dg_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 3, 2018

 

Commission File Number: 001-11421

 

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

TENNESSEE

 

61-0502302

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

100 MISSION RIDGE

GOODLETTSVILLE, TN  37072

(Address of principal executive offices, zip code)

 

Registrant’s telephone number, including area code:  (615) 855-4000

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

The registrant had 265,534,401 shares of common stock outstanding on August 24, 2018.

 

 

 


 

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

 

 

 

 

 

 

 

    

August 3,

    

February 2,

 

 

 

2018

 

2018

 

 

 

(Unaudited)

 

(See Note 1)

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

265,288

 

$

267,441

 

Merchandise inventories

 

 

3,896,432

 

 

3,609,025

 

Income taxes receivable

 

 

68,353

 

 

108,265

 

Prepaid expenses and other current assets

 

 

287,753

 

 

263,121

 

Total current assets

 

 

4,517,826

 

 

4,247,852

 

Net property and equipment

 

 

2,857,274

 

 

2,701,282

 

Goodwill

 

 

4,338,589

 

 

4,338,589

 

Other intangible assets, net

 

 

1,200,322

 

 

1,200,428

 

Other assets, net

 

 

29,938

 

 

28,760

 

Total assets

 

$

12,943,949

 

$

12,516,911

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

1,909

 

$

401,345

 

Accounts payable

 

 

2,294,996

 

 

2,009,771

 

Accrued expenses and other

 

 

611,389

 

 

549,658

 

Income taxes payable

 

 

7,250

 

 

4,104

 

Total current liabilities

 

 

2,915,544

 

 

2,964,878

 

Long-term obligations

 

 

2,776,811

 

 

2,604,613

 

Deferred income taxes

 

 

569,690

 

 

515,702

 

Other liabilities

 

 

302,962

 

 

305,944

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

Common stock

 

 

232,340

 

 

235,141

 

Additional paid-in capital

 

 

3,222,233

 

 

3,196,462

 

Retained earnings

 

 

2,928,064

 

 

2,698,352

 

Accumulated other comprehensive loss

 

 

(3,695)

 

 

(4,181)

 

Total shareholders’ equity

 

 

6,378,942

 

 

6,125,774

 

Total liabilities and shareholders' equity

 

$

12,943,949

 

$

12,516,911

 

 

See notes to condensed consolidated financial statements.

 

1


 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the 13 weeks ended

 

For the 26 weeks ended

 

 

    

August 3,

    

August 4,

    

August 3,

    

August 4,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net sales

 

$

6,443,309

 

$

5,828,305

 

$

12,557,772

 

$

11,437,930

 

Cost of goods sold

 

 

4,468,436

 

 

4,037,783

 

 

8,720,650

 

 

7,948,425

 

Gross profit

 

 

1,974,873

 

 

1,790,522

 

 

3,837,122

 

 

3,489,505

 

Selling, general and administrative expenses

 

 

1,429,397

 

 

1,297,376

 

 

2,801,462

 

 

2,522,564

 

Operating profit

 

 

545,476

 

 

493,146

 

 

1,035,660

 

 

966,941

 

Interest expense

 

 

25,451

 

 

23,748

 

 

50,224

 

 

48,752

 

Other (income) expense

 

 

1,019

 

 

 —

 

 

1,019

 

 

3,502

 

Income before income taxes

 

 

519,006

 

 

469,398

 

 

984,417

 

 

914,687

 

Income tax expense

 

 

111,769

 

 

174,615

 

 

212,328

 

 

340,415

 

Net income

 

$

407,237

 

$

294,783

 

$

772,089

 

$

574,272

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.53

 

$

1.08

 

$

2.89

 

$

2.09

 

Diluted

 

$

1.52

 

$

1.08

 

$

2.88

 

$

2.09

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

266,457

 

 

273,690

 

 

267,362

 

 

274,191

 

Diluted

 

 

267,226

 

 

274,132

 

 

268,180

 

 

274,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.29

 

$

0.26

 

$

0.58

 

$

0.52

 

 

See notes to condensed consolidated financial statements.

 

2


 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the 13 weeks ended

 

For the 26 weeks ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

 

$

407,237

 

$

294,783

    

$

772,089

 

$

574,272

 

Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $86, $125, $172 and $253, respectively

 

 

244

 

 

205

    

 

487

 

 

406

 

Comprehensive income

 

$

407,481

 

$

294,988

    

$

772,576

 

$

574,678

 

 

See notes to condensed consolidated financial statements.

 

3


 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

For the 26 weeks ended

 

 

    

August 3,

    

August 4,

     

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

772,089

 

$

574,272

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

221,511

 

 

197,616

 

Deferred income taxes

 

 

12,500

 

 

6,750

 

Loss on debt retirement

 

 

1,019

 

 

3,502

 

Noncash share-based compensation

 

 

21,779

 

 

16,839

 

Other noncash (gains) and losses

 

 

12,120

 

 

11,359

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Merchandise inventories

 

 

(292,934)

 

 

(205,385)

 

Prepaid expenses and other current assets

 

 

(25,727)

 

 

(43,240)

 

Accounts payable

 

 

270,862

 

 

292,074

 

Accrued expenses and other liabilities

 

 

61,096

 

 

26,751

 

Income taxes

 

 

43,058

 

 

(92,940)

 

Other

 

 

(84)

 

 

