees and direct customers to nearby locations. These 35 store closures resulted in an incremental pre-tax expense of approximately $28.3 million in the quarter or $0.07 per diluted share, primarily attributable to the remaining lease liability on these stores. Overall, we believe our real estate portfolio is in excellent shape and that these actions position us for the future.

Within our distribution network, we completed our 15th distribution center in Jackson, Georgia and began shipping in October of 2017. During 2017, we started construction on both our 16th and 17th distribution centers in Longview, Texas and Amsterdam, New York. We expect to begin shipping from these locations in 2019. These investments are key to driving the efficiency and speed of our network to support our growing store base while reducing our stem miles.

In his remarks, John will review our fiscal results or our financial results for Fiscal 2018 guidance, including the benefits of federal tax reform on both. But at a high level, we anticipate a cash benefit of approximately $300 million in 2018 as a result of federal tax reform. Of this amount, we expect -- $75 million in the business this year while returning the balance to shareholders through additional share repurchases and higher anticipated quarterly dividends.

As you know, one of our ongoing priorities is to enhance our position as a low-cost operator. We have a defined process to address spending that has allowed us to proactively improve our efficiencies and reduce expenses over time. We are doing this while creating flexibility to reinvest savings to drive growth.

We remain committed to this operating priority as well as continuing to make targeted strategic investments in the business for the long-term. In Fiscal 2018, we anticipate these investments will primarily be focused on the acceleration of our long-term strategic initiative as well as new store expansion and infrastructure to support future growth.

Similar to 2017, our planned investments in 2018 are strategically aligned with our four ongoing operating priorities. Importantly, we believe we are seeing clear outcomes and benefits from our significant prior year investments, particularly in store manager compensation and training. We also believe that we remain well-positioned from both a wage and everyday low-price perspective as we have been thoughtfully and proactively investing in these areas all along. As a result, we do not currently anticipate the need to invest heavily in those areas in 2018, which is reflected in our financial guidance for the coming year.

Regarding capital allocation, we continue to be disciplined and remain focused on financial returns and our capital allocation priorities remain unchanged. We will focus first on investing in high-return growth opportunities, including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividends, all while maintaining our current investment grade credit rating.

In 2018, our capital spending is prioritized to new stores, remodels, and relocations as well as to our two new distribution centers that are currently under construction. Additionally, we have plans to accelerate capital spending on select infrastructure projects and other key initiatives which we expect to deliver high returns.

In summary, we have a long track record of investing in the business, including the significant investments we made in 2017. And while we continue to invest in the business in the short and long-term, we expect the majority of the cash benefit from federal tax reform will flow directly through to our earnings and to our shareholders in 2018. We continue to believe we operate in one of the most attractive sectors in retail and that we are well-positioned to capitalize on the growth opportunities ahead.

With that, I'll now turn the call over to John.

John Garratt -- Chief Financial Officer

Thank you, Todd. Good morning, everyone. Now that Todd has taken you through the highlights of 2017, let me take you through some of the important financial details of the fiscal quarter and year. I will also spend some time discussing our 2018 guidance.

Gross profit as a percentage of sales was 32.1% in the fourth quarter, an increase of 43 basis points from last year's fourth quarter. This increase was primarily attributable to higher initial inventory markups, lower inventory shrink, and a reduction in markdowns. Partially offsetting these items were a greater proportion of sales of consumables, which generally have a lower gross profit rate than other product categories, sales of lower margin products compromising a higher proportion of consumables sales and increase transportation cost.

SG&A expense increased 159 basis points over the 2016 fourth quarter to $1.3 billion or 21.9% of sales in the fourth quarter. As a reminder, SG&A as a percentage of sales in 2016 was favorably impacted by higher net sales resulting from the Fiscal 2016 53rd week. The 2017 fourth quarter's results reflected increased occupancy costs, increased retail labor expenses given to our previously planned investment and store manager compensation and training and increased incentive compensation cost.

We also recorded $28.3 million of additional pre-tax expense related to 35 incremental store closures in the quarter, most of which were in the form of SG&A expense associated with the remaining lease liability of these stores. Partially offsetting these increased expenses, was a reduction in advertising costs.

Our effective tax rate for the quarter was a benefit of 18.9% as compared to an expense of 36.8% in the fourth quarter of last year. The reduction of the federal corporate tax rate due to federal tax reform resulted in a material positive impact on our effective income tax rate in the fourth quarter. This provisional benefit was primarily due to the remeasurement of the first tax assets and liabilities on the balance sheet at the new lower federal corporate tax rate accompanied by benefits associated with a federal corporate tax rate for 2017 of 33.7% compared to 35% in prior years.

