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 May 3, 2019

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.875 per share

 

DG

 

New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 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 ☐

 

 

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 258,322,808 shares of common stock outstanding on May 24, 2019.

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

 

 

 

 

 

 

 

    

May 3,

    

February 1,

 

 

 

2019

 

2019

 

ASSETS

 

(Unaudited)

 

(see Note 1)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

271,111

 

$

235,487

 

Merchandise inventories

 

 

4,109,759

 

 

4,097,004

 

Income taxes receivable

 

 

25,164

 

 

57,804

 

Prepaid expenses and other current assets

 

 

177,735

 

 

272,725

 

Total current assets

 

 

4,583,769

 

 

4,663,020

 

Net property and equipment

 

 

3,008,425

 

 

2,970,806

 

Operating lease assets

 

 

8,140,326

 

 

 —

 

Goodwill

 

 

4,338,589

 

 

4,338,589

 

Other intangible assets, net

 

 

1,200,164

 

 

1,200,217

 

Other assets, net

 

 

33,011

 

 

31,406

 

Total assets

 

$

21,304,284

 

$

13,204,038

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

555

 

$

1,950

 

Current portion of operating lease liabilities

 

 

894,469

 

 

 —

 

Accounts payable

 

 

2,452,898

 

 

2,385,469

 

Accrued expenses and other

 

 

560,007

 

 

618,405

 

Income taxes payable

 

 

48,787

 

 

10,033

 

Total current liabilities

 

 

3,956,716

 

 

3,015,857

 

Long-term obligations

 

 

2,732,105

 

 

2,862,740

 

Long-term operating lease liabilities

 

 

7,238,945

 

 

 —

 

Deferred income taxes

 

 

629,864

 

 

609,687

 

Other liabilities

 

 

173,985

 

 

298,361

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

Common stock

 

 

226,032

 

 

227,072

 

Additional paid-in capital

 

 

3,275,917

 

 

3,252,421

 

Retained earnings

 

 

3,074,584

 

 

2,941,107

 

Accumulated other comprehensive loss

 

 

(3,864)

 

 

(3,207)

 

Total shareholders’ equity

 

 

6,572,669

 

 

6,417,393

 

Total liabilities and shareholders' equity

 

$

21,304,284

 

$

13,204,038

 

 

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

 

 

    

May 3,

    

May 4,

 

 

 

2019

 

2018

 

Net sales

 

$

6,623,185

 

$

6,114,463

 

Cost of goods sold

 

 

4,620,909

 

 

4,252,214

 

Gross profit

 

 

2,002,276

 

 

1,862,249

 

Selling, general and administrative expenses

 

 

1,490,039

 

 

1,372,065

 

Operating profit

 

 

512,237

 

 

490,184

 

Interest expense

 

 

25,933

 

 

24,773

 

Income before income taxes

 

 

486,304

 

 

465,411

 

Income tax expense

 

 

101,291

 

 

100,559

 

Net income

 

$

385,013

 

$

364,852

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

1.49

 

$

1.36

 

Diluted

 

$

1.48

 

$

1.36

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

259,021

 

 

268,267

 

Diluted

 

 

260,265

 

 

269,135

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.32

 

$

0.29

 

 

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

 

 

 

May 3,

 

May 4,

 

 

    

2019

    

2018

 

Net income

 

$

385,013

 

$

364,852

 

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

 

 

244

 

 

243

 

Comprehensive income

 

$

385,257

 

$

365,095

 

 

See notes to condensed consolidated financial statements.

 

3

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

Stock

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

 

Shares

 

Stock

 

Capital

 

Earnings

 

Loss

 

Total

 

Balances, February 1, 2019

 

259,511

 

$

227,072

 

$

3,252,421

 

$

2,941,107

 

$

(3,207)

 

$

6,417,393

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

385,013

 

 

 —

 

 

385,013

 

Dividends paid, $0.32 per common share

 

 —

 

 

 —

 

 

 —

 

 

(82,756)

 

 

 —

 

 

(82,756)

 

Unrealized net gain (loss) on hedged transactions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

244

 

 

244

 

Share-based compensation expense

 

 —

 

 

 —

 

 

13,631

 

 

 —

 

 

 —

 

 

13,631

 

Repurchases of common stock

 

(1,686)

 

 

(1,475)

 

 

 —

 

 

(198,511)

 

 

 —

 

 

(199,986)

 

Transition adjustment upon adoption of leases accounting standard (see Note 1)

 

 —

 

 

 —

 

 

 —

 

 

28,830

 

 

 —

 

 

28,830

 

Other equity and related transactions

 

497

 

 

435

 

 

9,865

 

 

901

 

 

(901)

 

 

10,300

 

Balances, May 3, 2019

 

258,322

 

$

226,032

 

$

3,275,917

 

$

3,074,584

 

$

(3,864)

 

$

6,572,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 2, 2018

    

268,733

 

$

235,141

 

$

3,196,462

 

$

2,698,352

 

