Dollar General Corporation — Form 10-Q Summary
Reporting-period note: The request metadata says 2019 Q3, but the filing provided is for the 13 and 39 weeks ended October 30, 2020, compared with periods ended November 1, 2019. This summary covers the 2020 third quarter. Amounts below are in U.S. dollars.
Business context and reporting period
Dollar General operates discount stores in the United States and reported one operating segment. It had 16,979 stores in 46 states at October 30, 2020. The interim financial statements are unaudited; the independent accountant’s review found no material modifications needed for conformity with U.S. GAAP.
Key financial metrics
| Metric | 13 weeks ended Oct. 30, 2020 | 13 weeks ended Nov. 1, 2019 | 39 weeks ended Oct. 30, 2020 | 39 weeks ended Nov. 1, 2019 |
|---|---|---|---|---|
| Net sales | $8.20 billion | $6.99 billion | $25.33 billion | $20.60 billion |
| Gross profit | $2.57 billion | $2.07 billion | $7.98 billion | $6.22 billion |
| Gross margin | 31.32% | 29.54% | 31.51% | 30.18% |
| Operating profit | $773.1 million | $491.4 million | $2.68 billion | $1.58 billion |
| Operating margin | 9.43% | 7.03% | 10.59% | 7.68% |
| Net income | $574.3 million | $365.6 million | $2.01 billion | $1.18 billion |
| Diluted EPS | $2.31 | $1.42 | $8.00 | $4.54 |
| Interest expense | $40.3 million | $24.3 million | $110.1 million | $75.0 million |
- Third-quarter sales increased 17.3%; same-store sales increased 12.2%. The company attributed higher sales largely to more items per transaction, partly offset by lower customer traffic. Average sales per square foot for the 52 weeks ended October 30 were $266.
- For the quarter, gross margin rose 178 basis points, primarily due to lower markdowns, higher initial markups, lower shrink as a percentage of sales, and a stronger non-consumables mix. SG&A was 21.9% of sales versus 22.5%.
- For the first 39 weeks, sales grew 23.0%, same-store sales increased 17.5%, and diluted EPS rose 76.2%. Non-consumables grew faster than consumables, supporting margins; management said it was uncertain whether that mix shift would persist.
- Operating cash flow for the 39 weeks was $3.38 billion, versus $1.66 billion. Investing cash outflow was $696.0 million, chiefly property and equipment purchases; financing cash outflow was $728.4 million. Cash and equivalents ended at $2.20 billion, compared with $240.3 million at January 31, 2020.
- At October 30, total long-term obligations were $4.13 billion, up from $2.91 billion at January 31. Operating lease liabilities totaled $9.33 billion, including current and long-term portions. The company issued $1.5 billion of senior notes in April 2020, due 2030 and 2050.
- The company reported no balance-sheet commercial paper outstanding and no revolving-facility borrowings; it reported approximately $1.25 billion of facility availability, with about $1.06 billion available as incremental liquidity after maintaining capacity for its commercial paper program. It was in compliance with debt covenants.
- Inventories were $5.03 billion, up from $4.68 billion at fiscal year-end; inventory turnover was 4.9 times on a rolling four-quarter basis. Per-store inventory was 5.9% higher year over year.
- During the 39-week period, share repurchases totaled $1.57 billion and dividends paid totaled $268.6 million, or $1.08 per share. Remaining repurchase authorization at October 30 was approximately $1.58 billion.
Material changes, outlook, and management commentary
- Management said pandemic-related demand materially benefited sales, gross profit, operating income, and net income in each of the first three quarters. Customers consolidated trips and bought larger baskets; demand shifted toward non-consumables in the second and third quarters.
- COVID-related employee appreciation bonuses were approximately $99 million year to date, in addition to higher payroll, distribution, transportation, safety, and cleaning costs. Management said incremental costs were more than offset by higher sales.
- For fiscal 2020, the company planned 1,000 new stores, 1,670 remodels, and 110 relocations; it projected capital expenditures of $1.0–$1.1 billion. For fiscal 2021, it planned approximately 1,050 new stores, 1,750 remodels, and 100 relocations. It also targeted more than 5,600 stores with its non-consumables offering by fiscal year-end, approximately 30 pOpshelf stores by fiscal 2021 year-end, and up to ten DG Fresh distribution facilities by fiscal 2020 year-end.
- Management expected potential combined Revolving Facility and commercial paper borrowings to peak at approximately $300 million at any one time for the remainder of fiscal 2020. It believed operating cash flow, cash, credit availability, and debt-market access would support obligations and planned investment, dividends, and buybacks for at least the next 12 months and several years; this expectation is subject to risks.
- The company warned that pandemic duration and effects remain uncertain, including potential changes in customer demand, unemployment and reduced spending, product shortages, supply-chain disruption, increased costs, and irregular seasonal sales patterns. Other cited risks include competition, inventory management and shrink, labor and occupancy costs, tariffs, cybersecurity, and execution of growth and digital initiatives.
- Legal proceedings include motor-oil labeling and marketing litigation. The company had an agreement in principle to resolve the multidistrict litigation for an amount it considered immaterial, subject to formalization and court approval. A New Mexico matter was scheduled for trial in March 2021; the company stated that outcomes and potential liabilities in some matters remained uncertain.
- The filing states that 2019 included a $31.0 million expense for estimated settlement of certain legal matters. The 2020 year-to-date effective tax rate was 21.8%, versus 21.9% in 2019.
Most important facts for investors to verify
- Confirm the period: the supplied filing is Q3 2020, not Q3 2019.
- Assess how much of the unusually strong sales and margin growth depended on pandemic-driven demand and a temporary shift in merchandise mix.
- Track cash generation alongside inventory growth, capital spending, dividends, and substantial share repurchases.
- Review the added debt and lease obligations, cash deployment, and the availability and covenant conditions of credit facilities.
- Monitor COVID-related supply, cost, customer-demand, and operating risks, as well as the status and potential exposure of pending litigation.
- Compare the stated store-growth, remodel, capital expenditure, and strategic initiative plans with subsequent execution and results.