UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
Commission file number 1-11421
DOLLAR GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 61-0502302
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
104 Woodmont Blvd.
Suite 500
Nashville, Tennessee 37205
(Address of principal executive offices, zip code)
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Registrant's telephone number, including area code: (615) 783-2000
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 X No____.
The number of shares of common stock outstanding at June 8, 1999, was 265,562,355.
Dollar General Corporation
Form 10-Q
For the Quarter Ended April 30, 1999
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of
April 30, 1999, January 29, 1999
(derived from the audited financial
statements) and May 1, 1998. 3
Consolidated Statements of Income for the
three months ended April 30,1999 and May 1, 1998. 4
Consolidated Statements of Cash
Flows for the three months ended
April 30, 1999 and May 1, 1998. 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Apr. 30, Jan. 29, May 1,
1999 1999 1998
(Unaudited) * (Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 25,617 $ 22,294 $ 37,241
Merchandise inventories 939,154 811,722 692,658
Deferred income taxes 2,632 2,523 6,283
Other current assets 31,744 42,378 20,449
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Total current assets 999,147 878,917 756,631
Property and equipment, at cost 533,065 528,238 415,974
Less: accumulated depreciation 216,434 201,830 162,692
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316,631 326,408 253,282
Other assets 9,648 6,459 6,591
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Total assets $ 1,325,426 $ 1,211,784 $ 1,016,504
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LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt $ 667 $ 725 $ 715
Short-term borrowings 113,573 0 119,650
Accounts payable 246,672 257,759 179,120
Accrued expenses 145,011 172,825 87,065
Income taxes 6,798 23,825 11,227
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Total current liabilities 512,721 455,134 397,777
Long-term debt 647 786 406
Deferred income taxes 24,611 30,103 21,669
Shareholders' equity:
Preferred stock 858 858 858
Common stock 132,604 105,121 83,719
Additional paid-in capital 424,207 418,039 395,938
Retained earnings 430,305 402,270 316,664
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987,974 926,288 797,179
Less: treasury stock 200,527 200,527 200,527
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Total shareholders' equity 787,447 725,761 596,652
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Total liabilities and
shareholders' equity $ 1,325,426 $ 1,211,784 $ 1,016,504
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* Derived from the January 29, 1999 audited financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
April 30, May 1,
1999 1998
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Net sales $ 844,593 $ 705,260
Cost of goods sold 618,646 514,928
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Gross profit 225,947 190,332
Selling, general and
administrative expense 168,051 140,940
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Operating profit 57,896 49,392
Interest expense 879 939
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Income before taxes on income 57,017 48,453
Provision for taxes on income 20,669 18,049
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Net income $ 36,348 $ 30,404
==============================================================================================================================
Diluted earnings per share 0.14 0.11
==============================================================================================================================
Weighted average diluted shares 269,101 268,731
==============================================================================================================================
Basic earnings per share 0.16 0.13
==============================================================================================================================
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The accompanying notes are an integral part of these consolidated financial statements.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Operating activities:
Net income $ 36,348 $ 30,404
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 14,826 12,364
Deferred income taxes (5,601) (808)
Change in operating assets and liabilities:
Merchandise inventories (127,432) (60,704)
Other current assets 10,634 1,435
Accounts payable (11,087) (838)
Accrued expenses (27,814) (4,962)
Income taxes (17,027) (1,116)
Other 765 285
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Net cash used in operating activities (126,388) (23,940)
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Investing activities:
Purchase of property and equipment (30,637) (24,393)
Proceeds from sale of property and equipment 21,634 0
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Net cash used in investing activities (9,003) (24,393)
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Financing activities:
Issuance of short-term borrowings 146,419 128,535
Repayments of short-term borrowings (32,846) (30,818)
Issuance of long-term debt 786 0
Repayments of long-term debt (983) (1,623)
Payments of cash dividend (8,313) (8,076)
Proceeds from exercise of stock options 17,331 11,926
Repurchase of common stock 0 (26,066)
Tax benefit of stock options exercised 16,320 4,568
Other 0 0
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Net cash provided by financing activities 138,714 78,446
Net increase in cash and cash equivalents 3,323 30,113
Cash and cash equivalents, beginning of period 22,294 7,128
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Cash and cash equivalents, end of period $ 25,617 $ 37,241
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The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's Annual Report on Form 10-K. Accordingly, the reader of the quarterly report on Form 10-Q should refer to the Company's Annual Report on Form 10-K, for the year ended January 29, 1999, for additional information.
