Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 06/01/2011 09:05:22)

 

 

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 April 29, 2011

 

Commission File Number: 001-11421

 

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.)

 

100 MISSION RIDGE
GOODLETTSVILLE, TN  37072
(Address of principal executive offices, zip code)

 

Registrant’s telephone number, including area code:  (615) 855-4000

 

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 o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes x   No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 

The registrant had 341,535,481 shares of common stock outstanding on May 23, 2011.

 

 

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

April 29,
2011

 

January 28,
2011

 

 

 

(Unaudited)

 

(see Note 1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

602,463

 

$

497,446

 

Merchandise inventories

 

1,767,121

 

1,765,433

 

Prepaid expenses and other current assets

 

137,313

 

104,946

 

Total current assets

 

2,506,897

 

2,367,825

 

Net property and equipment

 

1,562,596

 

1,524,575

 

Goodwill

 

4,338,589

 

4,338,589

 

Intangible assets, net

 

1,251,289

 

1,256,922

 

Other assets, net

 

55,493

 

58,311

 

Total assets

 

$

9,714,864

 

$

9,546,222

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

 

$

1,039

 

$

1,157

 

Accounts payable

 

933,710

 

953,641

 

Accrued expenses and other

 

380,422

 

347,741

 

Income taxes payable

 

32,217

 

25,980

 

Deferred income taxes

 

39,842

 

36,854

 

Total current liabilities

 

1,387,230

 

1,365,373

 

Long-term obligations

 

3,262,597

 

3,287,070

 

Deferred income taxes

 

606,071

 

598,565

 

Other liabilities

 

230,043

 

231,582

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

9,267

 

9,153

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

298,844

 

298,819

 

Additional paid-in capital

 

2,948,506

 

2,945,024

 

Retained earnings

 

987,901

 

830,932

 

Accumulated other comprehensive loss

 

(15,595

)

(20,296

)

Total shareholders’ equity

 

4,219,656

 

4,054,479

 

Total liabilities and shareholders’ equity

 

$

9,714,864

 

$

9,546,222

 

 

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

 

 

 

April 29,
2011

 

April 30,
2010

 

Net sales

 

$

3,451,697

 

$

3,111,314

 

Cost of goods sold

 

2,364,300

 

2,111,558

 

Gross profit

 

1,087,397

 

999,756

 

Selling, general and administrative expenses

 

765,779

 

709,033

 

Operating profit

 

321,618

 

290,723

 

Interest income

 

(19

)

(6

)

Interest expense

 

65,591

 

72,018

 

Other (income) expense

 

2,272

 

145

 

Income before income taxes

 

253,774

 

218,566

 

Income tax expense

 

96,805

 

82,570

 

Net income

 

$

156,969

 

$

135,996

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.46

 

$

0.40

 

Diluted

 

$

0.45

 

$

0.39

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

341,522

 

340,819

 

Diluted

 

345,393

 

344,397

 

 

See notes to condensed consolidated financial statements.

 

2



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the 13 weeks ended

 

 

 

April 29,
2011

 

April 30,
2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

156,969

 

$

135,996

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

67,486

 

63,252

 

Deferred income taxes

 

7,393

 

10,029

 

Tax benefit of stock options

 

(434

)

(4,806

)

Loss on debt retirement

 

2,167

 

 

Non-cash share-based compensation

 

3,519

 

4,979

 

Other non-cash gains and losses

 

4,574

 

1,633

 

Change in operating assets and liabilities:

 

 

 

 

 

Merchandise inventories

 

(5,275

)

(85,176

)

Prepaid expenses and other current assets

 

(32,369

)

(13,503

)

Accounts payable

 

(25,922

)

(36,954

)

Accrued expenses and other

 

38,810

 

(26,722

)

Income taxes

 

6,671

 

42,510

 

Other

 

(17

)

(26

)

Net cash provided by operating activities

 

223,572

 

91,212

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(91,958

)

(90,998

)

Proceeds from sale of property and equipment

 

367

 

258

 

Net cash used in investing activities

 

(91,591

)

(90,740

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock

 

165

 

285

 

Repayments of long-term obligations

 

(27,151

)

(463

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(412

)

(4,467

)

Tax benefit of stock options

 

434

 

4,806

 

Net cash provided by (used in) financing activities

 

(26,964

)

161

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

105,017

 

633

 

Cash and cash equivalents, beginning of period

 

497,446

 

222,076

 

Cash and cash equivalents, end of period

 

$

602,463

 

$

222,709

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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

 

$

35,649

 

$

25,669

 

 

See notes to condensed consolidated financial statements.

 

3



 

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 footnotes and other disclosures normally required by U.S. GAAP or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of January 28, 2011, which has been derived from the audited consolidated financial statements at that date. Accordingly, the reader 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 January 28, 2011 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 2011 fiscal year will be a 53-week accounting period that will end on February 3, 2012 and the 2010 fiscal year was a 52-week accounting period that ended on January 28, 2011.

 

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 April 29, 2011 and results of operations for the 13-week quarterly accounting periods ended April 29, 2011 and April 30, 2010 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.

 

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/deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded LIFO charges of $3.6 million and zero in the 13-week periods ended April 29, 2011 and April 30, 2010, respectively. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation. Because the Company’s

 

4



 

business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

Certain financial statement amounts relating to prior periods have been reclassified to conform to the current period presentation.

 

2.           Comprehensive income

 

Comprehensive income consists of the following:

 

 

 

13 Weeks Ended

 

(in thousands)

 

April 29,
2011

 

April 30,
2010

 

Net income

 

$

156,969

 

$

135,996

 

Unrealized net gain on hedged transactions, net of income tax expense of $3,016 and $3,400 respectively (see Note 7)

 

4,700

 

4,396

 

Comprehensive income

 

$

161,669

 

$

140,392

 

 

3.           Earnings per share

 

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

 

 

 

13 Weeks Ended April 29, 2011

 

13 Weeks Ended April 30, 2010

 

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

156,969

 

341,522

 

$

0.46

 

$

135,996

 

340,819

 

$

0.40

 

Effect of dilutive share-based awards

 

 

 

3,871

 

 

 

 

 

3,578

 

 

 

Diluted earnings per share

 

$

156,969

 

345,393

 

$

0.45

 

$

135,996

 

344,397

 

$

0.39

 

 

Basic earnings per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share was determined based on the dilutive effect of stock options using the treasury stock method.

