01—Abstract
Summary
Summary of the 10-K filed April 26, 1999. Cited figures are marked; the original filing is the authoritative source.
Dollar General's fiscal 1998 10-K (year ended January 29, 1999) shows a retailer executing a rapid store expansion while maintaining strong profitability.
Net sales rose 22.6% to $3.22 billiona, driven by 518 net new stores (ending at 3,687 across 24 states) and an 8.3% same-store sales increase. Net income grew 25.9% to $182.0 million, and diluted EPS reached $0.85, up from $0.67. Return on average equity was 27.8%, and the company's total debt was nearly eliminated to $1.5 million at year-end, with all short-term borrowings repaid from internally generated funds.
The key investor considerations are margin pressure and working capital intensity. Gross margin slipped to 28.1% from 28.3% due to higher inventory shrinkage (2.5% of sales versus 2.2%), and management expects gross profit as a percentage of sales to decline slightly in 1999 as it prioritizes low prices. Inventory grew to $811.7 millionb, up roughly 28%, outpacing sales growth, and accounts payable and accrued expenses increased to fund it.
SG&A continued to fall as a share of sales (19.1%, the ninth consecutive annual decline), which is the core of the operating leverage story. Looking ahead, the company plans 575 to 600 new stores in 1999, 200 to 250 relocations, and two additional distribution centers, with capital expenditures projected at about $120 millionc, funded internally. The company also flagged an effective tax rate increase to 36.5% and disclosed a $225 million leveraged lease facility and interest rate swaps.
Year 2000 remediation costs were modest ($400,000 to $600,000d), though the company acknowledged dependence on third-party vendor readiness. Investors should weigh the strong growth and returns against the rising inventory intensity and the sustainability of store-level economics as expansion continues.
02—Key points
Key Highlights
- Net sales increased 22.6% to $3.22 billion in 1998, with same-store sales up 8.3%
- Net income rose 25.9% to $182.0 million; diluted EPS of $0.85 versus $0.67 in 1997
- Store count reached 3,687 in 24 states after 551 openings, with 2025 plans for 575 to 600 new stores
- SG&A fell to 19.1% of net sales, the ninth consecutive year of decline, while gross margin eased to 28.1% from 28.3% on higher shrinkage (2.5% of sales)
- Return on average equity of 27.8% and total debt reduced to $1.5 million, with all short-term borrowings repaid at year-end
- Merchandise inventories rose to $811.7 million from $632.0 million, reflecting new distribution centers and store growth
- Management expects gross margin to decline slightly in 1999 and the effective tax rate to rise to 36.5%
03—Questions
Frequently Asked Questions
How fast is Dollar General growing its store base, and what drives its sales growth?
The company added 551 stores in 1998 (518 net) to reach 3,687, a roughly 16% unit increase, and plans 575 to 600 openings in 1999. Sales growth of 22.6% came from both new stores and an 8.3% same-store sales increase, with the convenience-format stores targeting low, middle, and fixed income households.
Is the company's margin profile improving or deteriorating?
Mixed. SG&A as a percentage of sales declined to 19.1% from 19.3%, reflecting lower advertising costs and lower incentive compensation. However, gross margin slipped to 28.1% from 28.3% due to higher inventory shrinkage, and management expects a slight further decline in 1999 as it keeps prices low. Operating margin held at 9.0%.
How is the company financing its growth, and is its balance sheet healthy?
Growth is largely funded by internally generated cash and seasonal short-term borrowings under a $175 million revolver and $165 million in seasonal bank lines. Total debt fell to $1.5 million at year-end, and all short-term borrowings were repaid. The company also uses a $225 million leveraged lease facility for stores, distribution centers, and its headquarters, with $200 million of it hedged by interest rate swaps.
What are the main risks flagged in the filing?
Key risks include rising inventory relative to sales, which increases working capital needs; gross margin pressure from shrinkage; dependence on third-party vendors for Year 2000 readiness, with the company describing this as its greatest Y2K risk; and the sustainability of new store productivity as the company continues rapid expansion. The company reported no material pending legal proceedings.
What is the capital expenditure outlook for 1999?
Management projects approximately $120 million in capital expenditures for 1999: about $65 million for new stores, relocations, and remodels; about $20 million for expanding the Ardmore, Oklahoma distribution center; and about $20 million for transportation equipment and logistics technology. The company expects to fund these from internally generated cash flow.
04—Continue