Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 08/31/2010 09:36:08)



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 July 30, 2010


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 [  ]


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 [  ]  No [  ]


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 [  ]

Accelerated filer [  ]

Non-accelerated filer [X]

Smaller reporting company [  ]


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


The registrant had 341,038,564 shares of common stock outstanding on August 24, 2010.






PART I—FINANCIAL INFORMATION


ITEM 1.

FINANCIAL STATEMENTS.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


 

July 30,
2010

 

January 29,
2010

ASSETS

(Unaudited)

 

(see Note 1)

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

281,421

 

 

$

222,076

 

Merchandise inventories

 

1,738,439

 

 

 

1,519,578

 

Income taxes receivable

 

-

 

 

 

7,543

 

Prepaid expenses and other current assets

 

114,824

 

 

 

96,252

 

Total current assets

 

2,134,684

 

 

 

1,845,449

 

Net property and equipment

 

1,377,630

 

 

 

1,328,386

 

Goodwill

 

4,338,589

 

 

 

4,338,589

 

Intangible assets, net

 

1,268,990

 

 

 

1,284,283

 

Other assets, net

 

59,581

 

 

 

66,812

 

Total assets

$

9,179,474

 

 

$

8,863,519

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term obligations

$

1,595

 

 

$

3,671

 

Accounts payable

 

941,742

 

 

 

830,953

 

Accrued expenses and other

 

321,672

 

 

 

342,290

 

Income taxes payable

 

14,864

 

 

 

4,525

 

Deferred income taxes

 

39,287

 

 

 

25,061

 

Total current liabilities

 

1,319,160

 

 

 

1,206,500

 

Long-term obligations

 

3,350,807

 

 

 

3,399,715

 

Deferred income taxes

 

532,313

 

 

 

546,172

 

Other liabilities

 

279,423

 

 

 

302,348

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

14,927

 

 

 

18,486

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

 

-

 

Common stock

 

298,399

 

 

 

298,013

 

Additional paid-in capital

 

2,933,846

 

 

 

2,923,377

 

Retained earnings

 

480,266

 

 

 

203,075

 

Accumulated other comprehensive loss

 

 (29,667

)

 

 

(34,167

)

Total shareholders’ equity

 

3,682,844

 

 

 

3,390,298

 

Total liabilities and shareholders’ equity

$

9,179,474

 

 

$

8,863,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

For the 26 weeks ended

 

July 30,
2010

 

July 31,
2009

 

July 30,
2010

 

July 31,
2009

Net sales

$

3,214,155

 

 

$

2,901,907

 

 

$

6,325,469

 

 

$

5,681,844

 

Cost of goods sold

 

2,178,176

 

 

 

1,995,865

 

 

 

4,289,734

 

 

 

3,920,444

 

Gross profit

 

1,035,979

 

 

 

906,042

 

 

 

2,035,735

 

 

 

1,761,400

 

Selling, general and administrative expenses

 

735,222

 

 

 

672,825

 

 

 

1,444,255

 

 

 

1,303,314

 

Operating profit

 

300,757

 

 

 

233,217

 

 

 

591,480

 

 

 

458,086

 

Interest income

 

(32

)

 

 

(15

)

 

 

(38

)

 

 

(109

)

Interest expense

 

69,330

 

 

 

89,945

 

 

 

141,348

 

 

 

179,180

 

Other (income) expense

 

6,526

 

 

 

(2,395

)

 

 

6,671

 

 

 

(728

)

Income before income taxes

 

224,933

 

 

 

145,682

 

 

 

443,499

 

 

 

279,743

 

Income taxes

 

83,738

 

 

 

52,092

 

 

 

166,308

 

 

 

103,147

 

Net income

$

141,195

 

 

$

93,590

 

 

$

277,191

 

 

$

176,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.41

 

 

$

0.29

 

 

$

0.81

 

 

$

0.56

 

Diluted

$

0.41

 

 

$

0.29

 

 

$

0.80

 

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

341,001

 

 

 

317,943

 

 

 

340,910

 

 

 

317,907

 

Diluted

 

344,746

 

 

 

319,505

 

 

 

344,572

 

 

 

318,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.




2




DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

For the 26 weeks ended

 

July 30,
2010

 

July 31,
2009

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

277,191

 

 

$

176,596

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

126,156

 

 

 

131,068

 

Deferred income taxes

 

(4,860

)

 

 

12,568

 

Tax benefit of stock options

 

(5,387

)

 

 

(262

)

Non-cash share-based compensation

 

8,366

 

 

 

6,106

 

Loss on debt retirement, net

 

6,387

 

 

 

-

 

Other non-cash gains and losses

 

6,466

 

 

 

8,141

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Merchandise inventories

 

(219,589

)

 

 

(136,262

)

Prepaid expenses and other current assets

 

(15,822

)

 

 

(4,109

)

Accounts payable

 

113,976

 

 

 

113,978

 

Accrued expenses and other

 

(40,259

)

 

 

(75,314

)

Income taxes

 

23,269

 

 

 

12,635

 

Other

 

(1,011

)

 

 

(1,280

)

Net cash provided by operating activities

 

274,883

 

 

 

243,865

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(163,058

)

 

 

(107,305

)

Proceeds from sale of property and equipment

 

544

 

 

 

322

 

Net cash used in investing activities

 

(162,514

)

 

 

(106,983

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of common stock

 

401

 

 

 

2,018

 

Issuance of long-term obligations

 

-

 

 

 

1,080

 

Repayments of long-term obligations

 

(58,137

)

 

 

(1,535

)

Repurchases of equity

 

(725

)

 

 

(1,327

)

Proceeds from exercise of stock options

 

50

 

 

 

-

 

Tax benefit of stock options

 

5,387

 

 

 

262

 

Net cash provided by (used in) financing activities

 

(53,024

)

 

 

498

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

59,345

 

 

 

137,380

 

Cash and cash equivalents, beginning of period

 

222,076

 

 

 

377,995

 

Cash and cash equivalents, end of period

$

281,421

 

 

$

515,375

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

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

$

27,206

 

 

$

15,383

 

 

 

 

 

 

 

 

 

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 disclosures normally required by U.S. GAAP or those normally made in the Company’s Annual Report on Form 10-K. 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 29, 2010 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 2010 fiscal year will end on January 28, 2011 and its 2009 fiscal year ended on January 29, 2010.


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 July 30, 2010 and results of operations for the 13-week and 26-week accounting periods ended July 30, 2010 and July 31, 2009 have been made.