 

Options to purchase shares of common stock 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 options would be antidilutive, were 0.4 million and 0.3 million in the 2011 and 2010 periods, respectively.

 

4.           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 a 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

 

5



 

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 Internal Revenue Service (“IRS”) is examining the Company’s federal income tax returns for fiscal years 2006, 2007 and 2008.  The 2005 and earlier years are not open for examination.  The 2009 and 2010 fiscal years, while not currently under examination, are subject to examination at the discretion of the IRS.  The Company has various state income tax examinations that are currently in progress.  The estimated liability related to these state income tax examinations is included in the Company’s reserve for uncertain tax positions.  Generally, the Company’s tax years ended in 2007 and forward remain open for examination by the various state taxing authorities.

 

As of April 29, 2011, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $26.4 million, $2.1 million and $0.5 million, respectively, for a total of $29.0 million. Of this amount, $0.2 million and $27.5 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the condensed consolidated balance sheet with the remaining $1.3 million reducing deferred tax assets related to net operating loss carry forwards.

 

The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $1.4 million in the coming twelve months principally as a result of the settlement of currently ongoing state income tax examinations. The reasonably possible change of $1.4 million is included in current liabilities in Accrued expenses and other in the amount of $0.2 million and in noncurrent Other liabilities in the amount of $1.2 million in the condensed consolidated balance sheet as of April 29, 2011. Also, as of April 29, 2011, approximately $26.5 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 rate for the 13-week period ended April 29, 2011 was 38.1% compared to a rate of 37.8% for the 13-week period ended April 30, 2010 which represents a net increase of 0.3%.

 

5.           Current and long-term obligations

 

On April 29, 2011, the Company repurchased in the open market $25.0 million aggregate principal amount of 10.625% senior notes due 2015 at a price of 107.0% plus accrued and unpaid interest. The pretax loss on this transaction of $2.2 million is reflected in Other (income) expense in the Company’s condensed consolidated statement of income for the 13-week period ended April 29, 2011.

 

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

 

6



 

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 has determined that the majority of the inputs used to value its derivative financial instruments using the income approach fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of April 29, 2011, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety, as discussed in detail in Note 7, are classified in Level 2 of the fair value hierarchy. The Company’s long-term obligations classified in Level 2 of the fair value hierarchy are valued at cost. The Company does not have any fair value measurements using significant unobservable inputs (Level 3) as of April 29, 2011.

 

(in thousands)

 

Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
April 29,
2011

 

Assets:

 

 

 

 

 

 

 

 

 

Trading securities (a)

 

$

7,643

 

$

 

$

 

$

7,643

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term obligations (b)

 

3,369,251

 

20,458

 

 

3,389,709

 

Derivative financial instruments (c)

 

 

27,455

 

 

27,455

 

Deferred compensation (d)

 

19,118

 

 

 

19,118

 

 


(a)         Reflected at fair value in the condensed consolidated balance sheet as Prepaid expenses and other current assets of $1,369 and Other assets, net of $6,274.

(b)        Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $1,039 and Long-term obligations of $3,262,597.

(c)         Reflected in the condensed consolidated balance sheet as non-current Other liabilities.

(d)        Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $1,369 and non-current Other liabilities of $17,749.

 

7.            Derivatives and hedging activities

 

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a

 

7



 

hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards.

 

Risk management objective of using derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

 

The Company is exposed to certain risks arising from uncertainties of future market values caused by the fluctuation in the prices of commodities. From time to time the Company may enter into derivative financial instruments to protect against future price changes related to these commodity prices.

 

Cash flow hedges of interest rate risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (also referred to as “OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the 13-week periods ended April 29, 2011 and April 30, 2010, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

 

8



 

As of April 29, 2011, the Company had three interest rate swaps with a combined notional value of $960.0 million that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company terminated an interest rate swap in October 2008 due to the bankruptcy declaration of the counterparty bank. The Company continues to report the net gain or loss related to the discontinued cash flow hedge in OCI, and such net gain or loss is expected to be reclassified into earnings during the original contractual terms of the swap agreement as the hedged interest payments are expected to occur as forecasted. During the next 52-week period, the Company estimates that an additional $22.6 million will be reclassified as an increase to interest expense for all of its interest rate swaps.

 

Non-designated hedges of commodity risk

 

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of April 29, 2011, and April 30, 2010, the Company had no such non-designated hedges.

 

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of April 29, 2011 and January 28, 2011:

 

(in thousands)

 

April 29,
2011

 

January 28,
2011

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

Interest rate swaps classified as Other liabilities

 

$

27,455

 

$

34,923

 

 

The table below presents the pre-tax effect of the Company’s derivative financial instruments on the condensed consolidated statement of income (including OCI, see Note 2) for the 13-week periods ended April 29, 2011 and April 30, 2010:

 

 

 

13 Weeks Ended

 

(in thousands)

 

April 29,
2011

 

April 30,
2010

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

 

 

Loss related to effective portion of derivative recognized in OCI

 

$

1,603

 

$

4,543

 

Loss related to effective portion of derivative reclassified from Accumulated OCI to Interest expense

 

$

9,319

 

$

12,340

 

Loss related to ineffective portion of derivative recognized in Other (income) expense

 

$

106

 

$

145

 

 

Credit-risk-related contingent features

 

The Company has agreements with all of its interest rate swap counterparties that contain a provision providing that the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness.

 

9



 

As of April 29, 2011, the fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $28.2 million. If the Company had breached any of these provisions at April 29, 2011, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value equal to the fair value of $28.2 million. As of April 29, 2011, the Company had not breached any of these provisions or posted any collateral related to these agreements.