$

(4,181)

 

$

6,125,774

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

364,852

 

 

 —

 

 

364,852

 

Dividends paid, $0.29 per common share

 

 —

 

 

 —

 

 

 —

 

 

(77,657)

 

 

 —

 

 

(77,657)

 

Unrealized net gain (loss) on hedged transactions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

243

 

 

243

 

Share-based compensation expense

 

 —

 

 

 —

 

 

12,406

 

 

 —

 

 

 —

 

 

12,406

 

Repurchases of common stock

 

(1,589)

 

 

(1,390)

 

 

 —

 

 

(148,611)

 

 

 —

 

 

(150,001)

 

Transition adjustment upon adoption of intra-entity transfers accounting standard (see Note 1)

 

 —

 

 

 —

 

 

 —

 

 

(41,316)

 

 

 —

 

 

(41,316)

 

Other equity and related transactions

 

409

 

 

358

 

 

1,659

 

 

 —

 

 

 —

 

 

2,017

 

Balances, May 4, 2018

 

267,553

 

$

234,109

 

$

3,210,527

 

$

2,795,620

 

$

(3,938)

 

$

6,236,318

 

 

See notes to condensed consolidated financial statements.

 

4

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

For the 13 weeks ended

 

 

    

May 3,

    

May 4,

 

 

 

2019

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

385,013

 

$

364,852

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

122,485

 

 

109,335

 

Deferred income taxes

 

 

10,303

 

 

8,046

 

Noncash share-based compensation

 

 

13,631

 

 

12,406

 

Other noncash (gains) and losses

 

 

3,527

 

 

3,340

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Merchandise inventories

 

 

(14,252)

 

 

12,356

 

Prepaid expenses and other current assets

 

 

(7,392)

 

 

3,294

 

Accounts payable

 

 

39,707

 

 

5,043

 

Accrued expenses and other liabilities

 

 

(47,679)

 

 

(55,124)

 

Income taxes

 

 

71,394

 

 

85,276

 

Other

 

 

(2,542)

 

 

(176)

 

Net cash provided by (used in) operating activities

 

 

574,195

 

 

548,648

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(144,757)

 

 

(164,630)

 

Proceeds from sales of property and equipment

 

 

453

 

 

631

 

Net cash provided by (used in) investing activities

 

 

(144,304)

 

 

(163,999)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of long-term obligations

 

 

 —

 

 

499,495

 

Repayments of long-term obligations

 

 

(525)

 

 

(400,330)

 

Net increase (decrease) in commercial paper outstanding

 

 

(121,300)

 

 

(237,200)

 

Costs associated with issuance and retirement of debt

 

 

 —

 

 

(4,444)

 

Repurchases of common stock

 

 

(199,986)

 

 

(150,001)

 

Payments of cash dividends

 

 

(82,756)

 

 

(77,657)

 

Other equity and related transactions

 

 

10,300

 

 

2,017

 

Net cash provided by (used in) financing activities

 

 

(394,267)

 

 

(368,120)

 

Net increase (decrease) in cash and cash equivalents

 

 

35,624

 

 

16,529

 

Cash and cash equivalents, beginning of period

 

 

235,487

 

 

267,441

 

Cash and cash equivalents, end of period

 

$

271,111

 

$

283,970

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

Right of use assets obtained in exchange for new operating lease liabilities

 

$

358,806

 

$

 —

 

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

 

$

91,384

 

$

66,684

 

 

See notes to condensed consolidated financial statements.

 

5

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 1, 2019 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 1, 2019 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 2019 fiscal year is scheduled to be a 52-week accounting period ending on January 31, 2020, and the 2018 fiscal year was a 52-week accounting period that ended on February 1, 2019.

 

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 May 3, 2019 and results of operations for the 13-week accounting periods ended May 3, 2019 and May 4, 2018 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 of $3.4 million and $2.1 million in the respective 13-week periods ended May 3, 2019 and May 4, 2018. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation.

 

The Company adopted new accounting guidance related to leases as of February 2, 2019, using the modified retrospective approach. Under this approach, existing leases were recorded at the adoption date, and comparative periods were not restated and are presented under previously existing guidance. In addition, the Company elected the package of practical expedients permitted under the transition guidance in the standard, which among other things, allowed the carry forward of historical conclusions for lease identification, lease classification, and initial direct costs. The Company is accounting for leases with a term of less than one year under the short-term policy election. The Company also elected the practical expedient to not separate lease components from the nonlease components (typically fixed common-area maintenance costs at its retail store locations) for all classes of leased assets.  The Company chose not to elect the hindsight practical expedient. Factors incorporated into the calculation of lease discount rates include the valuations and yields of the Company’s senior notes, their credit spread over comparable U.S. Treasury rates, and an index of the credit spreads for all North American investment grade companies by rating. To determine an indicative secured rate, the Company uses the estimated credit spread improvement that would result from an upgrade of one ratings classification by tenor.

