Dollar General Corporation — Form 10-Q Summary
Reporting period: 13 weeks ended May 1, 2020, compared with the 13 weeks ended May 3, 2019. The filing’s cover page identifies this period; it does not correspond to the “2019 Q1” label in the request metadata. Dollar General operated 16,500 stores in 46 states at quarter-end.
Financial performance
- Sales: Net sales rose 27.6% to $8.448 billion. Same-store sales increased 21.7%, with growth in both customer traffic and average transaction amount. Consumables sales rose 28.6% to $6.703 billion.
- Profit and margins: Gross profit increased 29.6% to $2.596 billion; gross margin expanded 49 basis points to 30.72%. SG&A rose 16.0% to $1.729 billion, but declined as a share of sales by 204 basis points to 20.46%. Operating profit grew 69.2% to $866.8 million, with a 10.26% operating margin. Net income increased 68.9% to $650.4 million; diluted EPS was $2.56, up from $1.48.
- Cash flow: Operating cash flow was $1.736 billion, versus $574.2 million a year earlier. Investing activities used $195.0 million, including $195.4 million of property and equipment purchases. Financing activities provided $892.2 million. Cash increased to $2.674 billion from $240.3 million at January 31, 2020.
- Debt and liquidity: Long-term obligations were $3.968 billion, excluding operating lease liabilities; total debt principal was approximately $4.0 billion. The company issued $1.5 billion of senior notes in April (3.5% due 2030 and 4.125% due 2050). It had no consolidated commercial paper or revolving-facility borrowings at May 1, and reported about $1.06 billion of incremental revolving-facility liquidity after reserving availability for its commercial paper program. It was in compliance with credit-facility covenants.
- Other balance-sheet and shareholder metrics: Total assets were $24.848 billion; operating lease liabilities totaled $8.948 billion. Inventory was $4.107 billion, down 12% during the quarter. The company paid $90.6 million in dividends, or $0.36 per share, and repurchased $63.1 million of stock.
Changes and management commentary
Management attributed the exceptional sales and profit growth primarily to COVID-19-related customer demand, especially for consumables. Higher sales more than offset approximately $60 million in employee appreciation bonuses, increased hiring, distribution and transportation costs, and other health-and-safety expenses. Gross-margin improvement reflected lower markdowns and higher initial markups; expense leverage also benefited from sales growth. Interest expense rose $4.6 million to $30.5 million, mainly due to higher average debt balances. The effective tax rate increased to 22.2% from 20.8%.
Management cautioned that pandemic-driven demand and consumer behavior disrupted historical seasonal patterns and could continue to make quarterly results unusually variable. The company expects pandemic effects, including possible changes in demand, supply interruptions, higher operating costs, and economic weakness affecting core customers, to remain uncertain and potentially persist through 2020 or longer.
Outlook, risks and unusual items
- The company maintained its 2020 plans for approximately 1,000 new stores, 1,500 remodels and 80 relocations. Planned 2020 capital expenditures were $925 million to $975 million. It also planned to expand its Non-Consumable initiative to about 5,000 stores and operate up to ten DG Fresh distribution facilities serving approximately 12,000 stores by year-end.
- Share repurchases were temporarily suspended to strengthen liquidity; management said resumption could occur as early as the second quarter if deemed prudent. The board declared a $0.36-per-share dividend payable in July. Future dividends and repurchases remain subject to board discretion.
- COVID-19 risks include supply-chain and product availability disruptions, additional labor and safety costs, store or distribution-center closures, cybersecurity threats, and potential adverse effects from unemployment and weaker consumer spending. Management stated the pandemic’s duration and financial effects could not be predicted.
- Pending litigation includes motor-oil labeling and marketing matters. A New Mexico court denied the company’s motion to dismiss on May 4, 2020; the company’s appeal of class-certification rulings remains pending. Management said outcomes are uncertain, although it believes other pending legal matters are not expected to materially adversely affect the consolidated financial statements as a whole. A $31 million accrual for class-action and related matters was recorded in 2019.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the extraordinary 21.7% same-store sales increase and related margin and earnings gains persist after pandemic-driven demand normalizes.
- How pandemic-related costs, supply constraints, customer spending, and inventory availability affect subsequent periods and cash flows.
- The use of proceeds from the $1.5 billion debt issuance, interest burden, and liquidity after considering lease commitments and planned capital expenditures.
- Progress against store, remodel, DG Fresh, digital, and capital-spending plans, and the timing and scale of any resumed share repurchases.
- Developments in motor-oil litigation and other contingencies, including whether additional material liabilities or cash payments arise.