The condensed consolidated balance sheet as of January 29, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by U.S. GAAP for complete financial statements.


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 (credits) of $0.7 million and $(0.3) million in the respective 13-week periods, and $0.7 million and $0.5 million in the respective 26-week periods, ended July 30, 2010 and July 31, 2009. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are



4




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.


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


In June 2009, the FASB issued new accounting guidance relating to variable interest entities. This standard amends previous standards and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity, specifies updated criteria for determining the primary beneficiary, requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, amends certain guidance for determining whether an entity is a variable interest entity, requires enhanced disclosures about an enterprise’s involvement in a variable interest entity, and includes other provisions. This standard was effective as of January 30, 2010, the beginning of the Company’s 2010 fiscal year. The impact of the adoption of this guidance on the Company’s condensed consolidated financial statements was not material.


2.

Comprehensive income


Comprehensive income consists of the following:

 

 

13 Weeks Ended

 

26 Weeks Ended

(in thousands)

 

July 30,
2010

 

July 31,
2009

 

July 30,
2010

 

July 31,
2009

Net income

 

$

141,195

 

$

93,590

 

$

277,191

 

$

176,596

Unrealized net gain on hedged transactions, net of income tax expense of $66, $2,437, $3,467, and $1,514, respectively (see Note 7)

 

 

104

 

 

3,802

 

 

4,500

 

 

2,806

Comprehensive income

 

$

141,299

 

$

97,392

 

$

281,691

 

$

179,402



3.

Earnings per share


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


 

13 Weeks Ended July 30, 2010

 

13 Weeks Ended July 31, 2009

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

Basic earnings per share

$

141,195

 

341,001 

 

 

$

0.41 

 

$

93,590

 

317,943

 

 

$

0.29

Effect of dilutive share-based awards

 

 

 

3,745 

 

 

 

 

 

 

 

 

1,562

 

 

 

 

Diluted earnings per share

$

141,195

 

344,746 

 

 

$

0.41 

 

$

93,590

 

319,505

 

 

$

0.29




5





 

26 Weeks Ended July 30, 2010

 

26 Weeks Ended July 31, 2009

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

Basic earnings per share

$

277,191

 

340,910 

 

 

$

0.81 

 

$

176,596

 

317,907 

 

 

$

0.56

Effect of dilutive share-based awards

 

 

 

3,662 

 

 

 

 

 

 

 

 

995 

 

 

 

 

Diluted earnings per share

$

277,191

 

344,572 

 

 

$

0.80 

 

$

176,596

 

318,902 

 

 

$

0.55


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 0.4 million in each of the 13-week periods ended July 30, 2010 and July 31, 2009, 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 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 2005 and 2006. The 2004 and earlier years are not open for examination. The 2007, 2008 and 2009 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 2006 and later remain open for examination by the various state taxing authorities.


As of July 30, 2010, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $48.3 million, $9.1 million and $1.2 million, respectively, for a total of $58.6 million. Of this amount, $57.5 million is reflected in noncurrent Other liabilities in the condensed consolidated balance sheet with the remaining $1.1 million reducing deferred tax assets related to net operating loss carry forwards. The reserve for uncertain tax positions decreased during the 26-week period ended July 30, 2010 by $19.3 million due principally to the reduction of a liability associated with an accounting method



6




utilized by the Company for income tax return filing purposes. The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $19.4 million in the coming twelve months principally as a result of the settlement of currently ongoing state income tax examinations and the anticipated filing of an income tax accounting method change request that is expected to resolve various uncertainties related to accounting methods employed by the Company. The full amount of this reasonably possible change is included in noncurrent Other liabilities in the condensed consolidated balance sheet as of July 30, 2010. Also, as of July 30, 2010, approximately $39.1 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 periods ended July 30, 2010 and July 31, 2009 were 37.2% and 35.8 %, respectively, for the 13-week periods, and 37.5% and 36.9%, respectively, for the 26-week periods. The increase in the tax rate of 1.4% for the 13-week period and 0.6% for the 26-week period is due principally to an adjustment to a deferred tax valuation allowance associated with state income taxes. While both the 2010 periods and the 2009 periods included a decrease in the valuation allowance (which reduces the effective income tax rate), the 2010 decrease was smaller than the decrease that occurred in 2009.



5.

Current and long-term obligations


On May 6, 2010, the Company repurchased in the open market $50.0 million aggregate principal amount of 10.625% senior notes due 2015 at a price of 111.0% plus accrued and unpaid interest. The pretax loss on this transaction of $6.5 million is reflected in the Company’s condensed consolidated statement of income for the 13-week and 26-week periods ended July 30, 2010.


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).


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 July 30, 2010, 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



7




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 using significant unobservable inputs (Level 3) as of July 30, 2010.


(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
July 30,
2010

Assets:

 

 

 

 

 

 

 

 

 

 

 

Trading securities (a)

$

7,926 

 

$

 

$

 

$

7,926

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations (b)

 

3,425,161 

 

 

21,914 

 

 

 

 

3,447,075

Derivative financial instruments (c)

 

 

 

49,714 

 

 

 

 

49,714

Deferred compensation (d)

 

15,276 

 

 

 

 

 

 

15,276

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Reflected at fair value in the condensed consolidated balance sheet as Prepaid expenses and other current assets of $2,063 and Other assets, net of $5,863.

(b)

Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $1,595 and Long-term obligations of $3,350,807.

(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 $2,063 and non-current Other liabilities of $13,213.


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



8




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 and 26-week periods ended July 30, 2010 and July 31, 2009, 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 July 30, 2010, the Company had three interest rate swaps with a combined notional value of $1.07 billion 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 $36.3 million will be reclassified as an increase to interest expense for all of its interest rate swaps.




9




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 July 30, 2010, the Company had no such non-designated hedges. As of July 31, 2009, the Company had one diesel fuel commodity swap hedging monthly usage of diesel fuel through January 2010 with a total 7.6 million gallons notional during the remaining term that was not designated as a hedge in a qualifying hedging relationship.