 

Adoption of the leasing standard resulted in right of use operating lease assets and operating lease liabilities of approximately $8.0 billion each as of February 2, 2019. The cumulative effect of applying the standard resulted in an

6

adjustment to retained earnings of $28.8 million at February 2, 2019, primarily for the elimination of deferred gain on a 2013 sale-leaseback transaction. Because the standard was adopted under the modified retrospective approach, it did not impact the Company’s historical consolidated net income or cash flows.

 

In February 2018, the FASB issued new accounting guidance for the reclassification of certain tax effects from accumulated other comprehensive income which gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (“TCJA”). An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the TCJA’s change in US federal tax rate for all items accounted for in other comprehensive income. These entities can also elect to reclassify other stranded effects that relate to the TCJA but do not directly relate to the change in the federal tax rate. The Company adopted this standard in the first quarter of 2019 and recorded a transition adjustment of $0.9 million, which is reflected as a reclassification from accumulated other comprehensive loss to retained earnings in the accompanying condensed consolidated financial statements.

 

In October 2016, the FASB issued amendments to existing guidance related to accounting for intra-entity transfers of assets other than inventory, which affected the Company’s historical accounting for intra-entity transfers of certain intangible assets. This guidance was effective for the Company in 2018. The amendments were 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.

 

2.Earnings per share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended May 3, 2019

 

 

13 Weeks Ended May 4, 2018

 

 

   

 

    

Weighted

   

 

  

  

 

   

Weighted

   

 

 

 

 

Net

 

Average

 

Per Share

 

 

Net

 

Average

 

Per Share

 

 

 

Income

 

Shares

 

Amount

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share

 

$

385,013

 

259,021

 

$

1.49

 

 

$

364,852

 

268,267

 

$

1.36

 

Effect of dilutive share-based awards

 

 

 

 

1,244

 

 

 

 

 

 

 

 

868

 

 

 

 

Diluted earnings per share

 

$

385,013

 

260,265

 

$

1.48

 

 

$

364,852

 

269,135

 

$

1.36

 

 

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 0.6 million and 0.9 million in the 2019 and 2018 13-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 2014 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 2015 through 2017 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 2015 and later tax years remain open for examination by the various state taxing authorities.

7

 

As of May 3, 2019, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $5.0 million, $0.9 million and $0.9 million, respectively, for a total of $6.8 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 May 3, 2019, approximately $5.0 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.

 

The effective income tax rates for the 13-week periods ended May 3, 2019 and May 4, 2018 were 20.8% and 21.6%, respectively. The tax rate for the 2019 13-week period was lower than the comparable 2018 13-week period primarily due to the recognition of a larger tax benefit in the 2019 period associated with share-based compensation than in the 2018 period.

 

4.Leases

 

As of February 2, 2019, the Company’s primary leasing activities were real estate leases for most of its retail store locations and certain of its distribution facilities. Many of the Company’s store locations are subject to build-to-suit arrangements with landlords which typically carry a primary lease term of up to 15 years. The Company does not control build-to-suit properties during the construction period. Store locations not subject to build-to-suit arrangements are typically shorter-term leases. Certain of the Company’s leased store locations have variable payments based upon actual costs of common area maintenance, real estate taxes and property and liability insurance. In addition, some of the Company’s leased store locations have provisions for variable payments based upon a specified percentage of defined sales volume. The Company’s leased distribution facilities are subject to operating lease agreements, with the exception of one distribution facility which is subject to a financing transaction. The Company’s lease agreements generally do not contain material restrictive covenants.

 

Most of the Company’s leases include one or more options to renew and extend the lease term. The exercise of lease renewal options is at the Company’s sole discretion. Generally, a renewal option is not deemed to be reasonably certain to be exercised until such option is legally executed. The Company’s leases do not include purchase options or residual value guarantees on the leased property. The depreciable life of leasehold improvements are limited by the expected lease term.

 

All of the Company’s leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the condensed consolidated balance sheet. At May 3, 2019, the weighted-average remaining lease term for the Company’s leases is 10.2 years, and the weighted average discount rate is 4.4%. For the 13-week period ended May 3, 2019, operating lease cost of $308.1 million and variable lease cost of $9.1 million were reflected as selling, general and administrative expenses in the condensed consolidated statement of income. Cash paid for amounts included in the measurement of operating lease liabilities of $310.2 million was reflected in cash flows from operating activities in the condensed consolidated statement of cash flows.

 

The scheduled maturity of the Company’s operating lease liabilities is as follows:

 

 

 

 

 

 

(In thousands)

    

 

 

 

2019

 

$

929,139

 

2020

 

 

1,195,237

 

2021

 

 

1,134,275

 

2022

 

 

1,061,229

 

2023

 

 

982,135

 

Thereafter

 

 

4,803,513

 

Total lease payments (a)

 

 

10,105,528

 

Less imputed interest

 

 

(1,972,114)

 

Present value of lease liabilities

 

$

8,133,414

 


a)

Excludes approximately $0.5 billion of legally binding minimum lease payments for leases signed which have not yet commenced.