The accompanying consolidated financial statements have been prepared in accordance with the Company's customary accounting practices and have not been audited. In management's opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated results of operations for the three-month periods ended April 30, 1999 and May 1, 1998, respectively, have been made.
Interim cost of goods sold is determined using estimates of inventory shrinkage, inflation, and markdowns which are adjusted to reflect actual results at year end. Because of the seasonal nature of the Company's business, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.
2. Shareholders' Equity
Changes in shareholders' equity for the three months ended April 30, 1999 and May 1, 1998 were as follows.
Preferred Common Paid-In Retained Additional Treasury
Stock Stock Capital Earnings Stock Total
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Balances, January 30, 1998 $ 858 $83,526 $379,954 $320,085 ($200,527) $583,896
Net Income 30,404 30,404
Cash dividend, $.04 per
common share, as declared (7,062) (7,062)
Cash dividend, $.61 per
preferred share (1,047) (1,047)
Issuance of common stock
under employee stock
incentive plans 543 11,416 11,959
Stock repurchase (350) (25,716) (26,066)
Tax benefit of stock options
exercised 4,568 4,568
Balances, May 1, 1998 $ 858 $83,719 $395,938 $316,664 ($200,527) $596,652
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Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock Total
Balances, January 29, 1999 $ 858 $ 105,121 $418,039 $402,270 ($200,527) $725,761
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Net Income 36,348 36,348
5-for-4 stock split,
May 24, 1999 26,521 (26,521)
Cash dividend, $.03 per
common share, as declared (7,135) (7,135)
Cash dividend, $.69 per
preferred share (1,178) (1,178)
Issuance of common stock
under employee stock
incentive plans 962 16,369 17,331
Tax benefit of stock options
exercised 16,320 16,320
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Balances, April 30, 1999 $ 858 $132,604 $424,207 $430,305 ($200,527) $787,447
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3. Earnings Per Share
Shares have been adjusted for all stock splits including the May 24, 1999
five-for-four common stock split.
Three months ended April 30, 1999
Per-Share
Income Shares Amount
------------------------------------
Net income $36,348
Less: preferred stock dividends 1,178
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Basic earnings per share
Income available to common shareholders $35,170 222,809 $0.16
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Stock options outstanding 5,386
Convertible preferred stock 1,178 40,906
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Diluted earnings per share
Income available to common shareholders
plus assumed conversions $36,348 269,101 $0.14
==============================================================================================
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Three months ended May 1, 1998
Per-Share
Income Shares Amount
------------------------------------
Net income $30,404
Less: preferred stock dividends 1,047
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Basic earnings per share
Income available to common shareholders $29,357 220,380 $0.13
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Stock options outstanding 7,445
Convertible preferred stock 1,047 40,906
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Diluted earnings per share
Income available to common shareholders
plus assumed conversions $30,404 268,731 $0.11
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4. Stock Repurchases
Under current Board authorization which expires May 1, 2001, the Company may repurchase up to 6.3 million shares from time to time in the open market or in privately negotiated transactions. The Company may repurchase shares depending upon the market price of the shares and other factors in order to offset the impact of the Company's employee stock option program and to take advantage of an undervalued share price as cash is available. As a part of its share repurchase program, the Company has entered into equity collar arrangements with independent third parties. Under these arrangements, the Company sold put warrants to independent third parties which entitle the holders to sell shares of the Company's common stock to the Company on certain dates at specified prices. In addition, the Company purchased call options which entitle the Company to purchase shares of the Company's common stock on certain dates at specified prices. The Company has the option of a net-share settlement. At April 30, 1999, put warrants on 2.0 million shares of common stock and call options on 1.0 million shares of common stock were outstanding. The outstanding warrants and options expire in March 2000 and have a strike price ranging from $22 to $26 per share.
5. Segment Reporting
The Company manages its business on the basis of one reportable segment. As of April 30, 1999 and May 1, 1998, all of the Company's operations were located within the United States. The following data is presented in accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information."
