Dollar General Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the 13 weeks ended May 3, 2019; comparisons are with the 13 weeks ended May 4, 2018. The filing metadata’s “2018 Q1” label does not match the filing period. Dollar General operates one reportable segment and had 15,597 stores in 44 states at quarter-end.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $6.623 billion | $6.114 billion | +8.3% |
| Same-store sales | +3.8% | Not stated here | Traffic and average transaction amount increased |
| Gross profit / margin | $2.002 billion / 30.23% | $1.862 billion / 30.46% | Profit +7.5%; margin down 23 bps |
| Operating profit / margin | $512.2 million / 7.73% | $490.2 million / 8.02% | Profit +4.5%; margin down 29 bps |
| Net income / net margin | $385.0 million / 5.81% | $364.9 million / 5.97% | Income +5.5% |
| Diluted EPS | $1.48 | $1.36 | +8.8% |
| Operating cash flow | $574.2 million | $548.6 million | +4.7% |
Gross-margin pressure reflected higher distribution and transportation costs and a greater mix of lower-margin consumables, partly offset by higher initial markups. SG&A was $1.490 billion, or 22.50% of sales versus 22.44%; employee benefits and occupancy costs contributed to the increase. Interest expense rose 4.7% to $25.9 million, primarily due to higher average borrowing rates. The effective tax rate declined to 20.8% from 21.6%, mainly reflecting greater share-based compensation tax benefits.
Consumables generated $5.213 billion of sales (+9.2%) and represented 78.71% of sales; seasonal sales were $737.0 million (+6.6%), home products $375.7 million (+5.9%), and apparel $297.3 million (+0.3%). Apparel same-store sales declined. Basic and diluted weighted-average shares fell year over year, while share repurchases were $200.0 million versus $150.0 million. Dividends paid were $0.32 per share versus $0.29.
Financial position, cash flow and liquidity
Cash was $271.1 million at May 3, 2019. Merchandise inventory was $4.110 billion, up 8.2% per store from a year earlier; rolling four-quarter inventory turnover was 4.6 times. Cash flow from investing was a $144.3 million outflow, including $144.8 million of property and equipment purchases. Financing cash outflow was $394.3 million, including share repurchases, dividends and a $121.3 million net reduction in commercial paper. Cash increased $35.6 million during the quarter.
Reported debt and other long-term obligations totaled approximately $2.7 billion, including $245.6 million of commercial paper on the balance sheet; an additional $181.0 million of commercial paper held by a wholly owned subsidiary was excluded. The company had no revolver borrowings and reported $1.24 billion of availability under its $1.25 billion facility, with $816.7 million described as incremental liquidity after preserving availability for the commercial paper program. It was in compliance with debt covenants.
Adoption of lease accounting on February 2, 2019 added approximately $8.0 billion each of operating lease assets and liabilities; therefore, the increase in total assets and liabilities versus February 1 is not directly comparable. At May 3, operating lease assets were $8.140 billion and lease liabilities were $8.133 billion. The filing reports a 10.2-year weighted-average remaining lease term and a 4.4% discount rate. Lease cost was $308.1 million and variable lease cost $9.1 million for the quarter. Management stated that cash, operating cash flow and borrowing access should cover obligations, working capital, capital spending and dividends over the next 12 months and several years.
Outlook, commentary and risks
- For fiscal 2019, management planned approximately 975 new stores, 1,000 remodels and 100 relocations, and projected capital expenditures of $775 million to $825 million. It anticipated maximum combined revolver and commercial-paper borrowings of approximately $800 million at any one time for the remainder of the year.
- The company opened 240 stores, remodeled 330 and relocated 27 in the quarter. Its plans included expanding the DG Fresh self-distribution pilot, testing Fast Track store and distribution initiatives, and extending a refreshed non-consumables assortment. Management cautioned that these initiatives require upfront spending and may not deliver timely or acceptable returns.
- Tariffs on Chinese goods did not materially affect first-quarter results. Rates on certain products rose from 10% to 25% effective May 10, 2019. Management expected sourcing, merchandising and pricing measures to mitigate effects, but gave no assurance; further tariff increases or expansion could have a greater impact.
- Key exposures include value-conscious customers’ sensitivity to employment, wages, household costs and assistance programs; sales mix, inventory shrink and management, rising wages and occupancy costs, distribution disruptions, competition, weather, and execution of growth initiatives.
- Motor-oil labeling and marketing litigation includes certified statewide classes and related state matters. The company is defending the claims, but stated it cannot estimate potential loss or range of loss; an adverse outcome could materially affect financial statements. Other ordinary-course legal matters may also affect future results.
- Management said the company’s credit ratings were Baa2 (Moody’s) and BBB (S&P), both with stable outlooks, and noted ratings changes could affect financing costs and access. The interim financial statements received an independent accountant’s review, not an audit.
Most important facts for investors to verify
- Whether sales growth and customer traffic can continue while gross and operating margins remain below prior-year levels.
- Actual tariff effects after the May 10 increase and the success and cost of mitigation efforts.
- Capital spending, store-opening and remodel execution, and returns from DG Fresh, Fast Track and merchandising initiatives.
- Commercial-paper and revolver use, liquidity headroom, and the company’s ability to meet substantial lease commitments.
- Developments in motor-oil litigation, including class treatment, potential exposure and any material change to the company’s inability to estimate losses.