8

 

5.Current and long-term obligations

 

Current and long-term obligations consist of the following:

 

 

 

 

 

 

 

 

 

 

    

May 3,

    

February 1,

 

(In thousands)

 

2019

 

2019

 

Revolving Facility

 

$

 —

 

$

 —

 

3.250% Senior Notes due April 15, 2023 (net of discount of $1,023 and $1,084)

 

 

898,977

 

 

898,916

 

4.150% Senior Notes due November 1, 2025 (net of discount of $544 and $562)

 

 

499,456

 

 

499,438

 

3.875% Senior Notes due April 15, 2027 (net of discount of $365 and $375)

 

 

599,635

 

 

599,625

 

4.125% Senior Notes due May 1, 2028 (net of discount of $460 and $471)

 

 

499,540

 

 

499,529

 

Unsecured commercial paper notes

 

 

245,600

 

 

366,900

 

Capital lease obligations

 

 

 —

 

 

10,977

 

Tax increment financing due February 1, 2035

 

 

5,835

 

 

6,360

 

Debt issuance costs, net

 

 

(16,383)

 

 

(17,055)

 

 

 

 

2,732,660

 

 

2,864,690

 

Less: current portion

 

 

(555)

 

 

(1,950)

 

Long-term portion

 

$

2,732,105

 

$

2,862,740

 

 

At May 3, 2019, 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 May 3, 2019 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 May 3, 2019, 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 May 3, 2019, the Company was in compliance with all such covenants.  The Revolving Facility also contains customary events of default.

 

As of May 3, 2019, the Company had no outstanding borrowings, outstanding letters of credit of $6.7 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 $816.7 million. In addition, as of May 3, 2019, the Company had outstanding letters of credit of $34.5 million which were issued pursuant to separate agreements.

 

As of May 3, 2019, 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 May 3, 2019, the Company’s condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $245.6 million classified as long-term obligations due to its intent and ability to refinance these obligations as long-term debt. An additional $181.0 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 May 3, 2019, the outstanding CP Notes had a weighted average borrowing rate of 2.7%. 

 

9

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. 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.

 

6.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 May 3, 2019.

 

The following table presents the Company’s assets and liabilities disclosed at fair value as of May 3, 2019, 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

 

May 3,

 

(In thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2019

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations (a)

 

$

2,542,717

 

$

251,435

 

$

 —

 

$

2,794,152

 

Deferred compensation (b)

 

 

27,530

 

 

 —

 

 

 —

 

 

27,530

 


(a)

Included in the condensed consolidated balance sheet at book value as Current portion of long-term obligations of $555 and Long-term obligations of $2,732,105.

(b)

Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $2,170 and noncurrent Other liabilities of $25,360.

 

7.Commitments and contingencies

Legal proceedings

From time to time, the Company is a party to various legal matters in the ordinary course 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 and based on information currently available, the Company believes 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.  Adverse decisions and settlements, including any required changes to the Company’s business, or other developments in such matters, including those matters disclosed in Note 6 to the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2019 under “Wage and Hour/Employment Litigation,” could affect our consolidated operating results in future periods or could result in liability or other amounts material to the Company’s annual consolidated financial statements.

10

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 sought 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 on August 3, 2017. 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 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 it was transferred to the Motor Oil MDL. (Hector H. Balderas v. Dolgencorp, LLC, D.N.M., Case No. 1:17-cv-772).  On April 23, 2019, the matter was remanded to state court, and on May 3, 2019, the Company moved to dismiss the action.

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). On May 7, 2019, the Mississippi AG renewed its motion to remand. 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.

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 a multi-state class relating to their claims of breach of implied warranties and multiple statewide classes relating to alleged unfair trade practices/consumer fraud, unjust enrichment and breach of implied warranty claims. The Company opposed the plaintiffs’ certification motion. On March 21, 2019, the court granted the plaintiffs’ certification motion as to 16 statewide classes regarding claims of unjust enrichment and 16 statewide classes regarding state consumer protection laws.  The court denied plaintiffs’ motion in all other respects. On April 24, 2019, the Company filed a Petition for Permission to Appeal in the United States Court of Appeals for the Eighth Circuit. The Company’s petition is pending.

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 ultimately will be permitted to proceed as a class or in a similar fashion,

11

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 and/or the Louisiana Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

8.Segment reporting

 

The Company manages its business on the basis of one reportable operating segment. As of May 3, 2019, all of the Company’s operations were located within the United States with the exception of certain product sourcing operations in Hong Kong and China, 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

 

 

 

May 3,

 

May 4,

 

(in thousands)

    

2019

    

2018

 

Classes of similar products:

 

 

 

 

 

 

 

Consumables

 

$

5,213,155

 

$

4,772,388

 

Seasonal

 

 

736,978

 

 

691,031

 

Home products

 

 

375,713

 

 

354,633

 

Apparel

 

 

297,339

 

 

296,411

 

Net sales

 

$

6,623,185

 

$

6,114,463

 

 

 

9.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 13, 2019, the Company’s Board of Directors authorized a $1.0 billion increase to the existing common stock repurchase program. As of May 3, 2019, a cumulative total of $7.0 billion had been authorized under the program since its inception and approximately $1.1 billion remained available for repurchase. The repurchase authorization has no expiration date and allows repurchases from 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 5.