(1,368)

 

Net cash provided by (used in) operating activities

 

 

1,097,289

 

 

786,230

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(370,968)

 

 

(314,050)

 

Proceeds from sales of property and equipment

 

 

1,349

 

 

343

 

Net cash provided by (used in) investing activities

 

 

(369,619)

 

 

(313,707)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of long-term obligations

 

 

499,495

 

 

599,556

 

Repayments of long-term obligations

 

 

(575,664)

 

 

(750,584)

 

Net increase (decrease) in commercial paper outstanding

 

 

(149,400)

 

 

25,000

 

Costs associated with issuance and retirement of debt

 

 

(4,384)

 

 

(9,524)

 

Repurchases of common stock

 

 

(349,538)

 

 

(163,736)

 

Payments of cash dividends

 

 

(154,708)

 

 

(142,339)

 

Other equity and related transactions

 

 

4,376

 

 

(4,638)

 

Net cash provided by (used in) financing activities

 

 

(729,823)

 

 

(446,265)

 

Net increase (decrease) in cash and cash equivalents

 

 

(2,153)

 

 

26,258

 

Cash and cash equivalents, beginning of period

 

 

267,441

 

 

187,915

 

Cash and cash equivalents, end of period

 

$

265,288

 

$

214,173

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

 

$

77,541

 

$

69,912

 

 

See notes to condensed consolidated financial statements.

4


 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by U.S. GAAP for annual financial statements or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of February 2, 2018 which was derived from the audited consolidated financial statements at that date. Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2018 for additional information.

 

The Company’s fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2018 fiscal year is scheduled to be a 52-week accounting period ending on February 1, 2019, and the 2017 fiscal year was a 52-week accounting period that ended on February 2, 2018.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position as of August 3, 2018 and results of operations for the 13-week and 26-week accounting periods ended August 3, 2018 and August 4, 2017 have been made.

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Because the Company’s business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

The Company uses the last-in, first-out (“LIFO”) method of valuing inventory. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded a LIFO provision (benefit) of $3.4 million and $(0.5) million in the respective 13-week periods, and $5.5 million and $0.3 million in the respective 26-week periods, ended August 3, 2018 and August 4, 2017. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued comprehensive new accounting standards related to the recognition of revenue and in August 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017. The Company adopted this guidance using the modified retrospective approach effective February 3, 2018, and such adoption had no effect on the Company’s consolidated results of operations, financial position or cash flows.  

 

In February 2016, the FASB issued new guidance related to lease accounting, which when effective will require a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. As originally issued, this guidance required a modified retrospective approach for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. In July 2018, the FASB issued additional guidance which allows companies to record the cumulative effect

5


 

of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption as an alternative to the modified retrospective approach. The Company formed a project team to assess and implement the standard, which has completed its internal evaluation of existing contractual arrangements for embedded leases. The project team is also testing computations in the Company’s lease administration system, integrating interfaces between the lease administration system and the enterprise resource planning systems, identifying and implementing new processes and controls to ensure compliance, and is in the process of evaluating and documenting the Company’s accounting conclusions related to the new standard. As a result of the efforts of this project team, the Company has identified its store leases as the area in which it would most likely be affected by the new guidance. The Company’s assessment of the impact that adoption of this guidance will have on its consolidated financial statements is ongoing, and the Company anticipates a material impact because it is party to a significant number of lease contracts for its stores.

 

In October 2016, the FASB issued amendments to existing guidance related to accounting for intra-entity transfers of assets other than inventory, which affects the Company’s historical accounting for intra-entity transfers of certain intangible assets. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance effective February 3, 2018 which resulted in an increase in deferred income tax liabilities and a decrease in retained earnings of $41.3 million.

 

In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The amendments should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition.  The Company currently does not anticipate a material effect on its consolidated results of operations, financial position or cash flows to result from the adoption of this guidance.

 

2. Earnings per share

 

Earnings per share is computed as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended August 3, 2018

 

 

13 Weeks Ended August 4, 2017

 

 

   

 

    

Weighted

   

 

  

  

 

   

Weighted

   

 

 

 

 

Net

 

Average

 

Per Share

 

 

Net

 

Average

 

Per Share

 

 

 

Income

 

Shares

 

Amount

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share

 

$

407,237

 

266,457

 

$

1.53

 

 

$

294,783

 

273,690

 

$

1.08

 

Effect of dilutive share-based awards

 

 

 

 

769

 

 

 

 

 

 

 

 

442

 

 

 

 

Diluted earnings per share

 

$

407,237

 

267,226

 

$

1.52

 

 

$

294,783

 

274,132

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26 Weeks Ended August 3, 2018

 

 

26 Weeks Ended August 4, 2017

 

 

   

 

   

Weighted

   

 

  

  

 

   

Weighted

   

 

 

 

 

Net

 

Average

 

Per Share

 

 

Net

 

Average

 

Per Share

 

 

 

Income

 

Shares

 

Amount

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share

 

$

772,089

 

267,362

 

$

2.89

 

 

$

574,272

 

274,191

 

$

2.09

 

Effect of dilutive share-based awards

 

 

 

 

818

 

 

 

 

 

 

 

 

483

 

 

 

 

Diluted earnings per share

 

$

772,089

 

268,180

 

$

2.88

 

 

$

574,272

 

274,674

 

$

2.09

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined based on the dilutive effect of share-based awards using the treasury stock method.

