Is Dollar General's growth coming from existing stores or new locations?

Both contribute, but new stores drive most of the increase. The company opened 468 stores in 1998 and closed 33, a net gain of 435 stores to 3,169. Same-store sales rose 8.4%, which adds to that growth. The company targets roughly 15% annual new-store growth over the next several years and focuses on small towns within its existing 24-state footprint.

Why did operating cash flow decline even though earnings grew?

Net income rose, but operating cash flow fell to $139.1 million from $170.1 million. The main reason was a $155.9 million increase in merchandise inventories, needed to stock the new Virginia distribution center and 435 net new stores. Accounts payable increased $76.4 million, which partly offset the inventory build.

What risks could affect margins going forward?

Management expects gross margin to decline slightly in 1999 as a percentage of sales. Drivers include the continuing shift toward hardlines, higher freight costs for the 700 new faster-turning items, and the apparel expansion. The company also faces a minimum wage increase that took effect in September 1997, although management says it was offset by sales growth and productivity gains in 1998.

How is the company funding its expansion, and is leverage a concern?

Leverage is minimal. Total debt was $24.7 million at year-end, down from $43.1 million a year earlier, and the debt-to-equity ratio fell to 4.2%. Expansion is primarily funded from internal cash flow. Liquidity is supplemented by a $175 million revolving credit/term loan and $175 million in seasonal bank lines, plus a $225 million leveraged lease facility (after the March 1998 increase) for distribution centers and stores. Most of these facilities expire in 2002.

Did the company return cash to shareholders, and what were the share-related events?

Yes. Dividends per share rose to $0.13 from $0.10, and the company has paid dividends since 1975. It repurchased about 2 million shares in fiscal 1998 for roughly $75 million. Two 5-for-4 stock splits (September 1997 and March 1998) increased the share count to about 167 million. Stock-based compensation was accounted for under APB 25, and the pro forma diluted EPS under SFAS 123 would have been $0.81 rather than $0.84.

DG 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 20, 1998. Cited figures are marked; the original filing is the authoritative source.

Dollar General's fiscal 1998 10-K (year ended January 30, 1998) shows a retailer executing a rapid store-expansion strategy while sustaining strong profitability.

Net sales rose 23.1% to $2.63 billion^a, driven by 435 net new stores (3,169 total) and an 8.4% same-store sales increase. Net income grew 25.6% to $144.6 million, and diluted EPS reached $0.84 (up from $0.67), with net margin of 5.5%. Return on average equity was 27.0% and return on average assets 17.7%, reflecting a capital-light, low-debt model: total debt was only $24.7 million against $583.9 million of shareholders' equity, and interest expense fell to $3.8 million.

The key watch items for investors are margin pressure and working capital. Gross margin was flat at 28.3%, but management expects it to decline slightly in 1999 due to a shift toward hardlines, higher freight costs, and the introduction of 700 faster-turning items. Inventory rose sharply to $632 million^b (from $476 million), and operating cash flow fell to $139.1 million from $170.1 million, largely because of that inventory build.

Capital expenditures were $107.7 million^c, and 1999 plans call for 500 to 525 new stores and $100 to $125 million in capex, to be funded internally. The company is also building out distribution capacity, with a new Indianola, Mississippi center and two additional ~1 million square foot facilities planned. Supporting the growth thesis are a shareholder-friendly backdrop and a relatively clean risk profile.

The company has paid dividends since 1975, increased dividends per share, and repurchased stock. Credit facilities were expanded in March 1998 to $175 million^d revolving and $225 million leveraged lease capacity, both expiring in 2002.

Management reported no material pending legal proceedings and said Year 2000 costs would not be material. The stock traded between $16.75 and $32 (split-adjusted) during fiscal 1998, and the 5-for-4 split distributed March 23, 1998 was a further adjustment.

02—Key points

Key Highlights

Net sales grew 23.1% to $2.63 billion, driven by 435 net new stores and an 8.4% same-store sales increase.
Net income rose 25.6% to $144.6 million; diluted EPS was $0.84, up from $0.67 in fiscal 1997.
Return on average equity of 27.0% and return on average assets of 17.7%, both improving year over year.
SG&A fell to 19.3% of net sales from 21.7% in 1994, supported by labor productivity and lower self-insurance and advertising costs.
Balance sheet is conservative: total debt of $24.7 million versus $583.9 million in shareholders' equity; interest expense fell 19% to $3.8 million.
Inventory rose to $632 million (up roughly 33%), which pressured operating cash flow to $139.1 million from $170.1 million.
Management expects 500 to 525 new stores in 1999, $100 to $125 million in capex funded internally, and a slight decline in gross margin.

03—Questions

Frequently Asked Questions

Is Dollar General's growth coming from existing stores or new locations?
Both contribute, but new stores drive most of the increase. The company opened 468 stores in 1998 and closed 33, a net gain of 435 stores to 3,169. Same-store sales rose 8.4%, which adds to that growth. The company targets roughly 15% annual new-store growth over the next several years and focuses on small towns within its existing 24-state footprint.
Why did operating cash flow decline even though earnings grew?
Net income rose, but operating cash flow fell to $139.1 million from $170.1 million. The main reason was a $155.9 million increase in merchandise inventories, needed to stock the new Virginia distribution center and 435 net new stores. Accounts payable increased $76.4 million, which partly offset the inventory build.
What risks could affect margins going forward?
Management expects gross margin to decline slightly in 1999 as a percentage of sales. Drivers include the continuing shift toward hardlines, higher freight costs for the 700 new faster-turning items, and the apparel expansion. The company also faces a minimum wage increase that took effect in September 1997, although management says it was offset by sales growth and productivity gains in 1998.
How is the company funding its expansion, and is leverage a concern?
Leverage is minimal. Total debt was $24.7 million at year-end, down from $43.1 million a year earlier, and the debt-to-equity ratio fell to 4.2%. Expansion is primarily funded from internal cash flow. Liquidity is supplemented by a $175 million revolving credit/term loan and $175 million in seasonal bank lines, plus a $225 million leveraged lease facility (after the March 1998 increase) for distribution centers and stores. Most of these facilities expire in 2002.
Did the company return cash to shareholders, and what were the share-related events?
Yes. Dividends per share rose to $0.13 from $0.10, and the company has paid dividends since 1975. It repurchased about 2 million shares in fiscal 1998 for roughly $75 million. Two 5-for-4 stock splits (September 1997 and March 1998) increased the share count to about 167 million. Stock-based compensation was accounted for under APB 25, and the pro forma diluted EPS under SFAS 123 would have been $0.81 rather than $0.84.

04—Continue

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