Dollar General Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 3, 2013, compared with the 13 weeks ended May 4, 2012. Although the request metadata labels the period “2012 Q1,” the filing is for the first quarter of fiscal 2013. Dollar General operated 10,662 stores in 40 states at quarter-end. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | 13 weeks ended May 3, 2013 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $4.234 billion | $3.901 billion | Up 8.5% |
| Same-store sales | Up 2.6% | — | Traffic and average transaction amount increased |
| Gross profit | $1.295 billion; 30.6% of sales | $1.228 billion; 31.5% | Rate down 89 basis points |
| SG&A | $900.1 million; 21.3% of sales | $843.9 million; 21.6% | Rate improved 37 basis points |
| Operating profit | $395.0 million; 9.3% of sales | $384.3 million; 9.9% | Up 2.8% |
| Interest expense | $24.5 million | $37.1 million | Down $12.6 million |
| Net income | $220.1 million; 5.2% of sales | $213.4 million; 5.5% | Up 3.1% |
| Diluted EPS | $0.67 | $0.63 | Up $0.04 |
| Operating cash flow | $147.2 million | $192.6 million | Down $45.4 million |
Cash and cash equivalents were $155.5 million at May 3, 2013. Total debt, including current obligations, was approximately $2.84 billion; revolving-facility availability was $786.7 million. Merchandise inventory was $2.414 billion, up from $2.397 billion at February 1, 2013. The company reported rolling four-quarter inventory turnover of 5.0 times and inventory per store 14% above the prior-year period.
Material changes and notable items
- Consumables sales rose 11.0% and accounted for 75.46% of sales, compared with 73.75% a year earlier. Management attributed the lower gross margin rate principally to increased markdowns, a greater consumables mix, higher inventory shrink, and lower initial markups; transportation efficiencies and moderately lower fuel rates partly offset these pressures.
- SG&A improved as a percentage of sales, mainly due to lower incentive compensation and workers’ compensation/general liability expense, plus store-labor process improvements. Advertising, rent, depreciation and utilities grew faster than sales.
- Other expense included an $18.9 million pretax loss from writing off costs associated with terminating prior credit facilities. The comparable 2012 period included a $1.6 million debt-cost write-off.
- The effective tax rate declined to 37.4% from 38.2%, principally because federal Work Opportunity Tax Credits were available in 2013 but generally not in the comparable 2012 quarter. Availability for hires after December 31, 2013 depended on future legislation.
- Net cash from operations declined, with accounts payable timing and merchandise-purchase mix among the main factors. Capital expenditures were $149.7 million, versus $145.9 million in the prior-year quarter.
- Share repurchases totaled $20.0 million for approximately 0.4 million shares, versus $300.0 million for 6.8 million shares in the prior-year quarter. The board added $500 million to the authorization; $623.6 million remained available at May 3.
Financing, outlook and risks
- In April 2013, the company refinanced its prior credit agreements with a five-year unsecured facility comprising a $1.0 billion term loan and an $850 million revolver, and issued $400 million of 1.875% notes due 2018 and $900 million of 3.25% notes due 2023. It also had $500 million of 4.125% notes due 2017. The term and revolver borrowings are variable-rate; $875 million of interest-rate swaps were designated as cash-flow hedges. The company reported compliance with facility covenants at quarter-end.
- Management expected fiscal 2013 capital expenditures of $575 million–$625 million, with plans for approximately 635 new stores and approximately 550 remodels or relocations. It anticipated possible revolver borrowings of up to approximately $200 million outstanding at any one time during fiscal 2013.
- Management said economic pressure on customers, weaker discretionary spending, a shift toward lower-margin consumables, and higher shrink could continue to challenge gross margins. Priorities included productive sales growth, margin improvement, cost reduction, and store and merchandise initiatives.
- Moody’s upgraded the senior unsecured rating to Baa3 from Ba2 in March 2013, and S&P upgraded it to BBB- from BB+ in April; both outlooks were stable. Management cautioned that ratings changes could affect financing access and cost.
- Material legal uncertainties include the Richter store-manager overtime litigation, the Marcum background-check class allegations, a potential EEOC action concerning criminal-background screening, and the Winn-Dixie restrictive-covenant appeal. The company could not estimate potential exposure in several matters; adverse outcomes in some could materially affect financial results or liquidity.
- Other stated risks include substantial debt and covenant restrictions, variable interest rates, inventory management and shrink, economic and commodity pressures, supply-chain disruptions, and litigation and tax contingencies. Management believed cash, operating cash flow, and revolving availability would provide sufficient liquidity for obligations and planned spending.
Important facts for investors to verify
- Whether sales growth and store initiatives can offset the 89-basis-point gross-margin decline and higher consumables mix.
- Whether the operating-cash-flow decline, inventory growth per store, and inventory-shrink trend persist.
- Debt balances, variable-rate exposure, hedge effects, covenant compliance, and actual revolver use following the refinancing.
- Delivery of the stated capital-spending and store-opening/remodel plans, and the pace and funding of future share repurchases.
- Developments in the disclosed litigation and tax matters, including potential losses that the company said it could not estimate.
- Continuation of federal hiring tax credits after December 31, 2013 and any resulting effect on the tax rate.