April 30, May 1,
1999 1998
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Classes of similar products Net Sales:
Hardlines $692,680 $579,658
Softlines $151,913 $125,602
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$844,593 $705,260
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6. Subsequent Event
On April 27, 1999, the Company's Board of Directors authorized a five-for-four common stock split for shareholders of record on May 10, 1999, which was distributed on May 24, 1999. The effect of the stock split has been retroactively reflected as of April 30, 1999, in the consolidated balance sheet and Note 2 to the consolidated financial statements, but activity for 1998 was not restated in that statement or Note 2. All references to the number of common shares and per share amounts have been restated as appropriate to reflect the effect of the split for all periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis contains both historical and forward-looking information. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although Dollar General Corporation (the "Company") believes the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements will prove to be accurate. Forward-looking statements may be significantly impacted by certain risks and uncertainties, including, but not limited to: general transportation and distribution delays or interruptions; interruptions in suppliers' operations; inventory risks due to shifts in market demand; changes in product mix; costs and delays associated with building, opening and operating new distribution centers; and the other risk factors referenced in the Annual Report on Form 10-K for the year ended January 29, 1999. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
The following text contains references to years 1999, 1998, 1997 and 1996 which represent fiscal years ending or ended January 28, 2000, January 29, 1999, January 30, 1998 and January 31, 1997, respectively. This discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and their notes.
RESULTS OF OPERATIONS
The nature of the Company's business is seasonal. Historically, sales in the fourth quarter have been significantly higher than sales achieved in each of the first three quarters of the fiscal year. Thus, expenses, and to a greater extent operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, comparing any period to a period other than the same period of the previous year may reflect the seasonal nature of the Company's business.
THREE MONTHS ENDED APRIL 30, 1999 AND MAY 1, 1998
NET SALES. Net sales for the first three months of 1999 increased $139.3 million, or 19.8%, to $844.6 million from $705.3 million for the comparable period in 1998. The increase resulted from 532 net additional stores being in operation as of April 30, 1999, as compared with May 1, 1998, and an increase of 5.7% in same-store sales. The increase in same store sales for the three months ended April 30, 1999 was primarily driven by continued improvements in the Company's consumable basic merchandise mix and improved in-stock levels. Same-store sales growth resulted in a 19.4% increase for the same period last year driven by the addition of 700 faster-turning consumable items to the merchandise mix and refurbishing more than 2,400 stores to a new prototype reflecting a 65% hardlines/35% softlines space allocation versus the previous 50%/50% allocation.
The Company defines same stores as those opened before the beginning of the previous fiscal year which have remained open throughout the current period.
GROSS PROFIT. Gross profit for the first three months of 1999 was $225.9 million, or 26.8% of net sales, compared with $190.3 million, or 27.0% of net sales, in the same period last year. This decrease was driven by higher distribution expense associated with the operation of two additional distribution centers compared with first quarter last year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE. SG&A expense for the first three months of 1999 totaled $168.1 million, or 19.9% of net sales, compared with $140.9 million, or 20.0% of net sales during the comparable period last year. Total SG&A expense increased 19.2% primarily as a result of 532 net additional stores being in operation as compared to the three month period last year.
INTEREST EXPENSE. Interest expense was consistent with the first quarter of year at $0.9 million.
PROVISIONS FOR TAXES ON INCOME. The effective income tax rate for the three
month period
ended April 30, 1999 was 36.3% compared with 37.3% in the comparable period last year. The 1999 effective tax rate decreased as a result of effective tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities - Net cash used by operating activities totaled $126.4 million during the first three months of 1999 compared to $23.9 million cash used in operating activities in the comparable period last year. This increase in use of cash was primarily the result of increased inventories.
Cash flows from investing activities - Net cash used by investing activities totaled $9.0 million during the first three months of 1999 compared to $24.4 million in the comparable period last year. The decrease in cash used by investing activities was primarily the result of $21.6 million received in 1999 from the sale/leaseback of the South Boston, Virginia distribution center expansion. Current period cash used resulted from $30.6 million in capital expenditures primarily from opening 169 new stores during the first three months of 1999.
