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DG > SEC Filings for DG > Form 10-Q on 5-Sep-2012All Recent SEC Filings

Show all filings for DOLLAR GENERAL CORP

Form 10-Q for DOLLAR GENERAL CORP


5-Sep-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended February 3, 2012. It also should be read in conjunction with the disclosure under "Cautionary Disclosure Regarding Forward-Looking Statements" in this report.

Executive Overview

We are the largest discount retailer in the United States by number of stores, with 10,203 stores located in 40 states as of August 3, 2012, the majority of which are located in the southern, southwestern, midwestern and eastern United States. We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise, home decor and domestics, and apparel. Our merchandise includes high quality national brands from leading manufacturers, as well as comparable quality private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box (small store) locations.

The customers we serve are value-conscious, and Dollar General has always been intensely focused on helping our customers make the most of their spending dollars. We believe our convenient store format and broad selection of high quality products at compelling values have driven our substantial growth and financial success over the years. Like other companies, we have been operating in an environment with heightened economic challenges and uncertainties in recent years. Consumers are facing low rates of employment, fluctuating food, gasoline and energy costs, rising medical costs, and continued weakness in housing and consumer credit markets, and the timetable and strength of any economic recovery remains uncertain. Nonetheless, as a result of our long-term mission of serving the value-conscious customer, coupled with a vigorous focus on improving our operating and financial performance, our financial results have been strong, and we are optimistic with regard to executing our operating priorities in 2012.

In recent years, we have emphasized the following four operating priorities, which we remain keenly focused on executing: (1) drive productive sales growth,
(2) increase our gross margins, (3) leverage process improvements and information technology to reduce costs, and (4) strengthen and expand Dollar General's culture of serving others.

Drive Productive Sales Growth. We drive productive sales growth by attempting to increase shopper frequency and transaction amount and maximize sales per square foot. In addition to our ongoing category management processes which help us determine the most productive merchandise offerings, 2012 sales growth initiatives include: improvement in


merchandise in-stock levels; further emphasis on the $1.00 price point; expansion of the number of coolers in approximately 1,200 existing stores; and the initial implementation of a merchandise allocation strategy based on store demographics. In addition, we expect our remodeled and relocated stores to enhance same-store sales growth. New store expansion is an important element of our overall growth strategy and currently includes expansion into several new markets, including portions of California, and the testing of larger store formats with expanded perishable foods. We opened a total of 625 new stores in 2011 and plan to open an additional 625 stores in 2012, of which 295 were opened in the first half of 2012. While traditional Dollar General stores remain our highest priority, representing 256 of the total new stores opened in 2012, we have also opened 21 new Dollar General Market stores and 18 Dollar General Plus stores and relocated or remodeled 46 traditional Dollar General stores to the Plus format this year. Dollar General Market and Dollar General Plus offer a broader selection of perishable foods than our traditional format allowing customers to complete a greater portion of their everyday food purchases at Dollar General.

Increase Gross Profit. We strive to increase gross profit and optimize our gross profit rate as a percentage of sales through effective category management, the expansion of private brand offerings, increased foreign sourcing, shrink reduction, transportation and distribution efficiencies and improvements to our pricing and markdown model, while remaining committed to our everyday low price strategy. Within our consumables category, we strive to offer the optimal balance of the most popular nationally advertised brands and our own private brands, which generally have higher gross profit rates than national brands. In recent years, sales growth in consumables, which generally have lower gross profit rates than non-consumables, has outpaced the growth in non-consumables, due in part to economic challenges faced by our customers which have impacted discretionary spending as well as our focus on expanding the consumables offerings in our stores. To some extent, the increased commodities costs we experienced in 2011 moderated in the first half of 2012. Diesel fuel prices were lower in the 2012 second quarter than in the corresponding 2011 period, contributing to our ability to lower transportation costs as a percentage of sales, although fuel prices have risen since the end of the second quarter. We opened two new distribution centers in the 2012 first quarter and announced our intent to open an additional distribution center in the northeastern U.S. in 2013 to help reduce the number of miles driven in connection with, and thus the cost of, delivering merchandise to our stores.

