Business context and reporting period
This filing is Dollar General Corporation’s Form 10-Q for the 13 and 26 weeks ended July 31, 2015 (second quarter and first half of fiscal 2015), compared with periods ended August 1, 2014. This differs from the request metadata’s “2014 Q2.” Dollar General operated 12,198 stores in 43 states and reported one operating segment.
Key financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $5.096B (+7.9%) | $4.724B | $10.015B (+8.3%) | $9.246B |
| Same-store sales growth | 2.8% | — | 3.3% | — |
| Gross profit / margin | $1.588B / 31.17% | $1.456B / 30.81% | $3.087B / 30.82% | $2.813B / 30.43% |
| SG&A / sales | $1.112B / 21.83% | $1.027B / 21.74% | $2.183B / 21.80% | $2.005B / 21.69% |
| Operating profit / margin | $475.8M / 9.34% | $428.5M / 9.07% | $904.0M / 9.03% | $808.2M / 8.74% |
| Net income | $282.3M (+12.4%) | $251.3M | $535.6M (+13.1%) | $473.7M |
| Diluted EPS | $0.95 | $0.83 | $1.79 | $1.54 |
| Interest expense | $20.7M | $22.6M | $42.3M | $44.9M |
First-half cash provided by operations was $557.1M, versus $486.9M a year earlier; investing cash outflow was $246.8M, including $247.1M of property and equipment purchases. Financing cash outflow was $709.6M, including $734.3M of share repurchases and $131.2M of dividends. Cash ended at $180.5M, down from $579.8M at fiscal year-end.
At July 31, total debt, including current maturities, was approximately $2.86B. The company had $646.4M available under its $850M revolving facility, with $173M borrowed on it. Total assets were $11.20B; inventory was $3.03B. The company was in compliance with its debt covenants.
Material changes and management commentary
- Q2 sales growth reflected a 2.8% same-store increase, driven by higher customer traffic and average transaction amount, plus new stores. All four merchandise categories grew; consumables were the largest category and grew 8.1% in the quarter.
- Gross margin improved 36 basis points in Q2 and 39 basis points in the first half, primarily from higher initial markups, improved shrink, and lower transportation costs; increased markdowns partly offset Q2 gains.
- SG&A as a share of sales increased 9 basis points in Q2 and 11 basis points in the first half. Management cited impairment charges, incentive compensation, repairs and maintenance, and debit-card fees, partly offset by customer cash-back convenience fees.
- Management attributed lower interest expense to lower average debt balances. Diluted shares fell by 7.4 million year over year in Q2, supporting EPS growth alongside higher net income.
- The company opened 428 stores and remodeled or relocated 593 in the first half; 19 stores closed. Inventory increased 9% in the first half, and inventory per store was up 2.7% year over year.
Outlook, risks, contingencies, and unusual items
- Management planned approximately 730 new stores and 875 remodels or relocations for fiscal 2015, with capital expenditures projected at $500M–$550M. It expected potential revolving borrowings of up to approximately $500M at any one time during the rest of the year, including for repurchases.
- Management said operating cash flow, cash, credit availability, and debt-market access were expected to support obligations, working capital, capital spending, and dividends over the next twelve months and several years. This is an expectation, not a guarantee.
- Interest-rate swaps covering $875M of variable-rate debt expired in May 2015; facility borrowings were unhedged at quarter-end. A 1 percentage-point rate increase was estimated to reduce annualized earnings and cash flow by approximately $10.6M before tax.
- Pending matters include an EEOC lawsuit alleging disparate impact from the company’s criminal-background-check policy and several wage-and-hour/employment cases, including California matters. The company could not estimate potential losses for the EEOC and certain California cases; an adverse outcome could materially affect results or liquidity. It considered the Hood matter unlikely to have a material adverse effect.
- Uncertain tax reserves totaled $11.0M, including $9.4M for uncertain tax benefits; the company said approximately $3.0M could be released within twelve months. The Work Opportunity Tax Credit’s renewal for 2015 was uncertain.
- The business is seasonal, with historically higher sales in the fourth quarter. Management cited customer economic conditions, competition, inventory management, shrink, labor costs, supply-chain execution, store expansion, litigation, and debt and interest-rate exposure among risks. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2015, not Q2 2014.
- Track whether same-store sales growth and margin gains persist, and whether higher SG&A and planned labor investment produce expected returns.
- Assess cash use for buybacks, dividends, and capital investment against cash balances, operating cash flow, and revolving-facility borrowing.
- Monitor unhedged floating-rate debt, debt maturities and covenants, and the impact of any rating or interest-rate changes.
- Follow outcomes and any updated loss estimates for employment litigation, tax examinations, and uncertain tax positions.
- Consider that the interim financial statements were reviewed by Ernst & Young, not audited; the filing states that interim results may not indicate full-year results.