Cash flows from financing activities - Total debt (including current maturities and short-term borrowings) at April 30, 1999 was $114.9 million compared to $120.8 million at May 1, 1998.
Because of the significant impact of seasonal buying (e.g., Spring and December holiday purchases), the Company's working capital requirements vary significantly during the year. These working capital requirements were financed by short-term borrowings under the Company's $175.0 million revolving credit/term loan facility and short-term bank lines of credit totaling $145.0 million at April 30, 1999. The Company had short-term borrowings of $113.6 million outstanding as of April 30, 1999 and $119.7 million as of May 1, 1998. Seasonal working capital expenditure requirements will continue to be met through cash flow provided by operations supplemented by the revolving credit/term loan facility and short-term bank lines of credit.
Capital requirements for the construction of new stores, new distribution centers and the new corporate headquarters complex will continue to be funded under the Company's $225.0 million leveraged lease facility. As of April 30, 1999, $192.5 million of construction costs had been funded under the facility including: $77.9 million for new stores; $43.6 million for the Indianola, Mississippi Distribution Center; $42.6 million for the Fulton, Missouri Distribution Center; and $28.4 million for the corporate headquarters complex. As of April 30, 1999 the Company has entered into four five-year interest rate swap agreements to fix the interest rate on $200.0 million of this leveraged lease facility.
ACCOUNTING PRONOUNCEMENTS
The Company is in the process of analyzing the impact of the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Currently, adoption of this Statement is required for the Company's fiscal year ending January __, 2001. However, the Financial Accounting Standards Board has recently issued an Exposure Draft which would extend the required adoption date of this Statement to the Company's year ending February 1, 2002.
YEAR 2000
The Company recognizes that without appropriate modification, some computer programs may not operate properly when asked to recognize the year 2000. Upon reaching the year 2000, these computer programs will inaccurately interpret the "00" used in two-digit date calculations as the year 1900. In anticipation of the need to correct and otherwise prepare for any potential Year 2000 computer problems, the Company formed a Year 2000 Task Force (the "Task Force") which has developed a year 2000 compliance plan (the "Plan"). The Plan addresses the Company's state of readiness, the costs to address the Company's year 2000 issues, the risks of the Company's year 2000 issues and the Company's contingency plans.
The Company's state of readiness
Internal Systems: The Company's Plan addresses all of the Company's hardware and
software systems, as well as equipment controlled by microprocessors used in the
offices, stores, and
distribution centers. As a part of the Plan, the Task Force has completed its assessment of the Company's systems, has identified the Company's hardware, software and equipment that will not operate properly in the year 2000 and in most cases, has remedied the problem with programming changes. The Plan has identified the Company's accounting, inventory management and warehouse management systems as critical systems. The Company expects the programming changes and software replacement for systems that are not already year 2000 compliant will be completed during the second quarter of 1999. The Company has completed testing the year 2000 readiness of many of its systems and expects to complete the testing process by July 1999. The Company's year 2000 compliance effort has not resulted in any material delays to other internal information technology projects.
External Systems: The Company has requested, and is receiving, written confirmation from vendors, suppliers and other service providers ("Third Party Vendors") as to their year 2000 system compliance status. Although the Company is diligently seeking and is receiving information as to its Third Party Vendors' year 2000 compliance progress, there can be no assurance that the such Third Party Vendors will have remedied their year 2000 issues. Although the Company currently knows of no material business partner system that will not be year 2000 ready, the failure of any significant business partner to remedy its year 2000 issues could have a material adverse effect on the Company's operations, financial position or liquidity. The Company will continue to aggressively monitor the progress of its Third Party Vendors in an effort to mitigate its own year 2000 non-compliance risk.
The costs to address the Company's year 2000 issues
Based on the Company's current estimates, the cost of addressing the Company's year 2000 remediation efforts will be between $400,000 and $600,000. To date, expenditures have been approximately $250,000. Costs are being expensed when incurred. This cost estimate excludes the costs of previously planned software implementations as well as salaries of existing employees involved in the year 2000 remediation efforts. These projected costs are based upon management's best estimates which were derived utilizing numerous assumptions of future events. However, there can be no guarantee that these costs estimates will be accurate; actual results could differ materially.
