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Dollar General Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: December 5, 2011 07:25AM

Dollar General Corp. (DG) filed Quarterly Report for the period ended 2011-10-28. Dollar General has a market cap of $13.64 billion; its shares were traded at around $39.94 with a P/E ratio of 19.67 and P/S ratio of 1.05.



Highlight of Business Operations:

SG&A Expense. SG&A expense was 22.4% as a percentage of sales in the 2011 period compared to 22.8% in the 2010 period, a decrease of 45 basis points. Retail salaries increased at a rate lower than our increase in sales, partially due to the completed rollout of our workforce management system. A decrease in incentive compensation also contributed to the overall decrease in SG&A as a percentage of sales. Utilities increased at a rate lower than the increase in sales, primarily due to lower electricity and waste management costs reflecting our recycling efforts, partially offset by increased data transmission costs related to store computers. SG&A, as a percentage of sales, was also favorably impacted by other cost reduction and productivity initiatives as well as the 11.5% increase in sales. These improvements were partially offset by depreciation and amortization expense and increased use of debit cards. Depreciation and amortization expense increased at a higher rate than the increase in sales primarily due to investments in store data communications technology, increased investment in store fixtures and equipment resulting from recent merchandising initiatives, and store properties purchased.

Gross Profit. The gross profit rate as a percentage of sales was 31.6% in the 2011 period compared to 31.9% in the 2010 period, a decline of 35 basis points. Consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2011 period than in the 2010 period. Our purchase costs increased primarily due to increased commodity costs, we incurred higher markdowns to sell through certain home and apparel products, and our transportation costs were impacted by higher fuel rates. Our LIFO provision increased to $25.4 million in the 2011 period compared to $0.7 million in the 2010 period. These factors were partially offset by selective price increases as well as lower inventory shrinkage and distribution center costs, as a percentage of sales.

SG&A Expense. SG&A expense was 22.3% as a percentage of sales in the 2011 period compared to 22.8% in the 2010 period, a decrease of 54 basis points. Retail salaries increased at a rate lower than our increase in sales, partially due to the completed rollout of our workforce management system. A decrease in incentive compensation also contributed to the overall decrease in SG&A as a percentage of sales. SG&A, as a percentage of sales, was also favorably impacted by other cost reduction and productivity initiatives as well as the 11.2% increase in sales. These improvements were partially offset by depreciation and amortization expense, which increased at a higher rate than the increase in sales, primarily due to investments in store data communications technology, increased investment in store fixtures and equipment resulting from recent merchandising initiatives, and store properties purchased. SG&A in the 2011 period includes expenses totaling $13.1 million for payments and accruals related to the settlement and expected settlement of two legal matters while SG&A in the 2010 period includes expenses totaling $15.0 million primarily relating to share-based compensation incurred in connection with a secondary offering of our common stock.

Under the Term Loan Facility we are required to prepay outstanding term loans, subject to certain exceptions, with up to 50% of our annual excess cash flow (as defined in the credit agreement) which will be reduced to 25% and 0% if we achieve and maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively; the net cash proceeds of certain non-ordinary course asset sales or other dispositions of property; and the net cash proceeds of any incurrence of debt other than proceeds from debt permitted under the senior secured credit agreement. Through October 28, 2011, no prepayments have been required under the prepayment provisions listed above. The Term Loan Facility can be prepaid in whole or in part at any time.

Cash flows from operating activities. Cash flows from operating activities were $604.5 million in the 2011 period, an increase of $200.7 million over the 2010 period. Cash flows from operating activities in the 2011 period compared to the 2010 period were positively impacted by our strong operating performance due to greater sales and increased net income, as described in more detail above under “Results of Operations.” Significant components of the increase in cash flows from operating activities in the 2011 period as compared to the 2010 period were related to working capital in general and Accrued expenses and other in particular. Items affecting Accrued expenses and other include increased accruals for income tax reserves, increased accruals for legal settlements and taxes exclusive of taxes on income, and lower incentive compensation payments in the 2011 period compared to the 2010 period, partially offset by reduced interest accruals due primarily to the redemption of the Senior Notes. In addition, inventory purchases are a significant component of cash flows from operating activities, and our inventory balances may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. During the 2011 period, merchandise inventories increased by 18% compared to a 24% overall increase during the 2010 period. Inventory levels in our four inventory categories in the 2011 period compared to the respective 2010 period were as follows: the consumables category increased 21% compared to a 23% increase; the seasonal category increased by 13% compared to a 31% increase; the home products category increased by 22% compared to a 23% increase; and apparel increased by 12% compared to a 17% increase. Underlying these increases are the effects of commodity cost increases (net of LIFO charges) and the addition of new items to our merchandise offerings.

Read the The complete Report



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