Dollar General Corporation — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended February 1, 2019 (fiscal 2018), not fiscal 2017 Q4. It also reports fourth-quarter results; fiscal 2018 and 2017 each comprised 52 weeks.
Business context and reporting period
Dollar General operates small-format discount stores selling consumables, seasonal goods, home products and apparel. At fiscal year-end it had 15,370 stores; the filing reports 15,472 stores across 44 states as of March 1, 2019. Consumables accounted for 77.5% of fiscal 2018 sales. The company reported 29 consecutive years of positive same-store sales growth.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $25.63 billion | $23.47 billion | +9.2% |
| Same-store sales growth | 3.2% | 2.7% | +0.5 percentage points |
| Gross profit | $7.80 billion | $7.22 billion | +8.1% |
| Gross margin | 30.45% | 30.77% | -32 basis points |
| Operating profit | $2.12 billion | $2.01 billion | +5.4% |
| Operating margin | 8.26% | 8.55% | -29 basis points |
| Net income | $1.59 billion | $1.54 billion | +3.3% |
| Diluted EPS | $5.97 | $5.63 | +6.0% |
| Operating cash flow | $2.14 billion | $1.80 billion | +18.9% |
| Capital expenditures | $734 million | $646 million | +13.6% |
For fiscal 2018 Q4, sales were $6.65 billion, operating profit $638.5 million, net income $483.2 million and diluted EPS $1.84. In Q4 fiscal 2017, the corresponding figures were $6.13 billion, $623.4 million, $712.2 million and $2.63. The prior-year quarter included a substantial tax benefit from U.S. tax reform, making the net income and EPS comparison unusually difficult.
At February 1, 2019, cash and cash equivalents were $235.5 million, total assets $13.20 billion, and total debt and other long-term obligations approximately $2.86 billion, down from $3.01 billion a year earlier. Shareholders’ equity was $6.42 billion. The company had no revolving-credit borrowings and reported $366.9 million of consolidated commercial paper outstanding; additional commercial paper held by a subsidiary was excluded from the consolidated balance sheet. Management said operating cash flow, cash, credit facilities and debt-market access should meet obligations and planned spending. The company was in compliance with credit-facility covenants.
The company repurchased 9.9 million shares for approximately $1.0 billion and paid $306.5 million in dividends during fiscal 2018. The Board raised the quarterly dividend to $0.32 per share in March 2019. Contractual operating lease payments totaled approximately $9.85 billion, separate from reported debt.
Material changes versus the prior comparable period
- Sales growth accelerated to 9.2% from 6.8%; same-store sales growth improved to 3.2% from 2.7%, mainly on higher average transaction amounts while traffic was essentially unchanged.
- Gross margin declined as sales shifted toward lower-margin consumables, markdowns and transportation costs increased, and the LIFO provision rose. Improved shrink and higher initial markups partly offset these pressures.
- SG&A was 22.20% of sales versus 22.21%, broadly flat as a percentage of sales; occupancy and depreciation costs were offset by lower repairs and maintenance.
- Net income rose more slowly than sales and operating profit, partly reflecting the higher effective tax rate: 21.1% versus 19.3%. Fiscal 2017 included a tax-reform-related benefit, including a provisional $335 million benefit.
- Operating cash flow increased, but inventory absorbed $521 million of cash, compared with $348 million the prior year. Inventory increased 14% overall and 7.3% per store.
- Debt declined, while share repurchases increased to approximately $1.0 billion from $580 million in fiscal 2017.
Outlook, commentary and risks
For fiscal 2019, management planned approximately 975 new stores, 1,000 remodels and 100 relocations. Capital expenditures were projected at $775 million to $825 million. The filing also describes approximately 1,100 stores to be remodeled or relocated in its capital-spending discussion; investors should clarify this difference in project counts.
Management highlighted tests of DG Fresh, a self-distribution model for fresh and frozen products, and Fast Track, intended to improve labor productivity, in-stock availability and convenience. Broader rollout and financial benefits were uncertain, and upfront costs could precede returns. The company planned to broaden its non-consumables merchandising initiative.
Tariffs then in effect on Chinese goods had no material fiscal 2018 impact, but management warned that increased rates or broader tariffs could affect costs, margins and customer budgets. Other stated risks include pressure on low- and fixed-income customers, intense retail competition, labor and occupancy cost increases, inventory shrink and markdowns, supply-chain disruption, cyber and information-system incidents, and execution risks from store growth and strategic initiatives.
Material contingencies include private-label motor-oil litigation, for which the company could not estimate a loss range; in March 2019, the court certified certain statewide classes. The company also described wage-and-hour and employment matters, some with potential exposure it could not estimate, while reporting preliminary, non-material settlements in certain cases. The filing expects approximately $8.0 billion each of right-of-use assets and lease liabilities upon adoption of the new lease standard. Auditors issued unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Confirm fiscal-year and Q4 comparisons, especially the effect of the prior-year tax-reform benefit on Q4 earnings and EPS.
- Track whether sales growth, traffic and transaction trends can offset lower gross margins and consumables-heavy mix.
- Assess inventory growth, shrink, markdowns and operating cash flow conversion.
- Verify execution and returns from planned store projects, capital spending, DG Fresh and Fast Track; reconcile the differing remodel/relocation counts.
- Follow motor-oil and employment litigation developments, including potential exposure that the filing says cannot be estimated.
- Evaluate liquidity and leverage alongside substantial lease commitments, commercial-paper refinancing needs, and the expected lease-accounting balance-sheet increase.
- Monitor tariff developments, customer affordability, labor and occupancy costs, and distribution capacity.