Diluted earnings per share for the fourth quarter were $2.63, excluding the $1.15 provisional benefit from the remeasurement of deferred tax assets and liabilities, adjusted diluted earnings per share for the fourth quarter were $1.48. Both our fourth quarter reporter and adjusted diluted EPS results include an approximate $0.09 provisional benefit due to the reduced federal corporate income tax rate for 2017. This $0.09 provisional benefit was largely offset by an approximate $0.07 charge from the 35 incremental store closures in the quarter.

Looking at a few items on our balance sheet and cashflow statement, merchandise inventories were $3.6 billion at Fiscal 2017 yearend, a slight increase of about 1.5% on a per-store basis. As we enter 2018, we believe our inventory is in great shape and are comfortable with the quality. Our longer-term goal continues to be inventory growth in line with or below our sales growth.

In 2017, we generated strong cashflow growth from operations, totaling $1.8 billion, an increase of $197 million or 12% compared to the prior fiscal year. Total capital expenditures for the year were $646 million and included the majority of the cost of our Jackson, Georgia distribution center.

During the quarter, we repurchased 3 million shares of our common stock for $281 million and paid a quarterly dividend of $0.26 per common share outstanding at a total cost of $70 million. For the full year, we returned cash to shareholders totally $863 million through the combination of share repurchases and quarterly dividends.

From December 2011 through the end of the 2017 fiscal year, we repurchased $5.1 billion or 81.4 million shares of our common stock. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $1.4 billion under the repurchase program.

Turning now to our guidance. For Fiscal 2018, we anticipate net sales growth of approximately 9% and expect full-year comp growths to be in the mid-2% range. As Todd mentioned earlier, in 2018, we plan to accelerate investments in our long-term strategic initiatives. Despite these investments as well as headwinds from increasing wage rates and rising transportation costs, we anticipate our operating margin rate to be relatively unchanged as compared to Fiscal 2017.

Diluted earnings per share for Fiscal 2018 is forecasted to be in the range of $5.95 to $6.15. Our diluted EPS guidance assumes an estimated effective tax rate of 22% to 23% in 2018, which we expect will result in an incremental cash benefit of approximately $300 million for the year. We plan to invest $50 million to $75 million of our tax savings in the business this year, primarily in capital expenditures to accelerate our strategic initiatives such as digital and non-consumables and other high-return projects.

Overall, our capital spending in 2018 is expected to be in the range of $725 million to $800 million as we continued to invest in the business to drive and support future growth. In terms of cash distributions to shareholders, as we outlined in today's press release, our board of directors approved of a quarterly dividend of $0.29 per share, an increase of 12%.

In Fiscal 2018, we also plan to repurchase approximately $850 million of our common stock. In total, we expect to return over $1.1 billion to shareholders this year through the combination of share repurchases and anticipated quarterly dividends, which represent an increase of more than $250 million compared to the prior year.

As you model 2018, please keep in mind the following -- a record 1,315 new store openings in 2017, including acquired stores, were weighted toward the back-half of the year and the ramp up of the later opened stores is expected to pressure SG&A leverage at the beginning of the year. Additionally, our investment in store manager compensation training began in March of 2017. This too is expected to pressure SG&A leverage in Q1 before we anniversary the investment from the prior year.

Combined, we expect these two items to result in an incremental impact of approximately 20 basis points of SG&A deleverage as a percentage of sales in the first quarter. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while positioning our business for long-term growth.

We remain confident in our business model and our ongoing operating priorities to drive profitable same-sore sales growth, healthy new store returns, strong free cashflow and long-term shareholder value.

With that, I will turn the call back over to Todd.

Todd Vasos -- Chief Executive Officer

Thank you, John. As I shared with you over the last several quarters, we are investing in and building momentum behind certain strategic initiatives that we believe will ultimately drive strong sales and profit growth in the years ahead. Today, I'll provide an update on our digital and non-consumable initiatives, which represent two of our more near-term strategic opportunities.

Starting with our digital initiatives, we are strategically investing in our business to help our customers utilize digital tools and resources for more personalized and convenient in-store shopping experience. With nearly 75% of the US population currently within five miles of a Dollar General, we have a unique opportunity to help shape our customers' digital shopping behavior all while leveraging our more than 14,500 brick and mortar stores to help them save time and money.

Our efforts are all about making things easier for customers and further enhancing our strong value proposition, providing a unique combination of value and convenience. Our insights indicate that our customers are utilizing digital more to plan their visits and want more options on how they engage with us in-store. These insights have helped to shape our digital strategy, which we have accelerated.

Earlier this week, we launched a customer pilot of our new Shop and Scan mobile app service in select store locations. This mobile app allows customers to scan items while they shop and pay directly with their phones, allowing for a faster and easier checkout experience. Not only does Shop and Scan help customers save time, it also makes staying on budget easier. Customers can see the price of individual items as they scan them, along with a running total.

In 2018, we have plans to expand this service to additional stores as we continue to enhance our overall value proposition for our consumers. We see a continued opportunity to improve engagement and build loyalty through further integration of our traditional and digital media mix.

