What drove Dollar General's strong sales growth in fiscal 1995?

Growth came from two sources: 259 net new stores opened during the year, which contributed to the 27.9% sales increase, and a 13.5% same-store sales gain. Management attributed the same-store growth to better merchandise selection, improved in-stock positions, everyday low pricing, and price point consolidation, partly offset by selective markdowns and price reductions, mainly in apparel.

Is the company's profit growth sustainable, and how efficiently is it operating?

Operating efficiency improved. Gross margin edged up to 29.0% from 28.8%, and SG&A fell to 20.7% of sales from 21.7%, aided by scanner and cash register productivity gains, lower self-insurance and health costs, and better utility and advertising ratios. Headwinds include higher depreciation, third-party warehouse costs during the holiday quarter, and higher incentive compensation. The company also expects its effective tax rate to rise to 38.5% in 1996 after the Targeted Jobs Tax Credit expired.

How is the company funding its expansion, and what are the balance sheet risks?

Capital spending is funded primarily by internally generated cash flow, supplemented by short-term borrowings under a $65 million revolving credit/term loan and $95 million of bank lines at year-end. Average daily short-term borrowing rose 51.1% to $51.5 million as inventory grew 37%. Long-term debt is small at $4.8 million. Seasonal working capital needs remain significant, and the revolving facility was expected to be increased in 1996. Loan agreements include covenants on minimum tangible net worth and working capital, and restrict capital spending, stock repurchases, and additional borrowing.

Are there governance or related-party considerations investors should know about?

Yes. In August 1994, the company exchanged 1,715,742 shares of Series A Convertible Junior Preferred Stock for 8,578,710 common shares held by CTS, Inc., a holding company controlled by members of the Turner family, who founded the company. The company said this was done to address the family's estate planning needs and stabilize a large block of shares. The preferred stock is non-transferable and not convertible at the holder's option until August 22, 1996, and it carries a reduced, non-cumulative dividend. The Turner family, led by Chairman and CEO Cal Turner, Jr., retains significant influence.

What are the main risks to the store growth plan?

The main risks are execution and cost. The company plans to open 330-350 stores in 1996, roughly 10-15% more than 1995. Its Ardmore, Oklahoma distribution center is expected to serve 750 stores by mid-1996, and fourth-quarter 1995 distribution problems from using third-party warehouses showed how stretched logistics can be. Other risks include competition from discount, department, and variety stores; reliance on a seasonal fourth quarter; and the planned removal of newspaper, radio, and TV advertising, which management says may cause only a temporary dip in same-store sales growth.

DG 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed May 1, 1995. Cited figures are marked; the original filing is the authoritative source.

Dollar General Corporation's 10-K for the fiscal year ended January 31, 1995 reports a strong year of growth and profitability.

Net sales rose 27.9% to $1,448.6 million^a, driven by 259 net new stores (2,059 total at year-end across 24 states) and a 13.5% increase in same-store sales. Net income climbed 51.6% to $73.6 million, and net margin expanded to 5.1% from 4.3%. The company reported its fourth consecutive year of double-digit same-store sales growth, with the improvement attributed to everyday low pricing, better in-stock positions, and a leaner overhead structure, as SG&A fell to 20.7% of sales from 21.7%.

Return metrics improved meaningfully, with return on average equity at 26.1% and return on average assets at 15.7%. The company accelerated its expansion, opening 302 stores and planning 330-350 openings in 1996, while building a third distribution center in Ardmore, Oklahoma at a cost of $23.3 million^b. Capital expenditures rose to $65.8 million, and the company said growth was financed without a significant increase in debt.

Total debt was $35.8 million^c, and the total debt-to-equity ratio was 11.1%. Investors should also note several structural items. The stock began trading on the NYSE on February 1, 1995, after previously trading on Nasdaq.