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 July 30, 2010 and January 29, 2010 (in thousands):


Tabular Disclosure of Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

Balance Sheet
Classification

 

Fair Value

 

Balance Sheet
Classification

 

Fair Value

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

As of July 30, 2010

 

 

 

 

 

Other liabilities

 

$

49,714

As of January 29, 2010

 

 

 

 

 

Other liabilities

 

$

57,058


The tables below present 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 and 26-week periods ended July 30, 2010 and July 31, 2009 (in thousands):


Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statement of Income
For the 13-weeks ended July 30, 2010

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest Rate Swaps

 

$

10,893

Interest expense

 

$

11,063

Other (income)
expense

 

$

140




10







Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statement of Income
For the 13-weeks ended July 31, 2009

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest Rate Swaps

 

$

5,652

Interest expense

 

$

11,891 

Other (income)
expense

 

$

156

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging
Instruments

Location of Gain or
Loss Recognized in
Income on
Derivative

 

Amount of
(Gain) or Loss
Recognized in
Income on
Derivative

 

 

 

 

Commodity Hedges

Other (income)
expense

 

$

(2,551)

 

 

 

 


Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statement of Income
For the 26 weeks ended July 30, 2010

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest Rate Swaps

 

$

15,436

Interest expense

 

$

23,403

Other (income)
expense

 

$

285


Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statement of Income
For the 26-weeks ended July 31, 2009

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest Rate Swaps

 

$

19,469

Interest expense

 

$

23,789 

Other (income)
expense

 

$

314

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging
Instruments

Location of Gain or
Loss Recognized in
Income on
Derivative

 

Amount of
(Gain) or Loss
Recognized in
Income on
Derivative

 

 

 

 

Commodity Hedges

Other (income)
expense

 

$

(1,043)

 

 

 

 




11




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 July 30, 2010, 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 $51.8 million. If the Company had breached any of these provisions at July 30, 2010, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value of $51.8 million. As of July 30, 2010, 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.


The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that this action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending store manager exemption cases in which it has filed such a motion. The Company intends to vigorously defend this action and expects to ask the court to decertify the class at the conclusion of the discovery period. However, at this time, it is not possible to predict whether the court ultimately will permit this action to proceed collectively, and no assurances can be given that the Company will be successful in the defense on the merits or otherwise. If the Company is not successful in its efforts to defend this action, the resolution 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



12




plaintiffs seek to proceed collectively under the FLSA and as a class under New York, Ohio, 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. At this time, it is not possible to predict whether the court will permit this action to proceed collectively or as a class. However, the Company believes that this action is not appropriate for either collective or class treatment and that the Company’s wage and hour policies and practices comply with both federal and state law. The Company plans to vigorously defend this action; however, no assurances can be given that the Company will be successful in the defense on the merits or otherwise, and, if it is not successful, the resolution of this action 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”). 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 attorney’s 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. The Company expects to file a similar motion at the appropriate time.


At this time, it is not possible to predict whether the court ultimately will permit the Calvert action to proceed collectively under the Equal Pay Act or as a class under Title VII. However, the Company believes that the case is not appropriate for class or collective treatment and that its policies and practices comply with the Equal Pay Act and Title VII. The Company intends to vigorously defend the action; however, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. If the Company is not successful in defending the Calvert action, its resolution could have a material adverse effect on the Company’s financial statements as a whole.




13




On July 30, 2008, the Company was served with a complaint filed in the District Court for Dallas County, Iowa ( Julie Cox, et al. v. Dolgencorp, Inc., et al – Case No. LACV-034423) in which the plaintiff, a former store manager, alleged that the Company discriminates against pregnant employees on the basis of sex and retaliates against employees in violation of the Iowa Civil Rights Act. Cox sought to represent a class of “all current, former and future employees from the State of Iowa who are employed by Dollar General who suffered from, are currently suffering from or in the future may suffer from” alleged sex/pregnancy discrimination and retaliation and seeks declaratory and injunctive relief as well as equitable, compensatory and punitive damages and attorneys’ fees and costs.


On April 5, 2010, the Court denied the plaintiff’s motion for class certification. Subsequently, the Company resolved the matter for an amount that was immaterial to the Company’s financial statements.


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, allege that they were not paid for all hours worked in violation of the FLSA. Specifically, plaintiffs allege that they were not properly paid for certain breaks. Plaintiffs seek back wages (including overtime wages), liquidated damages and attorneys’ fees and costs.


The Company has not been served with the Gross, et al complaint, and at this time, it is not possible to predict whether the court will permit this action to proceed collectively. However, the Company believes that this action is not appropriate for collective treatment and that the Company’s wage and hour policies and practices comply with both federal and state law. The Company plans to vigorously defend this action; however, no assurances can be given that the Company will be successful in the defense on the merits or otherwise, and, if it is not successful, the resolution of this action could have a material adverse effect on the Company’s 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, 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 intends to participate in the alternative dispute resolution procedures but does not believe that this additional payment is owed. The Company believes the methodology it used to calculate the settlement amount was commercially reasonable and appropriate; however, no assurances can be given that the Company will be successful in its defense on the merits or otherwise. If the Company is not successful, the resolution of this action could have a material adverse effect on the Company’s financial statements as a whole.




14




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.

9.

Share-based payments

For the 26-week periods ended July 30, 2010 and July 31, 2009, the Company recorded share-based compensation expense (a component of selling, general and administrative expenses) of $19.9 million and $6.2 million, respectively. The increase in the 2010 period is primarily attributable to certain equity appreciation rights as discussed below.

The Company’s Second Amended and Restated Equity Appreciation Rights Plan provides for the granting of equity appreciation rights to nonexecutive managerial employees. During the 26-week period ended July 30, 2010, 679,777 of such equity appreciation rights, affecting 873 employees, vested in conjunction with a secondary offering of the Company’s common stock, resulting in share-based awards expense of $13.3 million as well as expense for related payroll taxes of $1.0 million.

10.

Segment reporting


The Company manages its business on the basis of one reportable segment. As of July 30, 2010, 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

 

26 Weeks Ended

(In thousands)

July 30,
2010

 

July 31,
2009

 

July 30,
2010

 

July 31,
2009

Classes of similar products:

 

 

 

 

 

 

 

 

 

 

 

Consumables

$

2,297,374 

 

$

2,053,196 

 

$

4,528,874 

 

$

4,049,005 

Seasonal

 

471,185 

 

 

423,297 

 

 

901,236 

 

 

779,749 

Home products

 

222,459 

 

 

212,194 

 

 

447,326 

 

 

429,077 

Apparel

 

223,137 

 

 

213,220 

 

 

448,033 

 

 

424,013 

Net sales

$

3,214,155 

 

$

2,901,907 

 

$

6,325,469 

 

$

5,681,844 




15





11.

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 July 30, 2010 of approximately $1.96 billion. The Company paid approximately $30.1 million and $39.8 million of interest on the Term Loan Facility during the 26-week periods ended July 30, 2010 and July 31, 2009, respectively.


