Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 06/04/2012 16:14:48)

 

 

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 May 4, 2012

 

Commission File Number: 001-11421

 

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

TENNESSEE

 

61-0502302

(State or other jurisdiction of
incorporation or organization)

 

(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 332,326,972 shares of common stock outstanding on May 31, 2012.

 

 

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

May 4,
2012

 

February 3,
2012

 

 

 

(Unaudited)

 

(see Note 1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

132,530

 

$

126,126

 

Merchandise inventories

 

2,000,864

 

2,009,206

 

Income taxes receivable

 

5,210

 

 

Prepaid expenses and other current assets

 

135,131

 

139,742

 

Total current assets

 

2,273,735

 

2,275,074

 

Net property and equipment

 

1,878,172

 

1,794,960

 

Goodwill

 

4,338,589

 

4,338,589

 

Other intangible assets, net

 

1,231,866

 

1,235,954

 

Other assets, net

 

47,846

 

43,943

 

Total assets

 

$

9,770,208

 

$

9,688,520

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

 

$

459

 

$

590

 

Accounts payable

 

985,924

 

1,064,087

 

Accrued expenses and other

 

360,349

 

397,075

 

Income taxes payable

 

50,355

 

44,428

 

Deferred income taxes

 

14,166

 

3,722

 

Total current liabilities

 

1,411,253

 

1,509,902

 

Long-term obligations

 

2,880,920

 

2,617,891

 

Deferred income taxes

 

649,532

 

656,996

 

Other liabilities

 

231,427

 

229,149

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

5,644

 

6,087

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

290,782

 

295,828

 

Additional paid-in capital

 

2,967,014

 

2,960,940

 

Retained earnings

 

1,336,298

 

1,416,918

 

Accumulated other comprehensive loss

 

(2,662

)

(5,191

)

Total shareholders’ equity

 

4,591,432

 

4,668,495

 

Total liabilities and shareholders’ equity

 

$

9,770,208

 

$

9,688,520

 

 

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

 

 

 

May 4,
2012

 

April 29,
2011

 

Net sales

 

$

3,901,205

 

$

3,451,697

 

Cost of goods sold

 

2,672,949

 

2,364,300

 

Gross profit

 

1,228,256

 

1,087,397

 

Selling, general and administrative expenses

 

843,932

 

765,779

 

Operating profit

 

384,324

 

321,618

 

Interest expense

 

37,074

 

65,572

 

Other (income) expense

 

1,671

 

2,272

 

Income before income taxes

 

345,579

 

253,774

 

Income tax expense

 

132,164

 

96,805

 

Net income

 

$

213,415

 

$

156,969

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.64

 

$

0.46

 

Diluted

 

$

0.63

 

$

0.45

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

Basic

 

336,080

 

341,522

 

Diluted

 

339,490

 

345,393

 

 

See notes to condensed consolidated financial statements.

 

2



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

For the 13 weeks ended

 

 

 

May 4,
2012

 

April 29,
2011

 

Comprehensive income

 

$

215,944

 

$

161,669

 

 

See notes to condensed consolidated financial statements.

 

3



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the 13 weeks ended

 

 

 

May 4,
2012

 

April 29,
2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

213,415

 

$

156,969

 

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

 

 

 

 

 

Depreciation and amortization

 

72,271

 

67,486

 

Deferred income taxes

 

(1,119

)

7,393

 

Tax benefit of stock options

 

(18,589

)

(434

)

Loss on debt retirement, net

 

1,629

 

2,167

 

Noncash share-based compensation

 

4,759

 

3,519

 

Other noncash gains and losses

 

2,828

 

4,574

 

Change in operating assets and liabilities:

 

 

 

 

 

Merchandise inventories

 

6,499

 

(5,275

)

Prepaid expenses and other current assets

 

5,370

 

(32,369

)

Accounts payable

 

(82,227

)

(25,922

)

Accrued expenses and other liabilities

 

(30,218

)

38,810

 

Income taxes

 

19,306

 

6,671

 

Other

 

(1,285

)

(17

)

Net cash provided by operating activities

 

192,639

 

223,572

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(145,857

)

(91,958

)

Proceeds from sales of property and equipment

 

119

 

367

 

Net cash used in investing activities

 

(145,738

)

(91,591

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments of long-term obligations

 

(202

)

(27,151

)

Borrowings under revolving credit facility

 

584,900

 

 

Repayments of borrowings under revolving credit facility

 

(321,800

)

 

Debt issue costs

 

(7,663

)

 

Repurchase of common stock from principal shareholder

 

(300,000

)

 

Equity transactions with employees, net of taxes paid

 

(14,321

)

(247

)

Tax benefit of stock options

 

18,589

 

434

 

Net cash used in financing activities

 

(40,497

)

(26,964

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

6,404

 

105,017

 

Cash and cash equivalents, beginning of period

 

126,126

 

497,446

 

Cash and cash equivalents, end of period

 

$

132,530

 

$

602,463

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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

 

$

39,726

 

$

35,649

 

 

See notes to condensed consolidated financial statements.

