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 October 30, 1998
Commission file number 1-11421
DOLLAR GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of incorporation or organization)
61-0502302
(I.R.S. employer identification no.)
104 Woodmont Blvd.
Suite 500
Nashville, Tennessee 37205
(Address of principal executive offices, zip code)
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 December 7,
1998 was 209,696,046.
Dollar General Corporation
Form 10-Q
For the Quarter Ended October 30, 1998
Index
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of October 30,
1998, January 30, 1998 (derived from the
audited financial statements) and
October 31, 1997.
Consolidated Statements of Income for the
three months and nine months ended
October 30, 1998 and October 31, 1997.
Consolidated Statements of Cash Flows
for the nine months ended October 30, 1998
and October 31, 1997.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Oct. 30, Jan.30, Oct. 31,
1998 1998 1997
(Unaudited) * (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 18,254 $7,128 $ 13,168
Merchandise inventories 944,266 631,954 737,263
Deferred income taxes 6,233 5,743 3,776
Other current assets 34,692 21,884 21,694
Total current assets 1,003,445 666,709 775,901
Property and equipment, at cost 477,281 391,911 378,506
Less: accumulated depreciation 188,241 150,466 140,404
289,040 241,445 238,102
Other assets 6,498 6,684 5,595
Total assets $1,298,983 $ 914,838 $1,019,598
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt$ 649 $ 1,450 $ 1,597
Short-term borrowings 259,679 21,933 193,583
Accounts payable 280,776 179,958 210,845
Accrued expenses 85,398 92,027 75,547
Income taxes 8,026 12,343 14,363
Total current liabilities 634,528 307,711 495,935
Long-term debt 189 1,294 1,411
Deferred income taxes 12,277 21,937 5,360
Shareholders' equity:
Preferred stock 858 858 858
Common stock 105,510 83,526 66,660
Additional paid-in capital 415,762 379,954 373,234
Retained earnings 366,439 320,085 276,667
888,569 784,423 717,419
Less treasury stock 236,580 200,527 200,527
Total shareholders' equity 651,989 583,896 516,892
Total liabilities and shareholders'
equity $1,298,983 $ 914,838 $1,019,598
* Derived from the January 30, 1998 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 Nine Months Ended
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1998 1997 1998 1997
Net Sales $781,389 $649,400 $2,228,004 $1,766,234
Cost of goods sold 556,655 465,616 1,607,457 1,280,439
Gross profit 224,734 183,784 620,547 485,795
Selling, general and
administrative expense 158,445 128,220 449,786 355,254
Operating profit 66,289 55,564 170,761 130,541
Interest expense 3,315 1,559 6,285 2,625
Income before taxes on income 62,974 54,005 164,476 127,916
Provision for taxes on income 22,636 20,387 60,445 48,288
Net income $ 40,338 $ 33,618 $104,031 $ 79,628
Diluted earnings per share $ 0.19 $ 0.16 $ 0.48 $ 0.37
Weighted average diluted
shares 214,673 215,356 214,763 214,475
Basic earnings per share $ 0.22 $ 0.19 $ 0.57 $ 0.44
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)
Nine Months Ended
Oct. 30, Oct. 31,
1998 1997
Operating activities:
Net income $104,031 $ 79,628
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 38,825 27,750
Deferred income taxes (10,150) (298)
Change in operating assets and liabilities:
Merchandise inventories (312,312) (261,160)
Other current assets (12,808) (3,191)
Accounts payable 100,818 107,322
Accrued expenses (6,629) 5,106
Income taxes (4,317) 4,361
Other 1,751 343
Net cash (used in) provided by operating activities (100,791) (40,139)
Investing activities:
Purchase of property and equipment (104,090) (92,313)
Proceeds from sale of property and equipment 16,105 33,811
Net cash (used in) investing activities (87,985) (58,502)
Financing activities:
Issuance of short-term borrowings 358,078 170,892
Repayments of short-term borrowings (120,332) (15,777)
Issuance of long-term debt 0 190
Repayments of long-term debt (1,906) (1,794)
Payments of cash dividend (20,960) (17,562)
Proceeds from exercise of stock options 27,247 26,072
Repurchase of common stock (73,236) (75,123)
Tax benefit of stock options exercised 30,256 17,748
Other 755 600
Net cash provided by (used in) financing activities 199,902 105,246
Net increase in cash and cash equivalents 11,126 6,605
