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 |
|
(I.R.S. Employer |
100 MISSION RIDGE
GOODLETTSVILLE, TN 37072
(Address of principal executive offices, zip code)
Registrants 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 IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
May 4, |
|
February 3, |
| ||
|
|
(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.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
|
|
For the 13 weeks ended |
| ||||
|
|
May 4, |
|
April 29, |
| ||
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.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
|
For the 13 weeks ended |
| ||||
|
|
May 4, |
|
April 29, |
| ||
Comprehensive income |
|
$ |
215,944 |
|
$ |
161,669 |
|
See notes to condensed consolidated financial statements.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
For the 13 weeks ended |
| ||||
|
|
May 4, |
|
April 29, |
| ||
|
|
|
|
|
| ||
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.
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 Companys 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 Companys Annual Report on Form 10-K for the fiscal year ended February 3, 2012 for additional information.
The Companys fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Companys fiscal year. The Companys 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 Companys customary accounting practices. In managements 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 managements 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 Companys business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.
Certain financial statement amounts relating to prior periods have been reclassified to conform to the current period presentation.
2. Common stock transactions
On November 30, 2011, the Companys Board of Directors authorized a $500 million common stock repurchase program. Under the program, shares of the Companys 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 Companys 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 |
|
Shares |
|
Per Share |
|
Net |
|
Shares |
|
Per Share |
| ||||
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 Companys 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 Companys 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 Companys 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 Companys 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 Acts Retention Credit were offset by decreases associated with the adjustment of accruals related to the IRS examination of the Companys 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 Companys 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
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 Companys condensed consolidated statement of income for the 13-week period ended May 4, 2012.
On March 30, 2012, the Companys $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 Companys 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 entitys 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 Companys 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 Companys 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.
(in thousands) |
|
Quoted Prices in |
|
Significant |
|
Significant |
|
Balance at |
| ||||
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 Companys
derivative financial instruments are used to manage differences in the amount, timing, and duration of the Companys known or expected cash receipts and its known or expected cash payments principally related to the Companys 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 Companys 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 Companys 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 Companys 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.
The tables below present the fair value of the Companys 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, |
|
February 3, |
| ||
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 Companys 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, |
|
April 29, |
| ||
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 Companys 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
managers. The Company opposed the plaintiffs 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. Plaintiffs 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 Companys 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 Companys 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.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys response to the complaint is due to be filed on June 15, 2012.
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 Companys 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 Companys criminal background check policy. The cause finding alleges that Dollar Generals 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 Commissions 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 Companys 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 Companys 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 Companys 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 Companys financial statements as a whole.
In 2008, the Company terminated an interest rate swap as a result of the counterpartys 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,
will be resolved without a material adverse effect on the Companys 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 Companys 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 Companys financial position or may negatively affect operating results if changes to the Companys business operation are required.
9. Related party transactions
Affiliates of KKR and Goldman, Sachs & Co. indirectly own a substantial portion of the Companys common stock. Two of KKRs members and a Managing Director of Goldman, Sachs & Co. serve on the Companys Board of Directors.
Affiliates of KKR and Goldman, Sachs & Co. (among other entities) are or may be lenders under the Companys 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 Companys 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 Companys 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.
10. Segment reporting
The Company manages its business on the basis of one reportable segment. As of May 4, 2012, all of the Companys 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, |
|
April 29, |
| ||
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 Companys subsidiaries (the Guarantors) have fully and unconditionally guaranteed on a joint and several basis the Companys 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.
|
|
May 4, 2012 |
| |||||||||||||
|
|
DOLLAR |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
|
|
February 3, 2012 |
| |||||||||||||
|
|
DOLLAR |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
|
|
For the 13-weeks ended May 4, 2012 |
| |||||||||||||
|
|
DOLLAR |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
|
|
For the 13 weeks ended May 4, 2012 |
| |||||||||||||
|
|
DOLLAR |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
|
|
For the 13 weeks ended April 29, 2011 |
| |||||||||||||
|
|
DOLLAR |
|
GUARANTOR |
|
OTHER |
|
ELIMINATIONS |
|
CONSOLIDATED |
| |||||
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 |
|
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 Companys 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 |
|
ITEM 2. MANAGEMENTS 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 Managements 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 Generals 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
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 Generals 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.
· 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.
