Dollar General Corporation — Form 10-Q Summary
Period: The filing covers the 13 weeks ended May 5, 2017, compared with the 13 weeks ended April 29, 2016. Although the request metadata identifies “2016 Q1,” the filing itself reports fiscal 2017 first-quarter results. The interim financial statements are unaudited and were reviewed by Ernst & Young.
Business context and results
Dollar General operated 13,601 stores in 44 states at quarter-end. It sells consumable and non-consumable merchandise through small-format discount stores. Net sales rose 6.5% to $5.610 billion; same-store sales increased 0.7%, as higher average transaction amounts were partly offset by lower customer traffic.
Key financial metrics
- Profitability: Gross profit was $1.699 billion, up 5.4%, but gross margin declined 34 basis points to 30.29%. SG&A rose 8.2% to $1.225 billion and increased 34 basis points as a share of sales to 21.84%. Operating profit fell 1.4% to $473.8 million; operating margin was 8.45%, versus 9.13%.
- Net income and EPS: Net income declined 5.3% to $279.5 million. Diluted EPS was $1.02, compared with $1.03. The effective tax rate increased to 37.2% from 35.4%, principally because a stock-compensation tax benefit of about $9 million recorded in the prior-year quarter did not recur.
- Cash flow: Operating cash flow was $510.5 million, up from $404.0 million. Investing activities used $143.4 million, mainly for property and equipment; financing activities used $349.0 million. Cash increased $18.1 million to $206.0 million. The operating cash-flow increase included favorable timing-related changes in income taxes payable and accounts payable.
- Liquidity and debt: Total debt, including current obligations, was approximately $3.0 billion; cash was $206.0 million. The company had $467.7 million of commercial paper outstanding and $175 million drawn under its term facility. It reported $1.24 billion of revolving-facility availability, of which $768.5 million could contribute incremental liquidity while preserving support for commercial paper. The company was in compliance with credit-facility covenants.
- Capital returns: Dividends paid were $0.26 per share, totaling $71.3 million. The company repurchased 1.3 million shares for $88.8 million, versus 2.7 million shares for $231.0 million a year earlier; approximately $844.6 million remained authorized.
Material changes and management commentary
- Sales growth reflected new stores and modest same-store growth. Management attributed pressure on traffic and comparable sales to customer economic conditions, changes to assistance programs, and deflationary pricing; commodity input costs were less deflationary than in prior quarters.
- Gross margin was pressured by higher markdowns and a greater mix of lower-margin consumables, including a shift toward lower-margin consumable departments. Retail labor, including store-manager compensation investments, and occupancy costs contributed to higher SG&A as a percentage of sales.
- The company issued $600 million of 3.875% senior notes due 2027 and used proceeds to redeem $500 million of 4.125% notes due 2017 and for general corporate purposes. The redemption resulted in a $3.4 million pretax loss. Management expected to refinance the $400 million of notes due in 2018.
- Management planned approximately 1,290 store openings and 760 relocations or remodels in fiscal 2017, assuming the anticipated acquisition of 322 store locations closes. The transaction was expected to close in June 2017, subject to customary conditions; conversion to the Dollar General banner was expected by the end of November. Projected fiscal 2017 capital expenditures were $715–$765 million.
- Management cited investments in store managers, merchandising, in-stock performance, shrink reduction, store formats, and distribution capacity. It expected the mix of consumables to remain a margin consideration, most pronounced in the second quarter.
Risks, contingencies, and unusual items
- Material uncertainties include California wage-and-hour litigation, nationwide and state motor-oil labeling and marketing claims, related New Mexico proceedings, and shareholder and derivative litigation tied to statements about the impact of changes to nutrition-assistance programs. The company could not estimate potential losses for these matters and warned adverse outcomes could materially affect results, cash flows, or financial position.
- A California environmental matter was settled for an amount greater than $100,000 but not material to the consolidated financial statements.
- Management expects the new lease-accounting standard to have a material impact because of the company’s substantial lease portfolio. It did not expect revenue-recognition adoption to have a material effect; adoption was planned for February 3, 2018.
- Management said liquidity from operations, cash, credit facilities, commercial paper, and debt-market access should cover obligations and expected needs. Risks include economic and competitive conditions, execution of store and supply-chain plans, inventory and shrink management, litigation, credit-rating changes, and the pending store-site acquisition.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for the quarter ended May 5, 2017, not a quarter identified as 2016 Q1.
- Track same-store sales, customer traffic, transaction size, merchandise mix, and gross-margin trends, particularly the expected second-quarter mix pressure.
- Assess operating cash flow quality and the effects of tax-payment and supplier-payment timing, alongside inventory growth and capital spending.
- Review debt maturities, commercial-paper refinancing support, borrowing availability, and the planned refinancing of 2018 notes.
- Monitor the 322-store acquisition and conversion timetable, the capital-expenditure outlook, and developments in the unquantified litigation matters.