 

8.           Commitments and contingencies

 

Legal proceedings

 

On August 7, 2006, a lawsuit entitled Cynthia Richter, et al. v. Dolgencorp, Inc., et al. was filed in the United States District Court for the Northern District of Alabama (Case No. 7:06-cv-01537-LSC) (“Richter”) in which the plaintiff alleges that she and other current and former Dollar General store managers were improperly classified as exempt executive employees under the Fair Labor Standards Act (“FLSA”) and seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On August 15, 2006, the Richter plaintiff filed a motion in which she asked the court to certify a nationwide class of current and former store managers. The Company opposed the plaintiff’s motion. On March 23, 2007, the court conditionally certified a nationwide class. On December 2, 2009, notice was mailed to over 28,000 current or former Dollar General store managers, and approximately 3,860 individuals opted into the lawsuit. In September 2010, the court entered a scheduling order that governs, among other things, deadlines for fact discovery (September 30, 2011) and the Company’s anticipated decertification motion (August 15, 2011). The court’s scheduling order establishes a trial date of February 12, 2012.

 

The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the Richter action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending individual or single-plaintiff store manager exemption cases in which it has filed such a motion.

 

The Company intends to vigorously defend the Richter matter. However, at this time, it is not possible to predict whether Richter ultimately will be permitted to proceed collectively, and no assurances can be given that the Company will be successful in its defense of the action on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in Richter . For these reasons, the Company is unable to estimate any potential loss or range of loss in the matter; however, if the Company is not successful in its defense efforts, the resolution of Richter could have a material adverse effect on the Company’s financial statements as a whole.

 

On May 18, 2006, the Company was served with a lawsuit entitled Tammy Brickey, Becky Norman, Rose Rochow, Sandra Cogswell and Melinda Sappington v. Dolgencorp, Inc. and Dollar General Corporation (Western District of New York, Case No. 6:06-cv-06084-DGL, originally filed on February 9, 2006 and amended on May 12, 2006 (“Brickey”)). The Brickey plaintiffs seek to proceed collectively under the FLSA and as a class under New York, Ohio,

 

10



 

Maryland and North Carolina wage and hour statutes on behalf of, among others, assistant store managers who claim to be owed wages (including overtime wages) under those statutes. On February 22, 2011, the court denied the plaintiffs’ class certification motion in its entirety and ordered that the matter proceed only as to the named plaintiffs.  On March 22, 2011, the plaintiffs moved the court for reconsideration of its Order denying their class certification motion.  On March 30, 2011, the plaintiffs’ reconsideration motion was denied.  To date, the plaintiffs have not appealed. If the case proceeds only as to the named plaintiffs, the Company does not expect the outcome to be material to its financial statements as a whole.

 

On March 7, 2006, a complaint was filed in the United States District Court for the Northern District of Alabama ( Janet Calvert v. Dolgencorp, Inc. , Case No. 2:06-cv-00465-VEH (“Calvert”)), in which the plaintiff, a former store manager, alleged that she was paid less than male store managers because of her sex, in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964, as amended (“Title VII”) (now captioned, Wanda Womack, et al. v. Dolgencorp, Inc., Case No. 2:06-cv-00465-VEH). The complaint subsequently was amended to include additional plaintiffs, who also allege to have been paid less than males because of their sex, and to add allegations that the Company’s compensation practices disparately impact females. Under the amended complaint, plaintiffs seek to proceed collectively under the Equal Pay Act and as a class under Title VII, and request back wages, injunctive and declaratory relief, liquidated damages, punitive damages and attorneys’ fees and costs.

 

On July 9, 2007, the plaintiffs filed a motion in which they asked the court to approve the issuance of notice to a class of current and former female store managers under the Equal Pay Act. The Company opposed plaintiffs’ motion. On November 30, 2007, the court conditionally certified a nationwide class of females under the Equal Pay Act who worked for Dollar General as store managers between November 30, 2004 and November 30, 2007. The notice was issued on January 11, 2008, and persons to whom the notice was sent were required to opt into the suit by March 11, 2008. Approximately 2,100 individuals have opted into the lawsuit.

 

On April 19, 2010, the plaintiffs moved for class certification relating to their Title VII claims. The Company filed its response to the certification motion in June 2010. Briefing has closed, and the parties are awaiting a ruling. The Company’s motion to decertify the Equal Pay Act class was denied as premature. If the case proceeds, the Company expects to file a similar motion in due course.

 

The parties agreed to mediate this action, and the court has stayed the action pending the results of the mediation.  The mediation occurred in March and April, 2011, and the Company has reached an agreement in principle to settle the matter on behalf of the entire putative class. The proposed settlement, which still must be submitted to and approved by the court, provides for both monetary and equitable relief. Under the proposed terms, the Company will pay $15.5 million into a fund for the class members that will be apportioned and paid out to individual members (less any additional attorneys’ fees or litigation costs approved by the court), upon submission of a valid claim. It will pay an additional $3.25 million for plaintiffs’ legal fees and costs.  Of the total $18.75 million anticipated payment, the Company expects to receive reimbursement from its Employment Practices Liability Insurance (“EPLI”) carrier of approximately $15.9 million, which represents the balance remaining of the $20 million EPLI policy covering the claims.  In addition, the Company has agreed to make certain adjustments to

 

11



 

its pay setting policies and procedures for new store managers.  If approved, the Company expects to implement the new pay policies and practices no later than April 2012.  The Company expects the proposed settlement to be filed with the court in June of 2011 and anticipates the court’s ruling sometime during the summer of 2011. Because it deems settlement probable and estimable, the Company has appropriately accrued for the net settlement as well as for certain additional anticipated fees related thereto during the 13-week period ended April 29, 2011, and concurrently recorded a receivable of approximately $15.9 million from its EPLI carrier.

 

At this time, although probable it is not certain that the court will approve the settlement. If it does not, and the case proceeds, it is not possible at this time to predict whether the court ultimately will permit the action to proceed collectively under the Equal Pay Act or as a class under Title VII. Although the Company intends to vigorously defend the action, no assurances can be given that it would be successful in the defense on the merits or otherwise. At this stage in the proceedings, the Company cannot estimate either the size of any potential class or the value of the claims raised in this action if it proceeds. For these reasons, the Company is unable to estimate any potential loss or range of loss in such a scenario; however, if the Company is not successful in defending this action, its resolution could have a material adverse effect on the Company’s financial statements as a whole.

