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DG > SEC Filings for DG > Form 10-Q on 11-Dec-2012All Recent SEC Filings

Show all filings for DOLLAR GENERAL CORP

Form 10-Q for DOLLAR GENERAL CORP


11-Dec-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 10,371 stores located in 40 states as of November 2, 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, as well as non-consumable products such as seasonal merchandise, home decor and domestics, and apparel. Our merchandise includes high quality national brands from leading manufacturers, along with 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.

Dollar General has always been intensely focused on helping our value-conscious 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.

We remain keenly focused on executing the following four operating priorities:
(1) drive productive sales growth, (2) increase our gross profit margins, (3) leverage process improvements and information technology to reduce costs, and
(4) strengthen and expand Dollar General's culture of serving others. We are optimistic with regard to executing our operating priorities for the remainder of 2012, although we expect heightened competition with regard to pricing and advertising which could negatively impact our sales and margin results. We also expect that the ongoing economic uncertainties may continue to impact our customers' discretionary spending.

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 select stores; and the initial implementation of a merchandise allocation strategy to optimize square footage utilization in existing stores. We also are testing larger store formats with an expanded selection of perishable foods and with merchandise allocations based on store demographics. While we believe we are prepared for the upcoming 2012 fourth quarter holiday season to meet the needs of our customers and to provide the convenience and value they expect, as noted above, we expect the pressures on discretionary spending to continue throughout the remainder of the year and have planned accordingly. Looking forward to 2013, in response to competitive pressures and based on market tests, we are proceeding with plans to offer tobacco products to our customers. In addition, a labor dispute at West Coast ports has resulted in a work stoppage that was recently resolved. Labor uncertainties also exist at East Coast ports which, if not resolved, could result in a work stoppage. Like many retailers, we are dependent on these ports which are owned and controlled by outside third parties. Protracted work stoppages or slowdowns as well as extended recovery time following any resolution of such labor disputes, could have a material adverse impact on our sales, gross profit and net income results.

New store expansion, remodels and relocations are important elements of our overall growth strategy. In the first three quarters of 2012, we opened 479 of the 625 planned new stores for 2012. While traditional Dollar General stores remain our highest priority, representing 421 of the total new stores opened in 2012, we have also opened 34 new Dollar General Market stores and 24 Dollar General Plus stores and relocated or remodeled 82 traditional Dollar General stores to the Plus format this year. Dollar General Market and Dollar General Plus offer a broader selection of perishable foods and certain non-consumable products than our traditional format allowing customers to complete a greater portion of their everyday 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 seek 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 that in non-consumables due partly 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. The increased commodities costs we experienced in 2011 have moderated in 2012; as a result, increases in our selling prices have abated. Sales of non-consumables, including seasonal, home, and apparel merchandise, remain an important factor in serving our customers and increasing our gross margin rate. See "Drive Productive Sales Growth" above for a discussion of uncertainties relating to labor issues at West Coast and East Coast ports.

Leveraging Process Improvements and Information Technology to Reduce Costs. We remain committed to extracting costs that do not affect the customer experience. Our store managers continue to utilize the capabilities of our workforce management system to more effectively schedule store workforce hours, thus aiding improvement in our store standards and overall customer experience. In addition, we are in the early stages of a multi-year implementation of a comprehensive supply chain solution which we believe will help 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. We help customers "Save time. Save money. Every day!" by providing clean, well-stocked stores with quality products at low prices. We strive to create an environment that attracts and retains key employees throughout the organization. To this end, 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. We give back to our store communities through our charitable and other efforts. We also endeavor to meet expectations of an efficiently and profitably run organization that operates with compassion and integrity.

Focus on these four priorities primarily through the strategies identified above has resulted in improved performance in the third 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 10.3% to $3.96 billion. Sales in same-stores increased 4.0% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 53-week period ended November 2, 2012 were $219, up from $207 for the 52-week period ended October 28, 2011.

Operating profit increased by 16.2% and increased 47 basis points, as a percentage of sales, to 9.1%, due to the 58 basis points improvement in selling, general and administrative expenses ("SG&A") offset by an 11 basis point decline in our gross profit rate.

Gross profit, as a percentage of sales, was 30.9% in the 2012 period compared to 31.0% in the 2011 period. The most significant factors positively affecting our gross profit rate in the 2012 quarter were higher inventory markups, the impact of a significant LIFO charge in the 2011 period that did not recur in the 2012 period and transportation efficiencies. The most significant factors negatively affecting the gross profit rate included higher markdowns, a lesser impact from price increases compared to the prior year, a heavier consumables weighting within the sales mix and a higher shrink rate.