 

Pursuant to its common stock repurchase program, during the 13-week periods ended May 3, 2019 and May 4, 2018, the Company repurchased in the open market approximately 1.7 million shares of its common stock at a total cost of $200.0 million and approximately 1.6 million shares of its common stock at a total cost of $150.0 million, respectively.

 

The Company paid a quarterly cash dividend of $0.32 per share during the first quarter of 2019.  On May 29, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.32 per share, which is payable on or before July 23, 2019 to shareholders of record on July 9, 2019. 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.

 

12

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the 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 May 3, 2019, the related condensed consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the thirteen week periods ended May 3, 2019 and May 4, 2018, 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 1, 2019, 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 22, 2019, 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 1, 2019, 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

 

 

May 30, 2019

 

Nashville, Tennessee

 

 

 

13

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 1, 2019. 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 15,597 stores located in 44 states as of May 3, 2019, with the greatest concentration of stores 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 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 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 and/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 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, changes in U.S. and global trade policy (including price increases from tariffs), and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget, such as rent, healthcare and fuel prices. 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 we work to provide everyday low prices and meet our customers’ affordability needs, we 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. Several of our sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.

 

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 recent years, our sales mix has 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 reversing them.

 

We continue to make progress on and invest in certain strategic initiatives that we believe will help drive profitable sales growth and capture long-term growth opportunities. Such opportunities include leveraging existing and

14

developing new digital tools and technology to provide our customers with additional shopping access points and even greater convenience. Additionally, we began testing a refreshed approach to our non-consumable product offerings in 2018, and have extended this rollout to include more than 1,100 stores through the end of the 2019 first quarter. This non-consumables initiative is a merchandising strategy that offers a new, differentiated and limited assortment that will change throughout the year. As we extend this initiative more broadly in 2019, our goal is to continue to improve the shopping experience while delivering exceptional value within key areas of our non-consumable categories. In 2019, we also are testing two additional initiatives aimed at driving sales and enhancing our position as a low-cost operator, as discussed further below.

 

Tariffs on products from China, as applied to both our direct imports and domestic purchases, did not have a material impact on our first quarter 2019 financial results. Effective May 10, 2019, tariff rates on certain products from China increased from 10% to 25%.  We believe we can mitigate the potential sales and margin impact of such increased tariffs on our financial results for the remainder of 2019, particularly in light of our performance through the end of the 2019 first quarter, through various sourcing, merchandising and pricing efforts. However, future increases in tariff rates or additional expansions of products subject to tariffs may have a more significant impact on our business and on our customers’ budgets. There can be no assurance we will be successful in our efforts to mitigate the impacts of existing or future tariffs in whole or in part, including but not limited to any impacts on customer spending.

 

To support our other operating priorities, we remain focused on capturing growth opportunities. In the first quarter of 2019, we opened 240 new stores, remodeled 330 stores, and relocated 27 stores. For 2019, we plan to open approximately 975 new stores, remodel approximately 1,000 stores, and relocate approximately 100 stores for an approximate total of 2,075 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 2019. We expect approximately 500 of the planned 1,000 remodels in 2019 to use a higher-cooler-count store format that enables us to offer an 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 traditional distribution center network for non-refrigerated merchandise. Most recently, we began shipping from our distribution center in Longview, Texas in January 2019. In addition, our distribution center in Amsterdam, New York is currently under construction, and we expect to begin shipping from this facility later in 2019.

 

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 experiences. We plan to continue enhancing this position over time while 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.

 

In 2019, we are continuing our pilot of the “DG Fresh” initiative, a self-distribution model for fresh and frozen products that is designed to enhance sales, reduce product costs, improve our in-stock position and enhance item assortment. We are currently operating one DG Fresh distribution facility in Pottsville, Pennsylvania, which is serving more than 800 stores in the northeastern United States, and plan to open up to three additional self-distribution facilities in 2019.

 

We have also launched “Fast Track”, an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor productivity within our stores. The first phase of Fast Track involves optimizing sorting processes within our distribution centers to allow for greater store-level stocking efficiencies, followed by the second-phase pilot of a self-checkout option in a limited number of stores later in 2019. These and certain other strategic initiatives will require us to incur upfront expenses for which there may not be an immediate or acceptable return in terms of sales or enhanced profitability.  

 

15

Certain operating expenses such as wage rates and occupancy costs have continued to increase in recent years. While we expect these increases to persist, certain of our initiatives and plans are intended to help offset these challenges, although there can be no assurance we will be successful in mitigating them.