Leveraging Process Improvements and Information Technology to Reduce Costs. We are committed to extracting costs that do not affect the customer experience. In 2012, we have additional opportunities to utilize the capabilities of our workforce management system, implemented in 2011, which assists us in improving our store standards and overall customer experience by utilizing store workforce hours more effectively. In addition, we are in the early stages of a multi-year implementation of a comprehensive supply chain solution which we believe will help us improve our allocation of merchandise and reduce our overall costs of purchasing and delivering merchandise to our stores.

Strengthen and Expand Dollar General's Culture of Serving Others. For customers, we help them "Save time. Save money. Every day!" by providing clean, well-stocked stores with quality products at low prices. For employees, we strive to create an environment that attracts and retains key employees throughout the organization. We have significantly increased training


hours and access to computer-based learning for our store and field employees and are committed to developing and promoting employees within Dollar General. For the public, we give back to our store communities through our charitable and other efforts. For shareholders, we endeavor to meet expectations of an efficiently and profitably run organization that operates with compassion and integrity.

Focus on these four priorities through the strategies identified above has resulted in improved performance in the second quarter of 2012 over the comparable 2011 period in many of our key financial metrics. Basis points amounts referred to below are equal to 0.01% as a percentage of sales. Discussions of 2012 same-store sales increases are based on the comparable calendar weeks in 2011:

Total sales increased 10.4% to $3.95 billion. Sales in same-stores increased 5.1% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 53-week period ended August 3, 2012 were $218, up from $205 for the 52-week period ended July 29, 2011.

Operating profit increased by 10.6% and was essentially unchanged as a percentage of sales at 9.8%, as the result of improvement in SG&A of 15 basis points offset by a 13 basis point decline in our gross profit rate.

Gross profit, as a percentage of sales, was 32.0% in 2012 period compared to 32.1% in the 2011 period. The most significant factors positively affecting our gross profit rate were higher initial inventory markups, transportation efficiencies coupled with lower fuel costs, and the impact of a significant LIFO charge in the 2011 period that did not reoccur in the 2012 period. The most significant factors negatively affecting the gross profit rate included a heavier consumables weighting within the sales mix, higher markdowns, and a lesser impact from price increases compared to the prior year.

Selling, general and administrative expenses, or SG&A, as a percentage of sales, was 22.2% compared to 22.3% in the 2011 quarter, a decrease of 15 basis points. The improvement in SG&A, as a percentage of sales, is primarily due to the impact of additional efficiencies in workforce utilization and lower workers' compensation, general liability and benefits expenses in addition to the impact of increased sales. Higher advertising costs, in part due to our entrance into new markets, and fees associated with the continued increase in debit card usage, partially offset the improvements.

Interest expense decreased by $25.0 million to $35.7 million in the 2012 second quarter. Total long-term obligations as of August 3, 2012 were $2.89 billion, an increase of $107 million compared to the prior year. During the second quarter, we redeemed the remaining $450.7 million of our 11.875%/12.625% senior subordinated notes and issued $500 million of 4.125% senior notes. The 2012 second quarter includes a non-operating loss of $29.0 million ($17.7 million net of income taxes, or approximately $0.05 per diluted share) resulting from the redemption. The 2011 second quarter includes a non-operating loss of $58.1 million ($35.4 million net of


income taxes, or approximately $0.10 per diluted share) resulting from the redemption of $839.3 million aggregate principal amount of our 10.625% senior notes due 2015.

The effective income tax rate for the quarter was 34.1% compared to 36.8% in the prior year period. Increases in the effective tax rate associated with the expiration of various federal jobs and related credits were more than offset by decreases totaling $14.5 million or approximately $0.04 per diluted share associated with the adjustment of accruals due to the favorable resolution of income tax examinations.

Net income was $214.1 million, or $0.64 per diluted share, compared to net income of $146.0 million, or $0.42 per diluted share, in the 2011 second quarter. Diluted shares outstanding decreased by 10.1 million shares.

Cash generated from operating activities was $373.5 million. At August 3, 2012, we had a cash balance of $134.2 million.

Inventory turnover was 5.2 times on a rolling four-quarter basis. Improving our in-stock levels, while improving our inventory turns, remains a high priority. Inventories increased 3% on a per store basis over the 2011 second quarter.

