Dollar General Corporation — Form 10-Q Summary
Reporting period: 13 weeks ended May 4, 2012, compared with 13 weeks ended April 29, 2011. The request metadata says “2011 Q1,” but the supplied filing reports the first quarter of fiscal 2012.
Business context and period
Dollar General operated 10,052 stores in 40 states at May 4, 2012, selling consumables and seasonal, home and apparel merchandise. The company reported one operating segment. Its interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3.901 billion | $3.452 billion | +13.0% |
| Same-store sales | +6.7% | — | Traffic and average transaction amount increased |
| Gross profit / margin | $1.228 billion / 31.48% | $1.087 billion / 31.50% | Margin essentially unchanged |
| SG&A / share of sales | $843.9 million / 21.63% | $765.8 million / 22.19% | Expense +10.2%; rate improved 56 basis points |
| Operating profit / margin | $384.3 million / 9.85% | $321.6 million / 9.32% | Profit +19.5% |
| Interest expense | $37.1 million | $65.6 million | Down $28.5 million |
| Net income / diluted EPS | $213.4 million / $0.63 | $157.0 million / $0.45 | Net income +36.0%; EPS +40.0% |
| Operating cash flow | $192.6 million | $223.6 million | Down $30.9 million |
| Capital expenditures | $145.9 million | $92.0 million | Cash flow after reported capex: approximately $46.9 million |
At May 4, cash was $132.5 million, inventory $2.001 billion, current assets $2.274 billion and current liabilities $1.411 billion (current ratio approximately 1.61). Long-term obligations were $2.881 billion, with $447.8 million drawn on the ABL revolver and $706.9 million available to borrow. The company reported a 1.2-to-1 senior secured debt-to-Adjusted EBITDA ratio against a 4.25-to-1 covenant threshold.
Material changes and notable transactions
- Sales growth reflected 6.7% same-store growth and new stores. Consumables sales rose 13.8% and accounted for 73.75% of sales; seasonal sales rose 14.8%, home products 10.6%, and apparel 3.9%.
- Gross margin stayed at about 31.5%. Higher markups, distribution efficiencies, lower shrink and a lower LIFO provision were offset by increased markdowns and a greater consumables mix.
- SG&A as a percentage of sales improved partly because the prior-year quarter included $13.1 million of expenses for two legal matters, and because sales growth and workforce-management initiatives improved labor leverage.
- Interest expense fell due to lower borrowings and lower all-in rates. The company amended its ABL facility, extending maturity to July 2014 and increasing commitments to $1.2 billion; it also extended $879.7 million of term loans to July 2017. The remaining approximately $1.08 billion of term loans matures in July 2014.
- In April, the company repurchased 6.8 million shares from Buck Holdings, an affiliate of principal shareholders KKR and Goldman Sachs, for $300 million. Only $15 million remained under the $500 million authorization.
- Net cash used in financing was $40.5 million, including the share repurchase; revolver borrowings and repayments during the quarter were $584.9 million and $321.8 million, respectively.
Outlook, risks and contingencies
- Management planned 625 new stores in fiscal 2012, including 128 opened in the quarter, and approximately 550 remodels or relocations. Fiscal 2012 capital spending was projected at $600–$650 million. Management expected operating cash flow, cash balances and credit availability to fund obligations and planned spending.
- Management described the economic recovery as uncertain and cited consumer employment, food, fuel, energy, medical and housing pressures. It noted elevated diesel costs, while some commodity-cost pressure had moderated.
- In May 2012, the company entered into interest-rate swaps on $875 million of variable-rate exposure, fixing the all-in rate at 3.34% through May 2015. Existing swaps covered $506.7 million; management estimated $4.4 million of additional interest expense would be reclassified from accumulated other comprehensive loss over the next 52 weeks.
- The company had $450.7 million of 11.875% senior subordinated notes due 2017 and intended to redeem or repurchase them on or after the July 2012 call date, subject to market conditions, liquidity and contractual restrictions.
- Tax reserves for uncertain positions, related interest and penalties totaled $39.7 million. The company said approximately $26.2 million might be released within 12 months, principally following tax examination settlements. The IRS was examining fiscal 2006–2008 returns.
- Material legal exposures included the Richter wage-and-hour collective action, for which loss could not be estimated; a preliminarily approved $18.75 million Womack equal-pay settlement, largely funded by insurance, awaiting final court approval; a new Fair Credit Reporting Act putative class action; an EEOC dispute over criminal background-check practices; and the Winn-Dixie restrictive-covenant case, with trial evidence concluded but no judgment issued. The filing said adverse outcomes in certain matters could materially affect the company.
- Other stated risks included inventory markdowns or shrink, commodity and fuel costs, supply-chain disruption, store expansion execution, interest rates, debt restrictions, self-insurance claims, and changes in consumer demand. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period: the filing is for Q1 fiscal 2012, despite the request metadata identifying 2011 Q1.
- Track same-store sales, traffic and transaction trends, and whether growth and the planned store openings translate into sustained margins.
- Assess cash conversion: operating cash flow declined year over year while capital spending increased; review working-capital timing and the full-year capital plan.
- Review debt maturities, revolver usage and availability, the planned high-coupon notes redemption, and interest-rate exposure after swaps.
- Monitor final approval and payments under the Womack settlement and developments in the other legal and tax matters whose potential losses are not estimable.