Dollar General Corporation — Form 10-K Summary
Business context and reporting period
The filing is the fiscal-year 2013 Form 10-K, covering the 52 weeks ended January 31, 2014, with comparisons to the 52 weeks ended February 1, 2013. Although the request metadata says “2012 Q4,” the filing is for fiscal 2013; its fourth quarter was a 13-week period. Dollar General operated 11,132 stores at fiscal year-end and reported 11,215 stores in 40 states as of February 28, 2014. It sells everyday consumables and general merchandise through small-format discount stores.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $17.504 billion | $16.022 billion | +9.2% |
| Same-store sales growth | 3.3% | 4.7% | Down 1.4 percentage points |
| Gross profit / margin | $5.436 billion / 31.05% | $5.085 billion / 31.74% | Profit +6.9%; margin down 69 bps |
| Operating profit / margin | $1.736 billion / 9.92% | $1.655 billion / 10.33% | +4.9%; margin down 41 bps |
| Net income / net margin | $1.025 billion / 5.86% | $952.7 million / 5.95% | +7.6% |
| Diluted EPS | $3.17 | $2.85 | +11.2% |
| Operating cash flow | $1.213 billion | $1.131 billion | +7.2% |
| Capital expenditures | $538.4 million | $571.6 million | Down 5.8% |
Fourth quarter: Net sales were $4.494 billion versus $4.208 billion; gross profit was $1.435 billion versus $1.368 billion; operating profit was $538.1 million versus $522.3 million; and net income was $322.2 million versus $317.4 million. Diluted EPS was $1.01 versus $0.97.
Balance sheet and funding: Cash and cash equivalents were $505.6 million; total assets were $10.868 billion; shareholders’ equity was $5.402 billion. Total debt and long-term obligations, including current maturities, were approximately $2.819 billion, compared with $2.772 billion a year earlier. The company had $822.8 million available under its revolving facility and reported compliance with debt covenants. Operating lease commitments totaled $5.739 billion, including $712.6 million due within one year.
Material changes versus the prior comparable period
- Sales rose 9.2%, driven by 3.3% same-store growth and store expansion; consumables sales grew 11.1% and increased to 75.2% of sales.
- Gross margin contracted 69 basis points. Management attributed the decline mainly to the higher mix of lower-margin tobacco and perishables and increased inventory shrinkage. A $11.0 million LIFO benefit partly offset these pressures; FY 2012 had a $1.4 million LIFO provision.
- SG&A declined to 21.14% of sales from 21.41%. Lower incentive compensation—because the company did not meet performance thresholds—and store labor efficiencies were key factors. Management cautioned that this benefit was not expected to recur at the same level.
- Interest expense fell $38.9 million to $89.0 million, primarily following the April 2013 refinancing and lower borrowing rates.
- Cash from operations increased while inventory growth slowed to 7% from 19% in the prior year. The company repurchased 11.0 million shares for $620.1 million, versus 14.4 million shares for $671.4 million in FY 2012.
Outlook, risks, contingencies and unusual items
- For fiscal 2014, management planned approximately 700 new stores, about 500 remodels or relocations, and capital expenditures of $450–$500 million. It expected consumables to remain the main sales-growth driver and SG&A as a percentage of sales to be higher than in 2013, citing incentive compensation normalization, healthcare requirements and higher occupancy costs after the sale-leaseback.
- In January 2014, the company sold and leased back 233 stores, receiving approximately $281.6 million in cash. It recorded a deferred gain of $67.2 million to be recognized as a rent-expense reduction over the 15-year initial lease term.
- Other unusual items included an $18.9 million pretax loss from terminating prior credit facilities. The company also recorded an $8.5 million estimated expense for a proposed settlement in the Richter wage-and-hour case. A separate background-check lawsuit had a preliminary settlement agreement for up to $4.08 million, subject to court approval.
- Other material legal exposures included EEOC litigation concerning criminal background checks, California wage-and-hour class claims, and other employee cases. For several claims, the company said the potential loss or range could not be estimated; adverse outcomes could materially affect results or liquidity.
- Key risks include pressure on low-income customers’ spending, intense price competition, shrink and inventory-management execution, store-growth and distribution capacity, labor and healthcare costs, fuel and transportation costs, supplier and import disruption, cybersecurity, litigation, and access to capital. The federal Work Opportunity Tax Credit authorization had expired for hires after December 31, 2013, with renewal uncertain.
- The company had no recurring dividend. It planned to continue share repurchases. Its financial-statement auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether same-store sales and traffic sustain growth while gross margin recovers from the lower-margin merchandise mix and shrink pressures.
- How much of 2013 SG&A leverage came from nonrecurring incentive-compensation reductions, and whether 2014 expense guidance is realized.
- Cash generation and debt capacity after capital spending, repurchases, lease obligations and the refinancing; confirm facility availability and covenant headroom.
- Execution and returns on planned new stores, remodels and relocations, including whether expansion risks sales cannibalization or distribution constraints.
- Developments in the Richter, EEOC, background-check and wage-and-hour matters, including court approval of proposed settlements and potential unestimated exposure.
- Whether the Work Opportunity Tax Credit is renewed and the resulting effect on the effective tax rate.