Dollar General Corporation — Form 10-Q Summary
Period: The filing covers the 13 weeks and 39 weeks ended October 30, 2015, compared with periods ended October 31, 2014. This is fiscal 2015 third quarter, not 2014 third quarter as stated in the request metadata. Dollar General operated 12,396 stores in 43 states and reported one operating segment.
Financial performance
| Metric | 13 weeks ended Oct. 30, 2015 | Change year over year | 39 weeks ended Oct. 30, 2015 | Change year over year |
|---|---|---|---|---|
| Net sales | $5.067 billion | +7.3% | $15.082 billion | +8.0% |
| Same-store sales | +2.3% | Traffic and average transaction amount increased | +2.9% | Traffic and average transaction amount increased |
| Gross profit | $1.537 billion; 30.33% margin | Margin +19 basis points | $4.624 billion; 30.66% margin | Margin +33 basis points |
| SG&A | $1.113 billion; 21.97% of sales | Ratio +18 basis points | $3.296 billion; 21.85% of sales | Ratio +13 basis points |
| Operating profit | $423.9 million; 8.37% margin | +7.5% | $1.328 billion; 8.80% margin | +10.4% |
| Net income | $253.3 million | +7.2% | $788.9 million | +11.1% |
| Diluted EPS | $0.86 | Compared with $0.78 | $2.65 | Compared with $2.32 |
| Operating cash flow | Not separately reported for quarter | — | $780.5 million | Down from $840.5 million |
Quarterly interest expense was $21.4 million, down $0.4 million, primarily from lower average interest rates. For the 39-week period, interest expense was $63.7 million, down $3.0 million, primarily from lower average debt balances. Effective tax rates were 37.0% for the quarter and 37.6% year to date, versus 36.5% and 37.5%, respectively.
As of October 30, 2015, cash was $182.5 million, inventory was $3.102 billion, and total assets were $11.288 billion. Total debt was approximately $3.11 billion. The company had $582.8 million available under its $1.0 billion revolving facility. Shareholders’ equity was $5.344 billion.
Year-to-date investing cash outflow was $386.1 million, including $386.9 million of property and equipment purchases. Financing cash outflow was $791.8 million, including $1.009 billion of share repurchases and $195.2 million of dividends. Cash declined by $397.3 million from the fiscal-year start.
Material changes and notable items
- Sales growth reflected 2.3% quarterly same-store growth, new stores, and growth across all four merchandise categories. Consumables remained the largest category at 77.4% of quarterly sales.
- Gross margin improved mainly because of lower transportation costs and reduced inventory shrink, partly offset by sales-mix effects.
- SG&A as a share of sales increased, reflecting restructuring severance, incentive compensation, repairs and maintenance, occupancy, and advertising costs. The quarter included $6.1 million of restructuring expense related to eliminating approximately 255 corporate-support positions. Remaining related liability was $5.6 million.
- Inventory increased 11% year to date; inventory per store was up 5.1% from October 31, 2014. Increased inventory purchases contributed to lower operating cash flow.
- On October 20, 2015, the company refinanced its credit facilities and issued $500 million of 4.150% senior notes due 2025. The amended facilities include a $425 million term loan and a $1.0 billion revolver, both scheduled to mature in 2020. The company reported compliance with debt covenants.
- Year-to-date the company opened 634 stores, remodeled or relocated 857, and closed 27. It planned 730 store openings and 875 remodels or relocations for fiscal 2015.
Outlook, risks, and contingencies
- Management expected fiscal 2015 capital expenditures of $500 million to $550 million and planned store square-footage growth of approximately 7% in 2016, versus 6% in 2015. No earnings or sales guidance was provided in the filing.
- Management said cash from operations, cash balances, credit availability, and debt-market access were expected to cover obligations, working capital, capital spending, and anticipated dividends for the next 12 months and several years, while noting liquidity depends on factors outside its control.
- The board approved a further $1.0 billion increase to the repurchase authorization on December 2, 2015; approximately $1.2 billion remained authorized afterward. The company paid $0.22 per share quarterly dividends in the first three quarters and approved another $0.22 dividend payable in January 2016.
- Material unresolved litigation includes an EEOC action concerning the company’s criminal-background-check policy and California wage-and-hour matters. The company said it could not estimate potential losses; adverse outcomes could materially affect financial statements.
- Tax reserves for uncertain benefits, related interest, and penalties totaled $8.3 million. Management said approximately $2.6 million could be released within 12 months; tax examinations and uncertainty over renewal of the Work Opportunity Tax Credit remain relevant.
- Key disclosed risks include customer spending and economic conditions, competition, inventory management and shrink, store execution and expansion, supply-chain costs and disruptions, labor costs and retention, litigation and regulation, debt levels, interest rates, and credit-rating changes. The company reported S&P ratings of BBB with stable outlook and Moody’s Baa3 with positive outlook.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for fiscal 2015 Q3, despite the metadata’s 2014 Q3 label.
- Assess whether inventory growth and year-to-date operating cash-flow decline reverse during the holiday season; interim results are seasonal and not necessarily indicative of full-year results.
- Track whether margin gains from lower shrink and transportation costs persist while SG&A grows faster than sales.
- Review leverage, revolving-facility usage, covenant headroom, and funding of repurchases, dividends, and planned capital expenditures.
- Monitor developments in the EEOC and California employment cases and any changes to tax reserves or tax-credit assumptions.
The interim financial statements were reviewed by Ernst & Young LLP, not audited; the review report stated it was not aware of material modifications needed for GAAP conformity.