Dollar General Corporation — Form 10-Q
Reporting period: The filing covers the 13 weeks ended April 29, 2011, compared with the 13 weeks ended April 30, 2010. Although the request metadata says “2010 Q1,” the filing itself is for fiscal 2011 Q1. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $3.452 billion | $3.111 billion | +10.9% |
| Same-store sales | +5.4% | Not stated here | Traffic and average transaction amount both increased |
| Gross profit | $1.087 billion; 31.50% margin | $1.000 billion; 32.13% margin | Profit +8.8%; margin down 63 basis points |
| Operating profit | $321.6 million; 9.32% margin | $290.7 million; 9.34% margin | +10.6% |
| Net income | $157.0 million; 4.55% margin | $136.0 million; 4.37% margin | +15.4% |
| Diluted EPS | $0.45 | $0.39 | +15.4% |
| Operating cash flow | $223.6 million | $91.2 million | +$132.4 million |
| Capital expenditures | $92.0 million | $91.0 million | Approximately unchanged |
Balance sheet and liquidity at April 29, 2011: Cash was $602.5 million, inventory $1.767 billion, total assets $9.715 billion, and shareholders’ equity $4.220 billion. Long-term obligations were $3.263 billion, with total debt including current maturities of approximately $3.26 billion. The company had no ABL borrowings and reported $967.1 million available under the ABL Facility. Cash rose from $497.4 million at January 28, 2011. Current assets were $2.507 billion and current liabilities $1.387 billion.
Material changes and operating developments
- Sales growth reflected 5.4% same-store growth and new stores; consumables sales rose 13.3% and increased to 73.27% of sales.
- Gross margin fell as the company took higher markdowns, restrained price increases, and sold a greater mix of lower-margin consumables. Higher diesel-related transportation costs and a $3.6 million LIFO charge also weighed on margin. Shrink reduction and distribution efficiencies were favorable.
- SG&A was 22.19% of sales versus 22.79% a year earlier, a 60-basis-point improvement. Retail labor productivity and lower advertising costs contributed; Q1 2011 also included accruals for expected legal settlements.
- Interest expense declined $6.4 million to $65.6 million, reflecting lower borrowings and lower Term Loan Facility rates. The company repurchased $25 million principal amount of 10.625% notes due 2015 for 107% of principal, recording a $2.2 million pretax loss.
- Operating cash flow increased substantially, with management citing stronger earnings and working-capital changes, including relatively flat inventory versus a 6% inventory increase in Q1 2010.
- During the quarter, Dollar General opened 139 stores, remodeled or relocated 184, and closed 15, ending with 9,496 stores in 35 states.
Outlook, risks and contingencies
- Management planned approximately 625 store openings in fiscal 2011, including entry into Connecticut, New Hampshire, and Nevada, and was developing plans for California entry in 2012. Fiscal 2011 capital expenditures were projected at approximately $550 million to $600 million. No specific earnings or sales forecast was provided.
- Management expected continued uncertainty in product costs and high or rising transportation costs due to diesel prices. It did not expect non-consumables to gain significantly in sales mix, citing customers’ constrained discretionary spending. The company emphasized everyday low prices and continued focus on sales growth, gross margin, cost productivity, and customer service.
- Management said cash, operating cash flow, and available credit were expected to cover obligations, working capital, and capital spending for at least the next 12 months and several years. The company nevertheless noted significant debt service needs. Its senior secured debt-to-Adjusted EBITDA ratio was 0.9 to 1, below the 4.25-to-1 covenant threshold described in the filing. Credit ratings remained non-investment grade, although S&P upgraded its outlook to positive.
- A proposed settlement of the Womack equal-pay matter would provide $15.5 million for class members and $3.25 million for plaintiffs’ legal fees and costs, subject to court approval. The company accrued the settlement and related costs and recorded an expected $15.9 million insurance reimbursement. The settlement had not yet received court approval.
- The company accrued an additional $9.85 million settlement payment for a dispute involving a terminated interest-rate swap; payment was made in May 2011. A separate store-manager overtime class action, Richter, remained unresolved; the company said it could not estimate potential loss, and an adverse outcome could materially affect its financial statements.
- Other matters included ongoing IRS examinations of fiscal 2006–2008 returns and state tax examinations. Reserves for uncertain tax benefits, related interest, and penalties totaled $29.0 million; management considered a $1.4 million reduction reasonably possible within 12 months.
- Principal risks highlighted include economic weakness, commodity and fuel inflation, inventory shrinkage and markdowns, execution of store growth, supply-chain disruption, debt and covenant constraints, and litigation. Interim results may not indicate full-year performance because of seasonality.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: this is fiscal 2011 Q1, not 2010 Q1.
- Track whether sales and same-store growth continue while gross margin recovers from the 63-basis-point year-over-year decline.
- Verify delivery of the planned store openings and $550–$600 million capital-spending program, and assess returns on store investments.
- Monitor debt reduction, cash generation, ABL availability, refinancing or redemption plans for the 2015 senior notes, and compliance with credit agreements.
- Check court approval, insurance recovery, and final costs for the Womack settlement; monitor exposure and developments in the Richter and other employment matters.
- Assess actual transportation, commodity, markdown, and LIFO costs against management’s expectations, and note that interim LIFO estimates may change at year-end.