Dollar General Corporation — FY2016 Form 10-K
Period note: The supplied filing is the annual report for the fiscal year ended February 3, 2017, not a 2015 Q4 filing. Fiscal 2016 comprised 53 weeks; fiscal 2015 comprised 52 weeks. The filing also reports quarterly results, including a 14-week fourth quarter in fiscal 2016 versus 13 weeks in fiscal 2015.
Business context
Dollar General operates small-box discount stores offering consumables, seasonal merchandise, home products and apparel. It had 13,320 stores in 43 states at fiscal year-end and 13,429 stores in 44 states as of March 3, 2017. Consumables generated 76.4% of fiscal 2016 sales. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $21.99 billion | $20.37 billion |
| Gross profit / margin | $6.78 billion / 30.85% | $6.31 billion / 30.96% |
| Operating profit / margin | $2.06 billion / 9.39% | $1.94 billion / 9.53% |
| Net income | $1.25 billion | $1.17 billion |
| Diluted EPS | $4.43 | $3.95 |
| Cash from operating activities | $1.61 billion | $1.39 billion |
| Capital expenditures | $560 million | $505 million |
| Cash and cash equivalents at year-end | $188 million | $158 million |
| Total debt obligations at year-end | $3.21 billion | $2.97 billion |
Same-store sales increased 0.9%, versus 2.8% in fiscal 2015; traffic was essentially unchanged and average transaction amount increased. The additional fiscal week contributed $398.7 million of sales. Fourth-quarter sales were $6.01 billion and diluted EPS was $1.49; the quarter included 14 weeks, limiting direct comparison with the prior-year 13-week quarter.
Gross margin fell 11 basis points, primarily from higher markdowns, a larger consumables mix and increased inventory shrink, partly offset by higher initial markups and lower transportation costs. SG&A rose 3 basis points as a share of sales, principally because retail labor costs grew faster than sales. Interest expense rose $10.9 million to $97.8 million, reflecting higher average debt and interest rates. The effective tax rate declined to 36.3% from 37.1%, including an $11 million benefit from the early adoption of share-based payment accounting guidance.
Inventory turnover was 4.7 times; inventory increased 6% overall but declined 0.7% per store. The company generated $1.61 billion in operating cash flow and used $990 million to repurchase approximately 12.4 million shares and $281 million for dividends. Share repurchases reduced the weighted-average diluted share count and contributed to EPS growth.
At year-end, current liabilities were $2.62 billion and current assets were $3.68 billion. Debt included $490.5 million of commercial paper and $500 million of 4.125% notes due July 2017, which the company expected to refinance. It reported $986.2 million available under its then-existing revolving facility, with $495.7 million described as incremental liquidity after maintaining availability to support commercial paper. A new $1.25 billion revolving facility and $175 million term facility were entered into on February 22, 2017. Operating lease commitments totaled $8.12 billion. Management stated that operating cash flow, cash, credit availability and debt-market access should cover obligations and planned spending for the next twelve months and several years.
Outlook, risks and unusual items
- For fiscal 2017, management planned approximately 1,000 store openings and approximately 900 remodels or relocations, with capital expenditures of $650–$700 million. It also planned about $70 million of investment, primarily in store-manager compensation and training.
- Management expected fiscal 2017 sales patterns to continue: consumables supporting traffic and non-consumables contributing higher margins and transaction size. It cited economic and competitive deflation, changes to nutrition-assistance programs, and customers’ rising rent and healthcare costs as pressures on traffic and sales.
- The company planned continued share repurchases at a lower amount than in 2016 and a quarterly dividend of $0.26 per share, subject to board discretion. No specific fiscal 2017 earnings or sales-growth target is provided in the filing text.
- Key operating risks include intense price competition, low same-store sales growth, inventory markdowns and shrink, labor-cost pressures, and execution risks in store growth and merchandising. Supply-chain disruptions, cybersecurity and information-system failures, product-safety or regulatory issues, and adverse weather or economic conditions could also affect results.
- Material or potentially material litigation includes an EEOC background-check case, California wage-and-hour claims, a consolidated class-action proceeding involving private-label motor oil, and shareholder litigation alleging misstatements about nutrition-assistance program impacts. The company could not estimate potential losses for several of these matters. It expected monetary sanctions exceeding $100,000 in a California environmental matter but did not believe that matter would be material to financial condition or results.
- Unusual items included $11.0 million of third-quarter 2016 lease-termination costs related to relocating stores to 42 acquired former Walmart Express locations, partly offset by a $4.5 million fourth-quarter expense reduction after leases for 12 closed locations were assigned or sold. Fiscal 2016 also included $12.2 million more disaster-related expense than fiscal 2015, much of it hurricane-related.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective at year-end.
Most important facts for investors to verify
- How comparable sales, customer traffic and margins develop after the weak 0.9% same-store sales increase, accounting for the extra fiscal week.
- Whether markdowns and inventory shrink improve, and whether growth in lower-margin consumables continues to weigh on gross margin.
- How the company refinances the $500 million notes due July 2017 and manages commercial paper, variable-rate exposure and planned shareholder returns.
- Whether planned store openings, remodels, distribution investments and the $650–$700 million capital program meet expected returns.
- Developments in the unquantified litigation matters and the potential balance-sheet effects of adopting lease-accounting standards, which management anticipated would have a material impact.