During the first half of 2012, we opened 295 new stores, remodeled or relocated 416 stores, and closed 29 stores, resulting in a store count of 10,203 as of August 3, 2012.

The above discussion is a summary only. Readers should refer to the detailed discussion of our operating results below for the full analysis of our financial performance in the current year period as compared with the prior year period.

Results of Operations

Accounting Periods. We follow the concept of a 52-53 week fiscal year that ends on the Friday nearest to January 31. The following text contains references to years 2012 and 2011, which represent the 52-week fiscal year ending February 1, 2013 and the 53-week fiscal year ended February 3, 2012, respectively. References to the second quarter accounting periods for 2012 and 2011 contained herein refer to the 13-week accounting periods ended August 3, 2012 and July 29, 2011, respectively.

Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, our sales and gross profit rate in the fourth quarter have historically been higher than those achieved in each of the first three quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.


The following table contains results of operations data for the most recent 13-week and 26-week periods of each of 2012 and 2011, and the dollar and percentage variances among those periods:

(amounts in millions,       13 Weeks Ended         2012 vs. 2011         26 Weeks Ended         2012 vs. 2011
except per share        August 3,    July 29,    Amount       %      August 3,    July 29,    Amount       %
amounts)                   2012        2011      change    change       2012        2011      change    change
Net sales by
category:
Consumables             $  2,920.8   $ 2,611.1   $ 309.8      11.9 % $  5,798.1   $ 5,140.1   $ 658.0      12.8 %
% of net sales               73.97 %     73.03 %                          73.86 %     73.15 %
Seasonal                     536.7       502.6      34.2       6.8      1,061.2       959.6     101.6      10.6
% of net sales               13.59 %     14.06 %                          13.52 %     13.66 %
Home products                255.9       235.8      20.1       8.5        514.9       470.0      44.9       9.6
% of net sales                6.48 %      6.60 %                           6.56 %      6.69 %
Apparel                      235.2       225.8       9.4       4.2        475.6       457.1      18.5       4.0
% of net sales                5.96 %      6.31 %                           6.06 %      6.51 %
Net sales               $  3,948.7   $ 3,575.2   $ 373.5      10.4 % $  7,849.9   $ 7,026.9   $ 823.0      11.7 %
Cost of goods sold         2,685.4     2,426.9     258.6      10.7      5,358.4     4,791.2     567.2      11.8
% of net sales               68.01 %     67.88 %                          68.26 %     68.18 %
Gross profit               1,263.2     1,148.3     114.9      10.0      2,491.5     2,235.7     255.7      11.4
% of net sales               31.99 %     32.12 %                          31.74 %     31.82 %
Selling, general and
administrative
expenses                     876.0       798.3      77.7       9.7      1,719.9     1,564.1     155.8      10.0
% of net sales               22.18 %     22.33 %                          21.91 %     22.26 %
Operating profit             387.2       350.0      37.2      10.6        771.5       671.6      99.9      14.9
% of net sales                9.81 %      9.79 %                           9.83 %      9.56 %
Interest expense              35.7        60.6     (25.0 )   (41.2 )       72.7       126.2     (53.5 )   (42.4 )
% of net sales                0.90 %      1.70 %                           0.93 %      1.80 %
Other (income)
expense                       26.6        58.2     (31.7 )   (54.4 )       28.2        60.5     (32.3 )   (53.4 )
% of net sales                0.67 %      1.63 %                           0.36 %      0.86 %
Income before income
taxes                        325.0       231.2      93.8      40.6        670.6       484.9     185.6      38.3
% of net sales                8.23 %      6.47 %                           8.54 %      6.90 %
Income taxes                 110.9        85.1      25.7      30.2        243.0       181.9      61.1      33.6
% of net sales                2.81 %      2.38 %                           3.10 %      2.59 %
Net income              $    214.1   $   146.0   $  68.1      46.6 % $    427.6   $   303.0   $ 124.5      41.1 %
% of net sales                5.42 %      4.08 %                           5.45 %      4.31 %
Diluted earnings per
share                   $     0.64   $    0.42   $  0.22      52.4 % $     1.27   $    0.88   $  0.39      44.3 %

13 WEEKS ENDED AUGUST 3, 2012 AND JULY 29, 2011

Net Sales. The net sales increase in the 2012 second quarter reflects a same-store sales increase of 5.1% compared to the 2011 quarter. Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period. For the 2012 quarter, there were 9,468 same-stores which accounted for sales of $3.71 billion. Increases in customer traffic and average transaction amount contributed to the increase in same-store sales. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores.