 

Our employees are a competitive advantage, and we proactively seek ways to continue investing in them. Our goal is to create an environment that attracts and retains talented personnel, particularly at the store level, because 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.

 

To further enhance shareholder returns, we repurchased shares of our common stock and paid a quarterly cash dividend in the first quarter of 2019. We intend to continue our share repurchase activity, and to pay quarterly cash dividends, throughout 2019, subject to Board discretion and approval.

 

Highlights of our 2019 first quarter results of operations compared to the 2018 first quarter and our financial condition at May 3, 2019 are set forth below. Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.

 

·

Net sales increased 8.3% to $6.62 billion. Sales in same-stores increased 3.8% reflecting increases in average transaction amount and customer traffic. Average sales per square foot for all stores over the 52-week period ended May 3, 2019 was $232.

 

·

Gross profit, as a percentage of net sales, was 30.2% in the 2019 period compared to 30.5% in the 2018 period, a decrease of 23 basis points, reflecting increased distribution and transportation expenses as well as changes in the mix of sales.

 

·

SG&A expense, as a percentage of net sales, was 22.5% in the 2019 period compared to 22.4% in the 2018 period, an increase of 6 basis points, reflecting increases in employee benefits and occupancy costs.

 

·

Operating profit increased 4.5% to $512.2 million in the 2019 period compared to $490.2 million in the 2018 period.

 

·

Interest expense increased by $1.2 million to $25.9 million in the 2019 period primarily due to higher weighted average borrowing rates.

 

·

The effective income tax rate for the 2019 period was 20.8% compared to a rate of 21.6% for the 2018 period primarily due to increased tax benefits related to share-based compensation.

 

·

Net income was $385.0 million, or $1.48 per diluted share, in the 2019 period compared to net income of $364.9 million, or $1.36 per diluted share, in the 2018 period.

 

·

Cash generated from operating activities was $574.2 million for the 2019 period, an increase of 4.7% over $548.6 million in the comparable 2018 period.

 

·

Total cash dividends of $82.8 million, or $0.32 per share, were paid during the 2019 period, compared to $77.7 million, or $0.29 per share, in the comparable 2018 period.

 

·

Inventory turnover was 4.6 times on a rolling four-quarter basis. On a per store basis, inventories at May 3, 2019 increased by 8.2% over the balances at May 4, 2018.

 

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 May 3, 2019.

 

16

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 2019 and 2018, which represent the 52-week fiscal years ending or ended January 31, 2020 and February 1, 2019, respectively. References to the first quarter accounting periods for 2019 and 2018 contained herein refer to the 13-week accounting periods ended May 3, 2019 and May 4, 2018, 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.

 

The following table contains results of operations data for the first 13-week periods of 2019 and 2018, and the dollar and percentage variances among those periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

2019 vs. 2018

 

(amounts in millions, except

    

May 3,

    

May 4,

    

Amount

 

%

    

per share amounts)

 

2019

 

2018

 

Change

 

Change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

 

$

5,213.2

 

$

4,772.4

 

$

440.8

 

9.2

%  

% of net sales

 

 

78.71

%  

 

78.05

%  

 

 

 

 

 

Seasonal

 

 

737.0

 

 

691.0

 

 

45.9

 

6.6

 

% of net sales

 

 

11.13

%  

 

11.30

%  

 

 

 

 

 

Home products

 

 

375.7

 

 

354.6

 

 

21.1

 

5.9

 

% of net sales

 

 

5.67

%  

 

5.80

%  

 

 

 

 

 

Apparel

 

 

297.3

 

 

296.4

 

 

0.9

 

0.3

 

% of net sales

 

 

4.49

%  

 

4.85

%  

 

 

 

 

 

Net sales

 

$

6,623.2

 

$

6,114.5

 

$

508.7

 

8.3

%  

Cost of goods sold

 

 

4,620.9

 

 

4,252.2

 

 

368.7

 

8.7

 

% of net sales

 

 

69.77

%  

 

69.54

%  

 

 

 

 

 

Gross profit

 

 

2,002.3

 

 

1,862.2

 

 

140.0

 

7.5

 

% of net sales

 

 

30.23

%  

 

30.46

%  

 

 

 

 

 

Selling, general and administrative expenses

 

 

1,490.0

 

 

1,372.1

 

 

118.0

 

8.6

 

% of net sales

 

 

22.50

%  

 

22.44

%  

 

 

 

 

 

Operating profit

 

 

512.2

 

 

490.2

 

 

22.1

 

4.5

 

% of net sales

 

 

7.73

%  

 

8.02

%  

 

 

 

 

 

Interest expense

 

 

25.9

 

 

24.8

 

 

1.2

 

4.7

 

% of net sales

 

 

0.39

%  

 

0.41

%  

 

 

 

 

 

Income before income taxes

 

 

486.3

 

 

465.4

 

 

20.9

 

4.5

 

% of net sales

 

 

7.34

%  

 

7.61

%  

 

 

 