 

4



 

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 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 February 3, 2012 which has been derived from the audited consolidated financial statements at that date. Accordingly, readers 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 February 3, 2012 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 2012 fiscal year will be a 52-week accounting period ending on February 1, 2013 and the 2011 fiscal year was a 53-week accounting period that ended on February 3, 2012.

 

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 May 4, 2012 and results of operations for the 13-week accounting periods ended May 4, 2012 and April 29, 2011 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 provisions of $1.6 million and $3.6 million in the 13-week periods ended May 4, 2012 and April 29, 2011, 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 business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

5



 

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

 

2.                                       Common stock transactions

 

On November 30, 2011, the Company’s Board of Directors authorized a $500 million common stock repurchase program. Under the program, shares of the Company’s common stock may be repurchased from time to time in open market transactions or in privately negotiated purchases, which could include repurchases from Buck Holdings, L.P. (which is controlled by affiliates of Kohlberg Kravis Roberts & Co., L.P. (“KKR”) and Goldman Sachs & Co.) or other related parties if appropriate. The timing and actual number of shares purchased will depend on a variety of factors, such as price, market conditions and other factors. Repurchases under the program may be funded from available cash or borrowings under the Company’s revolving credit facility. The repurchase authorization has no expiration date. In connection with the repurchase program, on April 2, 2012, the Company repurchased 6,817,311 shares from Buck Holdings, L.P. for $300 million. As of May 4, 2012, the remaining authorization under the repurchase program is $15 million.

 

3.                                       Earnings per share

 

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

 

 

 

13 Weeks Ended May 4, 2012

 

13 Weeks Ended April 29, 2011

 

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

213,415

 

336,080

 

$

0.64

 

$

156,969

 

341,522

 

$

0.46

 

Effect of dilutive share-based awards

 

 

 

3,410

 

 

 

 

 

3,871

 

 

 

Diluted earnings per share

 

$

213,415

 

339,490

 

$

0.63

 

$

156,969

 

345,393

 

$

0.45

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is 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 0.5 million and 0.4 million in the 2012 and 2011 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

 

6



 

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 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, 2010, and 2011 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. Generally, the Company’s tax years ended in 2007 and later remain open for examination by the various state taxing authorities.

 

As of May 4, 2012, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $37.9 million, $1.5 million and $0.3 million, respectively, for a total of $39.7 million. Of this amount, $0.3 million and $38.1 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 $26.2 million in the coming twelve months principally as a result of the settlement of currently ongoing income tax examinations. As of May 4, 2012, approximately $37.9 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 May 4, 2012 was 38.2% compared to a rate of 38.1% for the 13-week period ended April 29, 2011. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act’s Retention Credit were offset by decreases associated with the adjustment of accruals related to the IRS examination of the Company’s federal income tax returns for fiscal years 2006 through 2008 and the reversal of state income tax reserves due to an audit settlement.

 

5.                                       Current and long-term obligations

 

On March 15, 2012, the Company’s senior secured asset based revolving credit facility was amended and restated (the “ABL Facility”).  The maturity date was extended to July 6, 2014 and the total commitment was increased to $1.2 billion (of which up to $350.0 million is available for letters of credit), subject to borrowing base availability. At May 4, 2012, the applicable margin for borrowings under the ABL Facility was 1.50% for LIBOR borrowings and 0.50% for base-rate borrowings, and the commitment fee for any unutilized commitments was 0.375%. The applicable margins for borrowings and the

 

7



 

commitment fees under the ABL Facility are subject to adjustment each quarter, based on average daily excess availability under the ABL Facility.  The Company also must pay customary letter of credit fees. The Company capitalized $2.6 million of debt issue costs, and incurred a pretax loss of $1.6 million for the write off of a portion of existing debt issue costs associated with the amendment, which is reflected in Other (income) expense in the Company’s condensed consolidated statement of income for the 13-week period ended May 4, 2012.

 

On March 30, 2012, the Company’s $1.964 billion senior secured term loan facility was amended and restated (the “Term Loan Facility”).  Pursuant to the amendment, the maturity date for $879.7 million of the Term Loan Facility was extended from July 6, 2014 to July 6, 2017. The applicable margin for borrowings under the Term Loan Facility remains unchanged. The Company capitalized $5.2 million of debt issue costs associated with the amendment.

 

On April 29, 2011, the Company repurchased in the open market $25.0 million aggregate principal amount of Senior Notes at a price of 107.0% plus accrued and unpaid interest, funded with cash on hand. 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 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).