Goldman, Sachs & Co. is a counterparty to an amortizing interest rate swap with a $336.7 million notional amount as of July 30, 2010, entered into in connection with the Term Loan Facility. The Company paid Goldman, Sachs & Co. approximately $9.1 million and $8.3 million in the 26-week periods ended July 30, 2010 and July 31, 2009, respectively, pursuant to this swap.


The Company entered into a sponsor advisory agreement, dated July 6, 2007, with KKR and Goldman, Sachs & Co. pursuant to which those entities provided management and advisory services to the Company. Under the terms of the sponsor advisory agreement, among other things, the Company was obliged to pay to those entities an annual management fee, initially $5.0 million and subject to annual escalation. The Company completed its initial public offering of common stock in November 2009 and concurrently terminated the advisory agreement. In addition, the Company periodically reimburses KKR for incidental expenses incurred on behalf of the Company. The Company reimbursed KKR for incidental expenses of $0.1 million for the 26-week period ended July 30, 2010 and incurred advisory fees and other expenses for the 26-week period ended July 31, 2009 of $2.7 million. In addition, on July 6, 2007, the Company entered into a separate indemnification agreement with the parties to the sponsor advisory agreement, pursuant to which the Company agreed to provide customary indemnification to such parties and their affiliates.


Affiliates of KKR and Goldman, Sachs & Co. served as underwriters in connection with the Company’s initial public offering of its common stock and 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.


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



16




Company. The following consolidating schedules present condensed financial information on a combined basis, in thousands.


 

July 30, 2010

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

106,970

 

$

153,561

 

$

20,890

 

$

-

 

$

281,421

 

Merchandise inventories

 

-

 

 

1,738,439

 

 

-

 

 

-

 

 

1,738,439

 

Income taxes receivable

 

14,821

 

 

-

 

 

-

 

 

(14,821

)

 

-

 

Deferred income taxes

 

8,700

 

 

-

 

 

5,005

 

 

(13,705

)

 

-

 

Prepaid expenses and other current assets

 

557,098

 

 

3,298,544

 

 

5,786

 

 

(3,746,604

)

 

114,824

 

Total current assets

 

687,589

 

 

5,190,544

 

 

31,681

 

 

(3,775,130

)

 

2,134,684

 

Net property and equipment

 

103,667

 

 

1,273,821

 

 

142

 

 

-

 

 

1,377,630

 

Goodwill

 

4,338,589

 

 

-

 

 

-

 

 

-

 

 

4,338,589

 

Intangible assets, net

 

1,199,343

 

 

69,647

 

 

-

 

 

-

 

 

1,268,990

 

Deferred income taxes

 

-

 

 

-

 

 

42,557

 

 

(42,557

)

 

-

 

Other assets, net

 

4,785,652

 

 

9,078

 

 

299,530

 

 

(5,034,679

)

 

59,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

11,114,840

 

$

6,543,090

 

$

373,910

 

$

(8,852,366

)

$

9,179,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

$

-

 

$

1,595

 

$

-

 

$

-

 

$

1,595

 

Accounts payable

 

3,268,907

 

 

1,364,671

 

 

46,063

 

 

(3,737,899

)

 

941,742

 

Accrued expenses and other

 

41,308

 

 

232,154

 

 

56,915

 

 

(8,705

)

 

321,672

 

Income taxes payable

 

2,590

 

 

6,590

 

 

20,505

 

 

(14,821

)

 

14,864

 

Deferred income taxes

 

-

 

 

52,992

 

 

-

 

 

(13,705

)

 

39,287

 

Total current liabilities

 

3,312,805

 

 

1,658,002

 

 

123,483

 

 

(3,775,130

)

 

1,319,160

 

Long-term obligations

 

3,597,566

 

 

2,850,219

 

 

-

 

 

(3,096,978

)

 

3,350,807

 

Deferred income taxes

 

398,858

 

 

176,012

 

 

-

 

 

(42,557

)

 

532,313

 

Other liabilities

 

107,840

 

 

28,616

 

 

142,967

 

 

-

 

 

279,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

14,927

 

 

-

 

 

-

 

 

-

 

 

14,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Common stock

 

298,399

 

 

23,855

 

 

100

 

 

(23,955

)

 

298,399

 

Additional paid-in capital

 

2,933,846

 

 

431,253

 

 

19,900

 

 

(451,153

)

 

2,933,846

 

Retained earnings

 

480,266

 

 

1,375,133

 

 

87,460

 

 

(1,462,593

)

 

480,266

 

Accumulated other comprehensive loss

 

(29,667

)

 

-

 

 

-

 

 

-

 

 

(29,667

)

Total shareholders’ equity

 

3,682,844

 

 

1,830,241

 

 

107,460

 

 

(1,937,701

)

 

3,682,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

11,114,840

 

$

6,543,090

 

$

373,910

 

$

(8,852,366

)

$

9,179,474

 




17







 

January 29, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

97,620

 

$

103,001

 

$

21,455

 

$

-

 

$

222,076

 

Merchandise inventories

 

-

 

 

1,519,578

 

 

-

 

 

-

 

 

1,519,578

 

Income taxes receivable

 

9,924

 

 

1,645

 

 

-

 

 

(4,026

)

 

7,543

 

Deferred income taxes

 

16,066

 

 

-

 

 

3,559

 

 

(19,625

)

 

-

 

Prepaid expenses and other current assets

 

625,157

 

 

3,040,792

 

 

704

 

 

(3,570,401

)

 

96,252

 

Total current assets

 

748,767

 

 

4,665,016

 

 

25,718

 

 

(3,594,052

)

 

1,845,449

 

Net property and equipment

 

99,452

 

 

1,228,829

 

 

105

 

 

-

 

 

1,328,386

 

Goodwill

 

4,338,589

 

 

-

 

 

-

 

 

-

 

 

4,338,589

 

Intangible assets, net

 

1,201,223

 

 

83,060

 

 

-

 

 

-

 

 

1,284,283

 

Deferred income taxes

 

-

 

 

-

 

 

36,405

 

 

(36,405

)

 

-

 

Other assets, net

 

4,288,270

 

 

8,920

 

 

297,757

 

 

(4,528,135

)

 

66,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

10,676,301

 

$

5,985,825

 

$

359,985

 

$

(8,158,592

)

$

8,863,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

$

1,822

 

$

1,849

 

$

-

 

$

-

 