 

On June 16, 2010, a lawsuit entitled Shaleka Gross, et al v. Dollar General Corporation was filed in the United States District Court for the Southern District of Mississippi (Civil Action No. 3:10CV340WHB-LR) in which three former non-exempt store employees, on behalf of themselves and certain other non-exempt Dollar General store employees, alleged that they were not paid for all hours worked in violation of the FLSA. Specifically, plaintiffs alleged that they were not properly paid for certain breaks and sought back wages (including overtime wages), liquidated damages and attorneys’ fees and costs.

 

Before the Company was served with the Gross complaint, the plaintiffs dismissed the action and re-filed it in the United States District Court for the Northern District of Mississippi, now captioned as Cynthia Walker, et al. v. Dollar General Corporation, et al. (Civil Action No. 4:10-CV119-P-S). The Walker complaint was filed on September 16, 2010, and although it adds approximately eight additional plaintiffs, it adds no substantive allegations beyond those alleged in the Gross complaint. The Company filed a motion to transfer the case back to the Southern District of Mississippi and a motion to dismiss for lack of personal jurisdiction over two corporate defendants and for failure to state a claim as to Dollar General Corporation. The motion to transfer remains pending, but the plaintiffs agreed to dismiss their claims against Dollar General Corporation and Dolgencorp of Texas, Inc., another corporate defendant. Although the court stayed the matter pending resolution of the Company’s motion to dismiss, that stay has not been lifted.  To date, no other individuals have opted into the Walker matter, and the plaintiffs have not asked the court to certify any class.

 

At this time, it is not possible to predict whether the courts will permit the Walker action to proceed collectively. The Company does not believe that Walker is appropriate for collective treatment and believes that its wage and hour policies and practices comply with both federal and state law. Although the Company plans to vigorously defend Walker, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims

 

12



 

raised. For these reasons, the Company is unable to estimate any potential loss or range of loss; however if the Company is not successful in its defense efforts, the resolution of this action could have a material adverse effect on the Company’s financial statements as a whole.

 

On August 26, 2010, a lawsuit containing allegations substantially similar to those raised in the Walker matter was filed by a single plaintiff in the United States District Court for the Eastern District of Kentucky (Brenda McCown v. Dollar General Corporation , Case No. 210-297 (WOB)). On May 11, 2011, the Company agreed to resolve the matter for an amount that is not material to its financial statements as a whole.

 

In October 2008, the Company terminated an interest rate swap as a result of the counterparty’s declaration of bankruptcy. This declaration of bankruptcy constituted a default under the contract governing the swap, giving the Company the right to terminate. The Company subsequently settled the swap in November 2008 for approximately $7.6 million, including interest accrued to the date of termination. On May 14, 2010, the Company received a demand from the counterparty for an additional payment of approximately $19 million plus interest, claiming that the valuation used to calculate the $7.6 million was commercially unreasonable, and seeking to invoke the alternative dispute resolution procedures established by the bankruptcy court. The Company participated in the alternative dispute resolution procedures as it believed a reasonable settlement would be in the best interest of the Company to avoid the substantial risk and costs of litigation. In April of 2011, the Company reached a settlement with the counterparty under which the Company paid an additional $9.85 million in exchange for a full release. The Company appropriately accrued the settlement amount along with additional expected fees and costs related thereto in the 13-week period ended April 29, 2011. The settlement was finalized and the payment was made in May 2011.

 

From time to time, the Company is a party to various other legal actions involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation, including without limitation under federal and state employment laws and wage and hour laws. The Company believes, based upon information currently available, that such other litigation and claims, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these lawsuits, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect operating results if changes to the Company’s business operation are required.

 

13



 

9.           Segment reporting

 

The Company manages its business on the basis of one reportable segment. As of April 29, 2011, all of the Company’s operations were located within the United States, with the exception of a Hong Kong subsidiary and a liaison office in India, the collective assets and revenues of which are not material. Net sales grouped by classes of similar products are presented below.

 

 

 

13 Weeks Ended

 

(in thousands)

 

April 29,
2011

 

April 30,
2010

 

Classes of similar products:

 

 

 

 

 

Consumables

 

$

2,529,070

 

$

2,231,500

 

Seasonal

 

457,057

 

430,051

 

Home products

 

234,208

 

224,867

 

Apparel

 

231,362

 

224,896

 

Net sales

 

$

3,451,697

 

$

3,111,314

 

 

10.         Related party transactions

 

Affiliates of Kohlberg Kravis Roberts & Co. (“KKR”) and Goldman, Sachs & Co. indirectly own a substantial portion of the Company’s common stock. A Member and a Director of KKR and a Managing Director of Goldman, Sachs & Co. serve on the Company’s Board of Directors.

 

Affiliates of KKR and Goldman, Sachs & Co. (among other entities) may be lenders under the Company’s senior secured term loan facility (“Term Loan Facility”) with an original July 2007 principal amount of $2.3 billion and a principal balance as of April 29, 2011 of approximately $1.96 billion. The Company paid approximately $21.9 million and $14.8 million of interest on the Term Loan Facility during the 13-week periods ended April 29, 2011 and April 30, 2010, respectively.

 

Goldman, Sachs & Co. is a counterparty to an amortizing interest rate swap with a $280.0 million notional amount as of April 29, 2011, entered into in connection with the Term Loan Facility. The Company paid Goldman, Sachs & Co. approximately $7.3 million and $4.7 million in the periods ended April 29, 2011 and April 30, 2010, respectively, pursuant to this swap.

 

The Company periodically reimburses KKR for incidental expenses incurred on behalf of the Company, including reimbursements of $0 and $0.1 million for the periods ended April 29, 2011 and April 30, 2010, respectively.

 

Affiliates of KKR and Goldman, Sachs & Co. served as underwriters in connection with the secondary offering of the Company’s common stock held by certain existing shareholders that was completed in April 2010. The Company did not sell shares of common stock, receive proceeds from such shareholders’ sale of shares of common stock or pay any underwriting fees in connection with the secondary offering, but paid resulting aggregate expenses of approximately $0.7 million. Certain members of the Company’s management exercised registration rights in connection with such offering.

