DOLLAR GENERAL CORP quarterly report, Q2 FY2012

Dollar General Corporation — Form 10-Q Summary

Reporting period: The filing covers the 13 weeks and 26 weeks ended August 3, 2012, compared with the periods ended July 29, 2011. Although the request metadata says 2011 Q2, the filing itself is for 2012 Q2. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.

Business context and results

Dollar General operated 10,203 stores in 40 states and reported one segment. The discount retailer sells consumables, seasonal goods, home products and apparel. Second-quarter comparable-store sales rose 5.1%, driven by increased traffic and average transaction amount.

Metric	13 weeks ended Aug. 3, 2012	Year-over-year change	26 weeks ended Aug. 3, 2012	Year-over-year change
Net sales	$3.949 billion	+10.4%	$7.850 billion	+11.7%
Gross profit / margin	$1.263 billion / 32.0%	+10.0%; down 13 bps	$2.491 billion / 31.7%	+11.4%; down 8 bps
Operating profit / margin	$387.2 million / 9.8%	+10.6%	$771.5 million / 9.8%	+14.9%
Net income	$214.1 million	+46.6%	$427.6 million	+41.1%
Diluted EPS	$0.64	Up from $0.42	$1.27	Up from $0.88

Cash flow, debt and liquidity

First-half operating cash flow was $373.5 million, down from $398.4 million a year earlier. Capital expenditures were $304.0 million, up from $218.1 million; cash and cash equivalents ended at $134.2 million.
At August 3, total debt was approximately $2.89 billion, versus $2.62 billion in long-term obligations at fiscal year-end. The company reported $747.9 million available under its ABL facility; borrowings under that facility were $404.9 million.
The company issued $500 million of 4.125% senior notes due 2017 and redeemed $450.7 million of high-coupon senior subordinated notes, paying a redemption premium. The transaction generated a $29.0 million pretax loss. The ABL facility was extended to July 2014, and $879.7 million of term loans was extended to July 2017; the remaining approximately $1.08 billion of term loans matures in July 2014.
Management said cash from operations, cash balances and credit-facility availability should fund obligations, working capital and capital spending for at least the next 12 months and several years. The filing also notes significant debt-service and other obligations.

Material changes and management commentary

Sales growth was led by consumables, which represented about 74% of second-quarter sales. Management attributed lower gross margin mainly to the higher consumables mix, increased markdowns and smaller price increases; higher initial markups, transportation efficiencies and lower fuel costs partly offset these pressures.
SG&A improved to 22.2% of sales in Q2 from 22.3%, helped by workforce utilization, lower insurance-related costs and sales leverage. Higher advertising and debit-card fees partly offset savings.
Interest expense fell to $35.7 million in Q2 from $60.6 million, reflecting lower average borrowings and interest rates. The effective tax rate declined to 34.1% from 36.8%; favorable tax-examination resolutions more than offset the expiration of certain federal tax credits.
First-half inventory increased 7%; inventory turnover was 5.2 times on a rolling four-quarter basis. Management identified improving in-stock levels while maintaining inventory turns as a priority.
First-half activity included 295 new-store openings, 416 remodels or relocations, and 29 closures. Management planned approximately 625 new stores and 575 remodels or relocations for fiscal 2012.

Outlook, risks and unusual items

Capital expenditures for fiscal 2012 were projected at $600–$650 million. No specific sales, earnings or margin guidance is provided in the filing.
Management cited economic uncertainty, consumer spending and product-cost pressures, fuel and labor costs, inventory shrink and markdown risk, supply-chain execution, competition, and debt and covenant restrictions as risks. The business is seasonal, and interim results may not indicate full-year results.
Legal matters include a store-manager overtime collective-action case, an applicant background-check class-action claim, and an EEOC matter concerning the company’s criminal-background-check policy. The company could not estimate potential losses for these matters; adverse outcomes could be material. A separate pay-equity settlement was approved for $18.75 million, substantially covered by insurance, with the company paying approximately $2.8 million.
In the Winn-Dixie litigation, the court dismissed damages claims and most requests for injunctive relief; plaintiffs filed an appeal after the quarter-end ruling. The company said it expected no material impact from the ruling, while noting that a successful appeal could change the outcome.
The board authorized an additional $500 million share-repurchase program on August 29, 2012, after quarter-end. The earlier $500 million program had $15 million remaining at August 3; the company had repurchased $300 million of shares from a principal shareholder in April.
Other notable items include a $14.5 million Q2 benefit from favorable tax-examination adjustments and the refinancing-related debt-retirement loss. The company had $23.5 million of reserves for uncertain tax benefits, related interest and potential penalties at August 3.

Important facts for investors to verify

Whether comparable-store sales growth and new-store productivity continue, particularly amid the weaker performance noted in discretionary categories.
Whether gross margin stabilizes despite consumables mix, markdowns, commodity costs and inventory-shrink risks.
Debt maturities, ABL availability and borrowing needs, covenant headroom, and the effect of future interest rates; the reported senior secured leverage ratio was 1.2x against a 4.25x threshold.
Progress against the $600–$650 million capital-spending plan and planned store openings, remodels and relocations.
Developments and potential financial exposure in the unresolved employment and EEOC matters and the appeal in Winn-Dixie.
Use of the newly authorized repurchase capacity and its impact on liquidity and leverage.