Dollar General Corporation — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended July 29, 2016, compared with periods ended July 31, 2015. This differs from the request metadata identifying 2015 Q2; the filing itself is for 2016 Q2. Dollar General operated 12,967 stores in 43 states at quarter-end.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $5.392 billion | $5.096 billion | $10.657 billion | $10.015 billion |
| Gross profit | $1.682 billion | $1.588 billion | $3.294 billion | $3.087 billion |
| Operating profit | $509.1 million | $475.8 million | $989.8 million | $904.0 million |
| Net income | $306.5 million | $282.3 million | $601.6 million | $535.6 million |
| Diluted EPS | $1.08 | $0.95 | $2.11 | $1.79 |
| Operating cash flow | Not provided separately | Not provided separately | $793.3 million | $585.0 million |
- Q2 sales grew 5.8%; same-store sales rose 0.7%, reflecting higher average transaction amounts partly offset by lower customer traffic. First-half sales grew 6.4%, with same-store sales up 1.4% on increases in both traffic and transaction amount.
- Q2 gross margin was 31.19%, up 2 basis points; SG&A was 21.75% of sales, down 8 basis points. Operating margin increased to 9.44% from 9.34%. First-half gross margin rose 9 basis points to 30.91%, and SG&A declined 18 basis points to 21.62%.
- Q2 diluted EPS increased 13.7%; the decline in weighted-average diluted shares, primarily from repurchases, contributed to per-share growth. First-half diluted EPS increased 17.9%.
- First-half operating cash flow increased 35.6% year over year. Investing outflow was $265.4 million, primarily reflecting $267.8 million of property and equipment purchases; financing outflow was $500.9 million, including $454.5 million of repurchases and $142.2 million of dividends.
Financial position and liquidity
- At July 29, 2016, cash was $185.0 million, inventory $3.271 billion, and total assets $11.617 billion. Inventory increased 6% during the first half; inventory turnover was 4.7 times on a rolling four-quarter basis.
- Total debt, including current maturities, was $3.06 billion. The balance sheet classified $501.5 million as current obligations and $2.556 billion as long-term obligations. Revolver borrowings were $337.0 million, with $647.5 million available after outstanding letters of credit.
- On August 1, the company established a commercial paper program of up to $1.0 billion; $142.0 million was outstanding at August 23 at a 0.7% weighted-average rate. Management said cash, operating cash flow, credit availability, and debt-market access should provide sufficient liquidity for obligations and expected needs. The company was in compliance with credit-facility covenants at quarter-end.
- First-half capital expenditures were $267.8 million. Fiscal 2016 capital expenditures were projected at $580 million to $630 million.
Material changes and management commentary
- Q2 gross profit dollars grew 5.9%; higher initial markups and lower transportation costs were partly offset by higher markdowns, a greater consumables sales mix, and increased inventory shrink. SG&A leverage reflected lower administrative payroll, advertising, and incentive compensation, partly offset by retail labor and occupancy costs rising faster than sales.
- Interest expense rose 17.9% in Q2 to $24.4 million, primarily due to higher average debt and interest rates. The effective tax rate fell to 36.8% from 38.0% in Q2 and to 36.1% from 37.8% for the first half. First-half results included an approximately $10.5 million, or $0.04 per diluted share, benefit from adopting share-based payment accounting guidance.
- The company opened 510 stores and remodeled or relocated 594 in the first half. It planned 900 openings and 900 remodels or relocations for fiscal 2016, and about 1,000 openings plus 900 remodels or relocations in 2017. It acquired 41 former Walmart Express locations; 40 are intended as relocation sites.
- Management cited mixed pressures on core customers, including lower fuel prices and unemployment alongside rising rents and medical costs, reduced SNAP participation and benefits, and stagnant wage growth. It described pricing, labor, and marketing investments intended to improve traffic and market share, and continued efforts to improve in-stock levels, control shrink, and manage costs.
Outlook, risks, contingencies, and unusual items
- No full-year sales or EPS guidance is stated in the provided filing text. Management estimated the Walmart Express-related costs would reduce Q3 diluted EPS by approximately $0.02 to $0.03, mainly from lease termination costs. Implementation of overtime exemption changes was expected to reduce fiscal 2016 diluted EPS by approximately $0.03 to $0.04.
- Management expected to refinance the $500 million 4.125% notes due July 2017. For the remainder of fiscal 2016, it anticipated combined revolving-facility and commercial-paper borrowings of up to approximately $600 million outstanding at any one time, including expected repurchase funding.
- The board authorized an additional $1.0 billion of repurchases on August 24, bringing remaining authorization to approximately $1.4 billion. The company paid $0.50 per share in dividends in the first half and approved a further $0.25 quarterly dividend payable September 28, 2016.
- Significant litigation includes EEOC claims concerning hiring background checks; California wage-and-hour matters; a new FCRA background-check class complaint; and consolidated class litigation alleging misleading labeling or marketing of private-label motor oil. The company said potential losses in these matters could not be estimated and that adverse outcomes could materially affect results or financial position. A preliminary resolution of the Sullivan matter was described as immaterial, subject to court approval.
- Uncertain tax benefit, related interest, and penalty reserves totaled $8.5 million. The company said approximately $2.1 million of uncertain tax-position reserves could be reduced in the next 12 months. It expects adoption of new lease accounting guidance to have a material impact because of its significant lease portfolio.
- Other risks identified include weaker consumer demand, competitive pressures, execution and store-growth risks, inventory shrink and management, labor costs, supply-chain disruption, litigation and regulation, and changes in credit markets or ratings. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.
Most important facts for investors to verify
- Confirm the period: the filed report is for Q2 2016, not Q2 2015.
- Track same-store sales, especially traffic, and whether pricing and labor investments improve sales without eroding margins.
- Assess inventory growth, shrink, and working-capital movements, including the contribution of accounts payable to operating cash flow.
- Monitor debt refinancing, commercial-paper and revolver usage, repurchases, and the company’s capacity to fund capital spending and dividends.
- Follow the estimated store-acquisition and overtime-related EPS costs, and developments in litigation for which potential losses are not estimable.