$

3,671

 

Accounts payable

 

3,033,723

 

 

1,311,063

 

 

46,818

 

 

(3,560,651

)

 

830,953

 

Accrued expenses and other

 

72,320

 

 

226,571

 

 

53,149

 

 

(9,750

)

 

342,290

 

Income taxes payable

 

4,086

 

 

-

 

 

4,465

 

 

(4,026

)

 

4,525

 

Deferred income taxes

 

-

 

 

44,686

 

 

-

 

 

(19,625

)

 

25,061

 

Total current liabilities

 

3,111,951

 

 

1,584,169

 

 

104,432

 

 

(3,594,052

)

 

1,206,500

 

Long-term obligations

 

3,645,820

 

 

2,689,492

 

 

13,178

 

 

(2,948,775

)

 

3,399,715

 

Deferred income taxes

 

394,045

 

 

188,532

 

 

-

 

 

(36,405

)

 

546,172

 

Other liabilities

 

115,701

 

 

40,065

 

 

146,582

 

 

-

 

 

302,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

18,486

 

 

-

 

 

-

 

 

-

 

 

18,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Common stock

 

298,013

 

 

23,855

 

 

100

 

 

(23,955

)

 

298,013

 

Additional paid-in capital

 

2,923,377

 

 

431,253

 

 

19,900

 

 

(451,153

)

 

2,923,377

 

Retained earnings

 

203,075

 

 

1,028,459

 

 

75,793

 

 

(1,104,252

)

 

203,075

 

Accumulated other comprehensive loss

 

(34,167

)

 

-

 

 

-

 

 

-

 

 

(34,167

)

Total shareholders’ equity

 

3,390,298

 

 

1,483,567

 

 

95,793

 

 

(1,579,360

)

 

3,390,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

10,676,301

 

$

5,985,825

 

$

359,985

 

$

(8,158,592

)

$

8,863,519

 




18







 

For the 13-weeks ended July 30, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

73,122

 

$

3,214,155

 

$

21,943

 

$

(95,065

)

$

3,214,155

 

Cost of goods sold

 

-

 

 

2,178,176

 

 

-

 

 

-

 

 

2,178,176

 

Gross profit

 

73,122

 

 

1,035,979

 

 

21,943

 

 

(95,065

)

 

1,035,979

 

Selling, general and administrative expenses

 

66,453

 

 

744,212

 

 

19,622

 

 

(95,065

)

 

735,222

 

Operating profit

 

6,669

 

 

291,767

 

 

2,321

 

 

-

 

 

300,757

 

Interest income

 

(10,390

)

 

(3,219

)

 

(4,954

)

 

18,531

 

 

(32

)

Interest expense

 

77,852

 

 

10,003

 

 

6

 

 

(18,531

)

 

69,330

 

Other (income) expense

 

6,526

 

 

-

 

 

-

 

 

-

 

 

6,526

 

Income (loss) before income taxes

 

(67,319

)

 

284,983

 

 

7,269

 

 

-

 

 

224,933

 

Income tax expense (benefit)

 

(24,106

)

 

105,772

 

 

2,072

 

 

-

 

 

83,738

 

Equity in subsidiaries’ earnings, net of taxes

 

184,408

 

 

-

 

 

-

 

 

(184,408

)

 

-

 

Net income

$

141,195

 

$

179,211

 

$

5,197

 

$

(184,408

)

$

141,195

 


 

For the 13 weeks ended July 31, 2009

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

68,779

 

$

2,901,907

 

$

23,678

 

$

(92,457

)

$

2,901,907

 

Cost of goods sold

 

-

 

 

1,995,865

 

 

-

 

 

-

 

 

1,995,865

 

Gross profit

 

68,779

 

 

906,042

 

 

23,678

 

 

(92,457

)

 

906,042

 

Selling, general and administrative expenses

 

62,536

 

 

683,121

 

 

19,625

 

 

(92,457

)

 

672,825

 

Operating profit

 

6,243

 

 

222,921

 

 

4,053

 

 

-

 

 

233,217

 

Interest income

 

(13,767

)

 

(1,064

)

 

(5,214

)

 

20,030

 

 

(15

)

Interest expense

 

96,095

 

 

13,875

 

 

5

 

 

(20,030

)

 

89,945

 

Other (income) expense

 

(2,395

)

 

-

 

 

-

 

 

-

 

 

(2,395

)

Income (loss) before income taxes

 

(73,690

)

 

210,110

 

 

9,262

 

 

-

 

 

145,682

 

Income tax expense (benefit)

 

(27,690

)

 

76,890

 

 

2,892

 

 

-

 

 

52,092

 

Equity in subsidiaries’ earnings, net of taxes

 

139,590

 

 

-

 

 

-

 

 

(139,590

)

 

-

 

Net income

$

93,590

 

$

133,220

 

$

6,370

 

$

(139,590

)

$

93,590

 




19







 

For the 26-weeks ended July 30, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

160,586

 

$

6,325,469

 

$

41,591

 

$

(202,177

)

$

6,325,469

 

Cost of goods sold

 

-

 

 

4,289,734

 

 

-

 

 

-

 

 

4,289,734

 

Gross profit

 

160,586

 

 

2,035,735

 

 

41,591

 

 

(202,177

)

 

2,035,735

 

Selling, general and administrative expenses

 

146,072

 

 

1,466,075

 

 

34,285

 

 

(202,177

)

 

1,444,255

 

Operating profit

 

14,514

 

 

569,660

 

 

7,306

 

 

-

 

 

591,480

 

Interest income

 

(21,407

)

 

(5,929

)

 

(9,907

)

 

37,205

 

 

(38

)

Interest expense

 

157,309

 

 

21,233

 

 

11

 

 

(37,205

)

 

141,348

 

Other (income) expense

 

6,671

 

 

-

 

 

-

 

 

-

 

 

6,671

 

Income (loss) before income taxes

 

(128,059

)

 

554,356

 

 

17,202

 

 

-

 

 

443,499

 

Income tax expense (benefit)

 

(46,909

)

 

207,682

 

 

5,535

 

 

-

 

 

166,308

 

Equity in subsidiaries’ earnings, net of taxes

 

358,341

 

 

-

 

 

-

 

 

(358,341

)

 

-

 

Net income

$

277,191

 

$

346,674

 

$

11,667

 

$

(358,341

)

$

277,191

 


 

For the 26-weeks ended July 31, 2009

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

131,625

 

$

5,681,844

 

$

45,151

 