We continue to develop resources to personalize offerings, such as digital coupons tailored for individual customers and personalized marketing campaigns, which will enable our customers to save even more time and money. Looking ahead, we plan to add more digital tools and services to provide our customers with even more convenient, frictionless, and personalized shopping experiences.

With the introduction of Shop and Scan and over 900 million digital coupons clipped in 2017 by our more than 12 million digital coupon subscriber accounts, we know we have a great foundation on which to build for the future.

Turning to our non-consumable initiative, in 2018, we plan to test a bold, new, and expanded assortment in key categories. Our plans include enhancing the treasure hunt experience by Dollar General by first offering a new, differentiated, and limited assortment that will change throughout the year. Second, explain the new offering in high-traffic areas to enhance the in-store experience and create a sense of purchase urgency. And third, continue to deliver exceptional value by pricing the majority of offerings at $5.00 or below.

While we're expanding our assortment in select categories, the space currently dedicated to non-consumables within our stores is expected to remain the same. We will initially test these changes in approximately 700 store locations as we look -- growing consumable business. We are excited about our plans and believe we are well-positioned to capture market share in a changing retail landscape.

As we execute these growth initiatives, we remain committed to our ongoing operating priorities -- first, driving profitable sales growth, second, capturing growth opportunities, third, enhancing our position as a low-cost operator, and fourth, invest in our people as a competitive advantage.

Our first operating priority is to continue to drive profitable sales growth. With a focus on driving both the top and bottom line, our goal is both attract and growth new customers and trips and to capture additional share with existing customers. This includes expanding our merchandising initiatives, which are designed to provide our customers with trusted, simple solutions to help them manage their household budgets and provide them with their everyday needs and even more value.

In store for 2018, we plan to redesign our snack and beverage aisles to create a best-in-retail shopping experience. This change should enhance customer awareness and further position us as a destination retailer for immediate consumption shop through assessment and every day low prices. Across a second group of stores, we will be introduced an expanded assortment of better-for-you products, which a focus on higher protein and lower salt choices at price points that will be attractive to our customers.

We will also continue to strategically invest in our mature store base. We are particularly focused on remodeling stores that have fewer than 12 cooler doors, which in relative terms, are expected to drive the highest returns upon remodel. By the end of Fiscal 2018, we anticipate that across our store base, we will have an average of 20 cooler doors, up from 10 in 2012. In total, we expect to install over 20,000 additional cooler doors across our mature store base this year, as we continue to build on our multi-year track record of growth in cooler doors and associated sales.

Following the success of our health and beauty expansion in 2017, we are launching phase two of this initiative. In 2018, we plan to drive overall category awareness with our customers through improved and more impactful displays, consistent messaging in-store as well as across print and digital media, enhanced quality perception, and superior shopability.

We see significant runway for this category, particularly given our price advantage relative to some other channels. The expansion of private label offerings with a focus on value, quality, and appealing packaging will continue to play a role in our category management process in 2018. We know that private brands resonate with our consumer as we deliver the right combination of price and quality. Given the significant price gap compared to national brands and other channels, private brands play an important role in helping our customers stretch their budgets.

We have additional ongoing opportunities for gross margin expansion that includes improvements in shrink, global sourcing, distribution and transportation efficiencies, as well as private brand and non-consumable sales.

Inventory shrink reduction continues to be a large opportunity within gross margin. In addition to other defensive merchandising tactics, leveraging technology and improving process controls, we plan to expand electronic article surveillance or EAS to an incremental 5,000 stores in 2018, bringing the total stores with EAS to about 10,000 locations. This is a proven high-return project for us to help reduce shrink and drive sales by improving on shelf availability.

While we have seen carrier rates and fuel costs on the rise, our ongoing efforts to improve efficiencies and reduce expenses are expected to help mitigate these costs in 2018. Some of our ongoing initiatives include further reductions in stem miles, better optimization of our loads, and the expansion of our private fleet to around 210 tractors by yearend, up from 80 tractors at the end of 2017.

Our goal is to ensure we are highly relevant with our customers through ongoing investments in everyday low prices and targeted promotional activity. Importantly, our pricing surveys continue to indicate Dollar General is well-positioned from a price perspective against all classes of trade and across all geographic regions where we operate. We are committed to being priced right every day for our customers to drive traffic to our stores.

Our focus on initiatives to capture growth opportunities is our second priority. We have a proven high-return, low-risk model for our real estate growth. Our flexible real estate model allows us the ability to invest in new store growth, enter new markets, deliver new formats, and reinvest in our mature store base.

We constantly monitor new store productivity and returns to ensure new store growth is the best use of our capital, focusing on the following five metrics. First, new store productivity is a percent of our comp store sales, second, actual sales performance compared to our pro forma model, third, average returns of 20% to 22%, which is an increase compared to our prior target of 18% to 20% due to the benefit of federal tax reform. Fourth, cannibalization of our new stores on our comp store base, and finally, a payback period of less than two years.

