Dollar General Corporation — Form 10-Q Summary
Reporting-period note: The request metadata says 2016 Q2, but the filing is for the 13 and 26 weeks ended August 4, 2017; comparisons are against periods ended July 29, 2016. The company operated 13,865 stores in 44 states and reported one operating segment.
Financial performance
| Metric | 13 weeks ended August 4, 2017 | Change vs. 2016 | 26 weeks ended August 4, 2017 | Change vs. 2016 |
|---|---|---|---|---|
| Net sales | $5.83 billion | +8.1% | $11.44 billion | +7.3% |
| Same-store sales | +2.6% | — | +1.7% | — |
| Gross profit | $1.79 billion | +6.5% | $3.49 billion | +5.9% |
| Gross margin | 30.72% | Down 47 bps | 30.51% | Down 40 bps |
| SG&A | $1.30 billion | +10.6% | $2.52 billion | +9.5% |
| Operating profit | $493.1 million | Down 3.1% | $966.9 million | Down 2.3% |
| Net income | $294.8 million | Down 3.8% | $574.3 million | Down 4.5% |
| Diluted EPS | $1.08 | Flat | $2.09 | Down 0.9% |
| Operating cash flow | — | — | $786.2 million | Vs. $793.3 million |
Quarterly sales gains reflected higher average transactions and traffic. Consumables drove sales, but their larger share—and a shift toward lower-margin consumables—pressured gross margin. Higher promotional and clearance markdowns also weighed on margin; higher initial markups and improved shrink partially offset these effects. SG&A rose faster than sales, reflecting store-manager compensation investments, occupancy costs, and acquired-store costs, partly offset by lower waste-management and advertising expenses. Quarterly interest expense was $23.7 million, down $0.6 million; first-half interest expense was $48.8 million, up $0.3 million. A $3.5 million debt-retirement loss was recorded in the first half.
Cash, debt and liquidity
- Cash was $214.2 million at August 4, 2017, compared with $187.9 million at February 3, 2017. Inventory was $3.46 billion; total assets were $12.12 billion.
- Total debt and obligations were approximately $3.1 billion, including $515.5 million in commercial paper. The company had $401.4 million classified as current obligations and $2.68 billion as long-term obligations.
- The $1.25 billion revolving facility had no borrowings and $1.24 billion of stated availability; after reserving availability to support the commercial-paper program, it could provide $723.9 million of incremental liquidity. The $175 million term loan was outstanding. The company reported compliance with debt covenants.
- First-half investing cash outflow was $313.7 million, primarily reflecting $314.1 million of property and equipment purchases. Financing cash outflow was $446.3 million, including $163.7 million of share repurchases and $142.3 million of dividends.
- Management believes operating cash flow, cash balances, credit facilities, commercial paper capacity and debt-market access will fund obligations, working capital, capital spending and dividends over the next 12 months and several years. It anticipated combined revolver and commercial-paper borrowings of up to approximately $750 million at one time during the rest of fiscal 2017.
Material changes and outlook
- Same-store sales increased 2.6% in the quarter and 1.7% year to date. Management said macroeconomic pressures on customers and deflationary pricing had weighed on sales in recent quarters, though their impact was less negative in Q2. It cited customer exposure to wages, fuel, assistance-program changes, rent and healthcare costs.
- Management planned approximately 1,285 store openings in 2017, including acquired locations, and approximately 760 remodels or relocations. It planned to convert acquired sites to the Dollar General banner by the end of November 2017, subject to execution and timing. The company opened 574 stores and remodeled or relocated 555 in the first half.
- Management planned continued investment in existing stores, distribution capacity, customer traffic and employee compensation. It expected lower-margin consumables to remain a larger share of sales at least through the rest of the year. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- The company issued $600 million of 3.875% notes due 2027 and used proceeds to redeem $500 million of 4.125% notes due 2017 and for general corporate purposes. It expected to refinance $400 million of notes due in 2018.
- Hurricane Harvey struck Texas after the quarter end. The extent of damage and any financial effect were not yet clear.
Risks, contingencies and unusual items
- The company disclosed wage-and-hour, employment, private-label motor-oil consumer, shareholder securities and derivative litigation. It could not estimate potential losses or ranges for these matters; adverse outcomes could materially affect results, cash flows or financial position.
- Uncertain tax reserves totaled $4.8 million. Management said approximately $2.2 million could be released within 12 months, principally through settlements. Adoption of new intra-entity transfer tax guidance was expected to increase deferred tax liabilities and reduce retained earnings by approximately $32.2 million.
- New lease-accounting guidance is expected to have a material balance-sheet impact because the company has significant lease contracts. Management did not expect revenue-recognition guidance to have a material financial-statement effect.
- Retail seasonality, inventory management, competition, labor and occupancy costs, supply-chain execution, customer demand, credit ratings and legal developments are among the disclosed risks. The interim review by Ernst & Young reported no material modifications needed; it was not an audit opinion.
Important facts for investors to verify
- Confirm the period: this is a 2017 Q2 filing, not a 2016 Q2 filing.
- Track whether sales growth and traffic persist while consumables mix, markdowns and SG&A continue to pressure margins.
- Monitor cash generation, inventory and accounts-payable movements, commercial-paper reliance, debt maturities and available revolver capacity.
- Assess store-acquisition conversions, new-store and remodel execution, and the expected spending and returns from capital investments.
- Follow developments and potential exposure in the disclosed litigation, the Harvey-related damage assessment, and the adoption of lease and tax accounting standards.