 

Share-based awards that were outstanding at the end of the respective periods, but were not included in the computation of diluted earnings per share because the effect of exercising such awards would be antidilutive, were

6


 

0.9 million and 2.6 million in the 2018 and 2017 13-week periods, and 0.9 million and 2.6 million in the 2018 and 2017 26-week periods, respectively.

 

3.Income taxes

 

Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns.

 

Income tax reserves are determined using the methodology established by accounting standards for income taxes which require companies to assess each income tax position taken using the following two-step approach. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position.

 

The Company’s 2013 and earlier tax years are not open for further examination by the Internal Revenue Service (“IRS”). The IRS, at its discretion, may choose to examine the Company’s 2014 through 2016 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, with few exceptions, the Company’s 2014 and later tax years remain open for examination by the various state taxing authorities.

 

As of August 3, 2018, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $1.1 million, $0.8 million and $0.9 million, respectively, for a total of $2.8 million. This total amount is reflected in noncurrent Other liabilities in the condensed consolidated balance sheet.

 

The Company’s reserve for uncertain tax positions will not be reduced in the coming twelve months as a result of expiring statutes of limitations.  As of August 3, 2018, approximately $1.1 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The Company has not fully completed its accounting for the income tax effects of the TCJA.  As discussed in SEC Staff Accounting Bulletin No. 118, the accounting for the TCJA should be completed within one year from enactment.  During the 26-week period ended August 3, 2018, the Company made no adjustments to the provisional amounts recorded at February 2, 2018.  Any adjustments to the provisional amounts recorded at February 2, 2018 will be reflected upon the completion of the Company’s accounting for the TCJA.

 

The effective income tax rates for the 13-week and 26-week periods ended August 3, 2018 were 21.5% and 21.6%, respectively, compared to rates of 37.2% and 37.2%, respectively, for the 13-week and 26-week periods ended August 4, 2017. The tax rates for the 2018 13-week and 26-week periods were lower than the comparable 2017 13-week and 26-week periods primarily due to the federal tax law changes contained in the TCJA, including the change in the federal income tax rate to 21% in the 2018 periods compared to 35% in the 2017 periods. 

 

7


 

4.Current and long-term obligations

 

Current and long-term obligations consist of the following:

 

 

 

 

 

 

 

 

 

 

    

August 3,

    

February 2,

 

(In thousands)

 

2018

 

2018

 

Senior unsecured credit facilities

 

 

 

 

 

 

 

Term Facility

 

$

 —

 

$

175,000

 

Revolving Facility

 

 

 —

 

 

 —

 

1.875% Senior Notes due April 15, 2018 (net of discount of $16)

 

 

 —

 

 

399,984

 

3.250% Senior Notes due April 15, 2023 (net of discount of $1,204 and $1,322)

 

 

898,796

 

 

898,678

 

4.150% Senior Notes due November 1, 2025 (net of discount of $598 and $632)

 

 

499,402

 

 

499,368

 

3.875% Senior Notes due April 15, 2027 (net of discount of $395 and $413)

 

 

599,605

 

 

599,587

 

4.125% Senior Notes due May 1, 2028 (net of discount of $491)

 

 

499,509

 

 

 —

 

Unsecured commercial paper notes

 

 

280,800

 

 

430,200

 

Capital lease obligations

 

 

11,659

 

 

12,321

 

Tax increment financing due February 1, 2035

 

 

7,335

 

 

7,335

 

Debt issuance costs, net

 

 

(18,386)

 

 

(16,515)

 

 

 

 

2,778,720

 

 

3,005,958

 

Less: current portion

 

 

(1,909)

 

 

(401,345)

 

Long-term portion

 

$

2,776,811

 

$

2,604,613

 

 

At August 3, 2018, the Company maintained a $1.25 billion senior unsecured revolving credit facility (the “Revolving Facility”) that provides for the issuance of letters of credit up to $175.0 million and is scheduled to mature on February 22, 2022.

 

Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of August 3, 2018 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility.  As of August 3, 2018, the commitment fee rate was 0.15%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings.

 

The Revolving Facility contains a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional liens; sell all or substantially all of the Company’s assets; consummate certain fundamental changes or change in the Company’s lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of August 3, 2018, the Company was in compliance with all such covenants.  The Revolving Facility also contains customary events of default.

 

On June 11, 2018, the Company voluntarily prepaid the entire $175.0 million outstanding balance of its senior unsecured term loan facility and recognized an associated loss of $1.0 million which is reflected in Other (gains) losses in the consolidated statement of income for the 13-week and 26-week periods ended August 3, 2018. As of August 3, 2018, the Company had no outstanding borrowings, outstanding letters of credit of $9.1 million, and borrowing availability of $1.24 billion under the Revolving Facility that, due to its intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $774.1 million. In addition, as of August 3, 2018, the Company had outstanding letters of credit of $38.9 million which were issued pursuant to separate agreements.

 

As of August 3, 2018, the Company had a commercial paper program under which the Company may issue unsecured commercial paper notes (the “CP Notes”) from time to time in an aggregate amount not to exceed $1.0 billion outstanding at any time.  The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness.  The Company intends to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time.  As of August 3, 2018, the Company’s condensed consolidated balance sheet reflected

8


 

outstanding unsecured CP Notes of $280.8 million classified as long-term obligations due to its intent and ability to refinance these obligations as long-term debt. An additional $186.0 million of outstanding CP Notes were held by a wholly-owned subsidiary of the Company and are therefore not reflected on the condensed consolidated balance sheet. As of August 3, 2018, the outstanding CP Notes had a weighted average borrowing rate of 2.3%. 