We continue to be very pleased with the overall returns on our new stores as we remain committed to investing our capital effectively to drive strong financial returns. For 2018, we expect to open 900 new stores, remodel 1,000 of our mature store locations, and relocate approximately 100 stores. That's about 2,000 projects in total as we continue to deploy capital to these high-return investments.

Of the 1,000 planned store remodels for 2018, we expect approximately 400 locations to be in the Dollar General traditional plus format, bringing the total traditional plus store count to about 750 by yearend. These remodels incorporate a cooler set of 34 doors for increased perishable selection. Our cooler door expansion has proven to drive baskets and trips with our existing customer base, while also attracting new customers with an expanded offering.

Additionally, across about a third of these locations, we are including an assortment of fresh produce, bringing the total number of Dollar General stores with produce to around 450 by yearend. While it's still early, prior year traditional plus remodels are yielding strong same-store sales results. The ability to offer produce, particularly in areas with limited grocery availability represents an attractive growth opportunity for Dollar General in the years ahead.

Our third operating priority is to leverage and reinforce our position of the low-cost operator. Over the years, we have established a clear and defined process to control spending. All of our spending is filtered through three criteria. First, is it customer facing? Second, does it align with our strategic priorities? Third, how does it impact our risk profile?

At the store level, our operational initiatives for 2018 are centered on space optimization and ongoing efforts to simplify our operational by reducing unproductive inventory, operating complexity and product movement within the stores. These actions are designed to control costs and allow our store managers and their teams to invest time savings to provide better customer service as well as fast, clean, and an in-stock shopping experience.

We also have a continued focus on improving the speed of checkout with the goal of reducing transaction time by an average of three seconds. To put this in perspective, a reduction of three seconds of each of our nearly 2 billion annual transactions would result in over 1.6 million in additional time savings for our store teams each year. These time savings can be reinvested by our store managers to deliver a higher level of customers service, which ultimately helps to improve sales.

To advance our objective of reducing transaction times, in addition to our Shop and Scan offering, we are establishing optimal transaction times for each store based on individual store attributes. We are also tracking customer satisfaction scores at the individual employee level, which increases accountability and creates opportunities for employee recognition.

Our ability to drive execution across our large and growing store base is a key strength of Dollar General. At the store support center, work elimination and process improvement are ongoing efforts to take cost out of the business. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, control expenses, and always seek to be a low-cost operator.

Our fourth operating priority is to invest in our people as we believe they are our competitive advantage. We believe that significant investment in store manager compensation and training we made in 2017 is paying off as we experienced our lowest level of store manager turnover in five years. For the first time in several years, we are seeing a reduction in both assistant manager and store association turnover.

Importantly, the reduction in store-level employee turnover are accompanied by an increase in both store manager and hourly applicant flow, which is up substantially over the same prior year period. These results further support our belief we continue to be well-positioned from a wave perspective. Since we have already made wage investments, we can use the vast majority of the benefit from tax reform to invest in other areas of the business and return additional cash to shareholders. We will continue to monitor the environment and invest as needed to ensure we remain competitive in the labor market.

For the seventh consecutive year, Dollar General was named to Training Magazine's Top 125 Training List, ranking in the overall top-five and the highest ranked major retailer on their most recent 2018 list, which represents our highest ranking to date.

We are proud of our 10,000+ store managers who have been internally promoted and are excited about how engaged our workforce is across the business. I believe this has helped to contribute to our improvement in overall customer satisfaction scores, which continued to improve throughout 2017 and ended at their highest level of the year.

In 2018, we will continue to invest in our employees and remain committed to providing attractive career growth opportunities. As we announced last week, we are extending paid parental leave benefits and providing adoption assistance for eligible employees throughout the company. Additionally, we plan to create over 7,000 new jobs as a result of our 900 plan new store openings.

We are confident that we remain in a leadership position to attract and retain the right talent. We will continue to invest in our people as we believe they are a competitive advantage.

In closing, we are cautiously optimistic about economic conditions. It is always challenging for our core customer. So, regardless of the economic outlook for our consumer, our goal is do everything we can to provide her with a great shopping experience and to deliver the value and convenience you expect from Dollar General.

I want to thank each of our nearly 130,000 employees across the company for all their hard work and dedication to fulfilling our mission of serving others. As a team, we look forward to 2018 as we build on our strong performance from 2017.

With that Jennifer, we would now like to open the lines for questions.

Questions and Answers:

Operator

At this time, if you would like to ask a question, please press * then the number 1 on your telephone keypad. Your first question will come from Vinny Sinisi with Morgan Stanley.

Todd Vasos -- Chief Executive Officer

Hi, Vinny.