 

In connection with accounting standards for fair value measurement, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. 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 the Company’s 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 May 4, 2012, 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 classified its derivative valuations, as discussed in detail in Note 7, 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 categorized within Level 3 as of May 4, 2012.

 

8



 

(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
May 4,
2012

 

Assets:

 

 

 

 

 

 

 

 

 

Trading securities (a)

 

$

6,675

 

$

 

$

 

$

6,675

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term obligations (b)

 

2,904,606

 

19,382

 

 

2,923,988

 

Derivative financial instruments (c)

 

 

6,764

 

 

6,764

 

Deferred compensation (d)

 

20,919

 

 

 

20,919

 

 


(a)           Reflected at fair value in the condensed consolidated balance sheet as Prepaid expenses and other current assets of $1,637 and Other assets, net of $5,038.

(b)          Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $459 and Long-term obligations of $2,880,920.

(c)           Reflected in the condensed consolidated balance sheet as Accrued expenses and other current liabilities.

(d)          Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $1,679 and non-current Other liabilities of $19,240.

 

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 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

 

9



 

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 May 4, 2012 and April 29, 2011, 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.

 

As of May 4, 2012, the Company had three interest rate swaps with a combined notional value of $506.7 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. During the next 52-week period, the Company estimates that an additional $4.4 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 May 4, 2012, and April 29, 2011, the Company had no such non-designated hedges.

 

10



 

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 May 4, 2012 and February 3, 2012:

 

(in thousands)

 

May 4,
2012

 

February 3,
2012

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

Interest rate swaps classified in current liabilities as Accrued expenses and other

 

$

6,764

 

$

10,820

 

 

The tables below present the pre-tax effect of the Company’s derivative financial instruments on the condensed consolidated statements of comprehensive income for the 13-week periods ended May 4, 2012 and April 29, 2011:

 

 

 

13 Weeks Ended

 

(in thousands)

 

May 4,
2012

 

April 29,
2011

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

 

 

Loss related to effective portion of derivative recognized in OCI

 

$

36

 

$

1,603

 

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

 

$

4,185

 

$

9,319

 

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

 

$

42

 

$

106

 

 

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.

 

As of May 4, 2012, 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 $7.0 million. If the Company had breached any of these provisions at May 4, 2012, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value of $7.0 million. As of May 4, 2012, 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

 

11



 

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. Approximately 3,950 individuals have opted into the lawsuit, approximately 800 of whom have been dismissed for various reasons, including failure to cooperate in discovery.

 

Except as to certain limited fact discovery, the discovery period has closed.  On April 2, 2012, the Company filed its decertification motion.  Plaintiff’s response to that motion was filed on May 9, 2012.  No deadline currently exists for potentially dispositive motions, and the Court has not set a trial date.

 

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 is vigorously defending 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 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 opted into the lawsuit.

 

12



 

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 motion remains pending. 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 stayed the action pending the results of the mediation.  The mediation occurred in March and April, 2011, at which time the Company reached an agreement in principle to settle the matter on behalf of the entire putative class. The proposed settlement, which has received preliminary approval from the court, provides for both monetary and equitable relief. Under the preliminarily approved terms, $15.5 million will be paid 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. An additional $3.25 million will be paid for plaintiffs’ legal fees and costs.  Of the total $18.75 million, the Company’s Employment Practices Liability Insurance (“EPLI”) carrier paid approximately $15.9 million in the first quarter of 2012 to a third party claims administrator to disburse the funds, per the settlement terms, to claimants and counsel pending final approval from the court, which represented the balance remaining of the $20 million EPLI policy covering the claims.The Company paid approximately $2.8 million to the third party claims administrator.  In addition, the Company agreed to make, and, effective April 1, 2012, has made, certain adjustments to its pay setting policies and procedures for new store managers.  A hearing regarding final approval of the settlement is scheduled for July 23, 2012.  Because it deemed settlement probable and estimable, the Company accrued for the net settlement as well as for certain additional anticipated fees related thereto during the first quarter of 2011, and concurrently recorded a receivable of approximately $15.9 million from its EPLI carrier. Due to the payments described above, the accrual and receivable were each relieved during the first quarter of 2012.

 

At this time, although probable it is not certain that the court will grant final approval to 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 April 9, 2012, the Company was served with a lawsuit filed in the United States District Court for the Eastern District of Virginia entitled Jonathan Marcum v. Dolgencorp. Inc. (Civil Action No. 3:12-cv-00108-JRS) in which the plaintiff, whose conditional offer of employment was rescinded, alleges defamation and that certain of the Company’s background check procedures violate the Fair Credit Reporting Act (“FCRA”).  According to the complaint, the plaintiff seeks to represent a putative class of applicants in connection with his FCRA claims.  The Company’s response to the complaint is due to be filed on June 15, 2012.

