Dollar General Corporation — Form 10-Q summary
Period: The supplied filing is for the 13 and 26 weeks ended August 3, 2018, compared with periods ended August 4, 2017. This conflicts with the request metadata stating 2017 Q2; the filing itself is for fiscal 2018 Q2. Financial statements are unaudited and the interim review identified no material modifications needed.
Business context and results
Dollar General operated 15,015 stores in 44 states at quarter-end and reported one operating segment. Second-quarter sales growth reflected higher same-store sales and new-store contributions. For the quarter, same-store sales rose 3.7%, with both customer traffic and average transaction amount increasing. For the first half, same-store sales rose 2.9%, as a higher average transaction amount more than offset lower traffic.
| Metric | 13 weeks ended Aug. 3, 2018 | Change vs. prior year | 26 weeks ended Aug. 3, 2018 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $6.44 billion | +10.6% | $12.56 billion | +9.8% |
| Gross profit | $1.97 billion; 30.65% margin | +10.3%; margin down 7 bps | $3.84 billion; 30.56% margin | +10.0%; margin up 5 bps |
| SG&A | $1.43 billion; 22.18% of sales | +10.2%; rate down 8 bps | $2.80 billion; 22.31% of sales | +11.1%; rate up 26 bps |
| Operating profit | $545.5 million; 8.47% margin | +10.6% | $1.04 billion; 8.25% margin | +7.1% |
| Net income | $407.2 million | +38.1% | $772.1 million | +34.4% |
| Diluted EPS | $1.52 | +$0.44 | $2.88 | +$0.79 |
Cash flow, debt and liquidity
- First-half operating cash flow was $1.10 billion, up from $786.2 million. Capital expenditures were $370.97 million; cash and cash equivalents ended at $265.3 million, versus $267.4 million at fiscal year-end.
- At August 3, total debt was approximately $2.8 billion. Long-term obligations on the balance sheet were $2.78 billion; commercial paper included $280.8 million reported as long-term debt, plus $186.0 million held by a subsidiary and excluded from the balance sheet.
- The company had no revolving-facility borrowings and reported $1.24 billion of facility availability, with $774.1 million potentially available after preserving capacity for commercial paper. Commercial paper outstanding on the balance sheet carried a 2.3% weighted-average rate. The company was in compliance with debt covenants.
- First-half financing included $349.5 million of share repurchases and $154.7 million of dividends. The board authorized a further $0.29-per-share dividend after quarter-end; approximately $1.0 billion remained under the repurchase authorization at quarter-end.
Material changes, outlook and management commentary
- Net income benefited substantially from a lower effective tax rate: 21.5% for the quarter and 21.6% for the half, versus 37.2% in each prior-year period, primarily reflecting the Tax Cuts and Jobs Act and the federal rate reduction to 21% from 35%.
- Quarterly gross margin declined as sales mix shifted toward lower-margin consumables and lower-margin consumable departments, with higher markdowns and transportation costs also weighing. Improved shrinkage and higher initial markups partly offset these pressures. First-half gross margin increased slightly year over year.
- Management cited higher carrier and fuel rates as continuing transportation-cost pressures. It is pursuing shipment optimization, stem-mile reductions and private-fleet expansion. Tariffs could affect the business, particularly through domestic vendors’ global supply chains; current tariffs were not expected to materially affect direct imports.
- For fiscal 2018, management planned approximately 900 new stores, 1,000 remodels and 100 relocations, and projected capital expenditures of $725–$800 million. About 400 planned remodels were expected to add cooler capacity. Two distribution centers under construction were expected to begin shipping in calendar 2019. These are plans, not guarantees.
- Management said liquidity should be sufficient for obligations, working capital, capital spending and dividends over the next 12 months and several years, while noting liquidity depends on factors outside its control. It anticipated maximum combined revolving-facility and commercial-paper borrowings of approximately $800 million at any one time for the remainder of fiscal 2018, including potential stock-repurchase funding.
Risks, contingencies and unusual items
- Pending wage-and-hour, employment and private-label motor-oil litigation could have a material adverse effect if resolved adversely. The company could not estimate potential losses for most matters. A preliminary agreement in one Tennessee wage-and-hour case was subject to court approval and was not expected to be material.
- The company expects lease-accounting adoption to have a material impact on its financial statements because of its significant store-lease portfolio; the assessment was ongoing. Adoption timing and the ultimate quantified effect were not stated.
- The company recorded a $1.0 million loss on early repayment of its $175 million term loan. It issued $500 million of 4.125% notes due 2028 and used proceeds to redeem $400 million of notes due 2018.
- Interim inventory valuation uses estimates, including LIFO, shrinkage and markdown assumptions; actual year-end valuation may differ. The business is seasonal, and interim results may not indicate full-year performance.
- Other risks highlighted include customer sensitivity to economic conditions, fuel and commodity costs, competition, inventory management and shrink, supply-chain disruption, cybersecurity, labor availability, weather, tariffs, and credit-rating changes.
Important facts for investors to verify
- Confirm the intended period: the filing supplied is fiscal 2018 Q2, not 2017 Q2.
- Track same-store sales composition, especially traffic trends and the continuing mix shift toward lower-margin consumables.
- Assess whether transportation, markdown and occupancy pressures are offset by shrink improvements and operating efficiencies.
- Monitor inventory growth, operating cash flow, capital spending, commercial-paper usage and share repurchases relative to liquidity and debt levels.
- Watch the quantified balance-sheet effects of lease-accounting adoption and developments in motor-oil and employment litigation.