Dollar General Corporation — Form 10-Q
Reporting period: 13 and 39 weeks ended November 2, 2012; comparisons are with periods ended October 28, 2011. The filing is for fiscal 2012 Q3, despite the request metadata identifying 2011 Q3. Dollar General operated 10,371 U.S. stores in 40 states. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $3.965B | $3.595B | $11.815B | $10.622B |
| Gross profit | $1.226B | $1.116B | $3.718B | $3.352B |
| Gross margin | 30.9% | 31.0% | 31.5% | 31.6% |
| Operating profit | $361.4M | $310.9M | $1.133B | $982.6M |
| Operating margin | 9.1% | 8.7% | 9.6% | 9.3% |
| Net income | $207.7M | $171.2M | $635.2M | $474.2M |
| Diluted EPS | $0.62 | $0.50 | $1.89 | $1.37 |
Q3 sales rose 10.3%, including 4.0% same-store sales growth, driven by higher customer traffic and average transaction amount. For the 39-week period, sales increased 11.2% and same-store sales rose 5.3%. Consumables grew faster than non-consumables and represented 75.8% of Q3 sales. Q3 SG&A was 21.8% of sales versus 22.4% a year earlier; lower relative labor and other costs supported operating leverage. Interest expense declined to $27.7M in Q3 from $38.6M.
- Cash flow and investment: 39-week operating cash flow was $690.9M, up from $604.5M. Capital expenditures were $453.6M, versus $363.1M; operating cash flow less capital expenditures was approximately $237.3M. Cash at November 2 was $142.6M.
- Balance sheet and liquidity: Inventory was $2.330B, up from $2.009B at fiscal year-end. Long-term obligations were $3.023B, compared with $2.618B at February 3, 2012. ABL borrowing availability was $620.6M, with $538.3M borrowed and $41.1M of letters of credit outstanding.
- Capital returns: The company repurchased 12.7M shares for $596.4M during the 39-week period, including 11.7M shares from Buck Holdings. $218.6M remained under the August 2012 $500M authorization at November 2.
Material changes and unusual items
- Gross margin edged down year over year despite higher inventory markups, transportation efficiencies, and a smaller LIFO provision. Higher markdowns, a higher shrink rate, less benefit from price increases, and a sales mix weighted toward lower-margin consumables offset those benefits. Q3 2011 included an $11M LIFO charge that did not recur; year-to-date LIFO provision was $1.2M versus $25.4M.
- Year-to-date other expense included a $29.0M pretax loss on redeeming the remaining 11.875%/12.625% senior subordinated notes, partly offset by a $2.5M pretax gain on an interest-rate swap settlement. The prior-year period included $60.3M of debt-retirement losses.
- In July 2012, Dollar General issued $500M of 4.125% senior notes due 2017 and redeemed $450.7M of higher-coupon subordinated notes. About $1.6B of outstanding long-term debt was due in 2014. Interest-rate swaps with $1.175B combined notional value hedged variable-rate exposure; the company estimated $4.8M would be reclassified as increased interest expense over the next 52 weeks.
Outlook, commentary, and risks
- Management said it remained optimistic about executing its operating priorities, but expected heightened pricing and advertising competition and continued pressure on customers’ discretionary spending. No specific earnings or sales guidance was provided.
- Management planned approximately 625 new stores for 2012 and projected capital expenditures of $600M–$650M. Through the first three quarters, 479 stores had opened; 591 had been remodeled or relocated, and 45 had closed. The company was testing larger formats and planned to offer tobacco products in 2013.
- A West Coast port work stoppage had recently been resolved; labor uncertainty at East Coast ports remained. Extended disruptions or recovery delays could materially affect sales, gross profit, and net income. Other stated risks included competition, economic weakness, commodity and labor costs, inventory shrink and markdowns, supply-chain disruption, interest rates, and debt restrictions.
- Management believed cash, operating cash flow, and credit-facility availability would fund obligations, working capital, and capital spending for at least the next twelve months and several years. The filing notes that litigation, tax contingencies, inventory needs, and debt service could adversely affect liquidity.
- Legal matters included the Richter wage-and-hour case, for which the court granted the company’s class decertification motion; the company could not estimate potential losses. A background-check class action and an EEOC matter also had unestimable potential exposure. In the Winn-Dixie restrictive-covenant case, damages claims were dismissed and most injunctive claims dismissed; an appeal was pending. The company warned that adverse outcomes in certain matters could be material.
Investor facts to verify
- Whether sales momentum and same-store growth continued, and whether consumables mix, markdowns, and shrink further affected gross margins.
- Actual 2012 store openings, remodels, closures, and capital spending versus management’s plans.
- Debt maturities, ABL availability and borrowing needs, covenant compliance, and the effects of ongoing share repurchases on leverage and liquidity.
- Developments and potential financial exposure in the wage-and-hour, background-check, EEOC, and Winn-Dixie matters.
- Year-end inventory valuation and LIFO adjustments, which depend on estimates and may differ from interim calculations.