Cash and cash equivalents, beginning of period 7,128 6,563
Cash and cash equivalents, end of period $ 18,254 $ 13,168
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 30, 1998 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 and nine-month periods ended October 30, 1998 and
October 31, 1997, 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 nine months ended October
30, 1998 and October 31, 1997 were as follows (dollars in thousands
except per share amounts):
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances, January 31, 1997 $ 858 $53,105 $329,948 $302,145 ($200,527) $485,529
Net income 79,628 79,628
5-for-4 stock split,
September 22, 1997 13,416 (13,416)
Cash dividend, $.13 per
common share, as declared (15,132) (15,132)
Cash dividend, $1.42 per
preferred share (2,430) (2,430)
Issuance of common
stock under employee stock
incentive plans 1,119 24,953 26,072
Stock repurchased (995) (74,128) (75,123)
Tax benefit of stock options
exercised 17,748 17,748
Transfer to ESOP 15 585 600
Balances, October 31, 1997 $ 858 $66,660 $373,234 $276,667 ($200,527) $516,892
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock Total
Balances, January 30, 1998 $ 858 $83,526 $379,954 $320,085 ($200,527) $583,896
Net Income 104,031 104,031
5-for-4 stock split,
September 21, 1998 21,090 (21,090)
Cash dividend, $.10 per
common share, as declared (18,438) (18,438)
Cash dividend, $1.65
preferred share (2,555) (2,555)
Issuance of common stock
under employee stock
incentive plans 1,377 25,903 27,280
Stock repurchase (499) (36,684) (36,053) (73,236)
Tax benefit of stock options
exercised 30,256 30,256
Transfer to ESOP 16 739 755
Balances, October 30, 1998 $ 858 $105,510 $415,762 $366,439 ($236,580) $651,989
</TABLE>
3. Earnings Per Share
Amounts are in thousands except per share data, and shares have
been adjusted for the March 23, 1998 and September 21, 1998, five-
for-four common stock splits.
Nine months ended October 30, 1998
Per-Share
Income Shares Amount
Net Income $104,031
Less: preferred stock dividends 2,555
Basic Earnings per Share
Income available to common shareholders $101,476 176,763 $0.57
Stock options outstanding 5,275
Convertible preferred stock 2,555 32,725
Diluted Earnings per Share
Income available to common shareholders
plus assumed conversions $104,031 214,763 $0.48
Nine months ended October 31, 1997
Per-Share
Income Shares Amount
Net Income $79,628
Less: preferred stock dividends 2,430
Basic Earnings per Share
Income available to common shareholders $77,198 176,717 $0.44
Stock options outstanding 5,033
Convertible preferred stock 2,430 32,725
Diluted Earnings per Share
Income available to common shareholders
plus assumed conversions $79,628 214,475 $0.37
Three months ended October 30, 1998
Per-Share
Income Shares Amount
Net Income $40,338
Less: preferred stock dividends 942
Basic Earnings per Share
Income available to common shareholders $39,396 177,182 $0.22
Stock options outstanding 4,766
Convertible preferred stock 942 32,725
Diluted Earnings per Share
Income available to common shareholders
plus assumed conversions $40,338 214,673 $0.19
Three months ended October 31,1997
Per-Share
Income Shares Amount
Net Income $33,618
Less: preferred stock dividends 838
Basic Earnings per Share
Income available to common shareholders $32,780 176,978 $0.19
Stock options outstanding 5,653
Convertible preferred stock 838 32,725
Diluted Earnings per Share
Income available to common shareholders
plus assumed conversions $33,618 215,356 $0.16
4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in the first
quarter of 1998. The Company's comprehensive income and net
income for the three periods and nine periods ended October 30,
1998 and October 31, 1997 were equal.
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 the Company believes the
assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate,
and therefore, there can be no assurance that the forward-looking
statements included herein 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 listed in the Annual Report on
Form 10-K for the year ended January 30, 1998. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or
circumstances occurring after the date hereof or to reflect the
occurrence of interruptions in suppliers' operations or
unanticipated events.