$

(176,776

)

$

5,681,844

 

Cost of goods sold

 

-

 

 

3,920,444

 

 

-

 

 

-

 

 

3,920,444

 

Gross profit

 

131,625

 

 

1,761,400

 

 

45,151

 

 

(176,776

)

 

1,761,400

 

Selling, general and administrative expenses

 

119,670

 

 

1,326,537

 

 

33,883

 

 

(176,776

)

 

1,303,314

 

Operating profit

 

11,955

 

 

434,863

 

 

11,268

 

 

-

 

 

458,086

 

Interest income

 

(26,309

)

 

(2,145

)

 

(9,440

)

 

37,785

 

 

(109

)

Interest expense

 

190,356

 

 

26,599

 

 

10

 

 

(37,785

)

 

179,180

 

Other (income) expense

 

(728

)

 

-

 

 

-

 

 

-

 

 

(728

)

Income (loss) before income taxes

 

(151,364

)

 

410,409

 

 

20,698

 

 

-

 

 

279,743

 

Income tax expense (benefit)

 

(57,380

)

 

153,720

 

 

6,807

 

 

-

 

 

103,147

 

Equity in subsidiaries’ earnings, net of taxes

 

270,580

 

 

-

 

 

-

 

 

(270,580

)

 

-

 

Net income

$

176,596

 

$

256,689

 

$

13,891

 

$

(270,580

)

$

176,596

 




20







 

For the 26 weeks ended July 30, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

277,191

 

$

346,674

 

$

11,667

 

$

(358,341

)

$

277,191

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

16,924

 

 

109,210

 

 

22

 

 

-

 

 

126,156

 

Deferred income taxes

 

6,952

 

 

(4,214

)

 

(7,598

)

 

-

 

 

(4,860

)

Tax benefit of stock options

 

(5,387

)

 

-

 

 

-

 

 

-

 

 

(5,387

)

Non-cash share-based compensation

 

8,366

 

 

-

 

 

-

 

 

-

 

 

8,366

 

Loss on debt retirement, net

 

6,387

 

 

-

 

 

-

 

 

-

 

 

6,387

 

Other non-cash gains and losses

 

652

 

 

5,814

 

 

-

 

 

-

 

 

6,466

 

Equity in subsidiaries’ earnings, net

 

(358,341

)

 

-

 

 

-

 

 

358,341

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

-

 

 

(219,589

)

 

-

 

 

-

 

 

(219,589

)

Prepaid expenses and other current assets

 

3,347

 

 

(18,724

)

 

(445

)

 

-

 

 

(15,822

)

Accounts payable

 

(8,226

)

 

122,214

 

 

(12

)

 

-

 

 

113,976

 

Accrued expenses and other

 

(34,907

)

 

(5,503

)

 

151

 

 

-

 

 

(40,259

)

Income taxes

 

(1,006

)

 

8,235

 

 

16,040

 

 

-

 

 

23,269

 

Other

 

7

 

 

(1,018

)

 

-

 

 

-

 

 

(1,011

)

Net cash provided by (used in) operating activities

 

(88,041

)

 

343,099

 

 

19,825

 

 

-

 

 

274,883

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(11,222

)

 

(151,777

)

 

(59

)

 

-

 

 

(163,058

)

Proceeds from sale of property and equipment

 

-

 

 

544

 

 

-

 

 

-

 

 

544

 

Net cash used in investing activities

 

(11,222

)

 

(151,233

)

 

(59

)

 

-

 

 

(162,514

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

401

 

 

-

 

 

-

 

 

-

 

 

401

 

Repayments of long-term obligations

 

(57,229

)

 

(908

)

 

-

 

 

-

 

 

(58,137

)

Repurchases of equity

 

(725

)

 

-

 

 

-

 

 

-

 

 

(725

)

Proceeds from exercise of stock options

 

50

 

 

-

 

 

-

 

 

-

 

 

50

 

Tax benefit of stock options

 

5,387

 

 

-

 

 

-

 

 

-

 

 

5,387

 

Changes in intercompany note balances, net

 

160,729

 

 

(140,398

)

 

(20,331

)

 

-

 

 

-

 

Net cash provided by (used in) financing activities

 

108,613

 

 

(141,306

)

 

(20,331

)

 

-

 

 

(53,024

)

Net increase (decrease) in cash and cash equivalents

 

9,350

 

 

50,560

 

 

(565

)

 

-

 

 

59,345

 

Cash and cash equivalents, beginning of period

 

97,620

 

 

103,001

 

 

21,455

 

 

-

 

 

222,076

 

Cash and cash equivalents, end of period

$

106,970

 

$

153,561

 

$

20,890

 

$

-

 

$

281,421

 




21







 

For the 26 weeks ended July 31, 2009

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

176,596

 

$

256,689

 

$

13,891

 

$

(270,580

)

$

176,596

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

19,187

 

 

111,762

 

 

119

 

 

-

 

 

131,068

 

Deferred income taxes

 

8,362

 

 

24,259

 

 

(20,053

)

 

-

 

 

12,568

 

Tax benefit of stock options

 

(262

)

 

-

 

 

-

 

 

 

 

 

(262

)

Non-cash share-based compensation

 

6,106

 

 

-

 

 

-

 

 

-

 

 

6,106

 

Other non-cash gains and losses

 

(78

)

 

8,219

 

 

-

 

 

-

 

 

8,141

 

Equity in subsidiaries’ earnings, net

 

(270,580

)

 

-

 

 

-

 

 

270,580

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

-

 

 

(136,262

)

 

-

 

 

-

 

 

(136,262

)

Prepaid expenses and other current assets

 

1,992

 

 

(6,723

)

 

622

 

 

-

 

 

(4,109

)

Accounts payable

 

(16,752

)

 

130,726

 

 

4

 

 

-

 

 

113,978

 

Accrued expenses and other

 

(66,083

)

 

(9,201

)

 

(30

)

 

-

 

 

(75,314

)

Income taxes

 

63,315

 

 

(53,917

)

 

3,237

 

 

-

 

 

12,635

 

Other

 

(2,267

)

 

987

 

 

-

 

 

-

 

 

(1,280

)

Net cash provided by (used in) operating activities

 

(80,464

)

 

326,539

 

 

(2,210

)

 

-

 

 

243,865

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(5,287

)

 

(101,968

)

 

(50

)

 

-

 

 

(107,305

)

Proceeds from sale of property and equipment

 

-

 

 

322

 

 

-

 

 

-

 

