Business context and reporting period
Dollar General Corporation’s 10-Q covers the 13 weeks ended May 4, 2018, compared with the 13 weeks ended May 5, 2017. Although the request metadata identifies 2017 Q1, the filing is for fiscal 2018 Q1. The company operated 14,761 stores in 44 states and reported one operating segment.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $6.114 billion | $5.610 billion | Up 9.0% |
| Same-store sales | Up 2.1% | Not stated here | Transaction amount increased; customer traffic declined |
| Gross profit | $1.862 billion; 30.46% margin | $1.699 billion; 30.29% margin | Margin up 17 basis points |
| SG&A | $1.372 billion; 22.44% of sales | $1.225 billion; 21.84% of sales | Expense up 12.0%; rate up 60 basis points |
| Operating profit | $490.2 million; 8.02% margin | $473.8 million; 8.45% margin | Up 3.5%; margin down 43 basis points |
| Net income | $364.9 million | $279.5 million | Up 30.5% |
| Diluted EPS | $1.36 | $1.02 | Up 33.3% |
| Operating cash flow | $548.6 million | $510.5 million | Up $38.2 million |
Gross-margin improvement reflected higher initial markups and lower inventory shrink, partly offset by a sales mix tilted toward lower-margin consumables and higher transportation costs. SG&A pressure reflected increased retail labor, store-manager compensation, occupancy, utilities, and property taxes. Effective tax rate fell to 21.6% from 37.2%, primarily due to the Tax Cuts and Jobs Act; the prior-period comparison also included a $3.5 million debt-retirement loss that did not recur.
Liquidity, debt, and capital allocation
- At May 4, 2018, cash was $284.0 million and total debt obligations were approximately $2.9 billion. The company had $175 million outstanding on its term facility, $193 million of commercial paper on the consolidated balance sheet, and $2.5 billion aggregate principal of senior notes. Another $186 million of commercial paper held by a wholly owned subsidiary was excluded from the balance sheet.
- The $1.25 billion revolving facility had no borrowings; reported borrowing availability was $1.24 billion, with $861.9 million of incremental liquidity available after accounting for the company’s intended commercial-paper backstop. The company reported compliance with debt covenants.
- In April 2018, Dollar General issued $500 million of 4.125% notes due 2028 and used proceeds in part to redeem $400 million of 1.875% notes due 2018 and reduce commercial paper. Management expected cash, operating cash flow, credit facilities, commercial paper, and debt-market access to fund obligations and planned investment for the next 12 months and several years.
- Cash dividends paid were $77.7 million, or $0.29 per share; the board declared another $0.29 quarterly dividend. The company repurchased 1.6 million shares for $150 million and had approximately $1.2 billion remaining under its repurchase authorization.
Material changes, outlook, and risks
- Consumables sales rose 10.6% and increased to 78.05% of sales from 76.93%; apparel sales declined 0.6%. Management said the mix shift toward consumables, including lower-margin perishables and tobacco, was expected to continue through at least the first half of 2018.
- Management attributed weaker customer traffic partly to weather. Same-store sales gains came from higher average transaction amount, driven by more units and higher average retail prices; same-store sales declined in each non-consumables category.
- For fiscal 2018, the company planned approximately 900 new stores, 1,000 remodels, and 100 relocations, and projected capital expenditures of $725 million to $800 million. It opened 241 stores and remodeled or relocated 353 in Q1. Two new distribution centers were under construction, with openings expected in 2019.
- Management cited store-manager pay and training investments as supporting customer experience, sales, and employee retention. It also described digital initiatives and a refreshed approach to non-consumables, without providing quantified financial targets.
- New lease accounting guidance was expected to have a material balance-sheet impact because of the company’s many store leases; assessment was ongoing. Adoption of intra-entity transfer guidance increased deferred tax liabilities and reduced retained earnings by $41.3 million. The company had not completed its accounting for the Tax Cuts and Jobs Act.
- Contingencies include wage-and-hour and employment litigation and motor-oil labeling/marketing litigation and investigations. The company said it could not estimate potential losses for most of these matters; adverse outcomes could materially affect results, cash flows, or financial position. A preliminary agreement in one Tennessee wage-and-hour case was for an amount not material to the financial statements and required court approval. Federal shareholder litigation and related derivative actions were dismissed or voluntarily dismissed.
- Key risks cited include customer spending and economic conditions, competition, execution of store and merchandising initiatives, inventory shrink and management, transportation and supply-chain costs, labor availability and costs, weather, cybersecurity, legal and regulatory matters, credit ratings, and financing-market conditions. The company reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Confirm the period: this filing reports Q1 fiscal 2018, not Q1 2017.
- Track whether sales growth can be sustained as traffic declined and non-consumables weakened; assess the expected ongoing consumables mix shift and its margin effect.
- Monitor whether gross-margin improvements can offset rising SG&A and transportation costs, and whether planned store growth and remodels meet returns expectations.
- Review debt, commercial-paper usage, repurchases, and capital spending against operating cash generation and available liquidity.
- Follow the impact of lease-accounting adoption, completion of tax-reform accounting, and developments in litigation for which losses are not estimable.