Dollar General Corporation — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2017, ended November 3, 2017; comparisons are to periods ended October 28, 2016. The request metadata says “2016 Q3,” but the filing itself reports 2017 Q3. The interim financial statements are unaudited and were reviewed, not audited.
Business context and results
Dollar General operated 14,321 stores in 44 states and reported one operating segment. Sales are concentrated in consumables; the company noted that consumables and lower-margin consumable categories were taking a larger share of sales.
| Metric | 13 weeks | 39 weeks |
|---|---|---|
| Net sales | $5.904 billion, up 11.0%; same-store sales up 4.3% | $17.342 billion, up 8.5%; same-store sales up 2.6% |
| Gross profit / margin | $1.766 billion / 29.92%, versus 29.84% | $5.256 billion / 30.31%, versus 30.56% |
| Operating profit / margin | $417.4 million / 7.07%, versus 7.39% | $1.384 billion / 7.98%, versus 8.65% |
| Net income | $252.5 million, up 7.3% | $826.8 million, down 1.2% |
| Diluted EPS | $0.93, versus $0.84 | $3.02, versus $2.95 |
Quarterly gross margin improved slightly, helped by higher initial markups and lower shrink, but SG&A rose to 22.85% of sales from 22.45%. Year to date, gross margin declined and SG&A increased to 22.33% from 21.90%. Lower-margin sales mix, markdowns, transportation costs, labor and occupancy costs pressured profitability. Reduced average shares outstanding supported EPS growth.
Cash flow, balance sheet and capital allocation
- Year-to-date operating cash flow was $1.143 billion, versus $1.124 billion. Property and equipment purchases were $488.6 million, implying approximately $654 million of operating cash flow less capital expenditures.
- Cash was $226.2 million at November 3. Current assets were $4.153 billion and current liabilities $2.938 billion; inventory was $3.597 billion.
- Total obligations were about $3.121 billion, including $549.9 million of commercial paper and $175 million outstanding under the term facility. The company reported $1.24 billion of revolving-facility availability, of which $690.6 million could contribute incremental liquidity while maintaining planned support for commercial paper. It was in compliance with debt covenants.
- Year-to-date capital spending was $488.6 million. The company projected fiscal 2017 capital expenditures of $700–$750 million. It repurchased $298.7 million of stock and paid $212.9 million in dividends during the 39 weeks; approximately $634.6 million remained authorized for repurchases.
Changes, outlook and risks
- Third-quarter same-store sales rose 4.3%, with increases in transaction amount and traffic; management said macroeconomic pressures and deflation had weighed on sales in prior quarters. Hurricanes added an estimated 30–35 basis points to quarterly same-store sales but caused $24.8 million of expense and an estimated net diluted-EPS impact of negative $0.05.
- Management planned approximately 1,285 store openings in 2017, including acquired locations, and approximately 760 remodels or relocations. For 2018, it planned about 900 openings, 1,000 remodels and 100 relocations. The Jackson, Georgia distribution center began shipping in October 2017; construction began on a New York facility.
- Management expected higher carrier and fuel rates to pressure margins into early 2018 and anticipated continued growth in lower-margin consumables. No specific earnings guidance was provided in the filing.
- Pending U.S. tax legislation was expected, as then drafted, to have a favorable material impact on the tax rate and net income, but enactment and final terms were uncertain. Adoption of new lease accounting was expected to materially affect the financial statements. A separate accounting change was expected to increase deferred tax liabilities and reduce retained earnings by approximately $32–$36 million.
- The company disclosed wage-and-hour, employment, private-label motor-oil, securities and derivative litigation. It could not estimate potential losses for the principal matters and warned that adverse outcomes could be material. Other cited risks include customer spending and assistance-program changes, inventory management, competition, labor and supply-chain costs, natural disasters, and credit ratings.
Important facts for investors to verify
- Whether same-store sales and traffic momentum persist without hurricane-related effects.
- Whether consumables mix, transportation costs and higher labor and occupancy expenses continue to pressure margins.
- Execution and returns from planned store openings, remodels, acquired sites and distribution-center investment.
- Liquidity and refinancing plans, particularly the $400 million notes due April 2018 and commercial-paper reliance.
- Developments in tax legislation, lease-accounting implementation and the disclosed litigation, for which potential losses were not estimable.