Michael -- Morgan Stanley -- Analyst

Hey, guys. This is actually Michael in for Vinny. Thanks for taking my question. So, I wanted to ask, actually, about that reinvestment rate, which I think I average out to around 20% to 25%. So, that rate's maybe been on the lower side compared to some of your peers in retail and obviously, you guys have been way ahead of the curve with investments in stores and labor. I was wondering about the thought process, how you came to that number. Also, is that kind of incremental spending or pull forward of future planned investments?

John Garratt -- Chief Financial Officer

Yeah. So, as Todd mentioned, as we come into the year, because we've been proactively investing all along, we feel we're in a great spot. When you look at the investment we made last year in store manager pay, it's performing as we expected as we see higher applicant flow, higher staffing levels, lower turnover, we're seeing the financial benefits of that, with better customer satisfaction, better sales, and starting to see the lower shrink.

We're well-positioned also on pricing. So, as you look at those areas, we feel we're well positioned. We really saw this as an opportunity to continue to accelerate strategic initiatives and high-return projects. So, in addition, as you look as how we're breaking it down this year, in addition to investing in 2,000 real estate projects, both the high-return new stores as well as the remodels with additional cooler capacity which is driving great sales benefits and the support infrastructure, we see an ability to accelerate the strategic initiatives.

Todd mentioned digital and non-consumables to mention two of them and other high-return projects like EAS, which is helping us so much with shrink, expanding our private fleet to help mitigate risks around transportation costs, and LED lighting, which helps us save utility costs. So, we see a lot of opportunities to accelerate these, help the business, and feel we're really well-positioned and comfortable with the allocation here. That allows us to return a considerable amount of money back to the shareholders in the form of a competitive dividend and share repurchases.

Michael -- Morgan Stanley -- Analyst

Great. Thanks. Actually, just a quick follow-up on kind of what you just mentioned on the increasing transportation costs -- I wonder if you can maybe kind of quantify that or where you see the cadence of that headwind looking go through 2018.

John Garratt -- Chief Financial Officer

Yeah. We didn't quantify the impact of that. But as you look at our guidance for the year around overall operating margin, that is factored in and that is one of the key headwinds that we're overcoming. But still, we see ourselves in a position to, despite headwinds like that, and the targeted investments we talk about, keep our operating margin and rate levels.

We have offsets within that and within gross margin overall. The good thing is there are a lot of levers within gross margin. Within transportation costs, we mentioned we're reducing stem miles. We're optimizing our loads. We're expanding our private fleet to help mitigate that as well as other productivity initiatives in the distribution center. Then, of course, we have other levers within gross margin such as shrink. We're very pleased with the shrink performance there, five consecutive quarters of shrink improvement as the process improvement, the store manager pay, and the investments we've made pay off. The team does a phenomenal job on our product category management and see continued opportunity to expand private label penetration, foreign sourcing penetration, as well as our non-consumables. So, we see a lot of opportunities to help offset that pressure.

Michael -- Morgan Stanley -- Analyst

Great. Thanks so much. Very helpful.

Operator

Your next question is from Robby Ohmes with Bank of America Merrill Lynch.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my question. Actually, there's two of them. The first was just you guys in the press release called out that traffic comp was slightly negative and if I recall, I think it was accelerating in the third-quarter. I was hoping you could maybe tell us was there a change in trend in the fourth quarter? Maybe discuss that with us a little bit.

Todd Vasos -- Chief Executive Officer

Sure. As you look at the fourth quarter, we strategically looked year over year at our promotional activity. The main driver of the little bit of a slowdown that we saw in traffic was really a little bit of a pullback in our promotional activity. Quite frankly, it was in one big promotion that we ran the year prior in November leading into the baking season before Thanksgiving.

So, when you factor that in and then our position that we'll continue to work all levers and deliver profitable sales growth, we saw a little bit of a slowdown there. But again, it was intentional and quite frankly, not completely unplanned. So, we feel good about the long-term prospects of driving traffic. As we look at our 2018 initiatives, they're as robust as ever. I would tell you that I'm very excited about our strategic initiatives, especially the two that I outlined in the call today to help continue to drive that traffic for many years to come.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Thanks. The other question was in the fourth quarter -- maybe it's related to the pullback in the promo activity -- but I was curious where you're seeing less markdowns in the fourth quarter versus last year.

John Garratt -- Chief Financial Officer

Yeah, it really stems from the promotional activity. We've gotten very targeted on the promotional activity, particularly as we see the headwinds ease and the initiative is performing well. It's just been very targeted around our markdowns.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks, guys. That's really helpful.

Todd Vasos -- Chief Executive Officer

Thank you.

Operator

Your next question is from Scott Mushkin with Wolfe Research.

Scott Mushkin -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking my questions.

Todd Vasos -- Chief Executive Officer

Good morning, Scott.