 

On April 10, 2018, the Company issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on May 1, 2028. Interest on the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year, with the first payment commencing on November 1, 2018. The Company incurred $4.4 million of debt issuance costs associated with the issuance of the 2028 Senior Notes.

 

Effective April 15, 2018, the Company redeemed $400.0 million aggregate principal amount of outstanding 1.875% senior notes due 2018 (the “2018 Senior Notes”). There was no gain or loss associated with the redemption. The Company funded the redemption price for the 2018 Senior Notes with proceeds from the issuance of the 2028 Senior Notes.

 

On April 11, 2017, the Company issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”), net of discount of $0.4 million, which are scheduled to mature on April 15, 2027. Interest on the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year. The Company incurred $5.2 million of debt issuance costs associated with the issuance of the 2027 Senior Notes.

 

On April 27, 2017, the Company redeemed $500.0 million aggregate principal amount of outstanding 4.125% senior notes due 2017 (the “2017 Senior Notes”), resulting in a pretax loss of $3.4 million which is reflected in Other (income) expense in the condensed consolidated statement of income for the 13-week and 26-week periods ended August 4, 2017. The Company funded the redemption price for the 2017 Senior Notes with proceeds from the issuance of the 2027 Senior Notes.

 

5.Assets and liabilities measured at fair value

 

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The Company does not have any fair value measurements categorized within Level 3 as of August 3, 2018.

 

The following table presents the Company’s assets and liabilities disclosed at fair value as of August 3, 2018, aggregated by the level in the fair value hierarchy within which those measurements are classified.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quoted Prices

    

 

 

    

 

 

    

 

 

 

 

 

in Active

 

 

 

 

 

 

 

 

 

 

 

 

Markets

 

Significant

 

 

 

 

 

 

 

 

 

for Identical

 

Other

 

Significant

 

Total Fair

 

 

 

Assets and

 

Observable

 

Unobservable

 

Value at

 

 

 

Liabilities

 

Inputs

 

Inputs

 

August 3,

 

(In thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations (a)

 

$

2,467,011

 

$

299,793

 

$

 —

 

$

2,766,804

 

Deferred compensation (b)

 

 

25,875

 

 

 —

 

 

 —

 

 

25,875

 


(a)

Included in the condensed consolidated balance sheet at book value as Current portion of long-term obligations of $1,909 and Long-term obligations of $2,776,811.

(b)

Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $2,620 and noncurrent Other liabilities of $23,255.

 

9


 

6.Commitments and contingencies

Legal proceedings

From time to time, the Company is a party to various legal matters involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others.  The Company has recorded accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made.

Except as described below, the Company believes, based upon information currently available, that such matters, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s consolidated financial statements as a whole. However, litigation and other legal matters involve an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these matters, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect operating results if changes to the Company’s business operation are required.

Wage and Hour Litigation

The Company is defending the following wage and hour matters (collectively the “Wage/Hour Litigation”):

·

California Wage/Hour Litigation (“Key Carriers”): Plaintiffs allege, on behalf of themselves and other similarly situated current and former “key carriers,” that the Company failed to comply with California law, in some or all of the following respects: failure to provide meal and rest periods, failure to provide accurate wage statements, and failure to provide appropriate termination pay. Plaintiffs seek to recover alleged unpaid wages, injunctive relief, consequential damages, pre-judgment interest, statutory penalties under the Private Attorney General Act (the “PAGA”) and attorneys’ fees and costs.

·

California Wage/Hour Litigation (“Non Key Carriers”): Plaintiff alleges, on behalf of herself and other current and former “hourly non-key carrier” employees, that the Company failed to comply with California law in some or all of the following respects: failure to pay for all time worked, failure to pay timely wages, failure to provide meal and rest breaks, and failure to provide accurate wage statements and appropriate termination pay.  Plaintiff seeks to recover penalties under the PAGA, attorneys’ fees and costs, and pre-judgment and post-judgment interest. 

·

Pennsylvania Wage/Hour Litigation: Plaintiff, a former distribution center employee, alleges that he and other similarly situated current and former hourly distribution center employees were subjected to unlawful policies and practices and were denied regular and overtime wages in violation of federal and Pennsylvania law. Plaintiff seeks to proceed on a nationwide collective basis under federal law and a statewide class basis under Pennsylvania law and to recover alleged unpaid wages, liquidated damages, statutory damages, and attorneys’ fees and costs.

·

Tennessee Wage/Hour Litigation: Plaintiffs allege that they and other similarly situated current and former “key holders” were not paid for all hours worked in violation of federal, Illinois and Tennessee law. Plaintiffs seek to proceed on a nationwide collective basis under federal law and a statewide class basis under Tennessee and Illinois law and to recover alleged unpaid wages, statutory and common law damages, liquidated damages, pre- and post-judgment interest and attorneys’ fees and costs.  The Company has reached a preliminary agreement with plaintiffs, which must be submitted to and approved by the Court, to resolve this matter for an amount not material to the Company’s financial statements as a whole.