 

13



 

At this time, it is not possible to predict whether the court ultimately will permit the action to proceed as a class under the FCRA.  Although the Company intends to vigorously defend the action, no assurances can be given that it will 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 by the plaintiff.  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.

 

In September 2011, the Chicago Regional Office of the United States Equal Employment Opportunity Commission (“EEOC” or “Commission”) notified the Company of a cause finding related to the Company’s criminal background check policy.  The cause finding alleges that Dollar General’s criminal background check policy, which excludes from employment individuals with certain criminal convictions for specified periods, has a disparate impact on African-American candidates and employees in violation of Title VII of the Civil Rights Act of 1964, as amended.

 

The Company and the EEOC have been engaged in the statutorily required conciliation process.  Although the Company will continue to conciliate in good faith, it believes that its criminal background check process is both lawful and necessary to a safe environment for its employees and customers and the protection of its assets and shareholders’ investments.

 

Based on the Commission’s recent conciliation demands, the Company is not optimistic regarding the likelihood that the conciliation process will be successful.  If it is not, litigation may ensue.  The Company does not believe that this matter would be amenable to class or similar treatment; however, because at this time the Company cannot estimate or determine the form that any ultimate litigation would take, the size of any putative class or the damages or other recoveries that would be sought, it cannot estimate the potential exposure.  If the matter were to proceed successfully as a class or similar action, it could have a material impact on the Company’s financial statements as a whole.

 

On May 20, 2011, a lawsuit entitled Winn-Dixie Stores, Inc., et al. v. Dolgencorp, LLC was filed in the United States District Court for the Southern District of Florida (Case No. 9:11-cv-80601-DMM) (“Winn-Dixie”) in which the plaintiffs allege that the sale of food and other items in approximately 55 of the Company’s stores, each of which allegedly is or was at some time co-located in a shopping center with one of plaintiffs’ stores, violates restrictive covenants that plaintiffs contend are binding on the occupants of the shopping centers.  Plaintiffs seek damages and an injunction limiting the sale of food and other items in those stores.  Although plaintiffs have not made a demand for any specific amount of damages at this point in the proceeding, documents prepared and produced by plaintiffs during discovery suggest that plaintiffs seek as much as $47 million although the court limited their ability to prove such damages. The Company has vigorously defended the Winn-Dixie matter and views that sum as wholly without basis and unsupported by the law and the facts. The various leases involved in the matter are unique in their terms and/or the factual circumstances surrounding them, and, in some cases, the stores named by plaintiffs are not now and have never been co-located with plaintiffs’ stores. The court granted the Company’s motion challenging the admissibility of plaintiffs’ damages expert, precluding the expert from testifying. The case was consolidated with similar cases against Big Lots and Dollar Tree, and a non-jury trial commenced on May 14, 2012 and presentation of evidence concluded on May 22, 2012. To date, no judgment has been issued. At this time, no assurances can be given that the Company will be successful in its defense of the action on the merits or otherwise.  If the Company is not successful in defending the Winn-Dixie matter, the outcome could have a material adverse effect on the Company’s financial statements as a whole.

 

In 2008, the Company terminated an interest rate swap as a result of the counterparty’s declaration of bankruptcy and made a cash payment of $7.6 million to settle the swap. On May 14, 2010, the Company received a demand from the counterparty for an additional payment of approximately $19 million plus interest. In April 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 accrued the settlement amount along with additional expected fees and costs related thereto in the first quarter of 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,

 

14



 

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.

 

9.             Related party transactions

 

Affiliates of KKR and Goldman, Sachs & Co. indirectly own a substantial portion of the Company’s common stock. Two of KKR’s members 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) are or may be lenders under the Company’s Term Loan Facility and ABL Facility discussed in further detail in Note 5. The Company made interest payments of approximately $16.1 million and $21.9 million on the Term Loan Facility and $1.0 million and zero on the ABL Facility during the 13-week periods ended May 4, 2012 and April 29, 2011, respectively.

 

Goldman, Sachs & Co. is a counterparty to an amortizing interest rate swap with a $103.3 million notional amount as of May 4, 2012, entered into in connection with the Term Loan Facility. The Company paid Goldman, Sachs & Co. approximately $1.3 million and $7.3 million in the 13-week periods ended May 4, 2012 and April 29, 2011, respectively, pursuant to this swap.

 

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 2012. The Company did not sell shares of common stock, receive proceeds from such shareholders’ sales of shares of common stock or pay any underwriting fees in connection with the secondary offering. Certain members of the Company’s management exercised registration rights in connection with such offering.

 

The Company repurchased common stock held by Buck Holdings, L.P. (which is controlled by affiliates of KKR and Goldman Sachs & Co) during the first quarter of 2012 as further discussed in Note 2.