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, |
|
April 29, |
|
Amount |
|
% |
| |||
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 |
|
345.6 |
|
253.8 |
|
91.8 |
|
36.2 |
| |||
% of net sales |
|
8.86 |
% |
7.35 |
% |
|
|
|
| |||
Income tax expense |
|
132.2 |
|
96.8 |
|
35.4 |
|
36.5 |
| |||
% of net sales |
|
3.39 |
% |
2.80 |
% |
|
|
|
| |||
Net income |
|
$ |
213.4 |
|
$ |
157.0 |
|
$ |
56.4 |
|
36.0 |
% |
% of net sales |
|
5.47 |
% |
4.55 |
% |
|
|
|
| |||
Diluted earnings per share |
|
$ |
0.63 |
|
$ |
0.45 |
|
$ |
0.18 |
|
40.0 |
% |
13 WEEKS ENDED MAY 4, 2012 AND APRIL 29, 2011
Net Sales. The net sales increase in the 2012 first quarter reflects a same-store sales increase of 6.7% compared to the 2011 quarter. Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period. For the 2012 quarter, there were 9,346 same-stores which accounted for sales of $3.67 billion. Increases in customer traffic and average transaction amount contributed to the increase in same-store sales. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores.
We believe that the increase in sales reflects the impact of various operating and merchandising initiatives discussed in the Executive Overview, including the impact of improved store standards, the expansion of our merchandise offerings, improved utilization of store square footage and enhanced marketing efforts.
Gross Profit. The gross profit rate as a percentage of sales was 31.5% in the first quarter of both 2012 and 2011. Factors positively affecting our gross profit include higher inventory markups, improved transportation and distribution efficiencies and lower inventory shrinkage, as a percentage of sales. The primary factor negatively affecting gross profit in the 2012 period was higher markdowns for apparel and other products. In addition, consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2012 quarter than in the 2011 quarter. We recorded a $1.6 million LIFO provision in the 2012 quarter compared to a $3.6 million provision in the 2011 quarter.
Selling, General and Administrative (SG&A) Expense. SG&A expense was 21.6% as a percentage of sales in the 2012 period compared to 22.2% in the 2011 period, an improvement of 56 basis points reflecting the favorable impact of the 13.0% increase in sales as well as the effect of $13.1 million of expenses in the 2011 period related to the settlement of two legal matters which did not recur in the 2012 period. In addition, retail labor expense increased at a rate lower than our increase in sales, partially due to ongoing benefits of our workforce management system. Various cost reduction efforts affecting store rental and other expenses also contributed to the overall decrease in SG&A as a percentage of sales. Costs that increased at a rate higher than our increase in sales include fees associated with the increased use of debit cards, costs associated with the opening of our new distribution centers in Alabama and California, workers compensation and general liability expenses, and advertising costs.
Interest Expense. The decrease in interest expense in the 2012 period from the 2011 period is due to lower outstanding borrowings resulting from repurchases of indebtedness in 2011 and lower all-in interest rates.
Other (Income) Expense. In the 2012 period, we recorded pretax losses of $1.6 million resulting from the amendment of our senior secured revolving credit facility. In the 2011 period, we recorded pretax losses of $2.2 million resulting from the repurchase in the open market of $25.0 million aggregate principal amount of our Senior Notes described below.
Income Taxes. The effective income tax rate for the 2012 period was 38.2% compared to a rate of 38.1% for the 2011 period which represents a net increase of 0.1%. 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 Acts Retention Credit were offset by decreases associated with the adjustment of accruals related to the IRS examination of the Companys federal income tax returns for fiscal years 2006 through 2008 and the reversal of state income tax reserves due to an audit settlement.
Liquidity and Capital Resources
Credit Facilities
We have two senior secured credit facilities (the Credit Facilities) which provide financing of up to $3.16 billion as of May 4, 2012. The Credit Facilities consist of a $1.964 billion senior secured term loan facility (the Term Loan Facility) and a senior secured asset-based revolving credit facility (the ABL Facility). Total commitments under the ABL Facility are equal to $1.2 billion (of which up to $350.0 million is available for letters of credit), subject to borrowing base availability. The ABL Facility also includes borrowing capacity available for short-term borrowings referred to as swingline loans.
Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). As of May 4, 2012, the applicable margin for borrowings under the Term Loan Facility is 2.75% for LIBOR borrowings and 1.75% for base-rate borrowings, and the applicable margin for borrowings under the ABL Facility is 1.50% for LIBOR borrowings and 0.50% for base-rate borrowings. We are also required to pay a commitment fee to the lenders under the ABL Facility for any unutilized commitments, at a rate of 0.375% per annum as of May 4, 2012. The applicable margins for borrowings and the commitment fees under the ABL Facility are subject to adjustment each quarter based on average daily excess availability under the ABL Facility. We also must pay customary letter of credit fees.