The Company is vigorously defending the Wage/Hour Litigation and believes that its policies and practices comply with federal and state laws and that these actions are not appropriate for class or similar treatment.  At this time, it is not possible to predict whether these matters will be permitted to proceed as a class or other similar action, or the size of any putative class or classes. Likewise, except as to the resolution of the Tennessee Wage/Hour Litigation, at this time it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise.  For these reasons, except as to the resolution of the Tennessee Wage/Hour Litigation, the Company is unable to estimate any potential loss or range of loss in these

10


 

matters; however, if the Company is not successful in its defense efforts, the resolution of these actions could have a material adverse effect on the Company’s consolidated financial statements as a whole.

Other Employment Litigation

The Company is defending the following employment-related matters (collectively the “Employment Litigation”):

·

California Suitable Seating Litigation: Plaintiff alleges that the Company failed to provide her and other current and former California store employees with “suitable seats” in violation of California law.  Plaintiff seeks to recover penalties under the PAGA, injunctive relief, and attorneys’ fees and costs. 

·

EEOC Litigation:  The United States Equal Employment Opportunity Commission (“EEOC”) alleges that the Company’s use of post offer, pre-employment physical assessments, as applied to candidates for the general warehouse position in the Bessemer, Alabama distribution center, violates the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”). The EEOC seeks injunctive and monetary relief for a class of applicants and employees under the ADA and GINA. 

The Company is vigorously defending the Employment Litigation and believes that its employment policies and practices comply with federal and state law and that these matters are not appropriate for class or similar treatment.  At this time, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, or the size of any putative class or classes.  Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise.  For these reasons, the Company is unable to estimate any potential loss or range of loss in these matters; however if the Company is not successful in its defense efforts, the resolution of these matters could have a material adverse effect on the Company’s consolidated financial statements as a whole.

Consumer/Product Litigation

In December 2015 the Company was first notified of several lawsuits in which plaintiffs allege violation of state law, including state consumer protection laws, relating to the labeling, marketing and sale of certain Dollar General private-label motor oil. Each of these lawsuits, as well as additional, similar lawsuits filed after December 2015, was filed in, or removed to, various federal district courts of the United States (collectively “the Motor Oil Lawsuits”).

On June 2, 2016, the United States Judicial Panel on Multidistrict Litigation (“JPML”) granted the Company’s motion to centralize the Motor Oil Lawsuits in a matter styled In re Dollar General Corp. Motor Oil Litigation, Case MDL No. 2709, before the United States District Court for the Western District of Missouri (“Motor Oil MDL”).  Subsequently, plaintiffs in the Motor Oil MDL filed a consolidated amended complaint, in which they seek to certify two nationwide classes and multiple statewide sub-classes and for each putative class member some or all of the following relief: compensatory damages, injunctive relief, statutory damages, punitive damages and attorneys’ fees.  The Company’s motion to dismiss the allegations raised in the consolidated amended complaint was granted in part and denied in part. To the extent additional consumer lawsuits alleging violation of laws relating to the labeling, marketing and sale of Dollar General private-label motor oil have been or will be filed, the Company expects that such lawsuits will be transferred to the Motor Oil MDL.

In May 2017, the Company received a Notice of Proposed Action from the Office of the New Mexico Attorney General (the “New Mexico AG”) which alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated New Mexico law (the “New Mexico Motor Oil Matter”).  The State is represented in connection with this matter by counsel for plaintiffs in the Motor Oil MDL.

On May 25, 2017, in response to the Notice of Proposed Action, the Company filed an action in New Mexico federal court seeking a declaratory judgment that the New Mexico AG is prohibited by, among other things, the United States Constitution, from pursuing the New Mexico Motor Oil Matter and an order enjoining the New Mexico AG from pursuing such an action.  (Dollar General Corporation v. Hector H. Balderas, D.N.M., Case No. 1:17-cv-00588). Thereafter, on June 20, 2017, the New Mexico AG filed an action in the First Judicial District Court, County of Santa Fe, New Mexico pertaining to the New Mexico Motor Oil Matter.  (Hector H. Balderas v. Dolgencorp, LLC, Case No. D-101-cv-2017-01562).  The Company removed this matter to New Mexico federal court on July 26, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the New Mexico AG has moved to

11


 

remand it to state court. (Hector H. Balderas v. Dolgencorp, LLC, D.N.M., Case No. 1:17-cv-772). The Company’s and the New Mexico AG’s above-referenced motions are pending.

On September 1, 2017, the Mississippi Attorney General (the “Mississippi AG”), who also is represented by the counsel for plaintiffs in the Motor Oil MDL, filed an action in the Chancery Court of the First Judicial District of Hinds County, Mississippi in which the Mississippi AG alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated Mississippi law. (Jim Hood v. Dollar General Corporation, Case No. G2017-1229 T/1) (the “Mississippi Motor Oil Matter”). The Company removed this matter to Mississippi federal court on October 5, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the Mississippi AG moved to remand it to state court. (Jim Hood v. Dollar General Corporation, N.D. Miss., Case No. 3:17-cv-801-LG-LRA).  The Company’s and the Mississippi AG’s above-referenced motions are pending.