The following text contains references to years 1998, 1997, 1996
and 1995 which represent fiscal years ending or ended January 29,
1999, January 30, 1998, and January 31, 1997 and 1996,
respectively. This discussion and analysis should be read in
conjunction with, and is qualified in its entirety by, the
consolidated financial statements, including the notes thereto.
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 will reflect the seasonal nature of
the Company's business.
NINE MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
NET SALES. Net sales for the first nine months of fiscal 1998
increased $461.8 million, or 26.1%, to $2.23 million from $1.77
million for the comparable period of fiscal 1997. The increase
resulted from 449 net additional stores being in operation as of
October 30, 1998, as compared with October 31, 1997, and an
increase of 11.4% in same-store sales. Same-store sales growth was
a 7.6% increase for the same period last year.
The Company defines same stores as those opened prior to the
beginning of the previous fiscal year which have remained open
through the current period. Sales were negatively affected during
the first and second quarters of fiscal 1997 as the Company
refurbished more than 2,400 stores to a new prototype.
GROSS PROFIT. Gross profit for the first nine months was $620.5
million, or 27.9% of net sales, compared with $485.8 million, or
27.5% of net sales, in the same period last year. This increase
was driven by higher margin on current purchases.
For the fourth quarter, management expects gross margin, as a
percent of sales, to decline primarily because of higher inventory
shrinkage accruals.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE. SG&A expense
for the first nine months totaled $449.8 million, or 20.2% of net
sales, compared with $355.3 million, or 20.1% of net sales during
the comparable period last year. Total SG&A expense increased
26.6% primarily as a result of 449 net additional stores being in
operation as compared to the nine month period last year. For the
fourth quarter management expects SG&A to decline, as a percent of
sales, primarily as a result of lower advertising expense related
to the elimination of the December circular.
INTEREST EXPENSE. Interest expense increased to $6.3 million, or
0.28% of net sales, compared with $2.6 million or 0.15% of net
sales, in the comparable period last year. This increase was a
result of higher average borrowings to support higher company
inventory levels and the repurchase of common stock. The increase
in inventory levels was primarily a result of operating two
additional distribution centers, one in Indianola, Mississippi and
one in Villa Rica, Georgia; slightly higher inventory in existing
stores; and additional inventory required to operate 449 more
stores. During the first nine months of fiscal 1998 the Company
repurchased 2,496,625 shares of common stock at an average cost of
$29.34 per share. For the fourth quarter management expects
interest expense, as percent of sales, to be flat with last year.
PROVISIONS FOR TAXES ON INCOME. The effective income tax rate for
the three and nine month periods ended October 30, 1998 was 35.9%
and 36.8% compared with 37.8% in the comparable periods last year.
State tax planning initiatives allowed the Company to lower the
year-to-date rate to 36.8%.
THREE MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
NET SALES. Net sales for the quarter increased $132.0 million, or
20.3%, to $781.4 million from $649.4 million for the comparable
period of fiscal 1997. The increase resulted from 449 net
additional stores being in operation as compared with the
comparable period last year and an increase of 6.5% in same store
sales. Same store sales increased 11.6% for the third quarter
last year.
GROSS PROFIT. Gross profit for the quarter was $224.7 million, or
28.8% of net sales, compared with $183.8 million, or 28.3% of net
sales, in the same period last year. This increase was driven by
higher margin on current purchases which was partially offset by
higher shrink reserves, as a percent of sales.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE. SG&A expense
for the quarter totaled $158.4 million, or 20.3% of net sales,
compared with $128.2 million, or 19.7% of net sales last year.
Total SG&A expense increased 23.6% primarily as a result of adding
449 net new stores since the comparable period last year.
INTEREST EXPENSE. Interest expense increased to $3.3 million, or
0.42% of net sales, compared with $1.6 million or 0.24% of net
sales, in the comparable period last year. This increase was
primarily a result of the same factors listed above for the nine-
month period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities - Net cash used by operating
activities totaled $100.8 million during the first nine months of
fiscal 1998 compared with $40.1 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 $88.0 million during the first nine months of
fiscal 1998 million compared with $58.5 million in the comparable
period last year. The increase in cash used by investing
activities was primarily the result of the $33.8 million received
in 1997 from the sale/leaseback of the South Boston, Virginia
distribution center. Current period cash used resulted primarily
from $104.1 million in expenditures primarily from opening 452 new
stores during the first nine months of fiscal 1998.
