News Column

Dollar General Posts Record Sales, Profit, Income

Page 3 of 1

Dollar General Corp. (NYSE: DG) today reported record sales, operating profit and net income for its fiscal 2012 fourth quarter (13 weeks) and full year (52 weeks) ended Feb. 1, 2013.

"Dollar General had yet another outstanding year in 2012 including exceptionally strong fourth quarter results,"Rick Dreiling, chairman and CEO, said in a statement. "We grew our market share and invested strategically to continue to win with our customers. These results demonstrate the strength of our business strategy, and we believe we are very well-positioned for future growth."

He added that the company is forecasting a sales increase of 10 to 12 percent for 2013, same-store sales growth of 4 to 6 percent and adjusted EPS of $3.15 to $3.30. "We remain committed to delivering long-term value for our shareholders through increased earnings and return of cash through ongoing share repurchases," he said.

Fiscal Fourth Quarter 2012 Highlights

Net sales increased 0.5 percent to $4.21 billion in the 2012 fourth quarter compared to $4.19 billion in the 2011 fourth quarter. Excluding sales for the week ending February 3, 2012 ("the 2011 53rd week") of $289 million, net sales increased 8.0 percent. Same-store sales, based on the comparable 13-week periods ended February 1, 2013 and February 3, 2012, increased 3.0 percent, resulting from increases in both customer traffic and average transaction amount. Same-store sales increases were primarily driven by consumables.

The Company's gross profit, as a percentage of sales, was 32.5 percent in the 2012 fourth quarter compared to 32.2 percent in the 2011 quarter, an increase of 34 basis points. Factors contributing to the improvement included a significant reduction in the adjustment to the Company's LIFO reserve in addition to improved transportation efficiencies and higher markups, partially offset by an increase in the mix of consumables, which generally have lower markups than non-consumables, and higher markdowns. Cost of goods sold included charges to increase the Company's LIFO reserve of $0.2 million in the 2012 fourth quarter compared to $22.3 million in the 2011 fourth quarter.

Selling, general and administrative expenses ("SG&A") were $845 million, or 20.1 percent of sales, in the 2012 13-week fourth quarter, compared to $838 million, or 20.0 percent of sales, in the 2011 14-week quarter. Excluding the acceleration of equity-based compensation and other expenses resulting from secondary offerings of the Company's common stock of $10.3 million in the 2011 quarter, SG&A, as a percentage of sales, increased by 31 basis points. Costs that increased at a rate higher than the increase in sales include rent expense, depreciation expense, primarily related to store fixtures and equipment, and fees associated with the increased use of debit cards. Retail labor expense, as a percentage of sales, decreased due to efficiencies driven by the Company's workforce management system and work simplification efforts. In the 2011 fourth quarter, SG&A was favorably impacted by increased sales, including the 2011 53rd week, among other factors.

Operating profit was $522 million, or 12.4 percent of sales, in the 2012 fourth quarter, compared to $508 million, or 12.1 percent of sales, in the 2011 fourth quarter. Excluding the acceleration of equity-based compensation and other secondary offering expenses, 2011 fourth quarter operating profit was $519 million, or 12.4 percent of sales.

Interest expense was $27 million in the 2012 fourth quarter compared to $40 million in the 2011 fourth quarter, with the decrease attributable to lower all-in interest rates.

The effective income tax rate in the 2012 fourth quarter was 35.9 percent compared to 37.5 percent in the 2011 fourth quarter. The 2012 fourth quarter benefited by approximately $6.5 million, or $0.02 per share, from the retroactive (for employees hired on or after January 1, 2012) reenactment of the Work Opportunity Tax Credit ("WOTC"). Had WOTC been effective for these employees from the beginning of the fiscal year, income tax expense in prior quarters would have been reduced by the following estimated amounts: $2.6 million in the first quarter, $2.3 million in the second quarter and $1.6 million in the third quarter.

Net income for the 2012 fourth quarter was $317 million, or diluted earnings per share ("EPS") of $0.97, compared to net income of $293 million, or diluted EPS of $0.85, in the fourth quarter of fiscal 2011. Adjusted net income, as defined below, in the 2011 fourth quarter was $299 million, or adjusted diluted EPS of $0.87. The Company estimates that the 2011 53rd week contributed approximately $0.06 per share.

