Business context and reporting period
Dollar General Corporation operates discount stores offering consumables, seasonal goods, home products and apparel. This filing covers the 13 and 39 weeks ended November 2, 2018, compared with periods ended November 3, 2017. The request metadata says “2017 Q3,” but the filing itself is for fiscal 2018 Q3. Dollar General had 15,227 stores in 44 states at quarter-end. The interim statements are unaudited; the independent accountant performed a review, not an audit.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $6,417.5 | $5,903.6 | $18,975.2 | $17,341.5 |
| Gross profit / margin | $1,895.1 / 29.5% | $1,766.5 / 29.9% | $5,732.2 / 30.2% | $5,256.0 / 30.3% |
| Operating profit / margin | $442.1 / 6.9% | $417.4 / 7.1% | $1,477.8 / 7.8% | $1,384.4 / 8.0% |
| Net income | $334.1 | $252.5 | $1,106.2 | $826.8 |
| Diluted EPS | $1.26 | $0.93 | $4.14 | $3.02 |
| Cash from operating activities | Not presented for the quarter | $1,514.1 | $1,142.9 |
- Quarterly same-store sales increased 2.8%, mainly from higher average transaction amounts; customer traffic was essentially unchanged. For the 39-week period, same-store sales rose 2.9%, with higher transaction amounts partly offset by modestly lower traffic.
- Quarterly SG&A was 22.6% of sales versus 22.9%; year to date it was 22.4% versus 22.3%.
- Quarterly effective tax rate was 20.0% versus 35.8%; year to date it was 21.1% versus 36.8%. The decline primarily reflects the Tax Cuts and Jobs Act and its lower federal corporate tax rate.
- At November 2, cash was $260.7; inventory $3,979.1; current assets $4,630.3; and current liabilities $2,982.2. Total assets were $13,121.0 and shareholders’ equity was $6,355.9.
- Reported debt obligations were $2,904.4, including $407.0 of commercial paper; an additional $186.0 of commercial paper held by a wholly owned subsidiary was excluded from the balance sheet. The company had no Revolving Facility borrowings and reported $1.24 billion of facility availability, with $648.9 million potentially contributing incremental liquidity after reserving availability for commercial paper. It was in compliance with credit-facility covenants.
- Year-to-date capital spending was $550.9. Cash used in financing was $971.8, including $647.5 of share repurchases and $231.2 of dividends. Cash ended the period at $260.7.
Material changes versus the prior comparable period
- Q3 sales rose 8.7%, gross profit rose 7.3%, operating profit rose 5.9%, and net income rose 32.3%. Diluted EPS increased 35.5%, while weighted average diluted shares declined to 265.5 million from 272.9 million.
- Quarterly gross margin fell 39 basis points. Management attributed pressure to a higher LIFO provision, sales mix shifting toward lower-margin consumables, higher markdowns and transportation costs; improved inventory shrink partly offset those factors. Year-to-date gross margin declined 10 basis points.
- Operating cash flow rose $371.2 million year over year, alongside higher net income. Inventory growth used $388.1 million of cash, while accounts payable provided $310.6 million.
- Long-term obligations increased from $2,604.6 million at fiscal year-end to $2,902.4 million, while the current portion fell from $401.3 million to $1.9 million. The company issued $500 million of 2028 notes and used proceeds to redeem $400 million of 2018 notes; it also prepaid its $175 million term loan.
- Year-to-date repurchases increased to $647.5 million from $298.7 million, and dividends paid increased to $231.2 million from $212.9 million.
Outlook, management commentary and risks
- No full-year sales or earnings guidance is stated. Management projected fiscal 2018 capital expenditures of $725–$775 million and expected combined commercial-paper and Revolving Facility borrowings of up to approximately $800 million at any one time for the remainder of the year.
- For 2018, management planned approximately 900 new stores, 1,000 remodels and 100 relocations; for fiscal 2019, approximately 975 new stores, 1,000 remodels and 100 relocations. Two distribution centers under construction were expected to begin shipping in calendar 2019.
- Hurricanes drove an estimated $0.05 negative impact to Q3 diluted EPS. Management expected a further $0.04 negative EPS impact from related expenses in Q4.
- Management said tariffs then in effect had not materially affected results in the first three quarters, but warned that future or increased tariffs could have a greater impact on the business and customers. Sales mix pressure, higher freight costs, markdowns and customer sensitivity to economic conditions are ongoing concerns.
- New lease accounting was expected to materially affect the balance sheet because of the company’s significant store lease portfolio; the impact assessment was ongoing. Adoption of the new revenue standard had no reported effect. The Tax Cuts and Jobs Act accounting was not yet complete, though no material adjustment to provisional amounts was recorded in the 39-week period.
- Legal matters include wage-and-hour and employment claims and litigation and government actions concerning private-label motor oil. The company generally could not estimate potential losses; adverse outcomes could materially affect financial statements. A preliminary agreement to resolve the Tennessee wage-and-hour matter was described as immaterial, subject to court approval.
- Other disclosed risks include inventory management and shrink, supply-chain and transportation disruption, labor costs and retention, competition, severe weather, litigation, and credit ratings. Management stated it believed operating cash flow, cash balances, credit availability and debt-market access would support liquidity needs.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q3 2018, notwithstanding the request metadata’s Q3 2017 label.
- Track whether sales and same-store growth translate into improved margins, especially given consumables mix, LIFO costs, markdowns and freight pressures.
- Assess the earnings contribution from the lower tax rate and share-count reduction relative to underlying operating-profit growth.
- Monitor debt and liquidity, including the $407 million of balance-sheet commercial paper, additional subsidiary-held commercial paper, and the company’s stated borrowing availability.
- Compare actual capital spending, store openings and remodels with management’s plans; evaluate the expected balance-sheet effect of lease-standard adoption.
- Follow hurricane-related costs, tariff developments and the status and potential exposure of the disclosed legal matters.