On January 30, 2018, the Company received a Civil Investigative Demand (“CID”) from the Office of the Louisiana Attorney General requesting information concerning the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil (the “Louisiana Motor Oil Matter”). In response to the CID, the Company filed a petition for a protective order on February 20, 2018 in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking to set aside the CID. (In re Dollar General Corp. and Dolgencorp, LLC, Case No. 666499).  The Company’s petition is pending.

A mediation held in the Motor Oil MDL on February 26, 2018, was unsuccessful.  On August 20, 2018, plaintiffs moved to certify two nationwide classes relating to their claims of alleged unjust enrichment and breach of implied warranties. In addition, plaintiffs moved to certify 17 statewide classes relating to their claims of alleged unfair trade practices/consumer fraud statutory claims.

The Company is vigorously defending these matters and believes that the labeling, marketing and sale of its private-label motor oil comply with applicable federal and state requirements and are not misleading.  The Company further believes that these matters are not appropriate for class or similar treatment.  At this time, however, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, whether on a statewide or nationwide basis, or the size of any putative class or classes.  Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise.  For these reasons, the Company is unable to estimate the potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of the Motor Oil MDL, the New Mexico Motor Oil Matter, the Mississippi Motor Oil Matter or the Louisiana Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

7.Segment reporting

 

The Company manages its business on the basis of one reportable operating segment. As of August 3, 2018, all of the Company’s operations were located within the United States with the exception of certain subsidiaries in Hong Kong and China and a liaison office in India, which collectively are not material with regard to assets, results of operations or otherwise to the condensed consolidated financial statements. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

(in thousands)

    

2018

    

2017

    

2018

    

2017

Classes of similar products:

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

 

$

4,988,063

 

$

4,484,359

 

$

9,760,451

 

$

8,799,872

Seasonal

 

 

792,513

 

 

717,993

 

 

1,483,544

 

 

1,380,631

Home products

 

 

345,161

 

 

327,648

 

 

699,794

 

 

660,798

Apparel

 

 

317,572

 

 

298,305

 

 

613,983

 

 

596,629

Net sales

 

$

6,443,309

 

$

5,828,305

 

$

12,557,772

 

$

11,437,930

 

 

8.Common stock transactions

 

On August 29, 2012, the Company’s Board of Directors authorized a common stock repurchase program, which the Board has since increased on several occasions. Most recently, on March 14, 2018, the Company’s Board of Directors authorized a $1.0 billion increase to the existing common stock repurchase program. As of August 3, 2018, a cumulative total of $6.0 billion had been authorized under the program since its inception and approximately $1.0 billion remained available for repurchase. The repurchase authorization has no expiration date and allows repurchases from

12


 

time to time in the open market or in privately negotiated transactions.  The timing and number of shares purchased depends on a variety of factors, such as price, market conditions, compliance with the covenants and restrictions under the Company’s debt agreements and other factors.  Repurchases under the program may be funded from available cash or borrowings, including under the Company’s Revolving Facility and issuance of CP Notes discussed in further detail in Note 4.

 

Pursuant to its common stock repurchase program, during the 26-week periods ended August 3, 2018, and August 4, 2017, the Company repurchased in the open market approximately 3.7 million shares of its common stock at a total cost of $349.5 million and approximately 2.3 million shares of its common stock at a total cost of $163.7 million, respectively.

 

The Company paid a quarterly cash dividend of $0.29 per share during each of the first and second quarters of 2018.  On August 28, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.29 per share, which is payable on or before October 23, 2018 to shareholders of record on October 9, 2018. The amount and declaration of future cash dividends is subject to the sole discretion of the Company’s Board of Directors and will depend upon, among other things, the Company’s results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Board may deem relevant in its sole discretion.

13


 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of

Dollar General Corporation

 

Results of Review of Interim Financial Statements

 

We have reviewed the accompanying condensed consolidated balance sheet of Dollar General Corporation and subsidiaries (the Company) as of August 3, 2018, the related condensed consolidated statements of income and comprehensive income for the thirteen and twenty-six week periods ended August 3, 2018 and August 4, 2017, the condensed consolidated statements of cash flows for the twenty-six week periods ended August 3, 2018 and August 4, 2017, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of February 2, 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated March 23, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 2, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for Review Results

 

These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

 

 

 

/s/ Ernst & Young LLP

 

 

August 30, 2018

 

Nashville, Tennessee

 

 

 

 

14


 

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 as contained in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

 

Executive Overview

 

We are among the largest discount retailers in the United States by number of stores, with 15,015 stores located in 44 states as of August 3, 2018. Our greatest concentration of stores is 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 basic apparel. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.

 

We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years and through a variety of economic cycles. We are mindful that the majority of our customers are value-conscious, and many have low or fixed incomes. As a result, we are intensely focused on helping our customers make the most of their spending dollars. Our core customers are often among the first to be affected by negative or uncertain economic conditions, and are among the last to feel the effects of improving economic conditions particularly when trends are inconsistent and of an uncertain duration. The primary macroeconomic factors that affect our core customers include the unemployment and underemployment rates, wage growth, fuel prices, changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program, and potential changes in U.S. trade policy. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget, such as rent and healthcare. Finally, significant unseasonable or unusual weather patterns can impact customer shopping behaviors.

 

We remain committed to the following long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.

 

We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount, as well as an ongoing focus on enhancing our gross margins while maintaining both everyday low price and affordability. Several of these initiatives are also designed to capture growth opportunities and are discussed in more detail below. Even as we work to provide everyday low prices and meet our customers’ affordability needs, we also remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing and pricing and markdown optimization.