Scott Mushkin -- Wolfe Research -- Analyst

Good morning. I want to talk about your sales. I think you guys are guiding to the mid-twos in relation to kind of all the initiatives you have going and what looks like probably a little bit stronger inflation backdrop. I just wanted to see are you kind of being conservative there? I'm just trying to gauge it. It seems like every company is baking in additional cost related to the tax cut, but no one's really talking too much about sales. I was wondering if you could give us -- how are things going and what are thinking on that mid-two guide?

Todd Vasos -- Chief Executive Officer

Yeah. We're squarely focused on driving that topline. We believe over the long-term, 2%+ is definitely where we can drive. The 2.5% that we're guiding to is our best estimate at this point as we look for the whole year. In saying that, we always strive -- we're retailers and we always strive for more. We'll continue to drive that topline and, again, balance that with profitable sales growth at the same time.

So, stay tuned. But as I said earlier, I'm very encouraged in our 2018 shorter-term initiatives as well as those longer-term initiatives to sustain a nice comp as we move out into future quarters and years. So, stay tuned, but I can tell you that our merchant team is squarely focused on driving as much comp as we possibly can as we move through 2018.

Scott Mushkin -- Wolfe Research -- Analyst

So, my follow-up question along the same lines -- I know you guys are expanding health and beauty care as one of the key initiatives and, of course, the treasure hunt. I was wondering if you could actually size a little bit for us the healthy and beauty care expansion. How many stores will have the larger set? And then on the treasure hunt, I think you said 700 stores. When does that start? Could you size it from an SKU perspective?

Todd Vasos -- Chief Executive Officer

Yeah, sure. I'll try to size it up. On the health and beauty front, this is the second year of this initiative. This initiative really goes across the majority, if almost not all of our stores. It will touch pretty much all of them as we move through 2018. We have a unique position here. We have created a very nice niche for ourselves for our consumers in both health and beauty, especially on that health side of the equation.

I can tell you that our prices are very, very favorable compared to other classes of trade there and our private brand penetration is among the strongest in some of those categories that we see across all of our categories that we have private brands in. So, it's going to be an initiative that will touch all stores.

As we look at our longer-term initiative, the non-consumable initiative you mentioned, the 700 stores, that initiative will kick off middle of the year and we'll continue to put stores in as we move toward Q3 as well. But as we continue to see momentum in that, which we anticipate, we'll be able to take pieces of that initiative early on and start to implement them in the chain itself as we start to see things start to materialize in a real positive way, again, which we anticipate seeing.

I could tell you on a SKU basis there will be hundreds of new SKUs that will be in this. It is a whole different way of going about our non-consumable business. I think it's very smart. As you look at how the consumer is shopping today -- and you know us pretty well. We've always been on the forefront of changing as the consumer changes. She is looking for more of a treasure hunt. She's looking for something new and unique in her shopping experience, especially as it relates to non-consumables. We believe that this will deliver exactly what she's looking for.

So, stay tuned, more to come. We'll tell you as time goes how that initiative is progressing. But we're looking for some big things out of this as we move forward.

Scott Mushkin -- Wolfe Research -- Analyst

Alright, perfect. You just made a bunch more questions come into my head, but I'll yield. I know there's a lot of people on the call. Thanks very much.

Todd Vasos -- Chief Executive Officer

Sure.

Operator

Your next question is from Greg Melich with MoffettNathanson.

Greg Melich -- MoffettNathanson -- Analyst

Hi, thanks, guys. I just wanted to follow-up on gross margins. You mentioned some of the drivers that could help this year going forward, private label, foreign sourcing. Could you give us an update on where you are right now, percentage of volume or sales that is private label and also what the import percentage is? And call out China in particular, especially, what you might do if tariffs come into play. Thanks.

Todd Vasos -- Chief Executive Officer

Sure. On our private brands, we continue to see penetration rates between the 22 and 24 percentage point. And that's overall. Some categories are much higher than that, obviously. But we still see it right in that wheelhouse and we feel good about that amount of percentage. We're always looking to increase that. Again, I think as we look at 2018, the initiatives around private brands are as strong as I've seen them in the last couple three years. We feel good about being able to add to that.

As far as global sourcing is looking at, we still believe we've got somewhere in that $4 billion to $5 billion opportunity on a cost of good basis to bring more goods in through our foreign sourcing efforts. We, like most, are still predominately China-centric. I wouldn't say all, but I could tell you that over the last three years, our reach into other countries has grown tremendously.

We're now in double digits in the amount of countries that we actually export out of. That will continue to grow over time because we see the opportunity to move some of the goods out of China into other areas that have a very competitive price and have the infrastructure available to meet our needs and to get the goods over here on a timely basis. So, more to come there. I can tell you that our global sourcing folks are squarely focused on moving the needle on our percentage and on the amount that we bring into the country.