 

15



 

10.          Segment reporting

 

The Company manages its business on the basis of one reportable segment. As of May 4, 2012, 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)

 

May 4,
2012

 

April 29,
2011

 

Classes of similar products:

 

 

 

 

 

Consumables

 

$

2,877,282

 

$

2,529,070

 

Seasonal

 

524,493

 

457,057

 

Home products

 

258,998

 

234,208

 

Apparel

 

240,432

 

231,362

 

Net sales

 

$

3,901,205

 

$

3,451,697

 

 

11.          Subsequent event

 

In May 2012, the Company entered into interest rate swaps with a total notional amount of $875.0 million in order to mitigate a portion of the variable rate interest exposure under the Term Loan Facility. These swaps have an effective date of May 31, 2012 and are scheduled to mature on May 29, 2015. The terms of the agreements resulted in the swap of one month LIBOR rates for a fixed interest rate, which is expected to result in the payment of an all-in fixed rate of 3.34% on the notional amount through the date of maturity.

 

12.          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.

 

16



 

 

 

May 4, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,156

 

$

108,118

 

$

23,256

 

$

 

$

132,530

 

Merchandise inventories

 

 

2,000,864

 

 

 

2,000,864

 

Income taxes receivable

 

 

5,210

 

 

 

5,210

 

Deferred income taxes

 

415

 

 

21,848

 

(22,263

)

 

Prepaid expenses and other current assets

 

579,120

 

4,881,080

 

10,058

 

(5,335,127

)

135,131

 

Total current assets

 

580,691

 

6,995,272

 

55,162

 

(5,357,390

)

2,273,735

 

Net property and equipment

 

113,770

 

1,764,235

 

167

 

 

1,878,172

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Other intangible assets, net

 

1,199,700

 

32,166

 

 

 

1,231,866

 

Deferred income taxes

 

 

 

50,136

 

(50,136

)

 

Other assets, net

 

6,904,676

 

13,656

 

324,593

 

(7,195,079

)

47,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,137,426

 

$

8,805,329

 

$

430,058

 

$

(12,602,605

)

$

9,770,208

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

 

$

459

 

$

 

$

 

$

459

 

Accounts payable

 

4,831,858

 

1,423,354

 

51,904

 

(5,321,192

)

985,924

 

Accrued expenses and other

 

56,163

 

255,641

 

62,480

 

(13,935

)

360,349

 

Income taxes payable

 

21,425

 

 

28,930

 

 

50,355

 

Deferred income taxes

 

 

36,429

 

 

(22,263

)

14,166

 

Total current liabilities

 

4,909,446

 

1,715,883

 

143,314

 

(5,357,390

)

1,411,253

 

Long-term obligations

 

3,142,575

 

3,431,603

 

 

(3,693,258

)

2,880,920

 

Deferred income taxes

 

435,666

 

264,002

 

 

(50,136

)

649,532

 

Other liabilities

 

52,663

 

35,310

 

143,454

 

 

231,427

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

5,644

 

 

 

 

5,644

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

290,782

 

23,855

 

100

 

(23,955

)

290,782

 

Additional paid-in capital

 

2,967,014

 

431,253

 

19,900

 

(451,153

)

2,967,014

 

Retained earnings

 

1,336,298

 

2,903,423

 

123,290

 

(3,026,713

)

1,336,298

 

Accumulated other comprehensive loss

 

(2,662

)

 

 

 

(2,662

)

Total shareholders’ equity

 

4,591,432

 

3,358,531

 

143,290

 

(3,501,821

)

4,591,432

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

13,137,426

 

$

8,805,329

 

$

430,058

 

$

(12,602,605

)

$

9,770,208

 

 

17



 

 

 

February 3, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,844

 

$

102,627

 

$

21,655

 

$

 

$

126,126

 

Merchandise inventories

 

 

2,009,206

 

 

 

2,009,206

 

Deferred income taxes

 

10,078

 

 

21,729

 

(31,807

)

 

Prepaid expenses and other current assets

 

551,457

 

4,685,263

 

5,768

 

(5,102,746

)

139,742

 

Total current assets

 

563,379

 

6,797,096

 

49,152

 

(5,134,553

)

2,275,074

 

Net property and equipment

 

113,661

 

1,681,072

 

227

 

 

1,794,960

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Other intangible assets, net

 

1,199,200

 

36,754

 

 

 

1,235,954

 

Deferred income taxes

 

 

 

49,531

 

(49,531

)

 

Other assets, net

 

6,575,574

 

13,260

 

323,736

 

(6,868,627

)

43,943

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,790,403

 

$

8,528,182

 

$

422,646

 

$

(12,052,711

)

$

9,688,520

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

 

$

590

 

$

 

$

 

$

590

 

Accounts payable

 

4,654,237

 

1,451,277

 

52,362

 

(5,093,789

)

1,064,087

 

Accrued expenses and other

 

79,010

 