 

14



 

11.         Guarantor subsidiaries

 

Certain of the Company’s subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed on a joint and several basis the Company’s obligations under certain outstanding debt obligations. Each of the Guarantors is a direct or indirect wholly-owned subsidiary of the Company. The following consolidating schedules present condensed financial information on a combined basis, in thousands.

 

15



 

 

 

April 29, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,334

 

$

445,583

 

$

28,546

 

$

 

$

602,463

 

Merchandise inventories

 

 

1,767,121

 

 

 

1,767,121

 

Deferred income taxes

 

7,021

 

 

10,639

 

(17,660

)

 

Prepaid expenses and other current assets

 

848,325

 

3,931,907

 

9,485

 

(4,652,404

)

137,313

 

Total current assets

 

983,680

 

6,144,611

 

48,670

 

(4,670,064

)

2,506,897

 

Net property and equipment

 

109,075

 

1,453,250

 

271

 

 

1,562,596

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Intangible assets, net

 

1,199,200

 

52,089

 

 

 

1,251,289

 

Deferred income taxes

 

 

 

48,112

 

(48,112

)

 

Other assets, net

 

5,625,021

 

12,530

 

298,696

 

(5,880,754

)

55,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,255,565

 

$

7,662,480

 

$

395,749

 

$

(10,598,930

)

$

9,714,864

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

 

$

1,039

 

$

 

$

 

$

1,039

 

Accounts payable

 

3,921,932

 

1,600,130

 

50,208

 

(4,638,560

)

933,710

 

Accrued expenses and other

 

101,874

 

230,550

 

61,841

 

(13,843

)

380,422

 

Income taxes payable

 

10,919

 

776

 

20,522

 

 

32,217

 

Deferred income taxes

 

 

57,502

 

 

(17,660

)

39,842

 

Total current liabilities

 

4,034,725

 

1,889,997

 

132,571

 

(4,670,063

)

1,387,230

 

Long-term obligations

 

3,505,049

 

3,097,221

 

 

(3,339,673

)

3,262,597

 

Deferred income taxes

 

422,838

 

231,345

 

 

(48,112

)

606,071

 

Other liabilities

 

64,030

 

28,405

 

137,608

 

 

230,043

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

9,267

 

 

 

 

9,267

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

298,844

 

23,855

 

100

 

(23,955

)

298,844

 

Additional paid-in capital

 

2,948,506

 

431,253

 

19,900

 

(451,153

)

2,948,506

 

Retained earnings

 

987,901

 

1,960,404

 

105,570

 

(2,065,974

)

987,901

 

Accumulated other comprehensive loss

 

(15,595

)

 

 

 

(15,595

)

Total shareholders’ equity

 

4,219,656

 

2,415,512

 

125,570

 

(2,541,082

)

4,219,656

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

12,255,565

 

$

7,662,480

 

$

395,749

 

$

(10,598,930

)

$

9,714,864

 

 

16



 

 

 

January 28, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,545

 

$

364,404

 

$

21,497

 

$

 

$

497,446

 

Merchandise inventories

 

 

1,765,433

 

 

 

1,765,433

 

Income taxes receivable

 

13,529

 

 

 

(13,529

)

 

Deferred income taxes

 

8,877

 

 

6,825

 

(15,702

)

 

Prepaid expenses and other current assets

 

741,352

 

3,698,117

 

4,454

 

(4,338,977

)

104,946

 

Total current assets

 

875,303

 

5,827,954

 

32,776

 

(4,368,208

)

2,367,825

 

Net property and equipment

 

105,155

 

1,419,133

 

287

 

 

1,524,575

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Intangible assets, net

 

1,199,200

 

57,722

 

 

 

1,256,922

 

Deferred income taxes

 

 

 

47,690

 

(47,690

)

 

Other assets, net

 

5,337,522

 

12,675

 

304,285

 

(5,596,171

)

58,311

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,855,769

 

$

7,317,484

 

$

385,038

 

$

(10,012,069

)

$

9,546,222

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

 

$

1,157

 

$

 

$

 

$

1,157

 

Accounts payable

 

3,691,564

 

1,541,593

 

50,824

 

(4,330,340

)

953,641

 

Accrued expenses and other

 

68,398

 

226,225

 

61,755

 

(8,637

)

347,741

 

Income taxes payable

 

11,922

 

13,246

 

14,341

 

(13,529

)

25,980

 

Deferred income taxes

 

 

52,556

 

 

(15,702

)

36,854

 

Total current liabilities

 

3,771,884

 

1,834,777

 

126,920

 

(4,368,208

)

1,365,373

 

Long-term obligations

 

3,534,447

 

3,000,877

 

 

(3,248,254

)

3,287,070

 

Deferred income taxes

 

417,874

 

228,381

 

 

(47,690

)

598,565

 

Other liabilities

 

67,932

 

27,250

 

136,400

 

 

231,582

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

9,153

 

 

 

 

9,153

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

298,819

 

23,855

 

100

 

(23,955

)

298,819

 

Additional paid-in capital

 

2,945,024

 

431,253

 

19,900

 

(451,153

)

2,945,024

 

Retained earnings

 

830,932

 

1,771,091

 

101,718

 

(1,872,809

)

830,932

 

Accumulated other comprehensive loss

 

(20,296

)

 

 

 

(20,296

)

Total shareholders’ equity

 

4,054,479

 

2,226,199

 

121,718

 

(2,347,917

)

4,054,479

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

11,855,769

 

$

7,317,484

 

$

385,038

 

$

(10,012,069

)

$

9,546,222

 

 

17



 

 

 

For the 13-weeks ended April 29, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

87,517

 

$

3,451,697

 

$

18,814

 

$

(106,331

)

$

3,451,697

 

Cost of goods sold

 

 

2,364,300

 

 

 

2,364,300

 

Gross profit

 

87,517

 

1,087,397

 

18,814

 

(106,331

)

1,087,397

 

Selling, general and administrative expenses

 

79,561

 

774,568

 

17,981

 

(106,331

)

765,779

 

Operating profit

 

7,956

 

312,829

 

833

 

 

321,618

 

Interest income

 

(12,422

)

(3,981

)

(5,228

)

21,612

 

(19

)

Interest expense

 

74,746

 

12,451

 

6

 

(21,612

)

65,591

 

Other (income) expense

 