 

322

 

Net cash used in investing activities

 

(5,287

)

 

(101,646

)

 

(50

)

 

-

 

 

(106,983

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

2,018

 

 

-

 

 

-

 

 

-

 

 

2,018

 

Issuance of long-term obligations

 

-

 

 

1,080

 

 

-

 

 

-

 

 

1,080

 

Repayments of long-term obligations

 

-

 

 

(1,535

)

 

-

 

 

-

 

 

(1,535

)

Repurchases of equity

 

(1,327

)

 

-

 

 

-

 

 

-

 

 

(1,327

)

Tax benefit of stock options

 

262

 

 

-

 

 

-

 

 

-

 

 

262

 

Changes in intercompany note balances, net

 

112,723

 

 

(132,107

)

 

19,384

 

 

-

 

 

-

 

Net cash provided by (used in) financing activities

 

113,676

 

 

(132,562

)

 

19,384

 

 

-

 

 

498

 

Net increase in cash and cash equivalents

 

27,925

 

 

92,331

 

 

17,124

 

 

-

 

 

137,380

 

Cash and cash equivalents, beginning of period

 

292,637

 

 

64,404

 

 

20,954

 

 

-

 

 

377,995

 

Cash and cash equivalents, end of period

$

320,562

 

$

156,735

 

$

38,078

 

$

-

 

$

515,375

 




22




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 July 30, 2010, and the related condensed consolidated statements of operations for the three-month and six-month periods ended July 30, 2010 and July 31, 2009, and the condensed consolidated statements of cash flows for the six-month periods ended July 30, 2010 and July 31, 2009. 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 29, 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein) and in our report dated March 31, 2010, 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 29, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ Ernst & Young LLP


August 31, 2010

Nashville, Tennessee



23





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 29, 2010. 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 9,113 stores located in 35 states as of July 30, 2010, 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 two 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, continued weakness in the housing and credit markets, and the timetable for 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, we remain optimistic with regard to executing our operating priorities in 2010.


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 margins,


·

leverage process improvements and information technology to reduce costs, and


·

strengthen and expand Dollar General's culture of serving others.



24




Our first priority is driving productive sales growth by increasing shopper frequency and transaction amount and maximizing sales per square foot. We continue to enhance our category management processes, allowing the expansion of our product offerings while also improving profitability. Our improved processes have facilitated our success in adding more productive items and eliminating unproductive items. We are better utilizing the space in our stores through more effective and productive space planning. In addition, we are currently implementing the third phase of a four phase process to raise the height of our merchandise fixtures across the store. Phase three primarily impacts expansion of the health and beauty, home and apparel sections of the store. In addition, we are making significant progress in defining and improving our store standards with a goal of developing a consistent look and feel across all stores. We are targeting both new and existing customers with our improved advertising circulars, which have allowed us to communicate our strong value proposition to consumers struggling in the current economy. Finally, we believe we have significant potential to grow sales through new stores in both existing and new markets. We plan to open approximately 600 new stores in fiscal 2010, 315 of which have been opened in the first half of the year.


Our second priority is to increase gross profit through category management, distribution efficiencies, shrink reduction, an improved pricing model, expansion of private brand offerings and increased foreign sourcing. 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 strategy and work diligently to minimize product cost increases and to remain competitive. 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. We believe that our improved quality, selection, packaging and branding of our seasonal merchandise has contributed significantly to sales increases. We made significant progress over the past two years in reducing inventory shrinkage, as a percentage of sales, and we continue to be highly focused on shrink reduction initiatives. Finally, our supply chain team continues its efforts to increase capacity utilization and transportation efficiencies, while facing challenging domestic fuel costs.


Our third priority is leveraging process improvements and information technology to reduce costs. We are committed as an organization to extracting costs that do not affect the customer experience. Examples of cost reduction initiatives include our continuing focus on safety to reduce workers’ compensation expense, the improvement of energy management in our stores through the installation of energy management systems and increased preventive maintenance, and the reduction of waste management costs through recycling of cardboard and other materials. In addition, our real estate team has had success in negotiating favorable terms in lease renewals which we anticipate will benefit us going forward.


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.



25




Focus on these priorities resulted in improved performance in the second quarter of 2010 over the comparable 2009 period in many of our key financial metrics, as follows. Basis points amounts referred to below are equal to 0.01% as a percentage of sales.


·

Total sales increased 10.8% to $3.21 billion. Sales in same-stores increased 5.1% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 52-week period ended July 30, 2010 were approximately $199, up from $188 for the comparable prior 52-week period.


·

Gross profit, as a percentage of sales, increased to 32.2% compared to 31.2% in the 2009 period. This increase was primarily the result of higher average markups, partially offset by higher markdowns, and was driven by efforts to reduce our merchandise purchase costs while maintaining our everyday low prices.


·

Inventory turnover improved to 5.2 times on a rolling four-quarter basis compared to 5.1 times for the corresponding prior year period.


·

Selling, general and administrative expenses, or SG&A, as a percentage of sales, was 22.9% compared to 23.2% in the 2009 second quarter. SG&A as a percentage of sales declined due to our significant sales increase as well as our continued focus on cost reduction initiatives.


·

Operating profit, as a percentage of sales, was 9.4% compared to 8.0% in the 2009 second quarter, an improvement of 132 basis points.


·

Interest expense decreased by $20.6 million to $69.3 million in the 2010 second quarter primarily due to a $785 million reduction of long-term obligations in the 12-month period ended July 30, 2010. Total long-term obligations as of July 30, 2010 were $3.35 billion. The Company repurchased long-term obligations of $50 million in the 2010 second quarter resulting in a charge of $6.5 million ($4.0 million net of income taxes, or $0.01 per diluted share).


·

Net income was equal to $141.2 million, or $0.41 per diluted share, compared to net income of $93.6 million, or $0.29 per diluted share, in the 2009 second quarter.


Like other companies, we face uncertainties with regard to the future impact of healthcare reform legislation, including the Patient Protection and Affordable Care Act and the HealthCare and Education Reconciliation Act of 2010, signed into law in March 2010, which will likely affect the cost associated with employer-sponsored medical plans. Specifically, this legislation requires that employers provide a minimum level of coverage for full-time employees or pay penalties. Some of the plan coverage requirements may have an impact on our costs such as bans on exclusions for pre-existing conditions, extension of dependent coverage to age 26, and caps on employee premium sharing costs. Certain coverage provisions do not go into effect until 2014, but there are a number of dependent coverage and insurance market reforms that will take effect immediately. Although we do not expect this legislation will have a material effect on our consolidated financial statements in fiscal 2010, we continue to evaluate the impact it will have



26




on our costs in future years, and those costs could be material. Our analysis depends in part upon future guidance yet to be developed by federal agencies interpreting the legislation, and any estimates we develop could be significantly affected by any changes to or agency interpretation of the legislation prior to its full implementation.