 

Historically, our sales of consumables, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales of non-consumables, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. In the first half of 2018, our sales mix continued to shift slightly toward consumables, and, within consumables, slightly toward lower margin departments such as perishables and tobacco. While we expect some sales mix challenges to persist, certain of our initiatives are intended to address these trends, although there can be no assurance we will be successful in their reversal.

 

We continue to make progress on certain strategic initiatives that we believe will help drive profitable sales growth and capture long-term growth opportunities. Such opportunities include leveraging existing, and developing new, digital tools and technology to provide our customers with additional shopping access points and even greater

15


 

convenience. Following an in-depth analysis, we are also testing a refreshed approach to our non-consumables product offerings. This non-consumables initiative is a merchandising strategy that offers a new, differentiated and limited assortment that will change throughout the year. Our goal for this initiative is to improve the shopping experience while delivering exceptional value within key areas of our non-consumable categories.

 

The imposition of proposed or future tariffs by the U.S. government could have a material impact on our core customers, as well as on our business, although tariff regulations currently in effect are not expected to have a material impact on our direct imports. It is more difficult, however, to assess the potential impact to products that we buy from domestic vendors with global supply chains. We continue to monitor updates, and we are actively working to mitigate such pressures through various merchandising efforts, although there can be no assurance we will be successful in whole or in part.

 

To support our other operating priorities, we remain focused on capturing growth opportunities. In the first half of 2018, we opened 510 new stores, remodeled 643 stores, and relocated 67 stores. For 2018, we plan to open approximately 900 new stores, remodel approximately 1,000 mature store locations, and relocate approximately 100 stores for an approximate total of 2,000 real estate projects.

 

We continue to innovate within our channel and are able to utilize the most productive of our various store formats based on the specific market opportunity.  We expect that our traditional 7,300 square foot store format will continue to be the primary store layout for new stores, relocations and remodels in 2018. We expect approximately 400 of the planned 1,000 remodels in 2018 to include a higher cooler count for increased selection of perishable items. In addition, our smaller format store (less than 6,000 square feet) allows us to capture growth opportunities in metropolitan areas as well as in rural areas with a low number of households. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.

 

To support our new store growth and drive productivity, we continue to make investments in our distribution center network. Our distribution centers in Longview, Texas and Amsterdam, New York, respectively, are currently under construction. We expect both of these distribution centers to begin shipping in the 2019 calendar year.

 

We have established a position as a low-cost operator, always seeking ways to reduce or control costs that do not affect our customers’ shopping experience. We plan to continue enhancing this position over time as we aim to continually streamline our business while also employing ongoing cost discipline to reduce certain expenses as a percentage of sales. Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term profitability.

 

Our employees are a competitive advantage, and we are always searching for ways to continue investing in them.  We invest in our employees in an effort to create an environment that attracts and retains talented personnel, as we believe that, particularly at the store level, employees who are promoted from within our company generally have longer tenures and are greater contributors to improvements in our financial performance. We believe our investments in compensation and training for our store managers have contributed to improved customer experience scores, higher sales and improved turnover metrics.

 

Highlights of our 2018 second quarter results of operations compared to the 2017 second quarter and our financial condition at August 3, 2018 are set forth below. Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.

 

·

Net sales increased 10.6% to $6.44 billion. Sales in same-stores increased 3.7% due to increases in both average transaction amount and customer traffic. Average sales per square foot for all stores over the 52-week period ended August 3, 2018 was $229.

 

·

Gross profit, as a percentage of net sales, was 30.6% in the 2018 period compared to 30.7% in the 2017 period, a decrease of 7 basis points, reflecting changes in the mix of sales among other factors discussed below.

 

16


 

·

SG&A expense, as a percentage of net sales, was 22.2% in the 2018 period compared to 22.3% in the 2017 period, a decrease of 8 basis points, reflecting reductions in repairs and maintenance costs and lease termination expenses, among other factors discussed below.

 

·

Interest expense increased by $1.7 million to $25.5 million in the 2018 period primarily due to higher weighted average borrowing rates.

 

·

The effective income tax rate for the 2018 period was 21.5% compared to a rate of 37.2% for the 2017 period primarily due to the Tax Cuts and Jobs Act.

 

·

Net income was $407.2 million, or $1.52 per diluted share, in the 2018 period compared to net income of $294.8 million, or $1.08 per diluted share, in the 2017 period.

 

Highlights of the first half of 2018 include:

 

·

Cash generated from operating activities was $1.1 billion for the 2018 period, an increase of 39.6% over $786.2 million in the comparable 2017 period.

 

·

Total cash dividends of $154.7 million, or $0.58 per share, were paid during the 2018 period, compared to $142.3 million, or $0.52 per share, in the comparable 2017 period.

 

·

Inventory turnover was 4.7 times on a rolling four-quarter basis. On a per store basis, inventories at August 3, 2018 increased by 3.9% over the balances at August 4, 2017.

 

The above discussion is a summary only. Readers should refer to the detailed discussion of our results of operations below in the current year periods as compared with the prior year periods as well as our financial condition at August 3, 2018.

 

Results of Operations

 

Accounting Periods. We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31. The following text contains references to years 2018 and 2017, which represent the 52-week fiscal years ending or ended February 1, 2019 and February 2, 2018, respectively. References to the second quarter accounting periods for 2018 and 2017 contained herein refer to the 13-week accounting periods ended August 3, 2018 and August 4, 2017, respectively.