264,575

 

62,447

 

(8,957

)

397,075

 

Income taxes payable

 

12,972

 

5,013

 

26,443

 

 

44,428

 

Deferred income taxes

 

 

35,529

 

 

(31,807

)

3,722

 

Total current liabilities

 

4,746,219

 

1,756,984

 

141,252

 

(5,134,553

)

1,509,902

 

Long-term obligations

 

2,879,475

 

3,340,075

 

 

(3,601,659

)

2,617,891

 

Deferred income taxes

 

435,791

 

270,736

 

 

(49,531

)

656,996

 

Other liabilities

 

54,336

 

33,156

 

141,657

 

 

229,149

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

6,087

 

 

 

 

6,087

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

295,828

 

23,855

 

100

 

(23,955

)

295,828

 

Additional paid-in capital

 

2,960,940

 

431,253

 

19,900

 

(451,153

)

2,960,940

 

Retained earnings

 

1,416,918

 

2,672,123

 

119,737

 

(2,791,860

)

1,416,918

 

Accumulated other comprehensive loss

 

(5,191

)

 

 

 

(5,191

)

Total shareholders’ equity

 

4,668,495

 

3,127,231

 

139,737

 

(3,266,968

)

4,668,495

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

12,790,403

 

$

8,528,182

 

$

422,646

 

$

(12,052,711

)

$

9,688,520

 

 

18



 

 

 

For the 13-weeks ended May 4, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

83,250

 

$

3,901,205

 

$

23,331

 

$

(106,581

)

$

3,901,205

 

Cost of goods sold

 

 

2,672,949

 

 

 

2,672,949

 

Gross profit

 

83,250

 

1,228,256

 

23,331

 

(106,581

)

1,228,256

 

Selling, general and administrative expenses

 

75,682

 

851,948

 

22,883

 

(106,581

)

843,932

 

Operating profit

 

7,568

 

376,308

 

448

 

 

384,324

 

Interest income

 

(9,951

)

(8,576

)

(5,002

)

23,529

 

 

Interest expense

 

51,106

 

9,489

 

8

 

(23,529

)

37,074

 

Other (income) expense

 

1,671

 

 

 

 

1,671

 

Income (loss) before income taxes

 

(35,258

)

375,395

 

5,442

 

 

345,579

 

Income tax expense (benefit)

 

(13,820

)

144,095

 

1,889

 

 

132,164

 

Equity in subsidiaries’ earnings, net of taxes

 

234,853

 

 

 

(234,853

)

 

Net income

 

$

213,415

 

$

231,300

 

$

3,553

 

$

(234,853

)

$

213,415

 

Comprehensive income

 

$

215,944

 

$

231,300

 

$

3,553

 

$

(234,853

)

$

215,944

 

 

 

 

For the 13-weeks ended April 29, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE 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

)

21,631

 

 

Interest expense

 

74,746

 

12,451

 

6

 

(21,631

)

65,572

 

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

 

Comprehensive income

 

$

161,669

 

$

189,313

 

$

3,852

 

$

(193,165

)

$

161,669

 

 

19



 

 

 

For the 13 weeks ended May 4, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

213,415

 

$

231,300

 

$

3,553

 

$

(234,853

)

$

213,415

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

7,520

 

64,685

 

66

 

 

72,271

 

Deferred income taxes

 

5,439

 

(5,834

)

(724

)

 

(1,119

)

Tax benefit of stock options

 

(18,589

)

 

 

 

(18,589

)

Loss on debt retirement, net

 

1,629

 

 

 

 

1,629

 

Noncash share-based compensation

 

4,759

 

 

 

 

4,759

 

Other noncash gains and losses

 

109

 

2,719

 

 

 

2,828

 

Equity in subsidiaries’ earnings, net

 

(234,853

)

 

 

234,853

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

6,499

 

 

 

6,499

 

Prepaid expenses and other current assets

 

17,405

 

(13,025

)

990

 

 

5,370

 

Accounts payable

 

(6,888

)

(75,139

)

(200

)

 

(82,227

)

Accrued expenses and other liabilities

 

(25,442

)

(6,606

)

1,830

 

 

(30,218

)

Income taxes

 

27,042

 

(10,223

)

2,487

 

 

19,306

 

Other

 

(645

)

(569

)

(71

)

 

(1,285

)

Net cash provided by (used in) operating activities

 

(9,099

)

193,807

 

7,931

 

 

192,639

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(3,831

)

(142,020

)

(6

)

 

(145,857

)

Proceeds from sales of property and equipment

 

12

 

107

 

 

 

119

 

Net cash used in investing activities

 

(3,819

)

(141,913

)

(6

)

 

(145,738

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term obligations

 

 

(202

)

 

 

(202

)

Borrowings under revolving credit facility

 

584,900

 

 

 