SG&A, as a percentage of sales, was 21.8% compared to 22.4% in the 2011 quarter, a decrease of 58 basis points. The improvement in SG&A, as a percentage of sales, is primarily due to the impact of significant efficiencies in workforce utilization and the impact of increased sales.

Interest expense decreased by $10.9 million to $27.7 million in the 2012 third quarter, due to a lower average interest rate on our outstanding long-term obligations, primarily as a result of the refinancing of our senior subordinated notes.

The effective income tax rate for the quarter was 37.4% compared to 37.1% in the prior year period.


Net income was $207.7 million, or $0.62 per diluted share, compared to net income of $171.2 million, or $0.50 per diluted share, in the 2011 third quarter. Diluted shares outstanding decreased by 11.8 million shares.

Cash generated from operating activities was $690.9 million, a 14.3% increase over the 2011 period. At November 2, 2012, we had a cash balance of $142.6 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 5.5% on a per store basis over the comparable 2011 period.

During 2012, we have opened 479 new stores, remodeled or relocated 591 stores, and closed 45 stores, resulting in a store count of 10,371 as of November 2, 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 convention 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 third quarter accounting periods for 2012 and 2011 contained herein refer to the 13-week accounting periods ended November 2, 2012 and October 28, 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 39-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         39 Weeks Ended          2012 vs. 2011
except per share         Nov. 2,     Oct. 28,     Amount       %       Nov. 2,      Oct. 28,     Amount       %
amounts)                  2012         2011       change    change       2012         2011       change     change
Net sales by
category:
Consumables             $ 3,004.2    $ 2,705.8    $ 298.5      11.0 % $  8,802.4   $  7,845.9   $   956.4     12.2 %
% of net sales              75.78 %      75.26 %                           74.50 %      73.86 %
Seasonal                    471.5        433.9       37.6       8.7      1,532.8      1,393.6       139.2     10.0
% of net sales              11.89 %      12.07 %                           12.97 %      13.12 %
Home products               257.9        237.0       21.0       8.8        772.8        707.0        65.9      9.3
% of net sales               6.51 %       6.59 %                            6.54 %       6.66 %
Apparel                     230.9        218.6       12.4       5.7        706.6        675.7        30.9      4.6
% of net sales               5.83 %       6.08 %                            5.98 %       6.36 %
Net sales               $ 3,964.6    $ 3,595.2    $ 369.4      10.3 % $ 11,814.5   $ 10,622.1   $ 1,192.4     11.2 %
Cost of goods sold        2,738.5      2,479.4      259.1      10.5      8,096.9      7,270.6       826.3     11.4
% of net sales              69.07 %      68.96 %                           68.53 %      68.45 %
Gross profit              1,226.1      1,115.8      110.3       9.9      3,717.6      3,351.5       366.1     10.9
% of net sales              30.93 %      31.04 %                           31.47 %      31.55 %
Selling, general and
administrative
expenses                    864.7        804.9       59.8       7.4      2,584.7      2,369.0       215.7      9.1
% of net sales              21.81 %      22.39 %                           21.88 %      22.30 %
Operating profit            361.4        310.9       50.5      16.2      1,132.9        982.6       150.4     15.3
% of net sales               9.12 %       8.65 %                            9.59 %       9.25 %
Interest expense             27.7         38.6      (10.9 )   (28.2 )      100.5        164.8       (64.4 )  (39.0 )
% of net sales               0.70 %       1.07 %                            0.85 %       1.55 %
Other (income)
expense                       1.7          0.1       (1.7 )       -         30.0         60.6       (30.6 )  (50.5 )
% of net sales               0.04 %       0.00 %                            0.25 %       0.57 %
Income before income
taxes                       331.9        272.2       59.7      21.9      1,002.5        757.2       245.3     32.4
% of net sales               8.37 %       7.57 %                            8.49 %       7.13 %
Income taxes                124.2        101.1       23.2      22.9        367.3        283.0        84.3     29.8
% of net sales               3.13 %       2.81 %                            3.11 %       2.66 %
Net income              $   207.7    $   171.2    $  36.5      21.3 % $    635.2   $    474.2   $   161.1     34.0 %
% of net sales               5.24 %       4.76 %                            5.38 %       4.46 %
Diluted earnings per
share                   $    0.62    $    0.50    $  0.12      24.0 % $     1.89   $     1.37   $    0.52     38.0 %

13 WEEKS ENDED NOVEMBER 2, 2012 AND OCTOBER 28, 2011

Net Sales. The net sales increase in the 2012 third quarter reflects a 4.0% same-store sales increase 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 9,624 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. 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. We were pleased with the sales growth in our home and seasonal categories as well as certain basic apparel departments. Overall, hanging apparel sales were weak.


