Dollar General Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks and 39 weeks ended November 1, 2013, compared with periods ended November 2, 2012. The request metadata says “2012 Q3,” but the filing itself reports 2013 Q3.
Dollar General operated 11,061 stores in 40 states and reported one business segment. Its discount-retail assortment includes consumables, seasonal goods, home products and apparel. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial results and key metrics
| Metric | 13 weeks ended Nov. 1, 2013 | 13 weeks ended Nov. 2, 2012 | 39 weeks ended Nov. 1, 2013 | 39 weeks ended Nov. 2, 2012 |
|---|---|---|---|---|
| Net sales | $4,381.8 million | $3,964.6 million | $13,010.2 million | $11,814.5 million |
| Gross profit | $1,328.5 million | $1,226.1 million | $4,000.9 million | $3,717.6 million |
| Operating profit | $390.2 million | $361.4 million | $1,198.1 million | $1,132.9 million |
| Net income | $237.4 million | $207.7 million | $702.9 million | $635.2 million |
| Diluted EPS | $0.74 | $0.62 | $2.16 | $1.89 |
| Gross margin | 30.32% | 30.93% | 30.75% | 31.47% |
| SG&A as a share of sales | 21.41% | 21.81% | 21.54% | 21.88% |
Third-quarter sales increased 10.5%; same-store sales rose 4.4%, reflecting higher traffic and average transaction size. Consumables grew 11.9% and represented 76.7% of quarterly sales. Year-to-date same-store sales increased 4.0%.
Gross margin declined 61 basis points in Q3 and 72 basis points year to date. Management attributed the pressure chiefly to a higher consumables mix and more lower-margin consumables, higher shrink and markdowns. SG&A leverage improved, mainly from store-labor efficiencies and lower incentive compensation. Quarterly operating margin was 8.91%, versus 9.12%.
Interest expense fell to $21.5 million for the quarter and $66.7 million year to date, mainly following refinancing. Year-to-date other expense included an $18.9 million pretax debt-extinguishment loss. The 13-week effective tax rate was 35.6% versus 37.4%, aided by a tax benefit related to the closed assessment period for 2009; the 39-week rates were 36.8% and 36.6%.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $760.6 million, up from $690.9 million. Investing cash outflow was $443.0 million, primarily property and equipment purchases of $444.0 million.
- Cash was $165.7 million at November 1, 2013. Merchandise inventory was $2.592 billion, up 8% from fiscal year-end; management said inventory increased 4% per store over the prior-year period.
- Total obligations were approximately $2.925 billion, including $50.9 million current; long-term obligations were $2.874 billion. The company had $716.3 million available under its revolving facility and was in compliance with its debt covenants.
- April 2013 refinancing replaced secured facilities with a five-year $1.0 billion term loan and $850 million revolving facility, and included $400 million of 1.875% notes due 2018 and $900 million of 3.25% notes due 2023. The filing states management expects operating cash flow, cash and facility availability to meet obligations, working-capital needs and capital spending.
- The company repurchased 7.8 million shares for $420.0 million year to date. On December 4, after quarter-end, the board added $1.0 billion to the authorization, leaving approximately $1.22 billion available.
Outlook, commentary, risks and unusual items
- No earnings or sales guidance is provided. Management projected fiscal 2013 capital expenditures of $550–$600 million and planned approximately 650 new stores and 550 remodels or relocations. It had opened 577 stores and remodeled or relocated 534 year to date.
- Management identified continued pressure on discretionary sales, lower-margin product mix and higher shrink as risks to gross margin. It also cited economic conditions, inventory management, supply-chain execution, labor and transportation costs, interest rates, credit ratings and seasonal variability.
- In November 2013, the company signed a contingent agreement to sell and lease back about 233 stores, expected to close in January 2014 and generate more than $200 million net of taxes and fees. It anticipated using some or all proceeds for share repurchases; completion was not assured.
- The company accrued $8.5 million for a probable settlement of the Richter store-manager case, subject to court approval. Several other wage-and-hour and employment cases, including EEOC and California class allegations, had uncertain outcomes and loss ranges the company could not estimate; adverse outcomes could materially affect results or liquidity.
- Uncertain tax reserves, interest and penalties totaled $22.9 million. Management said approximately $11.9 million could be released in the next 12 months, principally through settlements. Availability of federal hiring credits for employees hired after December 31, 2013 was uncertain.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for Q3 2013, despite the request metadata’s “2012 Q3.”
- Track whether margin pressure from consumables mix, shrink and markdowns persists, and whether same-store sales growth continues.
- Review execution and funding of planned capital spending, store growth, the proposed sale-leaseback and expanded repurchases.
- Monitor debt levels, refinancing terms, revolving-credit availability, covenant compliance and credit ratings.
- Follow court approval of the $8.5 million Richter settlement and developments in other litigation and tax matters.