Greg Melich -- MoffettNathanson -- Analyst

That's great. Thanks a lot.

Todd Vasos -- Chief Executive Officer

Sure.

Operator

Your next question is from Michael Lasser with UBS.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. Todd, can you quantify what you've assumed for an average wage rate, maybe an average fuel price? I think there's going to be a lot of debate as the year progresses if you see the wage environment heat up and diesel prices start to put more pressure on your transportation costs, might you have to make some additional investments above and beyond what you originally planned for. So, it would be helpful to kind of help frame that.

Todd Vasos -- Chief Executive Officer

Yeah. As we look in 2018 -- and our guidance reflects what our current thoughts are and where we think the business is headed -- we feel very good about where we are on wages today. When you look at the investments that we made last year in our store managers -- by the way, the investments we made last year even in our hourly rates, not only the 16 to 18 states and municipalities that mandated a different rate, but also to stay competitive in certain markets, we have upped the rates across the board. We feel that we've been able to manage those very well. We believe we can manage that in 2018 very well.

Our applicant flow is at the highest we've seen in many years. With our turnover being down at the lowest rate that we've seen in the last five years, we feel very, very confident and very competitive in our wage structure and rates and be able to staff our stores appropriately. So, right now, we don't see a large need to invest heavily, but we'll always invest where we believe we think we need to to continue to stay competitive.

As we look at gross margin, especially as you indicated with fuel prices on the rise and the carrier rates on the rise, our team has done a great job in supply chain over the years in anticipating -- let's admit it. Fuel prices overall, while up recently, they're still not at their highs that they were a few years ago. We know that fuel rates are going rise. Our teams have been always proactive about ways to mitigate those fuel cost rises. The team is really doing a nice job. Now, we're not going to be able to mitigate all of it, but a portion of it.

Then, again, with our private fleet and the expansion of that, we feel that taking advantage of the private fleet will also give us a distinct advantage in some of these carrier rate increases that we're seeing. So, more to come -- again, in our guidance, we feel that we've nailed it pretty good right now, but like we always say, we always reserve the right to invest where we need to, whether it be pricing, whether it be waves or others, to continue to drive this business.

Michael Lasser -- UBS -- Analyst

That's very helpful. I have one follow-up. You're looking for a mid-two comp this year. That would represent a slowdown from what you saw in 2017, the full year basis, despite the fact that last year, you were dragged down by deflation and some of the changes to the SNAP program. Why would this year be better than last year, particularly you see traction with some of your initiatives?

Todd Vasos -- Chief Executive Officer

As I mentioned earlier, when you look at our comp, we're very happy where comp came in in Q4. As we look to 2018, we gave our best estimate to what we thought full year 18 is going to look like. But again, we're retailers and arguably, we're one of the best out there at driving that topline and balancing the margin components of that as well. So, we'll continue to try to strike that fine balance, but we'll always try to drive at a higher comp as we move through the year.

Michael Lasser -- UBS -- Analyst

Okay. Thank you so much and good luck.

Todd Vasos -- Chief Executive Officer

Sure. Thank you.

Operator

Your next question is from Paul Trussell with Deutsche Bank.

Paul Trussell -- Deutsche Bank -- Analyst

Good morning.

Todd Vasos -- Chief Executive Officer

Good morning.

Paul Trussell -- Deutsche Bank -- Analyst

Regarding SG&A overall, you highlighted, I believe, 20 basis points of deleverage in one Q and you called out occupancy and still needing to lap the store manager compensation increase from the last year as the factors driving that. So, should we assume more flattish levels of SG&A rate as we move through the balance of the year? Specific to 1Q, are there enough gross margin tailwinds to more than offset that aforementioned 1Q SG&A headwind?

John Garratt -- Chief Financial Officer

Yeah. So, as we mentioned in our call, in Q4 going into Q1, there was some noise putting some short-term pressure on our SG&A. But the way we look at it, our goal remains to leverage SG&A at a sales comp of 2.5% to 3% over time. As we indicated in our guidance, we really looked at operating margin overall, looking to manage all the levers within gross margin and SG&A. The team does a great job of making the right trade-offs there. As we said in our guidance, we see that overall being even for the year and we do see some of the noise of Q4 and the front half of Q1 SG&A normalizing.

Paul Trussell -- Deutsche Bank -- Analyst

And on the gross margin for 1Q?

John Garratt -- Chief Financial Officer

Yeah. So, we didn't call out anything specifically around gross margin. Again, we focus on the long-term and making the right trade-offs. But again, in our guidance for the year, when we look at the two in total, we see our ability to see our ability to keep that rate even with last year, while making target investments offsetting some headwinds. With all the levers at our disposal, we feel comfortable with the guidance we've provided.