Adjusted net income is defined as net income excluding specifically identified expenses. For the 2012 and 2011 full years, the adjustments relate to the acceleration of equity-based compensation and expenses relating to secondary offerings of the Company's common stock and net losses on debt repurchases in each year, $13.1 million relating to two settled legal matters in 2011 and certain items resulting from debt refinancing and interest rate swaps in 2012. In the 2011 fourth quarter, the acceleration of equity-based compensation and other expenses relating to a secondary offering of the Company's stock were excluded. The income tax effect of adjustments is also excluded from all periods presented. A reconciliation of adjusted net income to net income is presented in the accompanying schedules.

Full Year 2012 Financial Results

Full year 2012 net sales increased 8.2 percent to $16.02 billion compared to net sales of $14.81 billion in 2011. Excluding the impact of the 2011 53rd week, net sales increased 10.4 percent. Same-store sales, based on the comparable 52-week periods ended February 1, 2013 and February 3, 2012, increased 4.7 percent, including increases in both customer traffic and average transaction amount, resulting from the refinement of the Company's merchandise offerings, improvements in category management processes and store standards, and increased utilization of store square footage. The increase in sales of consumables outpaced non-consumables, with sales of snacks, candy, beverages and perishables contributing the majority of the increase throughout the year.

The Company's gross profit rate was 31.7 percent of sales in 2012 and 2011. Factors favorably impacting the gross profit rate included a significantly lower LIFO provision, higher inventory markups, and improved transportation efficiencies due in part to a decrease in average miles per delivery enabled by the Company's new distribution centers and other logistics initiatives. These positive factors were offset by higher markdowns, a reduction in price increases and a modest increase in the inventory shrinkage rate compared to 2011. In addition, consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in 2012 than in 2011. Primarily as the result of lower inflation on commodities in 2012, the LIFO provision decreased to $1.4 million in 2012 compared to $47.7 million in 2011.

Full year SG&A expense was 21.4 percent of sales in 2012 compared to 21.7 percent in 2011, an improvement of 25 basis points. Retail labor expense increased at a lower rate than the increase in sales, partially due to ongoing benefits of the Company's workforce management system coupled with savings due to various store work simplification initiatives. Also positively impacting SG&A were lower legal settlement expenses in 2012 due to two legal matters settled in 2011 for a combined cost of $13.1 million and the impact of decreased expenses ($2.9 million in 2012 compared to $11.1 million in 2011) relating to secondary offerings of the Company's common stock. Costs that increased at a rate higher than the increase in sales included rent expense, fees associated with the increased use of debit cards and depreciation expense, primarily related to additions of certain store equipment and fixtures. SG&A in 2011 was favorably impacted by increased sales, including the 2011 53rd week, among other factors.

Full year operating profit increased by 11 percent to $1.66 billion, or 10.3 percent of sales, in 2012 compared to $1.49 billion, or 10.1 percent of sales, in 2011. Excluding the acceleration of equity-based compensation and other secondary offering expenses from both years and expenses related to certain legal settlements in 2011, operating profit increased 9 percent to $1.66 billion, or 10.4 percent of sales, in 2012 compared to $1.52 billion, or 10.2 percent of sales, in 2011.

Interest expense in 2012 was $128 million, a decrease of $77 million from 2011, due to lower average outstanding long-term obligations, resulting from repurchases and refinancing of indebtedness in 2012 and 2011 and lower all-in interest rates on long-term obligations.

Other (income) expense in 2012 included pretax losses totaling $29.0 million resulting from the repurchase of the Company's 11.875%/12.125% senior subordinated notes. Other (income) expense in 2011 includes pretax losses totaling $60.3 million resulting from the repurchase of the Company's 10.625% senior notes.

The effective income tax rate for 2012 was 36.4 percent compared to a rate of 37.4 percent for 2011. The 2012 income tax rate was lower than the 2011 rate primarily due to an adjustment of $14.5 million, or $0.04 per diluted share, associated with an adjustment of accruals due to the favorable resolution of income tax audits, which was recorded in the fiscal 2012 second quarter.

