Dollar General Corporation — Form 10-Q Summary
Reporting-period note: The request identifies “2018 Q2,” but the supplied filing is for the 13 weeks ended August 2, 2019, with comparisons to the 13 weeks ended August 3, 2018. The six-month comparison is for the 26 weeks ended on those dates. Amounts below are in U.S. dollars; financial statements are unaudited.
Business context and period
Dollar General operated 15,836 stores in 44 states at August 2, 2019, selling consumable and non-consumable merchandise through small-format discount stores. It reports one operating segment. Results are seasonal, and management cautions that interim results may not indicate full-year performance.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $6.982B | $6.443B | $13.605B | $12.558B |
| Gross profit | $2.149B | $1.975B | $4.151B | $3.837B |
| Operating profit | $577.8M | $545.5M | $1.090B | $1.036B |
| Net income | $426.6M | $407.2M | $811.6M | $772.1M |
| Diluted EPS | $1.65 | $1.52 | $3.13 | $2.88 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.131B | $1.097B |
Q2 sales rose 8.4%; same-store sales increased 4.0%, reflecting higher average transaction amounts and customer traffic. Gross margin was 30.8%, up 13 basis points, while SG&A was 22.5% of sales, up 32 basis points. Operating margin was 8.28% versus 8.47%; net margin was 6.11% versus 6.32%. Q2 operating profit increased 5.9%, net income 4.7%, and diluted EPS 8.6%. First-half sales rose 8.3%, net income 5.1%, and diluted EPS 8.7%.
For the first half, capital spending was $293.1M and investing cash outflow was $291.6M. Financing cash outflow was $814.8M, including $385.0M of share repurchases and $165.1M of dividends. Cash increased $24.1M to $259.6M. Merchandise inventory was $4.420B, up from $4.097B at fiscal year-end; management reported inventory per store up 7.5% year over year.
At August 2, 2019, total assets were $21.918B and shareholders’ equity was $6.749B. Reported long-term obligations, including current maturities, totaled approximately $2.574B; cash was $259.6M. The company had $86.2M of commercial paper reflected on its balance sheet, plus $181.0M held by a wholly owned subsidiary and not reflected there. It reported $1.24B of revolving-facility availability, of which $976.1M could contribute incremental liquidity after maintaining capacity related to commercial paper. No revolver borrowings were outstanding, and the company reported compliance with its debt covenants.
Material changes and unusual items
- Dollar General adopted the new lease accounting standard on February 2, 2019. It recognized about $8.0B of operating lease assets and liabilities at adoption; at August 2, lease assets were $8.405B and lease liabilities were about $8.396B. The resulting balance-sheet growth makes comparison with the prior year less direct; prior periods were not restated. The adoption adjustment increased retained earnings by $28.8M.
- Q2 gross-margin improvement reflected lower markdowns and higher initial markups, partly offset by higher shrink and distribution costs and a greater consumables mix. First-half gross margin declined 5 basis points to 30.5%, with distribution costs and sales mix weighing on results.
- Q2 SG&A included a $31.0M legal accrual, which management said added 44 basis points to the expense ratio. The company separately recorded an immaterial accrual for the motor-oil litigation.
- The effective tax rate was 22.9% in Q2 and 21.9% for the first half, above the comparable 2018 rates of 21.5% and 21.6%, primarily due to state tax law changes, partly offset by share-based compensation tax benefits.
Outlook, management commentary and risks
- For fiscal 2019, management projected capital expenditures of $775M–$825M and planned approximately 975 new stores, 1,000 remodels and 100 relocations. It anticipated combined revolving-facility and commercial-paper borrowings of up to approximately $800M outstanding at one time for the remainder of the year.
- Management said cash from operations, cash balances, borrowing facilities and debt-market access should be sufficient for obligations, working capital, capital spending and anticipated dividends for the next twelve months and several years, while noting that liquidity depends on factors outside its control.
- Growth initiatives included DG Fresh, then serving more than 3,500 stores from three distribution facilities, and Fast Track store-efficiency efforts. Management cautioned that initiatives require upfront spending and may not deliver immediate returns.
- Tariffs on certain Chinese products increased from 10% to 25% effective May 10, 2019; further increases and additional tariffs were scheduled for later in 2019. Management said sourcing, merchandising and pricing actions could mitigate the impact, but gave no assurance and warned higher tariffs could affect margins and customer spending.
- Other cited risks include pressure on value-conscious customers from employment, wage, housing, health-care and fuel costs; sales-mix shifts toward lower-margin consumables; wage and occupancy cost increases; inventory shrink and management; supply-chain disruption; weather and seasonality; and competition.
- The company recorded a $31.0M accrual for probable and estimable losses relating to certified class actions and associated employment and consumer/product matters. Motor-oil labeling litigation includes certified state classes; the company is appealing class-certification rulings and says outcomes and potential exposure remain uncertain. It believes other pending matters will not materially affect the financial statements as a whole, but adverse developments could have material effects.
Most important facts for investors to verify
- Confirm the intended period: this filing covers Q2 and the first half of fiscal 2019, not 2018 Q2.
- Track same-store sales, traffic, transaction size and product mix, particularly the balance between lower-margin consumables and higher-margin categories.
- Assess whether gross-margin gains and cost initiatives can offset shrink, distribution, labor, occupancy and tariff pressures.
- Review inventory growth, cash conversion, capital spending and the planned store investment program.
- Distinguish reported debt from substantial lease liabilities, and monitor commercial-paper usage, revolver capacity, credit ratings and covenant compliance.
- Follow developments and potential cash exposure in employment and consumer/product litigation, including the motor-oil cases.
The independent accountant performed an interim review and reported no material modifications needed for GAAP conformity; this was not an audit.