Under the Term Loan Facility we would be required to prepay outstanding term loans, subject to certain exceptions, with: up to 50% of our annual excess cash flow (as defined in the credit agreement) which would be reduced to 25% and 0% if we were to achieve and maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively; the net cash proceeds of certain non-ordinary course asset sales or other dispositions of property; and the net cash proceeds of any incurrence of debt other than proceeds from debt permitted under the senior secured credit agreement. Through May 4, 2012, no prepayments have been required under the prepayment provisions listed above. The Term Loan Facility can be prepaid in whole or in part at any time.
We amended the Term Loan Facility in March 2012 which resulted in the extension of the maturity on $879.7 million of the Term Loan Facility to July 6, 2017. The remaining $1.08 billion of the Term Loan Facility will mature on July 6, 2014. The applicable margin for borrowings under the Term Loan Facility remains unchanged.
We also amended the ABL Facility in March 2012. The primary effects of the amendment were to extend the maturity of the ABL Facility to July 6, 2014, and to increase the
total commitment from $1.031 billion to $1.2 billion. The amendment resulted in the write-off of a portion ($1.6 million) of existing debt issue costs related to the ABL Facility. There is no amortization under the ABL Facility.
In addition, we are required to prepay the ABL Facility, subject to certain exceptions, with the net cash proceeds of all non-ordinary course asset sales or other dispositions of revolving facility collateral (as defined in the senior secured credit agreement); and to the extent such extensions of credit exceed the then current borrowing base. Through May 4, 2012, no prepayments have been required under any prepayment provisions.
We may voluntarily repay outstanding loans under the Term Loan Facility or the ABL Facility at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
All obligations under the Credit Facilities are unconditionally guaranteed by substantially all of our existing and future domestic subsidiaries (excluding certain immaterial subsidiaries and certain subsidiaries designated by us under our senior secured credit agreements as unrestricted subsidiaries), referred to, collectively, as U.S. Guarantors.
All obligations and related guarantees under the Term Loan Facility are secured by:
· a second-priority security interest in all existing and after-acquired inventory, accounts receivable, and other assets arising from such inventory and accounts receivable, of our company and each U.S. Guarantor (the Revolving Facility Collateral), subject to certain exceptions;
· a first-priority security interest in, and mortgages on, substantially all of our and each U.S. Guarantors tangible and intangible assets (other than the Revolving Facility Collateral); and
· a first-priority pledge of 100% of the capital stock held by us, or any of our domestic subsidiaries that are directly owned by us or one of the U.S. Guarantors and 65% of the voting capital stock of each of our existing and future foreign subsidiaries that are directly owned by us or one of the U.S. Guarantors.
All obligations and related guarantees under the ABL Facility are secured by the Revolving Facility Collateral, subject to certain exceptions.
The senior secured credit agreements contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; sell assets; pay dividends and distributions or repurchase our capital stock; make investments or acquisitions; repay or repurchase subordinated indebtedness, including the Senior Subordinated Notes discussed below; amend material agreements governing our subordinated indebtedness including the Senior Subordinated Notes discussed below; or change our lines of business. The senior secured credit agreements also contain certain customary affirmative covenants and events of default.
At May 4, 2012, we had borrowings of $447.8 million, commercial letters of credit of $21.7 million, and standby letters of credit of $23.7 million outstanding under the ABL Facility. We anticipate potential borrowings under the ABL Facility in fiscal 2012 up to a maximum of approximately $500 million outstanding at any one time.
Senior Subordinated Toggle Notes due 2017
As of May 4, 2012, we have $450.7 million aggregate principal amount of 11.875%/12.625% senior subordinated toggle notes due 2017 (the Senior Subordinated Notes or Notes) outstanding, which mature on July 15, 2017, pursuant to an indenture dated as of July 6, 2007 (the senior subordinated indenture or indenture).
Interest on the Senior Subordinated Notes is payable on January 15 and July 15 of each year. Cash interest on the Senior Subordinated Notes accrues at a rate of 11.875% per annum. An option to pay interest by increasing the principal amount of the Senior Subordinated Notes or issuing new Senior Subordinated Notes (PIK interest) instead of paying cash interest expired in 2011. As a result, all interest on the Senior Subordinated Notes has been paid or will be payable in cash.
We intend to redeem or otherwise repurchase all of the Senior Subordinated Notes on or following the first scheduled call date in July 2012 at the redemption price set forth in the senior subordinated indenture. We also may seek, from time to time, to retire some or all of the Notes through cash purchases on the open market, in privately negotiated transactions or otherwise. Such redemptions and repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Upon the occurrence of a change of control, which is defined in the indenture, each holder of the Notes has the right to require us to repurchase some or all of such holders Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
The indenture contains covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to (subject to certain exceptions): incur additional debt, issue disqualified stock or issue certain preferred stock; pay dividends on or make certain distributions and other restricted payments; create certain liens or enc