The Company reported net income of $953 million, or diluted EPS of $2.85 for fiscal year 2012 compared to net income of $767 million, or diluted EPS of $2.22 for fiscal year 2011. Adjusted net income, as defined above and as reconciled to net income in the accompanying schedules, increased 19 percent to $973 million, or $2.91 per diluted share, in fiscal 2012, compared to adjusted net income of $819 million, or $2.37 per diluted share, in fiscal 2011.

Merchandise Inventories

As of February 1, 2013, total merchandise inventories, at cost, were $2.40 billion compared to $2.01 billion as of February 3, 2012, an increase of 13 percent on a per-store basis. Annual inventory turns were 5.0 times in 2012. The increase in per-store inventories was due to several factors including new items introduced in 2012, improved presentation levels of select categories and early receipt of items related to the Company's 2013 planogram changes, including the "Phase Five" initiative to increase productivity in older format stores.

Capital Expenditures

Total additions to property and equipment in 2012 were $572 million, including: $155 million for new leased stores; $132 million for stores purchased or built by the Company; $83 million for distribution centers; $80 million for remodels and relocations of existing stores; $71 million for improvements and upgrades to existing stores; $27 million for information systems upgrades and technology-related projects; and $17 million for transportation-related capital.

During 2012, the Company opened 625 new stores and remodeled or relocated 592 stores.

Share Repurchases

In 2012, the Company repurchased $671 million, or 14.4 million shares, under its share repurchase program, including $75 million, or 1.7 million shares, repurchased in the 2012 fourth quarter. Since the inception of the program in December 2011, the Company has repurchased 19.3 million shares totaling $856 million. Including an additional $500 million authorization by the Company's board of directors on March 19, 2013, $644 million remains available for repurchase under the Company's share repurchase program.

Fiscal 2013 Financial Outlook

For the 2013 fiscal year, the Company expects total sales to increase 10 to 12 percent over the 2012 fiscal year. Same-store sales are expected to increase 4 to 6 percent. Operating profit for 2013 is expected to be in the range of $1.780 billion to $1.845 billion. The Company expects sales and EPS growth to be stronger in the second half of the year as merchandising initiatives are implemented, including the rollout of tobacco products to substantially all stores and the completion of "Phase Five." In particular, the first quarter sales comparison is very challenging as the Company laps a very strong 6.7 percent same-store sales increase in the 2012 first quarter.

The Company expects full year interest expense to be in the range of $100 million to $110 million. Diluted EPS for the fiscal year, adjusted to exclude potential charges or expenses relating to amendments to or refinancing of any notes, loans or revolving credit facilities and any expenses resulting from potential secondary stock offerings, is expected to be approximately $3.15 to $3.30, based on approximately 327 million weighted average diluted shares, assuming share repurchases. The full year 2013 effective tax rate is expected to be approximately 38 percent.

Capital expenditures are expected to be in the range of $575 million to $625 million in 2013. Approximately 50 percent of planned capital spending is for investment in store growth and development, including new stores, remodels, relocations and purchases of existing store locations; approximately 30 percent is planned for transportation, distribution and special projects; and the remaining 20 percent is expected to be spent on maintenance capital. The Company plans to open approximately 635 new stores, including approximately 20 Dollar General Market stores and 40 Dollar General Plus stores. In addition, the Company plans to remodel or relocate a total of approximately 550 stores. Square footage is again expected to increase by approximately 7 percent. The Company expects its new Pennsylvania distribution center to be fully operational in the first quarter of fiscal 2014.

The Company plans to utilize a portion of its cash flows in 2013 to repurchase common stock under its share repurchase program, while targeting a ratio of adjusted debt, which includes an adjustment to estimate capitalized rent based on rent expense times 8, to adjusted EBITDAR (defined as earnings before interest, income taxes, depreciation, amortization and rent) at or below 3.0 to 1.

The volatility of the macroeconomic environment continues to pressure the consumer and impact the Company's cost of purchasing and delivering merchandise to its stores. Management continues to closely monitor customers' responses to the economic and competitive climates.

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