2,272

 

 

 

 

2,272

 

Income (loss) before income taxes

 

(56,640

)

304,359

 

6,055

 

 

253,774

 

Income tax expense (benefit)

 

(20,444

)

115,046

 

2,203

 

 

96,805

 

Equity in subsidiaries’ earnings, net of taxes

 

193,165

 

 

 

(193,165

)

 

Net income

 

$

156,969

 

$

189,313

 

$

3,852

 

$

(193,165

)

$

156,969

 

 

 

 

For the 13-weeks ended April 30, 2010

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

87,464

 

$

3,111,314

 

$

19,648

 

$

(107,112

)

$

3,111,314

 

Cost of goods sold

 

 

2,111,558

 

 

 

2,111,558

 

Gross profit

 

87,464

 

999,756

 

19,648

 

(107,112

)

999,756

 

Selling, general and administrative expenses

 

79,619

 

721,863

 

14,663

 

(107,112

)

709,033

 

Operating profit

 

7,845

 

277,893

 

4,985

 

 

290,723

 

Interest income

 

(11,017

)

(2,710

)

(4,953

)

18,674

 

(6

)

Interest expense

 

79,457

 

11,230

 

5

 

(18,674

)

72,018

 

Other (income) expense

 

145

 

 

 

 

145

 

Income (loss) before income taxes

 

(60,740

)

269,373

 

9,933

 

 

218,566

 

Income tax expense (benefit)

 

(22,803

)

101,910

 

3,463

 

 

82,570

 

Equity in subsidiaries’ earnings, net of taxes

 

173,933

 

 

 

(173,933

)

 

Net income

 

$

135,996

 

$

167,463

 

$

6,470

 

$

(173,933

)

$

135,996

 

 

18



 

 

 

For the 13 weeks ended April 29, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

156,969

 

$

189,313

 

$

3,852

 

$

(193,165

)

$

156,969

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

8,162

 

59,289

 

35

 

 

67,486

 

Deferred income taxes

 

3,719

 

7,910

 

(4,236

)

 

7,393

 

Tax benefit of stock options

 

(434

)

 

 

 

(434

)

Loss on debt retirement

 

2,167

 

 

 

 

2,167

 

Non-cash share-based compensation

 

3,519

 

 

 

 

3,519

 

Other non-cash gains and losses

 

251

 

4,323

 

 

 

4,574

 

Equity in subsidiaries’ earnings, net

 

(193,165

)

 

 

193,165

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

(5,275

)

 

 

(5,275

)

Prepaid expenses and other current assets

 

(16,331

)

(16,741

)

703

 

 

(32,369

)

Accounts payable

 

14,019

 

(39,326

)

(615

)

 

(25,922

)

Accrued expenses and other

 

31,836

 

5,680

 

1,294

 

 

38,810

 

Income taxes

 

12,960

 

(12,470

)

6,181

 

 

6,671

 

Other

 

(328

)

308

 

3

 

 

(17

)

Net cash provided by operating activities

 

23,344

 

193,011

 

7,217

 

 

223,572

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(9,973

)

(81,966

)

(19

)

 

(91,958

)

Proceeds from sale of property and equipment

 

 

367

 

 

 

367

 

Net cash used in investing activities

 

(9,973

)

(81,599

)

(19

)

 

(91,591

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

165

 

 

 

 

165

 

Repayments of long-term obligations

 

(26,750

)

(401

)

 

 

(27,151

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(412

)

 

 

 

(412

)

Tax benefit of stock options

 

434

 

 

 

 

434

 

Changes in intercompany note balances, net

 

29,981

 

(29,832

)

(149

)

 

 

Net cash provided by (used in) financing activities

 

3,418

 

(30,233

)

(149

)

 

(26,964

)

Net increase in cash and cash equivalents

 

16,789

 

81,179

 

7,049

 

 

105,017

 

Cash and cash equivalents, beginning of period

 

111,545

 

364,404

 

21,497

 

 

497,446

 

Cash and cash equivalents, end of period

 

$

128,334

 

$

445,583

 

$

28,546

 

$

 

$

602,463

 

 

19


 


 

 

 

For the 13 weeks ended April 30, 2010

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

135,996

 

$

167,463

 

$

6,470

 

$

(173,933

)

$

135,996

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

8,518

 

54,724

 

10

 

 

63,252

 

Deferred income taxes

 

9,157

 

3,812

 

(2,940

)

 

10,029

 

Tax benefit of stock options

 

(4,806

)

 

 

 

(4,806

)

Non-cash share-based compensation

 

4,979

 

 

 

 

4,979

 

Other non-cash gains and losses

 

346

 

1,287

 

 

 

1,633

 

Equity in subsidiaries’ earnings, net

 

(173,933

)

 

 

173,933

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

(85,176

)

 

 

(85,176

)

Prepaid expenses and other current assets

 

(1,202

)

(12,382

)

81

 

 

(13,503

)

Accounts payable

 

(16,314

)

(20,634

)

(6

)

 

(36,954

)

Accrued expenses and other

 

5,806

 

(29,844

)

(2,684

)

 

(26,722

)

Income taxes

 

34,982

 

1,879

 

5,649

 

 

42,510

 

Other

 

1

 

(28

)

1

 

 

(26

)

Net cash provided by operating activities

 

3,530

 

81,101

 

6,581

 

 

91,212

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(6,086

)

(84,899

)

(13

)

 

(90,998

)

Proceeds from sale of property and equipment

 

 

258

 

 

 

258

 

Net cash used in investing activities

 

(6,086

)

(84,641

)

(13

)

 

(90,740

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

285

 

 

 

 

285

 

Repayments of long-term obligations

 

 

(463

)

 

 

(463

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(4,467

)

 

 

 

(4,467

)

Tax benefit of stock options

 

4,806

 

 

 

 

4,806

 

Changes in intercompany note balances, net

 

(2,090

)

4,821

 

(2,731

)

 

 

Net cash provided by (used in) financing activities

 

(1,466

)

4,358

 

(2,731

)

 

161

 

Net increase (decrease) in cash and cash equivalents

 

(4,022

)

818

 

3,837

 

 

633

 

Cash and cash equivalents, beginning of period

 

97,620

 

103,001

 

21,455

 

 

222,076

 

Cash and cash equivalents, end of period

 

$

93,598

 

$

103,819

 

$

25,292

 

$

 

$

222,709

 

 

20



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Dollar General Corporation:

 

We have reviewed the condensed consolidated balance sheet of Dollar General Corporation and subsidiaries (the Company) as of April 29, 2011, and the related condensed consolidated statements of income and cash flows for the thirteen-week periods ended April 29, 2011 and April 30, 2010. These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information 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 Public Company Accounting Oversight Board, 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.

