Dollar General Corporation — Form 10-Q Summary
Reporting-period note: The filing covers the 13 and 39 weeks ended October 28, 2011 (fiscal 2011 third quarter and year to date), with comparisons to periods ended October 29, 2010. This differs from the request metadata identifying 2010 Q3.
Business context
Dollar General operated 9,813 stores in 38 states and reported one operating segment. It opened 482 stores and remodeled or relocated 544 during the first 39 weeks of fiscal 2011. The company described sales growth as led by consumables, as consumers remained cautious on discretionary purchases.
Key financial metrics
| Metric | 13 weeks ended Oct. 28, 2011 | 13 weeks ended Oct. 29, 2010 | 39 weeks ended Oct. 28, 2011 | 39 weeks ended Oct. 29, 2010 |
|---|---|---|---|---|
| Net sales | $3,595.2 million | $3,223.4 million | $10,622.1 million | $9,548.9 million |
| Gross profit | $1,115.8 million | $1,010.7 million | $3,351.5 million | $3,046.4 million |
| Gross margin | 31.04% | 31.35% | 31.55% | 31.90% |
| Operating profit / margin | $310.9 million / 8.65% | $274.3 million / 8.51% | $982.6 million / 9.25% | $865.8 million / 9.07% |
| Net income | $171.2 million | $128.1 million | $474.2 million | $405.3 million |
| Diluted EPS | $0.50 | $0.37 | $1.37 | $1.18 |
| Interest expense | $38.6 million | $67.2 million | $164.9 million | $208.6 million |
Third-quarter sales rose 11.5%, including same-store sales growth of 6.3%; first-39-week sales increased 11.2%, with same-store sales up 5.9%. Consumables sales grew 13.8% in the quarter and represented 75.3% of sales, versus 73.8% a year earlier.
For the 39 weeks, operating cash flow was $604.5 million, versus $403.8 million; capital expenditures were $363.1 million, versus $259.2 million. Cash declined to $118.6 million at October 28 from $497.4 million at January 28, 2011. Total debt was approximately $2.72 billion; $287.8 million was drawn on the ABL facility, with $704.8 million available. Shareholders’ equity was $4.55 billion.
Material changes and unusual items
- Gross margin fell 31 basis points in the quarter and 35 basis points year to date. Management cited a higher consumables mix, commodity and fuel costs, and increased LIFO provisions, partly offset by lower shrink, selective price increases, and distribution efficiencies.
- SG&A declined as a percentage of sales to 22.4% from 22.8% in the quarter and to 22.3% from 22.8% year to date, helped by workforce-management and cost-reduction initiatives.
- Interest expense decreased, primarily reflecting lower borrowings and lower all-in term-loan rates. The company redeemed or repurchased all $864.3 million of its 10.625% senior notes in fiscal 2011; related pretax debt-retirement losses were $60.3 million year to date and are included in other expense.
- The company’s effective tax rate rose to 37.1% from 35.6% for the quarter and to 37.4% from 36.9% year to date, principally because prior-year tax-reserve reductions did not recur.
Outlook, risks and contingencies
- Management expected pressure on gross profit to continue in the near term as consumables mix, commodity costs, and fuel costs weighed on margins. It cited direct sourcing and private brands as potential margin opportunities.
- Management projected approximately 7% total square-footage growth in each of fiscal 2011 and 2012, and fiscal 2011 capital expenditures of $550–$600 million. Two distribution centers were expected to begin shipping in the first half of 2012; the company planned its first California stores in early 2012.
- Management believed cash flow, cash balances, and credit-facility availability would cover obligations, working capital, and capital spending for at least the next 12 months and several years. This is a management assessment, not a guarantee.
- On November 30, 2011, the board authorized a $500 million stock-repurchase program. A subsequent agreement contemplated approximately $185 million of repurchases from controlling shareholder Buck Holdings, conditional on a December 2011 secondary offering, and expected to be funded with ABL borrowings.
- Litigation exposure includes the Richter wage-and-hour action, for which the company could not estimate a loss range; the Winn-Dixie dispute, where plaintiffs’ materials suggested a claim of up to $55 million that the company disputed; and a proposed $18.75 million settlement of an equal-pay matter, subject to court approval. The company expected approximately $15.9 million of insurance reimbursement for that settlement.
- Uncertain tax reserves and related amounts totaled $44.0 million. The company said approximately $30.4 million of reserves might be reduced within 12 months, principally following tax-examination settlements. Commodity and fuel inflation, inventory management, consumer spending, debt covenants, legal outcomes, and store/distribution expansion execution are notable risks.
Most important facts for investors to verify
- Confirm the intended period: this filing is for fiscal 2011 Q3, not 2010 Q3.
- Track whether sales growth and same-store sales persist, particularly as consumables form a larger share of revenue.
- Monitor gross-margin trends, LIFO and inventory costs, and whether cost savings offset commodity and fuel pressures.
- Review debt, ABL utilization and availability, and the funding and effect of the announced repurchase program.
- Follow court approval and insurance recovery for the proposed settlement, and developments in the unquantified litigation and tax matters.
- Assess actual capital spending, store growth, and distribution-center timing against management’s plans.