Dollar General Corporation — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2014. The quarter comprised 13 weeks ended August 1, 2014; year-to-date results cover 26 weeks. Comparisons are with the periods ended August 2, 2013. The interim financial statements are unaudited; the auditor performed a review, not an audit.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $4.724 billion | $4.395 billion | $9.246 billion | $8.628 billion |
| Same-store sales growth | 2.1% | Not stated here | 1.8% | Not stated here |
| Gross profit | $1.456 billion | $1.377 billion | $2.813 billion | $2.672 billion |
| Gross margin | 30.8% | 31.3% | 30.4% | 31.0% |
| Operating profit | $428.5 million | $412.8 million | $808.2 million | $807.8 million |
| Net income | $251.3 million | $245.5 million | $473.7 million | $465.6 million |
| Diluted EPS | $0.83 | $0.75 | $1.54 | $1.42 |
| Operating cash flow | Not presented by quarter | $486.9 million | $484.1 million |
Q2 sales grew 7.5%, supported by higher customer traffic and average transaction size; first-half sales grew 7.2%. Consumables were 75.7% of Q2 sales and grew 8.3%. Q2 gross margin fell 53 basis points, primarily from greater promotional markdowns and a higher mix of lower-margin tobacco and perishable products; higher initial markups partly offset this pressure. SG&A was 21.7% of Q2 sales versus 21.9% a year earlier, but was 21.7% for the first half versus 21.6%.
Q2 net income increased 2.4%, while diluted EPS increased 10.7%, aided by 21.8 million fewer diluted shares year over year following repurchases. First-half net income rose 1.7% and diluted EPS rose 8.5%. The prior-year first half included an $18.9 million pretax debt-retirement loss; Q2 interest expense increased $2.0 million, partly due to borrowing for share repurchases.
Cash, debt and liquidity
- Cash and cash equivalents were $172.5 million at August 1, 2014, down from $505.6 million at January 31, 2014. First-half cash flow was $486.9 million from operations, $(190.7) million from investing, and $(629.3) million from financing; the financing outflow included $800.1 million of share repurchases.
- Total debt, including current maturities, was approximately $2.98 billion. The company had $628.8 million available under its $850 million revolving facility and reported compliance with its debt covenants.
- Inventory was $2.789 billion, up 9% during the first half and 4% per store year over year. Management reported rolling four-quarter inventory turnover of 4.8 times.
- First-half capital expenditures were $191.4 million. Total assets were $10.826 billion and shareholders’ equity was $5.096 billion at August 1, 2014.
Outlook, risks and notable items
- Management planned approximately 700 new stores and approximately 500 traditional remodels or relocations for fiscal 2014; 426 new stores had opened and 585 had been remodeled or relocated in the first half. Planned 2014 capital expenditures were $450–$500 million. Management expected consumables growth to outpace non-consumables and SG&A to be a higher percentage of sales for the full year than in 2013.
- Management said the promotional environment remained more competitive than in the recent past, though it believed promotional activity had moderated recently. Core-customer spending remained subject to economic uncertainty. Federal job-credit programs, including the Work Opportunity Tax Credit, had expired for eligible employees hired after December 31, 2013; the timing or likelihood of congressional renewal was uncertain.
- On August 18, 2014, Dollar General proposed acquiring Family Dollar for $78.50 per share in cash; Family Dollar rejected the proposal on August 21. No transaction was assured. Following the proposal, S&P placed ratings on negative watch and Moody’s placed ratings under review for downgrade. The company cited possible effects on financing access and costs.
- Several employment, wage-and-hour, background-check and other lawsuits remained pending. The company generally said potential class sizes and losses could not be estimated; adverse outcomes in certain matters could materially affect results or liquidity. It had accrued $8.5 million for a proposed Richter settlement and $1.8 million toward a proposed Marcum settlement, both subject to court approval. A separate EEOC action and multiple California wage-and-hour cases had unquantified potential exposure.
- Uncertain tax benefit reserves, related interest and penalties totaled $19.7 million; management said approximately $8.7 million could be reduced in the next 12 months, principally through settlements. The effective tax rate was 38.1% for Q2 and 38.0% for the first half, versus 37.4% in both prior-year periods.
- The company repurchased 14.1 million shares for $800.1 million in the first half; approximately $223.4 million remained under the authorization. It stated that operating cash flow, cash and credit availability should cover obligations and planned investment over the next 12 months and beyond, while noting that adverse litigation or tax developments could harm liquidity.
Important facts for investors to verify
- Whether sales momentum can continue while promotional markdowns and the mix shift toward lower-margin consumables pressure gross margin.
- Whether cash generation and revolving-facility capacity remain adequate given inventory investment, planned capital expenditures, debt and continued repurchases.
- Developments in the Family Dollar proposal and any resulting effects on credit ratings, borrowing costs or capital allocation.
- Court approval and final costs of proposed settlements, and progress or potential exposure in the remaining legal proceedings and tax examinations.
- Whether planned store openings and remodels deliver expected sales and returns, and whether expired federal job credits are renewed.