Paul Trussell -- Deutsche Bank -- Analyst

Fair enough. Lastly from me, just circling back to same-store sales. I just want to be clear on what drove the strength in ticket in 4Q -- it certainly sounds like there was a little bit less of promotions and also had some markups, but it's still a big number. If you could touch on that, and then just going forward as we think about same store sales in 2018, do you have an expectation that traffic in the home and apparel categories will positively contribute?

Todd Vasos -- Chief Executive Officer

So, as you look at our sales -- we were very pleased, as you indicated, we came out with a very strong comp in Q4. That was primarily driven by our initiatives. Those initiatives will continue to carry on as we move into the first half of this year. You couple that with our new initiatives in 2018, that's what gives us the confidence as we move into '18 in that 2.5+ range.

So, I think it's really everything that we've always done here. That is having strong initiatives leading into the year and then leveraging those as we move through the fiscal year. I see it no different for 2018. As you look at it, it was really comprised of those initiatives. Inflation, actually, was very flattish, if not down a little bit, in Q4 for us. So, it really wasn't inflation that drove that.

Then when you look at the transactions as well as the traffic, when you look at transactions, we've been doing a lot to move the needle on getting a fuller shop for our consumer. While we're still convenient based and it's definitely a fill-in shop, having her be able to pick up an additional item through our offering is starting to pay off. We're seeing that within our numbers. She's been able to do a little bit of a fuller shop as she comes to us. You couple that ability with a little bit of extra money in her pocket she has and that's usually a winning combination.

Paul Trussell -- Deutsche Bank -- Analyst

That's helpful color. Thank you. Best of luck.

Todd Vasos -- Chief Executive Officer

Sure. Thank you.

Operator

Your final question will come from John Heinbockel with Guggenheim Securities.

Ryan Kilbane -- Guggenheim Securities -- Analyst

Hey, guys. This is Ryan Kilbane. I'm for John.

Todd Vasos -- Chief Executive Officer

Good morning.

Ryan Kilbane -- Guggenheim Securities -- Analyst

So, the strength in traffic-generating categories seems like it's not really translating into the sale of more discretionary items. So, I was wondering is that a function of merchandise content, value or execution? Is this something that you guys expect from your strategic initiatives, from like treasure hunt to help drive?

Todd Vasos -- Chief Executive Officer

You know, as you look at our non-consumable business, we always have said that consumables will drive the traffic in. We'll round out the basket with the non-consumable goods. That played out in seasonal, but didn't play out in a couple of the other areas in Q4. That's where we're squarely focused, both in our short-term initiatives leading into 2018, but also those longer-term initiatives, that non-consumable initiative that I talked about, it could really have the juice to really move the needle long-term as we move through '18 and then into '19 because of the different type of a shop that we're moving after in non-consumables.

Always remember the consumer changes and her preferences change over time. We retailers that recognize that quickly as Dollar General does, and then moves quickly as we do to take advantage of that. That's exactly what we're doing over 2018 and then moving into the long term, '19 and '20, we believe we're positioning ourselves well to capitalize.

Ryan Kilbane -- Guggenheim Securities -- Analyst

Okay. Thank you. A quick follow-up -- the initial productivity seemed to fall a little bit in the quarter kind of relative to historical levels. Can you talk a little bit about that and then what might be driving, I guess, the implied step up a little bit in 2018 in terms of the implied productivity? Thanks.

John Garratt -- Chief Financial Officer

We haven't seen material change in the performance of the stores. As we said before, we follow a basket of metrics. We continue to see the new store productivity in that 80% to 85% range, continue to see the store sales and returns perform as hoped, continue to see the returns at the high end of the 18% to 20% range. Now, with the benefit of tax reform, that would be more like a 22%. We continue to see a quick payback, continue to see cannibalization, as expected, relatively level and less than one would expect, just given the proximity of the shops. We feel great about the performance of the new stores and are very excited about the full pipeline of 900 stores we'll open this year.

Ryan Kilbane -- Guggenheim Securities -- Analyst

Okay. Great. Thank you.

Todd Vasos -- Chief Executive Officer

Thank you.

Operator

Thank you, ladies and gentlemen, for joining today's Dollar General 2017 Fourth Quarter Conference Call. You may access the replay for today's call by dialing 800-585-8367 and using conference ID 5996418. Again, you may access today's replay by dialing 800-585-8367 and using conference ID 5996418. Thank you. You may now disconnect.

Duration: 62 minutes

Call participants:

Jennifer Beugelmans -- Vice President of Investor Relations and Public Relations

Todd Vasos -- Chief Executive Officer

John Garratt -- Chief Financial Officer

Michael -- Morgan Stanley -- Analyst

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Scott Mushkin -- Wolfe Research -- Analyst

Greg Melich -- MoffettNathanson -- Analyst

Michael Lasser -- UBS -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Ryan Kilbane -- Guggenheim Securities -- Analyst

More DG analysis

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