The risks of the Company's year 2000 issues
Management believes that its greatest risk to achieving timely year 2000 compliance is in its third-party relationships. For example, if a significant vendor experiences shipping delays because either its systems or a business partner's systems are not year 2000 compliant, such delays could have a material impact on the Company's business depending on the nature of the shipment and the length of the shipping delay. However, currently available information indicates that the Company's significant Third Party Vendors will be year 2000 ready. Management also believes there is a moderate level of risk associated with the unconfirmed year 2000 compliance status of utility companies that provide utility service to the Company's individual stores and its distribution centers.
The Company's contingency plans
The Company will continue to closely monitor the year 2000 compliance readiness of its Third Party Vendors and, where appropriate, will replace those Third Party Vendors who appear to be unwilling to confirm their year 2000 readiness or who are unable to meet compliance deadlines. The Company has been developing, and intends to complete by July 1999, a comprehensive business continuity plan ("BCP") that is designed to respond to significant business interruption. The BCP focuses on business recovery and continuation made necessary by natural disaster, year 2000 system non-compliance, vendor breach of contract or any other factor. Although it is impossible to accurately predict and prepare for all risks associated with the year 2000 issue, the Company will continue to evaluate and modify where appropriate its BCP to address those risks which it believes are reasonably foreseeable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities. The Company utilizes a credit facility to fund seasonal working capital requirements which is comprised primarily of variable rate debt. As of April 30, 1999 the Company had outstanding short term borrowings of $113.6 million at a weighted average interest rate of 5.14%
As of April 30, 1999, the Company was a party to interest rate swap agreements covering $200 million of its $225 million leveraged lease facility and expiring throughout 2008. These swap agreements exchange the Company's floating interest rate exposure on the lease payments under its $225 million leveraged lease facility for fixed rent payments. The Company will pay a weighted average fixed rate of 5.63% on $200 million of the $225 million facility rather than a rate based on the one-month LIBOR %, which was 5.01% at April 30, 1999. The fair value of the interest rate swap agreements was ($2.5) million at April 30, 1999.
PART II - OTHER INFORMATION
Item 1. Not applicable.
Item 2. Not applicable.
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. A. Exhibits:
27 Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
No Current Reports on Form 8-K were filed by Dollar
General Corporation during the quarter ended April 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DOLLAR GENERAL CORPORATION
(Registrant)
June 10, 1999 By:/s/ Brian M. Burr
Brian M. Burr, Executive Vice President,
Chief Financial Officer
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| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 3 MOS | 3 MOS |
| FISCAL YEAR END | JAN 28 2000 | JAN 29 1999 |
| PERIOD END | APR 30 1999 | MAY 1 1998 |
| CASH | 25,617 | 37,241 |
| SECURITIES | 0 | 0 |
| RECEIVABLES | 0 | 0 |
| ALLOWANCES | 0 | 0 |
| INVENTORY | 939,154 | 692,658 |
| CURRENT ASSETS | 31,744 | 20,449 |
| PP&E | 533,065 | 415,974 |
| DEPRECIATION | 216,434 | 162,692 |
| TOTAL ASSETS | 1,325,426 | 1,016,504 |
| CURRENT LIABILITIES | 512,721 | 1,016,504 |
| BONDS | 0 | 0 |
| PREFERRED MANDATORY | 0 | 0 |
| PREFERRED | 858 | 858 |
| COMMON | 132,604 | 83,719 |
| OTHER SE | 680,506 | 512,075 |
| TOTAL LIABILITY AND EQUITY | 1,325,426 | 1,016,504 |
| SALES | 844,593 | 705,260 |
| TOTAL REVENUES | 844,593 | 705,260 |
| CGS | 618,646 | 514,928 |
| TOTAL COSTS | 168,051 | 140,940 |
| OTHER EXPENSES | 0 | 0 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 879 | 939 |
| INCOME PRETAX | 57,017 | 48,453 |
| INCOME TAX | 20,669 | 18,049 |
| INCOME CONTINUING | 36,348 | 30,404 |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | 36,348 | 30,404 |
| EPS BASIC | 0.16 | 0.13 |
| EPS DILUTED | 0.14 | 0.11 |