 

584,900

 

Repayments of borrowings under revolving credit facility

 

(321,800

)

 

 

 

(321,800

)

Debt issue costs

 

(7,663

)

 

 

 

(7,663

)

Repurchase of common stock from principal shareholder

 

(300,000

)

 

 

 

(300,000

)

Equity transactions with employees, net of taxes paid

 

(14,321

)

 

 

 

(14,321

)

Tax benefit of stock options

 

18,589

 

 

 

 

18,589

 

Changes in intercompany note balances, net

 

52,525

 

(46,201

)

(6,324

)

 

 

Net cash provided by (used in) financing activities

 

12,230

 

(46,403

)

(6,324

)

 

(40,497

)

Net increase (decrease) in cash and cash equivalents

 

(688

)

5,491

 

1,601

 

 

6,404

 

Cash and cash equivalents, beginning of period

 

1,844

 

102,627

 

21,655

 

 

126,126

 

Cash and cash equivalents, end of period

 

$

1,156

 

$

108,118

 

$

23,256

 

$

 

$

132,530

 

               

20



 

 

 

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 (used in) 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, net

 

2,167

 

 

 

 

2,167

 

Noncash share-based compensation

 

3,519

 

 

 

 

3,519

 

Other noncash 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 liabilities

 

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 (used in) 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 sales of property and equipment

 

 

367

 

 

 

367

 

Net cash used in investing activities

 

(9,973

)

(81,599

)

(19

)

 

(91,591

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term obligations

 

(26,750

)

(401

)

 

 

(27,151

)

Equity transactions with employees, net of taxes paid

 

(247

)

 

 

 

(247

)

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 (decrease) 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

 

 

21



 

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 May 4, 2012, and the related condensed consolidated statements of income and comprehensive income for the thirteen-week periods ended May 4, 2012 and April 29, 2011, and the condensed consolidated statements of cash flows for the thirteen-week periods ended May 4, 2012 and April 29, 2011. 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 February 3, 2012 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, 2012, 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 February 3, 2012, 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 4, 2012

 

Nashville, Tennessee

 

 

22



 

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 February 3, 2012. 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 10,052 stores located in 40 states as of May 4, 2012, 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, we have been operating in an environment with heightened economic challenges and uncertainties in recent years. Consumers are facing low rates of employment, fluctuating food, gasoline and energy costs, rising medical costs, and continued weakness in housing and consumer credit markets, and the timetable and strength of any economic recovery remains uncertain. 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, our financial results have been strong, and we are optimistic with regard to executing our operating priorities in 2012.

 

At the beginning of 2008, we defined four operating priorities, which we remain keenly focused on executing. These priorities are: 1) drive productive sales growth, 2) increase our gross margins, 3) leverage process improvements and information technology to reduce costs, and 4) strengthen and expand Dollar General’s 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. In addition to our ongoing category management processes which help us determine the most productive merchandise offerings for

 

23



 

our customers, sales growth initiatives for 2012 include: improvement in merchandise in-stock levels; further emphasis on the $1.00 price point; expansion of the number of coolers in approximately 1,200 existing stores; and the initial implementation of a merchandise allocation strategy based on store demographics. In addition, we expect our remodeled and relocated stores to enhance same-store sales growth. New store expansion is an important element of our overall growth strategy and currently includes expansion in several new markets, including portions of California, and the testing of larger store formats with expanded perishable foods. We opened a total of 625 new stores in 2011 and plan to open an additional 625 stores in 2012, of which 128 were opened in the 2012 first quarter.

 

Our second priority is to increase gross profit through effective category management, the expansion of private brand offerings, increased foreign sourcing, shrink reduction, distribution efficiencies and improvements to our pricing and markdown model, while remaining committed to our everyday low price strategy. Within our consumables category, we strive to offer the optimal balance of the most popular nationally advertised brands and our own private brands, which generally have higher gross profit rates than national brands. In recent years, sales growth in consumables, which generally have lower gross profit rates than non-consumables, has outpaced the growth in non-consumables, due to economic challenges faced by our customers which have impacted discretionary spending as well as our focus on expanding the consumables offerings in our stores. To some extent, the increased commodities costs we experienced in 2011 moderated in the 2012 first quarter, although we continued to see elevated costs of diesel fuel through the first quarter and we expect higher costs to remain. We opened two new distribution centers in the 2012 first quarter to help reduce the number of miles driven in connection with delivering merchandise to our stores.

 

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. In 2012, we have additional opportunities to utilize the capabilities of our workforce management system, implemented in 2011, which assists us in improving our store standards and overall customer experience by utilizing store workforce hours more effectively. Also in 2011, we installed faster data transmission technology in our stores which we expect to create greater efficiencies in our retail store operations in 2012. In addition, we are in the early stages of implementing a comprehensive supply chain solution which we believe will help us improve our allocation of merchandise and reduce our overall costs of purchasing and delivering merchandise to our stores. This is a multi-year project which impacts the entire supply chain.