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 2010 and 2009, which represent 52-week fiscal years ending or ended January 28, 2011 and January 29, 2010, respectively. Consequently, references to quarterly accounting periods for 2010 and 2009 contained herein refer to 13-week accounting periods.


Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, sales in the fourth quarter have historically been higher than sales 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.




27




The following table contains results of operations data for the most recent 13-week and 26-week periods of each of 2010 and 2009, and the dollar and percentage variances among those periods:


(amounts in millions, except per share amounts)

13 Weeks Ended

 

2010 vs. 2009

 

26 Weeks Ended

 

2010 vs. 2009

July 30,
2010

 

July 31,
2009

 

Amount
change

%
change

 

July 30,
2010

 

July 31,
2009

 

Amount
change

%
change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

$

2,297.4 

 

$

2,053.2 

 

$

244.2 

11.9 

%

 

$

4,528.9 

 

$

4,049.0 

 

$

479.9 

11.9 

%

% of net sales

 

71.48% 

 

 

70.75% 

 

 

 

 

 

 

 

71.60% 

 

 

71.26% 

 

 

 

 

 

Seasonal

 

471.2 

 

 

423.3 

 

 

47.9 

11.3 

 

 

 

901.2 

 

 

779.7 

 

 

121.5 

15.6 

 

% of net sales

 

14.66% 

 

 

14.59% 

 

 

 

 

 

 

 

14.25% 

 

 

13.72% 

 

 

 

 

 

Home products

 

222.5 

 

 

212.2 

 

 

10.3 

4.8 

 

 

 

447.3 

 

 

429.1 

 

 

18.2 

4.3 

 

% of net sales

 

6.92% 

 

 

7.31% 

 

 

 

 

 

 

 

7.07% 

 

 

7.55% 

 

 

 

 

 

Apparel

 

223.1 

 

 

213.2 

 

 

9.9 

4.7 

 

 

 

448.0 

 

 

424.0 

 

 

24.0 

5.7 

 

% of net sales

 

6.94% 

 

 

7.35% 

 

 

 

 

 

 

 

7.08% 

 

 

7.46% 

 

 

 

 

 

Net sales

$

3,214.2 

 

$

2,901.9 

 

$

312.2 

10.8 

%

 

$

6,325.5 

 

$

5,681.8 

 

$

643.6 

11.3 

%

Cost of goods sold

 

2,178.2 

 

 

1,995.9 

 

 

182.3 

9.1 

 

 

 

4,289.7 

 

 

3,920.4 

 

 

369.3 

9.4 

 

% of net sales

 

67.77% 

 

 

68.78% 

 

 

 

 

 

 

 

67.82% 

 

 

69.00% 

 

 

 

 

 

Gross profit

 

1,036.0 

 

 

906.0 

 

 

129.9 

14.3 

 

 

 

2,035.7 

 

 

1,761.4 

 

 

274.3 

15.6 

 

% of net sales

 

32.23% 

 

 

31.22% 

 

 

 

 

 

 

 

32.18% 

 

 

31.00% 

 

 

 

 

 

Selling, general and administrative expenses

 

735.2 

 

 

672.8 

 

 

62.4 

9.3

 

 

 

1,444.3 

 

 

1,303.3 

 

 

140.9 

10.8 

 

% of net sales

 

22.87% 

 

 

23.19% 

 

 

 

 

 

 

 

22.83% 

 

 

22.94% 

 

 

 

 

 

Operating profit

 

300.8 

 

 

233.2 

 

 

67.5

29.0 

 

 

 

591.5 

 

 

458.1 

 

 

133.4 

29.1 

 

% of net sales

 

9.36% 

 

 

8.04% 

 

 

 

 

 

 

 

9.35% 

 

 

8.06% 

 

 

 

 

 

Interest income

 

(0.0)

 

 

(0.0)

 

 

(0.0)

113.3 

 

 

 

(0.0)

 

 

(0.1)

 

 

0.1 

(65.1)

 

% of net sales

 

(0.00)% 

 

 

(0.00)% 

 

 

 

 

 

 

 

(0.00)% 

 

 

(0.00)% 

 

 

 

 

 

Interest expense

 

69.3 

 

 

89.9 

 

 

(20.6)

(22.9)

 

 

 

141.3 

 

 

179.2 

 

 

(37.8)

(21.1)

 

% of net sales

 

2.16% 

 

 

3.10% 

 

 

 

 

 

 

 

2.23% 

 

 

3.15% 

 

 

 

 

 

Other (income) expense

 

6.5 

 

 

(2.4)

 

 

8.9 

 

 

 

6.7 

 

 

(0.7)

 

 

7.4 

 

% of net sales

 

0.20%

 

 

(0.08)%

 

 

 

 

 

 

 

0.11% 

 

 

(0.01)% 

 

 

 

 

 

Income before income taxes

 

224.9 

 

 

145.7 

 

 

79.3 

54.4 

 

 

 

443.5 

 

 

279.7 

 

 

163.8 

58.5 

 

% of net sales

 

7.00% 

 

 

5.02% 

 

 

 

 

 

 

 

7.01% 

 

 

4.92% 

 

 

 

 

 

Income taxes

 

83.7 

 

 

52.1 

 

 

31.6 

60.7 

 

 

 

166.3 

 

 

103.1 

 

 

63.2 

61.2 

 

% of net sales

 

2.61% 

 

 

1.80% 

 

 

 

 

 

 

 

2.63% 

 

 

1.82% 

 

 

 

 

 

Net income

$

141.2 

 

$

93.6 

 

$

47.6 

50.9 

%

 

$

277.2 

 

$

176.6 

 

$

100.6 

57.0 

%

% of net sales

 

4.39% 

 

 

3.23% 

 

 

 

 

 

 

 

4.38% 

 

 

3.11% 

 

 

 

 

 

Diluted earnings per share

$

0.41 

 

$

0.29 

 

$

0.12 

41.4 

%

 

$

0.80 

 

$

0.55 

 

$

0.25 

45.5 

%

Diluted weighted shares outstanding

 

344.7 

 

 

319.5