 

 

Income tax expense

 

 

101.3

 

 

100.6

 

 

0.7

 

0.7

 

% of net sales

 

 

1.53

%  

 

1.64

%  

 

 

 

 

 

Net income

 

$

385.0

 

$

364.9

 

$

20.2

 

5.5

%  

% of net sales

 

 

5.81

%  

 

5.97

%  

 

 

 

 

 

Diluted earnings per share

 

$

1.48

 

$

1.36

 

$

0.12

 

8.8

%  

 

13 WEEKS ENDED MAY 3, 2019 AND MAY 4, 2018

 

Net Sales. The net sales increase in the 2019 period reflects a same-store sales increase of 3.8% compared to the 2018 period. 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 2019 period, there were 14,537 same-stores which accounted for sales of $6.3 billion. The increase in same-store sales reflects an increase in average transaction amount driven by higher average item retail prices, as well as an increase in customer traffic. Same-store sales increased in the consumables, seasonal and home products categories and declined in the apparel category. The net sales increase was also positively affected by sales from new stores, modestly offset by sales from closed stores.

 

Gross Profit. For the 2019 period, gross profit increased by 7.5%, and as a percentage of net sales decreased by 23 basis points to 30.2% compared to the 2018 period. Increases in distribution and transportation costs and a greater

17

proportion of sales coming from the consumables category, which generally has a lower gross profit rate than our other product categories, and sales of lower margin products comprising a higher proportion of sales within the consumables category, each contributed to the decline in the gross profit rate. These factors were partially offset by higher initial markups on inventory purchases.

 

Selling, General & Administrative Expenses (“SG&A”). SG&A was 22.5% as a percentage of net sales in the 2019 period compared to 22.4% in the comparable 2018 period, an increase of 6 basis points. The 2019 period results reflect increased employee benefits and occupancy costs as a percentage of sales, partially offset by lower repairs and maintenance and workers’ compensation expenses.

 

Interest Expense. Interest expense increased by $1.2 million to $25.9 million in the 2019 period primarily due to higher weighted average borrowing rates. See Liquidity and Capital Resources.

 

Income Taxes. The effective income tax rate for the 2019 period was 20.8% compared to a rate of 21.6% for the 2018 period which represents a net decrease of 0.8 percentage points. The tax rate for the 2019 period was lower than the comparable 2018 period primarily due to the recognition of a larger tax benefit in the 2019 period associated with share-based compensation than in the 2018 period.

 

Accounting Standards

 

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.  We currently do not anticipate a material effect on our consolidated results of operations, financial position or cash flows to result from the adoption of this guidance.

 

Liquidity and Capital Resources

 

At May 3, 2019, we had a $1.25 billion unsecured revolving credit agreement (the “Revolving Facility”), $2.5 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $1.0 billion. At May 3, 2019, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $2.7 billion, which includes commercial paper borrowings (“CP Notes”) and senior notes, all of which are described in greater detail below. Our borrowing availability under the Revolving Facility may be effectively limited by our CP Notes as further described below.

 

We believe our cash flow from operations and existing cash balances, combined with availability under the Revolving Facility, the CP Notes and access to the debt markets will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending and anticipated dividend payments for a period that includes the next twelve months as well as the next several years.  However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control.  Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.

 

For the remainder of fiscal 2019, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $800 million outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

 

Revolving Credit Facility

 

On February 22, 2017, we entered into the Revolving Facility of which up to $175.0 million is available for the issuance of letters of credit and which is scheduled to mature on February 22, 2022.

18

 

Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our 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 May 3, 2019 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. We must also 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 May 3, 2019, 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 our 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, our (including our subsidiaries’) ability to: incur additional liens; sell all or substantially all of our assets; consummate certain fundamental changes or change in our lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants that require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.  As of May 3, 2019, we were in compliance with all such covenants.  The Revolving Facility also contains customary events of default.

 

As of May 3, 2019, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $6.7 million, and borrowing availability of $1.24 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $816.7 million at May 3, 2019. In addition, as of May 3, 2019 we had outstanding letters of credit of $34.5 million which were issued pursuant to separate agreements.

 

Commercial Paper

 

As of May 3, 2019, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $245.6 million classified as long-term obligations due to our intent and ability to refinance these obligations as long-term debt. An additional $181.0 million of outstanding CP Notes were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet. We may issue 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 our other unsecured and unsubordinated indebtedness.  We intend 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 May 3, 2019, the consolidated outstanding CP Notes had a weighted average borrowing rate of 2.7%.

 

Senior Notes

 

In April 2013 we issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the “2023 Senior Notes”) at a discount of $2.4 million, which are scheduled to mature on April 15, 2023. In October 2015 we issued $500.0 million aggregate principal amount of 4.150% senior notes due 2025 (the “2025 Senior Notes”) at a discount of $0.8 million, which are scheduled to mature on November 1, 2025. In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027. In April 2018 we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028. Collectively, the 2023 Senior Notes, 2025 Senior Notes, 2027 Senior Notes and 2028 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”). Interest on the 2023 Senior Notes and the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year. Interest on the 2025 and 2028 Senior Notes is payable in cash on May 1 and November 1 of each year.