 

Seasonality. The nature of our business is somewhat seasonal. Primarily because of sales of Christmas-related merchandise, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, 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.

 

17


 

The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2018 and 2017, and the dollar and percentage variances among those periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

2018 vs. 2017

 

26 Weeks Ended

2018 vs. 2017

 

(amounts in millions, except

    

August 3,

    

August 4,

    

Amount

 

%

    

August 3,

    

August 4,

    

Amount

    

%

 

per share amounts)

 

2018

 

2017

 

Change

 

Change

 

2018

 

2017

 

Change

 

Change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

 

$

4,988.1

 

$

4,484.4

 

$

503.7

 

11.2

%  

$

9,760.5

 

$

8,799.9

 

$

960.6

 

10.9

%

% of net sales

 

 

77.41

%  

 

76.94

%  

 

 

 

 

 

 

77.72

%  

 

76.94

%  

 

 

 

 

 

Seasonal

 

 

792.5

 

 

718.0

 

 

74.5

 

10.4

 

 

1,483.5

 

 

1,380.6

 

 

102.9

 

7.5

 

% of net sales

 

 

12.30

%  

 

12.32

%  

 

 

 

 

 

 

11.81

%  

 

12.07

%  

 

 

 

 

 

Home products

 

 

345.2

 

 

327.6

 

 

17.5

 

5.3

 

 

699.8

 

 

660.8

 

 

39.0

 

5.9

 

% of net sales

 

 

5.36

%  

 

5.62

%  

 

 

 

 

 

 

5.57

%  

 

5.78

%  

 

 

 

 

 

Apparel

 

 

317.6

 

 

298.3

 

 

19.3

 

6.5

 

 

614.0

 

 

596.6

 

 

17.4

 

2.9

 

%  of net sales

 

 

4.93

%  

 

5.12

%  

 

 

 

 

 

 

4.89

%  

 

5.22

%  

 

 

 

 

 

Net sales

 

$

6,443.3

 

$

5,828.3

 

$

615.0

 

10.6

%  

$

12,557.8

 

$

11,437.9

 

$

1,119.8

 

9.8

%

Cost of goods sold

 

 

4,468.4

 

 

4,037.8

 

 

430.7

 

10.7

 

 

8,720.7

 

 

7,948.4

 

 

772.2

 

9.7

 

% of net sales

 

 

69.35

%  

 

69.28

%  

 

 

 

 

 

 

69.44

%  

 

69.49

%  

 

 

 

 

 

Gross profit

 

 

1,974.9

 

 

1,790.5

 

 

184.4

 

10.3

 

 

3,837.1

 

 

3,489.5

 

 

347.6

 

10.0

 

% of net sales

 

 

30.65

%  

 

30.72

%  

 

 

 

 

 

 

30.56

%  

 

30.51

%  

 

 

 

 

 

Selling, general and administrative expenses

 

 

1,429.4

 

 

1,297.4

 

 

132.0

 

10.2

 

 

2,801.5

 

 

2,522.6

 

 

278.9

 

11.1

 

% of net sales

 

 

22.18

%  

 

22.26

%  

 

 

 

 

 

 

22.31

%  

 

22.05

%  

 

 

 

 

 

Operating profit

 

 

545.5

 

 

493.1

 

 

52.3

 

10.6

 

 

1,035.7

 

 

966.9

 

 

68.7

 

7.1

 

% of net sales

 

 

8.47

%  

 

8.46

%  

 

 

 

 

 

 

8.25

%  

 

8.45

%  

 

 

 

 

 

Interest expense

 

 

25.5

 

 

23.7

 

 

1.7

 

7.2

 

 

50.2

 

 

48.8

 

 

1.5

 

3.0

 

% of net sales

 

 

0.39

%  

 

0.41

%  

 

 

 

 

 

 

0.40

%  

 

0.43

%  

 

 

 

 

 

Other (income) expense

 

 

1.0

 

 

 —

 

 

1.0

 

 —

 

 

1.0

 

 

3.5

 

 

(2.5)

 

 —

 

% of net sales

 

 

0.02

%  

 

0.00

%  

 

 

 

 

 

 

0.01

%  

 

0.03

%  

 

 

 

 

 

Income before income taxes

 

 

519.0

 

 

469.4

 

 

49.6

 

10.6

 

 

984.4

 

 

914.7

 

 

69.7

 

7.6

 

% of net sales

 

 

8.05

%  

 

8.05

%  

 

 

 

 

 

 

7.84

%  

 

8.00

%  

 

 

 

 

 

Income tax expense

 

 

111.8

 

 

174.6

 

 

(62.8)

 

(36.0)

 

 

212.3

 

 

340.4

 

 

(128.1)

 

(37.6)

 

% of net sales

 

 

1.73

%  

 

3.00

%  

 

 

 

 

 

 

1.69

%  

 

2.98

%  

 

 

 

 

 

Net income

 

$

407.2

 

$

294.8

 

$

112.5

 

38.1

%  

$

772.1

 

$

574.3

 

$

197.8

 

34.4

%

% of net sales

 

 

6.32

%  

 

5.06

%  

 

 

 

 

 

 

6.15

%  

 

5.02

%