A five-for-four stock split was distributed March 6, 1995. In August 1994, the company repurchased 8.58 million common shares from CTS, Inc., a Turner family holding company, in exchange for Series A Convertible Junior Preferred Stock, which is a notable related-party transaction. Working capital pressures from seasonal inventory build and the shift toward larger, more expensive distribution infrastructure bear watching, as does the planned reduction in advertising circulars and the expected rise in the effective tax rate to 38.5%^d for 1996.

02—Key points

Key Highlights

Net sales grew 27.9% to $1,448.6 million, with same-store sales up 13.5%, the company's fourth straight year of double-digit same-store growth.
Net income rose to $73.6 million (5.1% of sales) from $48.6 million, with EPS of $1.33 before and $1.07 after the March 1995 five-for-four split.
Return on average equity reached 26.1% and return on average assets 15.7%, both up from the prior year.
SG&A as a percentage of sales fell to 20.7% from 21.7%, the lowest operating expense ratio in ten years, supported by overhead control and new store productivity.
Store base grew to 2,059 stores with 302 openings in 1995; plans call for 330-350 openings and about 50 closings in 1996.
Capital expenditures increased to $65.8 million, including $23.3 million for the Ardmore, Oklahoma distribution center, while total debt stayed modest at $35.8 million (11.1% of equity).
Stock moved to the NYSE on February 1, 1995, and the August 1994 repurchase of 8.58 million shares from a Turner family holding company was settled through convertible preferred stock.

03—Questions

Frequently Asked Questions

What drove Dollar General's strong sales growth in fiscal 1995?
Growth came from two sources: 259 net new stores opened during the year, which contributed to the 27.9% sales increase, and a 13.5% same-store sales gain. Management attributed the same-store growth to better merchandise selection, improved in-stock positions, everyday low pricing, and price point consolidation, partly offset by selective markdowns and price reductions, mainly in apparel.
Is the company's profit growth sustainable, and how efficiently is it operating?
Operating efficiency improved. Gross margin edged up to 29.0% from 28.8%, and SG&A fell to 20.7% of sales from 21.7%, aided by scanner and cash register productivity gains, lower self-insurance and health costs, and better utility and advertising ratios. Headwinds include higher depreciation, third-party warehouse costs during the holiday quarter, and higher incentive compensation. The company also expects its effective tax rate to rise to 38.5% in 1996 after the Targeted Jobs Tax Credit expired.
How is the company funding its expansion, and what are the balance sheet risks?
Capital spending is funded primarily by internally generated cash flow, supplemented by short-term borrowings under a $65 million revolving credit/term loan and $95 million of bank lines at year-end. Average daily short-term borrowing rose 51.1% to $51.5 million as inventory grew 37%. Long-term debt is small at $4.8 million. Seasonal working capital needs remain significant, and the revolving facility was expected to be increased in 1996. Loan agreements include covenants on minimum tangible net worth and working capital, and restrict capital spending, stock repurchases, and additional borrowing.
Are there governance or related-party considerations investors should know about?
Yes. In August 1994, the company exchanged 1,715,742 shares of Series A Convertible Junior Preferred Stock for 8,578,710 common shares held by CTS, Inc., a holding company controlled by members of the Turner family, who founded the company. The company said this was done to address the family's estate planning needs and stabilize a large block of shares. The preferred stock is non-transferable and not convertible at the holder's option until August 22, 1996, and it carries a reduced, non-cumulative dividend. The Turner family, led by Chairman and CEO Cal Turner, Jr., retains significant influence.
What are the main risks to the store growth plan?
The main risks are execution and cost. The company plans to open 330-350 stores in 1996, roughly 10-15% more than 1995. Its Ardmore, Oklahoma distribution center is expected to serve 750 stores by mid-1996, and fourth-quarter 1995 distribution problems from using third-party warehouses showed how stretched logistics can be. Other risks include competition from discount, department, and variety stores; reliance on a seasonal fourth quarter; and the planned removal of newspaper, radio, and TV advertising, which management says may cause only a temporary dip in same-store sales growth.

04—Continue

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