Cash flows from financing activities - Total debt (including
current maturities and short-term borrowings) at October 30, 1998
was $260.5 million compared to $196.6 million at October 31, 1997.
The increase in total debt was driven by increased inventories
and the stock repurchase.
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 $165.0 million at
October 30, 1998. The Company had short-term borrowings of $259.7
million outstanding as of October 30, 1998 and $193.6 million as
of October 31, 1997. 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 October 30, 1998 $93.3 million of
construction costs had been funded under this facility including:
$43.2 million for the Indianola, Mississippi Distribution Center;
$21.7 million for new stores; $15.2 million for the Fulton,
Missouri Distribution Center; and $13.2 million for the corporate
headquarters complex. As of October 30, 1998 the Company has
entered into three five-year interest rate swap agreements to fix
the interest rate on $150.0 million of this leveraged lease
facility.
The Company's liquidity position is set forth in the following
table (dollars in thousands):
October 30, January 30, October 31,
1998 1998 1997
Current ratio 1.6x 2.2x 1.6x
Total borrowings/equity 40.0% 4.2% 38.0%
Working Capital $368,917 $358,998 $279,966
Average daily use of debt
fiscal year-to-date) $162,427 $ 90,882 $ 70,634
Maximum outstanding short-term
debt (fiscal year-to-date) $312,580 $184,725 $193,583
ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" for the year ending January 29, 1999. The Company
will adopt Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," for
the year ending January 28, 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This pronouncement
will be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is still in the
process of analyzing the impact of the adoption of this Statement.
YEAR 2000
Dollar General Corporation ("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 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 ("Task Force") which has completed a year 2000 compliance
plan. The plan addresses all hardware and software systems, as
well as equipment controlled by microprocessors used in the
offices, stores, or distribution centers. As a part of the plan,
the Task Force has substantially 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 identifies the Company's accounting, inventory
management and warehouse management systems as critical systems.
The Company expects that programming changes and software
replacement for systems that are not already year 2000 compliant
will be completed during the first and second quarters of the
fiscal year beginning January 30, 1999. The Company has completed
testing the year 2000 readiness of many of its systems and expects
to complete the testing process by the end of the second quarter
of the fiscal year beginning January 30, 1999. The Company's year
2000 compliance effort has not resulted in any material delays to
other internal information technology projects.
The Company has requested, and is receiving, written confirmation
from vendors, suppliers and other service providers ("business
partners") as to their year 2000 system compliance status.
Although the Company is diligently seeking information as to its
business partners' year 2000 compliance progress, there can be no
assurance that such business partners will have remedied their
year 2000 issues. The failure of a 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 monitor the progress of
its business partners in an effort to mitigate its own year 2000
non-compliance risk.
Based on the Company's current estimates, the cost of the
Company's year 2000 remediation efforts will be between $500,000
and $1,000,000. To date, expenditures have been less than
$100,000. 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. There can be no
guarantee however, that these costs estimates will be accurate;
actual results could differ materially.
Management believes that its greatest risk to achieving timely
year 2000 compliance is in its third party relationships.
Currently available information indicates that Dollar General's
significant business partners will be year 2000 ready. Management
believes there is a moderate level of risk associated with the
unconfirmed year 2000 compliance status of small utility companies
that provide utility service to the Company's individual stores.
The Company will continue to closely monitor the year 2000
compliance readiness of its business partners, and where
appropriate, will replace those business partners who appear to be
unwilling to confirm their year 2000 readiness or unable to meet
compliance deadlines. In addition, the Company is developing
contingency plans to handle utility service failures caused by
utility companies' year 2000 system non-compliance.
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 October 30, 1998.
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)
December 11, 1998
By:/s/ Phil Richards
Phil Richards, Vice President,
Chief Financial Officer
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<PERIOD-END> OCT-30-1998 OCT-31-1997
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<SECURITIES> 0 0
<RECEIVABLES> 0 0
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