 

We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

 

The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and our ability and the ability

19

of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

 

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.

 

Current Financial Condition / Recent Developments

 

Our inventory balance represented approximately 54% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of May 3, 2019. Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.

 

As described in Note 7 to the unaudited condensed consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity.

 

Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will maintain or improve our current credit ratings.

 

Unless otherwise noted, all references to the “2019 period” and the “2018 period” in the discussion of “Cash flows from operating activities,” “Cash flows from investing activities,” and “Cash flows from financing activities” below refer to the 13-week periods ended May 3, 2019 and May 4, 2018, respectively. 

 

Cash flows from operating activities.  Cash flows from operating activities were $574.2 million in the 2019 period, which represents a $25.5 million increase compared to the 2018 period. Net income increased by $20.2 million in the 2019 period over the 2018 period. Changes in merchandise inventories resulted in a $14.3 million decrease in the 2019 period as compared to an increase of $12.4 million in the 2018 period. Changes in accounts payable resulted in a $39.7 million increase in the 2019 period compared to a $5.0 million increase in the 2018 period, due primarily to the timing of receipts and payments. Changes in income taxes in the 2019 period compared to the 2018 period are primarily due to the timing of payments for income taxes.

 

On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. Merchandise inventories changed by less than 1% in both the 2019 and 2018 periods, with changes in our four inventory categories as follows: consumables increased by 4% in both periods; seasonal decreased 4% compared to a 6% decrease; home products decreased by 4% compared to a 10% decrease; and apparel decreased by 11% compared to a 10% decrease.

 

Cash flows from investing activities.  Significant components of property and equipment purchases in the 2019 period included the following approximate amounts: $67 million for improvements, upgrades, remodels and relocations of existing stores; $36 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $25 million for distribution and transportation-related capital expenditures; and $15 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During the 2019 period, we opened 240 new stores and remodeled or relocated 357 stores.

 

Significant components of property and equipment purchases in the 2018 period included the following approximate amounts: $70 million for improvements, upgrades, remodels and relocations of existing stores; $41 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $39 million for distribution and transportation-related capital expenditures; and $12 million for information systems upgrades and technology-related projects. During the 2018 period, we opened 241 new stores and remodeled or relocated 353 stores.

 

20

Capital expenditures for 2019 are currently projected to be in the range of $775 million to $825 million. We anticipate funding 2019 capital requirements with a combination of some or all of the following: existing cash balances, cash flows from operations, availability under our Revolving Facility and/or the issuance of additional CP Notes. We plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores. Capital expenditures in 2019 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet; technology and other strategic initiatives; as well as routine and ongoing capital requirements.

 

Cash flows from financing activities.  In the 2018 period, net proceeds from the issuance of the 2028 Senior Notes were $499.5 million and we redeemed all outstanding 1.875% senior notes due 2018 for $400.0 million. Net commercial paper borrowings decreased by $121.3 million in the 2019 period and decreased by $237.2 million in the 2018 period. There were no borrowings or repayments under the Revolving Facility during the 2019 or 2018 periods. Also during the 2019 and 2018 periods, we repurchased approximately 1.7 million and 1.6 million shares of our common stock at a total cost of $200.0 million and $150.0 million, respectively, and paid cash dividends of $82.8 million and $77.7 million, respectively.

 

Share Repurchase Program

 

At May 3, 2019, our common stock repurchase program had a total remaining authorization of approximately $1.1 billion. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions. The authorization has no expiration date and may be modified or terminated from time to time at the discretion of our Board of Directors. For more information about our share repurchase program, see Note 8 to the condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended February 1, 2019.

 

ITEM 4.CONTROLS AND PROCEDURES.

 

(a) Disclosure Controls and Procedures.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

(b) Changes in Internal Control Over Financial Reporting.  We adopted new lease accounting guidance as of February 2, 2019 (See Notes 1 and 4 to the condensed consolidated financial statements contained in Part I, Item 1 of this report), and as a result, we modified the related internal controls over financial reporting. There have been no other changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) during the quarter ended May 3, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

21

PART II—OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS.

 

The information contained in Note 7 to the unaudited condensed consolidated financial statements under the heading “Legal proceedings” contained in Part I, Item 1 of this report is incorporated herein by this reference.

 

ITEM 1A.RISK FACTORS.

 

There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended February 1, 2019.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The following table contains information regarding purchases of our common stock made during the quarter ended May 3, 2019 by or on behalf of Dollar General or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act:

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number

    

Approximate

 

 

 

 

 

 

 

 

of Shares

 

Dollar Value

 

 

 

 

 

 

 

 

Purchased

 

of Shares that May

 

 

 

Total Number

 

Average

 

as Part of Publicly

 

Yet Be Purchased