Business Context and Reporting Period
Company: Dollar General Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended May 1, 1998 (First Quarter of Fiscal 1999)
Business Overview: The Company operates a chain of discount stores. The business is seasonal, with historically higher sales in the fourth quarter. As of May 1, 1998, the Company operated 460 net additional stores compared to the prior year period.
Key Financial Metrics
| Metric (in thousands) | Q1 1999 (Ended May 1, 1998) | Q1 1998 (Ended May 2, 1997) |
|---|---|---|
| Net Sales | $705,260 | $520,014 |
| Gross Profit | $190,332 | $141,855 |
| Gross Margin % | 27.0% | 27.3% |
| Operating Profit | $49,392 | $31,520 |
| Net Income | $30,404 | $19,294 |
| Diluted EPS | $0.18 | $0.11 |
| Cash and Equivalents | $37,241 | $33,388 |
| Short-term Borrowings | $119,650 | $50,000 |
| Long-term Debt | $406 | $1,807 |
| Working Capital | $358,854 | $329,759 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 35.6% ($185.3 million), driven by 460 net new stores and a 19.4% increase in same-store sales (compared to 1.6% growth in the prior year).
- Profitability: Net income increased 57.6% to $30.4 million. Operating profit rose 56.7% to $49.4 million.
- Margins: Gross margin percentage decreased slightly to 27.0% from 27.3% due to higher markdowns and freight costs associated with new inventory items, partially offset by lower shrinkage. SG&A expense as a percentage of sales improved to 20.0% from 21.2% due to leverage from higher same-store sales.
- Cash Flow: Operating cash flow turned negative, using $23.9 million compared to $4.6 million used in the prior year. This was primarily due to decreased accounts payable resulting from shorter payment terms for new product mixes. Investing activities used $24.4 million, primarily for opening 166 new stores.
- Liquidity: Short-term borrowings increased significantly to $119.7 million from $50.0 million to fund seasonal working capital requirements.
Guidance, Outlook, and Risks
- Outlook: Management expects gross margin percentage to increase slightly in the second quarter as the Company anniversaries initial stocking and freight costs for 700 new items. SG&A as a percentage of sales is expected to decrease slightly due to continued leverage from double-digit same-store sales growth. Interest expense as a percent of sales is expected to increase slightly due to higher inventory levels for a new apparel program.
- Capital Allocation: The Company repurchased 701,000 shares of common stock in the quarter at an average cost of $37.18 per share. Construction costs for new stores and distribution centers are funded via a $225.0 million leveraged lease facility.
- Risks and Contingencies:
- Seasonality: Results for interim periods are not necessarily indicative of full-year results.
- Operational Risks: Transportation delays, inventory risks due to market demand shifts, and costs associated with new distribution centers.
- Year 2000: The Company is implementing a new general ledger system and upgrading software to ensure compliance; management does not expect a material impact on operations or liquidity.
- Subsequent Event: On June 1, 1998, stockholders approved a change of incorporation from Kentucky to Tennessee, effective June 2, 1998.
Investor Verification Checklist
- Sustainability of Same-Store Sales: Verify if the 19.4% same-store sales growth is sustainable given the refurbishment of 2,400 stores in the prior year which negatively impacted previous results.
- Freight and Markdown Costs: Monitor if the increase in freight costs and markdowns stabilizes in subsequent quarters as projected by management.
- Debt Utilization: Confirm the Company's ability to manage the increased short-term borrowings ($119.7 million) against seasonal cash flow generation.
- Capital Expenditures: Track the $24.4 million in capital expenditures for new store openings and the funding status of the $225.0 million leveraged lease facility.
- Accounting Changes: Note the upcoming adoption of SFAS No. 131 for segment disclosures in the fiscal year ending January 29, 1999.