 

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above 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), the consolidated balance sheet of Dollar General Corporation as of January 28, 2011 and the related consolidated statements of income, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein) and in our report dated March 22, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 28, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Ernst & Young LLP

 

 

June 1, 2011

 

Nashville, Tennessee

 

 

21



 

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 year ended January 28, 2011. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

 

Executive Overview

 

We are the largest discount retailer in the United States by number of stores, with 9,496 stores located in 35 states as of April 29, 2011, primarily 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 apparel. Our merchandise includes high quality national brands from leading manufacturers, as well as comparable quality 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 (small store) locations.

 

The customers we serve are value-conscious, and Dollar General has always been intensely focused on helping our customers make the most of their spending dollars. We believe our convenient store format and broad selection of high quality products at compelling values have driven our substantial growth and financial success over the years. Like other companies, over the past three years we have been operating in an environment with heightened economic challenges and uncertainties. Consumers are facing very high rates of unemployment, fluctuating food, gasoline and energy costs, rising medical costs, and a continued weakness in housing and credit markets, and the timetable for economic recovery remains uncertain. Similarly, we continue to face significant uncertainty with respect to commodity and diesel fuel prices. Nonetheless, as a result of our long-term mission of serving the value-conscious customer, coupled with a vigorous focus on improving our operating and financial performance, we remain optimistic with regard to executing our operating priorities in 2011.

 

At the beginning of 2008, we defined the following four operating priorities on which we remain keenly focused:

 

·                                           drive productive sales growth,

 

·                                           increase our gross profit rate,

 

·                                           leverage process improvements and information technology to reduce costs, and

 

22



 

·                                           strengthen and expand our culture of serving others.

 

Our first priority is driving productive sales growth by increasing shopper frequency and transaction amount and maximizing sales per square foot. We have enhanced our category management processes, allowing us to continue expanding our product offerings while also improving profitability, by adding more productive items and eliminating unproductive items. We are utilizing the space in our stores more productively by implementing more consistent space planning; and in the 2011 first quarter, we completed the final phase of our three year initiative to raise the shelf height in our stores, increasing the linear feet available to expand our merchandise offerings. In addition, we are making significant progress in defining and improving our store standards with a goal of maintaining a consistent look and feel across all stores. We evaluate our store hours on an ongoing basis and opportunistically adjust our hours for our customers’ convenience. We are targeting both new and existing customers with our improved advertising circulars as well as through our website and social media. Finally, we believe we have significant potential to grow sales through new store growth in both existing and new markets. We plan to open approximately 625 new stores in fiscal 2011, including 139 stores opened in the first quarter, and to enter three additional states: Connecticut, New Hampshire and Nevada. We are currently in the process of developing our strategy and locating store sites for our planned entrance into California in 2012. Our criteria for opening new stores are based on numerous factors including, among other things, availability of appropriate sites, expected sales, lease terms, population demographics, competition, and the employment environment.

 

Our second priority is to increase gross profit through category management, distribution efficiencies, shrink reduction, an improved pricing model, and expansion of private brand offerings and increased foreign sourcing. Over the period from 2008 through 2010, our gross profit rate improved significantly, and we believe we have additional opportunities to improve, although at a more moderate pace. Our merchandising team has been successful in efforts to upgrade our merchandise selection to better serve our customers while managing our everyday low price strategy. We constantly review our pricing and markdown strategies and work diligently to minimize product cost increases and to remain competitive. We believe we have the potential to directly source a larger portion of our products at significant savings to current costs. We are focused on sales of private brands, which generally have higher gross profit rates than national brands, while we continue to offer a wide variety of national brands to ensure an optimal mix of product offerings. Our operations group continues to be highly focused on inventory shrink reduction initiatives, while our supply chain team continues its efforts to increase efficiencies, with the goal of leveraging transportation and distribution expenses.

 

Our third priority is leveraging process improvements and information technology to reduce costs. We are committed as an organization to extract costs that do not affect the customer experience. Examples of our cost reduction initiatives include the implementation of workforce management standards, a keen focus on safety to minimize workers’ compensation expense, health awareness initiatives to control healthcare costs, the installation of energy management systems in our stores as well as increased preventive maintenance, and the reduction of waste management costs through recycling of cardboard. In addition, our real estate team has had success in negotiating lease renewals which we anticipate will benefit us going forward.

 

23



 

Our fourth priority is to strengthen and expand Dollar General’s culture of serving others. For customers this means helping them “Save time. Save money. Every day!” by providing clean, well-stocked stores with quality products at low prices.  For employees, this means creating an environment that attracts and retains key employees throughout the organization. For the public, this means giving back to our store communities. For shareholders, this means meeting their expectations of an efficiently and profitably run organization that operates with compassion and integrity.

 

Focus on these priorities has resulted in improved performance in the first quarter of 2011 over the comparable 2010 period in many of our key financial metrics. Basis points amounts referred to below are equal to 0.01% as a percentage of sales.

 

·                   Total sales increased 10.9% to $3.45 billion. Sales in same-stores increased 5.4% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 52-week period ended April 29, 2011 were approximately $203, up from $197 for the comparable prior 52-week period.

 

·                   Gross profit, as a percentage of sales, was 31.5% compared to 32.1% in the 2010 period. In the quarter, we took higher markdowns and refrained from making significant price increases in order to build customer loyalty and drive sales in a challenging macroeconomic environment. The gross profit rate was also impacted by a change in sales mix resulting from sales of consumables, which generally have a lower gross profit rate, increasing at a higher rate than non-consumables. In addition, increased fuel prices contributed to higher transportation costs, and we recorded a LIFO charge in the 2011 quarter only.  Inventory shrink reduction and distribution efficiencies had a favorable impact on gross profit in the quarter.