We believe that the increase in sales also 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 30.9% in the 2012 period compared to 31.0% in the 2011 period. The most significant factors positively affecting our gross profit rate in the 2012 quarter were higher inventory markups, the impact of a significant LIFO charge in the 2011 period ($11 million) that did not recur in the 2012 period and transportation efficiencies. The most significant factors negatively affecting the gross profit rate included higher markdowns, a lesser impact from price increases compared to the prior year, a heavier consumables weighting within the sales mix and a higher shrink rate.

SG&A. SG&A was 21.8% as a percentage of sales in the 2012 quarter compared to 22.4% in the 2011 quarter, an improvement of 58 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. A decrease in incentive compensation also contributed to the overall decrease in SG&A as a percentage of sales. Workers' compensation and general liability expenses increased at a rate lower than the increase in sales. SG&A results for the 2012 quarter also reflect the favorable impact of other cost reduction and productivity initiatives as well as the 10.3% increase in sales. Costs that increased at a rate higher than our sales increase include fees associated with increased debit card usage.

Interest Expense. The decrease in interest expense in the 2012 period from the 2011 period is primarily due to lower all-in interest rates. See Liquidity and Capital Resources below for further discussion.

Other (Income) Expense. In the 2012 period, we recorded fees of $1.7 million to banks for costs relating to the waiver of certain restrictions with regard to our repurchase of $250.0 million of our outstanding common stock. These fees were reimbursed by Buck Holdings, L.P. (which is controlled by KKR and Goldman Sachs & Co.) and such reimbursement was recorded as a capital contribution.

Income Taxes. The effective income tax rate for the 2012 period was 37.4% compared to a rate of 37.1% for the 2011 period which represents a net increase of 0.3%. This increase in the effective tax rate is primarily associated with state income tax items. The 2011 period benefited from decreases in state income tax reserves while the 2012 period included expense associated with an increase in reserves. In addition, both periods benefited from decreases in a state income tax valuation allowance associated with state income tax credits; however, the 2011 period's benefit exceeded the 2012 period's benefit.

39 WEEKS ENDED NOVEMBER 2, 2012 AND OCTOBER 28, 2011

Net Sales. The net sales increase in the 2012 period reflects a same-store sales increase of 5.3% 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 9,624 same-stores which accounted for sales of $11.06 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 candy and snacks, perishables and our health and beauty offerings. We have been pleased with the sales growth in our home and seasonal categories and certain basic apparel departments in the 39-week 2012 period, although hanging apparel sales have remained weak.

Gross Profit. The gross profit rate as a percentage of sales was 31.5% in the 2012 period compared to 31.6% in the 2011 period. Factors favorably impacting our gross profit rate include a significantly lower LIFO provision, higher inventory markups and improved transportation efficiencies. These positive factors were offset by higher markdowns and lower price increases than in the 2011 period. In addition, consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2012 period than in the 2011 period. We recorded a LIFO provision of $1.2 million in the 2012 period compared to a $25.4 million provision in the 2011 period.

SG&A. SG&A was 21.9% as a percentage of sales in the 2012 period compared to 22.3% in the 2011 period, an improvement of 42 basis points partially due to the favorable impact of the 11.2% 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 sales increase include fees associated with the increased use of debit cards and advertising.

Interest Expense. The decrease in interest expense in the 2012 period from the 2011 period is due to lower average outstanding long-term obligations, resulting from our repurchases of indebtedness in 2012 and 2011 and lower all-in interest rates. 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, the $1.7 million bank waiver fees which were reimbursed by Buck Holdings, L.P. as discussed above, 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 36.6% compared to a rate of 37.4% for the 2011 period which represents a net decrease of 0.8%. 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), the expiration of the Hire Act's Retention Credit and an increase in the state income tax rate (the 2011 period benefited from decreases in state income tax reserves while the 2012 period included expense associated with an increase in reserves) 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 November 2, 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 November 2, 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 November 2, 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 were to exceed 5.0 to 1.0; 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 November 2, 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.

On October 9, 2012, the Term Loan and ABL Facilities were further amended to add additional capacity for the Company to repurchase, redeem or otherwise acquire shares of its capital stock, not to exceed $250 million. The Company incurred a fee of $1.7 million associated with these amendments, which was reimbursed to the Company by Buck Holdings, L.P.


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