 

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 through our charitable and other efforts. 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 2012 over the comparable 2011 period in many of our key financial metrics. Basis points amounts referred to below are equal to 0.01% as a percentage of sales.

 

24



 

·                   Total sales increased 13.0% to $3.90 billion. Sales in same-stores increased 6.7% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 53-week period ended May 4, 2012 were $216, up from $203 for the 52-week period ended April 29, 2011.

 

·                   Gross profit, as a percentage of sales, was 31.5% in both the 2012 and 2011 periods. The positive factors affecting the 2012 gross profit rate were effectively offset by several negative factors. The most significant factors positively affecting the gross profit rate were higher inventory markups, distribution and transportation efficiencies, inventory shrink reduction and a lower LIFO charge. The most significant factors negatively affecting the gross profit rate included increased apparel and other markdowns and a heavier consumables weighting within the sales mix.

 

·                   Selling, general and administrative expenses, or SG&A, as a percentage of sales, was 21.6% compared to 22.2% in the 2011 quarter, a decrease of 56 basis points. The 2011 quarter included expenses of $13.1 million, or 38 basis points, for the expected settlement of two legal matters. The remaining improvement in SG&A, as a percentage of sales, is primarily due to our increased sales, which combined with the impact of our new workforce management system, resulted in improved effectiveness of our store labor costs.

 

·                   Interest expense decreased by $28.5 million to $37.1 million in the 2012 first quarter. Total long-term obligations as of May 4, 2012 were $2.88 billion, a reduction of $382 million from the prior year.

 

·                   Net income was $213.4 million, or $0.63 per diluted share, compared to net income of $157.0 million, or $0.45 per diluted share, in the 2011 quarter. Diluted shares outstanding decreased by 5.9 million shares, reflecting the impact of repurchases of 11.7 million shares during the most recent two quarters.

 

·                   Cash generated from operating activities was $192.6 million. At May 4, 2012, we had a cash balance of $132.5 million.

 

·                   Inventory turnover was 5.3 times on a rolling four-quarter basis. Inventories increased 7% on a per store basis over the 2011 first quarter. Improving our in-stock levels, while improving our inventory turns, remains a high priority.

 

·                   During the 2012 first quarter, we opened 128 new stores, remodeled or relocated 224 stores, and closed 13 stores, resulting in a store count of 10,052 as of May 4, 2012.

 

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.

 

25



 

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 2012 and 2011, which represent the 52-week fiscal year ending February 1, 2013 and the 53-week fiscal year ended February 3, 2012, respectively. References to the first quarter accounting periods for 2012 and 2011 contained herein refer to the 13-week accounting periods ended May 4, 2012 and April 29, 2011, 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. 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 2012 and 2011, and the dollar and percentage variances among those periods:

 

 

 

13 Weeks Ended

 

2012 vs. 2011

 

(dollars in millions, except per share amounts)

 

May 4,
2012

 

April 29,
2011

 

Amount
change

 

%
change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

Consumables

 

$

2,877.3

 

$

2,529.1

 

$

348.2

 

13.8

%

% of net sales

 

73.75

%

73.27

%

 

 

 

 

Seasonal

 

524.5

 

457.1

 

67.4

 

14.8

 

% of net sales

 

13.44

%

13.24

%

 

 

 

 

Home products

 

259.0

 

234.2

 

24.8

 

10.6

 

% of net sales

 

6.64

%

6.79

%

 

 

 

 

Apparel

 

240.4

 

231.4

 

9.1

 

3.9

 

% of net sales

 

6.16

%

6.70

%

 

 

 

 

Net sales

 

3,901.2

 

3,451.7

 

449.5

 

13.0

 

Cost of goods sold

 

2,672.9

 

2,364.3

 

308.6

 

13.1

 

% of net sales

 

68.52

%

68.50

%

 

 

 

 

Gross profit

 

1,228.3

 

1,087.4

 

140.9

 

13.0

 

% of net sales

 

31.48

%

31.50

%

 

 

 

 

Selling, general and administrative expenses

 

843.9

 

765.8

 

78.2

 

10.2

 

% of net sales

 

21.63

%

22.19

%

 

 

 

 

Operating profit

 

384.3

 

321.6

 

62.7

 

19.5

 

% of net sales

 

9.85

%

9.32

%

 

 

 

 

Interest expense

 

37.1

 

65.6

 

(28.5

)

(43.5

)

% of net sales

 

0.95

%

1.90

%

 

 

 

 

Other (income) expense

 

1.7

 

2.3

 

(0.6

)

(26.5

)

% of net sales

 

0.04

%

0.07

%

 

 

 

 

Income before income taxes