 

·                   Selling, general and administrative expenses, or SG&A, as a percentage of sales, was 22.2% compared to 22.8% in the 2010 quarter, a decrease of 60 basis points. The improvement was primarily driven by retail labor, and to a lesser degree advertising and repairs and maintenance. The 2011 quarter included accruals for the expected settlement of two legal matters while the 2010 quarter included certain expenses resulting from a secondary offering of our common stock, and the difference between these items accounted for 10 of the 60 basis points reduction.

 

·                   Interest expense decreased by $6.4 million to $65.6 million in the 2011 first quarter. In the quarter, we repurchased an additional $25 million of our 10.625% senior notes due 2015, resulting in a pretax loss of $2.2 million. Total long-term obligations as of April 29, 2011 were $3.26 billion.

 

·                   Net income was $157.0 million, or $0.45 per diluted share, compared to net income of $136.0 million, or $0.39 per diluted share, in the 2010 quarter.

 

·                   Cash generated from operating activities was $223.6 million. At April 29, 2011, we had a cash balance of $602.5 million.

 

24



 

·                   Inventory turnover was 5.2 times on a rolling four-quarter basis. Inventories increased 4% on a per store basis over the 2010 first quarter. Improving our in-stock levels, while improving our inventory turns, remains a high priority.

 

·                   During the 2011 first quarter, we opened 139 new stores, remodeled or relocated 184 stores, and closed 15 stores, resulting in a store count of 9,496 as of April 29, 2011.

 

During the quarter, we were very cautious with regard to raising prices to the consumer. In this period of extended macroeconomic uncertainties, we believe that adhering to our strategy of everyday low prices has helped us to build loyalty with our customers as evidenced by our strong same-store sales. We expect to continue to experience uncertainty with regard to product costs, and we expect transportation costs to remain high or to increase for the remainder of the year due to diesel fuel rates. We also do not expect that the percentage of non-consumables sales in our total sales mix will grow significantly this year as we do not believe that our customers will be able to increase their discretionary spending due to the economic uncertainty they continue to face.

 

As discussed in more detail below, in recent years we have generated significant cash flows from operating activities. We have used a portion of these cash flows to pay down debt and to invest in new store growth through our traditional leased stores. We currently estimate that in 2011, the average cost per traditional leased store including improvements, equipment and fixtures will be as follows: $185,000 for new stores, $175,000 for relocated stores, and $90,000 for remodeled stores. These costs include strategic merchandising sales initiatives related to an increased number of in-store coolers, additional fixtures and equipment, and higher leasehold improvement costs for stores in metropolitan areas. Initial inventory, net of payables, increases the investment in new leased stores by approximately $75,000. In addition, during 2010 we made a strategic decision to purchase certain of our leased stores. This program has continued into 2011. We believe that the current environment in the real estate markets provides an opportunity to make these investments at levels which are expected to result in favorable returns and positively impact our operating results.

 

The above discussion is a summary only. Readers should refer to the detailed discussion of our operating results below for the full analysis of our financial performance in the current year period as compared with the prior year period.

 

Results of Operations

 

Accounting Periods . We follow the concept of a 52-53 week fiscal year that ends on the Friday nearest to January 31. The following text contains references to years 2011 and 2010, which represent the 53-week fiscal year ending February 3, 2012, and the 52-week fiscal year ended January 28, 2011. References to the first quarter accounting periods for 2011 and 2010 contained herein refer to the 13-week accounting periods ended April 29, 2011 and April 30, 2010, respectively.

 

Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, our sales and gross profit rate in the fourth quarter have historically been higher than those achieved in each of the first three quarters of the fiscal year.

 

25



 

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, the seasonal nature of our business may affect comparisons between periods.

 

The following table contains results of operations data for the first 13 weeks of each of 2011 and 2010, and the dollar and percentage variances among those periods:

 

 

 

13 Weeks Ended

 

2011 vs. 2010

 

(dollars in millions, except per share amounts)

 

April 29,
2011

 

April 30,
2010

 

Amount
change

 

%
change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

Consumables

 

$

2,529.1

 

$

2,231.5

 

$

297.6

 

13.3

%

% of net sales

 

73.27

%

71.72

%

 

 

 

 

Seasonal

 

457.1

 

430.1

 

27.0

 

6.3

 

% of net sales

 

13.24

%

13.82

%

 

 

 

 

Home products

 

234.2

 

224.9

 

9.3

 

4.2

 

% of net sales

 

6.79

%

7.23

%

 

 

 

 

Apparel

 

231.4

 

224.9

 

6.5

 

2.9

 

% of net sales

 

6.70

%

7.23

%

 

 

 

 

Net sales

 

3,451.7

 

3,111.3

 

340.4

 

10.9

 

Cost of goods sold

 

2,364.3

 

2,111.6

 

252.7

 

12.0

 

% of net sales

 

68.50

%

67.87

%

 

 

 

 

Gross profit

 

1,087.4

 

999.8

 

87.6

 

8.8

 

% of net sales

 

31.50

%

32.13

%

 

 

 

 

Selling, general and administrative expenses

 

765.8

 

709.0

 

56.7

 

8.0

 

% of net sales

 

22.19

%

22.79

%

 

 

 

 

Operating profit

 

321.6

 

290.7

 

30.9

 

10.6

 

% of net sales

 

9.32

%

9.34

%

 

 

 

 

Interest income

 

(0.0

)

(0.0

)

(0.0

)

216.7

 

% of net sales

 

(0.00

)%

(0.00

)%

 

 

 

 

Interest expense

 

65.6

 

72.0

 

(6.4

)

(8.9

)

% of net sales

 

1.90

%

2.31

%

 

 

 

 

Other (income) expense

 

2.3

 

0.1

 

2.1

 

 

% of net sales

 

0.07

%

0.00

%

 

 

 

 

Income before income taxes

 

253.8

 

218.6

 

35.2

 

16.1

 

% of net sales

 

7.35

%

7.02

%

 

 

 

 

Income tax expense

 

96.8

 

82.6

 

14.2

 

17.2

 

% of net sales

 

2.80