We believe that the increase in sales reflects the impact of various operating and merchandising initiatives discussed in the Executive Overview, including the impact of improved


store standards, the expansion of our merchandise offerings, improved utilization of store square footage and enhanced marketing efforts.

Gross Profit. The gross profit rate as a percentage of sales was 32.0% in the 2012 period compared to 32.1% in the 2011 period. Consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2012 period than in the 2011 period. Higher initial markups were offset by lower price increases and higher markdowns than in the 2011 period. Lower diesel fuel rates and improved efficiencies resulted in lower transportation costs as a percentage of sales. We recorded a LIFO benefit of $0.5 million in the 2012 period compared to a LIFO provision of $10.7 million in the 2011 period.

Selling, General and Administrative ("SG&A") Expense. SG&A expense was 22.2% as a percentage of sales in the 2012 quarter compared to 22.3% in the 2011 quarter, an improvement of 15 basis points. Retail labor expense increased at a rate lower than our increase in sales, partially due to ongoing benefits of our workforce management system. Reductions in benefits costs and workers' compensation and general liability expenses contributed to the overall decrease in SG&A as a percentage of sales, which was also favorably impacted by other cost reduction and productivity initiatives as well as the 10.4% increase in sales. Costs that increased at a rate higher than our increase in sales include fees associated with the increased use of debit cards and advertising costs.

Interest Expense. The decrease in interest expense in the 2012 period from the 2011 period is due to lower average outstanding borrowings resulting from repurchases of indebtedness in 2012 and 2011 as well as lower all-in interest rates. See Liquidity and Capital Resources below for further discussion.

Other (Income) Expense. In the 2012 period, we recorded pretax losses of $29.0 million resulting from the redemption of our 11.875/12.625% senior subordinated notes, partially offset by a $2.5 million pretax gain resulting from the settlement of interest rate swaps. In the 2011 period, we recorded pretax losses of $58.1 million resulting from the redemption of our 10.625% senior notes.

Income Taxes. The effective income tax rate for the 2012 period was 34.1% compared to a rate of 36.8% for the 2011 period which represents a net decrease of 2.7%. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act's Retention Credit were more than offset by decreases associated with the adjustment of accruals due to the favorable resolution of income tax examinations.

26 WEEKS ENDED AUGUST 3, 2012 AND JULY 29, 2011

Net Sales. The net sales increase in the 2012 period reflects a same-store sales increase of 5.9% compared to the 2011 period. Same-stores include stores that have been open at least 13 months and remain open at the end of the reporting period. For 2012, there were 9,468 same-stores which accounted for sales of $7.37 billion. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores. Consumables sales increased at a higher rate than non-consumables, with the most significant growth related to


changes in and further expansion of our candy and snacks and perishables offerings. Sales growth in our home, basic apparel and seasonal categories has been impacted by weakness and uncertainties in the macroeconomic environment, and to some extent, by unfavorable weather trends.

Gross Profit. The gross profit rate as a percentage of sales was 31.7% in the 2012 period compared to 31.8% in the 2011 period. Consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2012 period than in the 2011 period. Higher initial markups were offset by lower price increases and higher markdowns than in the 2011 period. Improved efficiencies resulted in lower distribution and transportation costs as a percentage of sales. We recorded a LIFO provision of $1.1 million in the 2012 period compared to a $14.2 million provision in the 2011 period.

Selling, General and Administrative ("SG&A") Expense. SG&A expense was 21.9% as a percentage of sales in the 2012 period compared to 22.3% in the 2011 period, an improvement of 35 basis points reflecting the favorable impact of the 11.7% increase in sales as well as the effect of $13.1 million of expenses in the 2011 period related to the settlement of two legal matters which did not recur in the 2012 period. In addition, retail labor expense increased at a rate lower than our increase in sales, partially due to ongoing benefits of our workforce management system. Various cost reduction efforts affecting expenses also contributed to the overall decrease in SG&A as a percentage of sales. Costs that increased at a rate higher than our increase in sales include fees associated with the increased use of debit cards and advertising costs.

