Business context and reporting period
Dollar General operates discount stores across the United States, with 11,999 stores in 43 states as of May 1, 2015. The supplied filing is a Form 10-Q for the 13 weeks ended May 1, 2015, compared with the 13 weeks ended May 2, 2014—not a 2014 Q1 filing as the request metadata indicates. Interim results are unaudited and may not indicate full-year performance; the independent accountant performed a review, not an audit.
Financial results and key metrics
| Metric | 13 weeks ended May 1, 2015 | Comparable 2014 period |
|---|---|---|
| Net sales | $4.919 billion | $4.522 billion |
| Gross profit / gross margin | $1.499 billion / 30.47% | $1.358 billion / 30.02% |
| SG&A / share of sales | $1.071 billion / 21.76% | $978.0 million / 21.63% |
| Operating profit / margin | $428.2 million / 8.71% | $379.7 million / 8.40% |
| Interest expense | $21.6 million | $22.3 million |
| Net income / net margin | $253.2 million / 5.15% | $222.4 million / 4.92% |
| Diluted EPS | $0.84 | $0.72 |
| Operating cash flow | $343.9 million | $251.5 million |
| Capital expenditures | $99.9 million | $84.1 million |
Same-store sales grew 3.7%, supported by higher customer traffic and average transaction amount. Cash and equivalents were $225.1 million at May 1, down from $579.8 million at January 30, 2015. Merchandise inventory was $2.839 billion. Total debt, including current maturities, was approximately $2.72 billion; the revolving facility had no borrowings and $819.4 million available. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales rose 8.8%; gross profit increased 10.4%, and gross margin expanded 45 basis points.
- Operating profit increased 12.8% and net income increased 13.9%. Diluted EPS rose 16.7%, also benefiting from 8.2 million fewer diluted weighted-average shares following repurchases.
- SG&A increased 9.5%, faster than its 8.8% sales growth; SG&A as a share of sales rose 13 basis points.
- Operating cash flow increased $92.4 million, with higher earnings and a more favorable accounts-payable movement among the drivers. Financing cash outflow included $534.7 million of share repurchases and $66.0 million of dividends.
- Sales increased across all reported merchandise categories. Consumables remained the largest category at 76.3% of sales.
Outlook, management commentary, risks and contingencies
- Management expected fiscal 2015 capital expenditures of $500 million to $550 million, approximately 730 new stores, and approximately 875 remodels or relocations. It opened 219 stores and remodeled or relocated 291 in the quarter.
- Management said higher initial markups, improved inventory shrink and lower transportation costs supported gross-margin improvement. Tobacco and perishables helped traffic and sales but generally carry lower margins. Management expected consumables’ growth to slow versus 2014 while modestly outpacing non-consumables for the remainder of 2015.
- Management expected operating cash, existing cash and available credit to cover obligations, working capital, capital spending and anticipated dividends over the next 12 months and several years, while noting liquidity is exposed to factors outside its control. It anticipated possible revolving-facility borrowings of up to approximately $500 million outstanding at one time during the rest of fiscal 2015, including for repurchases.
- The board increased the repurchase authorization by $1.0 billion in March 2015; $688.8 million remained at May 1. The company repurchased approximately 7.1 million shares for $534.7 million in the quarter and paid a $0.22-per-share dividend. Future dividends remain discretionary.
- Risks include uncertain consumer and commodity conditions, execution and competitive pressures, inventory and shrink management, labor and supply-chain costs, credit ratings and debt restrictions, and litigation. The Hood store-manager classification case, EEOC background-check case, and California employment cases have potential exposure the company could not estimate; adverse outcomes could materially affect results or liquidity. Two West Virginia cases had preliminary settlements described as not material, subject to court approval. The Winn-Dixie litigation was not expected to have a material adverse effect.
- Uncertain tax reserves totaled $10.8 million; the company said approximately $3.0 million could be released in the next 12 months, principally following settlements. Renewal of the Work Opportunity Tax Credit for 2015 was uncertain. Management reported no material change in market-risk disclosures or risk factors from its prior annual report.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers Q1 fiscal 2015, despite the request metadata specifying 2014 Q1.
- Assess whether same-store sales growth, margin improvement and the planned store expansion continue, particularly given lower-margin tobacco and perishables.
- Monitor cash use for repurchases, dividends and capital spending against cash generation, debt maturities and available revolving credit.
- Track developments in the Hood, EEOC and California employment litigation, whose potential losses were not estimable in this filing.
- Check subsequent filings for tax-credit developments, tax-reserve settlements and progress toward fiscal 2015 capital-spending and store plans.