Interest Expense. The decrease in interest expense in the 2012 period from the 2011 period is due to lower average outstanding borrowings, resulting from our repurchases of indebtedness in 2012 and 2011 and lower all-in interest rates on our term loan primarily due to reduced notional amounts on interest rate swaps. See Liquidity and Capital Resources below for further discussion.

Other (Income) Expense. Other (income) expense in the 2012 period includes pretax losses totaling $29.0 million resulting from the repurchase of our 11.875%/12.125% senior subordinated notes, a $2.5 million pretax gain resulting from the settlement of interest rate swaps, and a pretax loss of $1.6 million resulting from the amendment of our senior secured revolving credit facility. Other (income) expense in the 2011 period includes pretax losses totaling $60.3 million resulting from the repurchase of our 10.625% senior notes.

Income Taxes. The effective income tax rate for the 2012 period was 36.2% compared to a rate of 37.5% for the 2011 period which represents a net decrease of 1.3%. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act's Retention Credit were more than offset by decreases associated with the adjustment of accruals due to the favorable resolution of income tax examinations.


Liquidity and Capital Resources

Credit Facilities

We have two senior secured credit facilities (the "Credit Facilities") which provide financing of up to $3.16 billion as of August 3, 2012. The Credit Facilities consist of a $1.964 billion senior secured term loan facility (the "Term Loan Facility") and a senior secured asset-based revolving credit facility (the "ABL Facility"). Total commitments under the ABL Facility are equal to $1.2 billion (of which up to $350.0 million is available for letters of credit), subject to borrowing base availability. The ABL Facility also includes borrowing capacity available for short-term borrowings referred to as swingline loans.

Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). As of August 3, 2012, the applicable margin for borrowings under the Term Loan Facility is 2.75% for LIBOR borrowings and 1.75% for base-rate borrowings, and the applicable margin for borrowings under the ABL Facility is 1.75% for LIBOR borrowings and 0.75% for base-rate borrowings. We are also required to pay a commitment fee to the lenders under the ABL Facility for any unutilized commitments, at a rate of 0.375% per annum as of August 3, 2012. The applicable margins for borrowings and the commitment fees under the ABL Facility are subject to adjustment each quarter based on average daily excess availability under the ABL Facility. We also must pay customary letter of credit fees.

Under the Term Loan Facility we would be required to prepay outstanding term loans, subject to certain exceptions, with: up to 50% of our annual excess cash flow (as defined in the credit agreement) if our total net leverage ratio was in excess of 6.0 to 1.0, which would be reduced to 25% and 0% if we were to maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively; the net cash proceeds of certain non-ordinary course asset sales or other dispositions of property; and the net cash proceeds of any incurrence of debt other than proceeds from debt permitted under the senior secured credit agreement. Through August 3, 2012, no prepayments have been required under such prepayment provisions. The Term Loan Facility can be prepaid in whole or in part at any time.

We amended the Term Loan Facility in March 2012 which resulted in the extension of the maturity on $879.7 million of the Term Loan Facility to July 6, 2017. The remaining $1.08 billion of the Term Loan Facility will mature on July 6, 2014. The applicable margin for borrowings under the Term Loan Facility remains unchanged.

We also amended the ABL Facility in March 2012. The primary effects of the amendment were to extend the maturity of the ABL Facility to July 6, 2014, and to increase the total commitment from $1.031 billion to $1.2 billion. The amendment resulted in the write-off of a portion ($1.6 million) of existing debt issue costs related to the ABL Facility.

There is no amortization of the principal balance of the ABL Facility. In addition, we are required to prepay the ABL Facility, subject to certain exceptions, with the net cash proceeds of all non-ordinary course asset sales or other dispositions of revolving facility collateral (as defined in the senior secured credit agreement); and to the extent such extensions of credit


exceed the then current borrowing base. Through August 3, 2012, no prepayments have been required under any prepayment provisions.

We may voluntarily repay outstanding loans under the Term Loan Facility or the . . .

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