How is Dollar General growing, and how sustainable is that growth?

Growth comes mainly from new store openings, with 607 net additions in 1999 and a 2000 plan of 675-700 new stores plus 200-250 relocations. Same-store sales rose 6.4% in 1999, following 8.3% and 8.4% in the two prior years. Sustainability depends on the company's ability to keep finding viable sites in its existing markets and on continued same-store gains from its consumable basics strategy.

Are margins under pressure?

Gross margin was essentially flat at 28.2%, but management expects a slight decline in 2000 because of higher DC expense from operating an additional distribution center and lower initial markups. SG&A rose to 19.3% of sales, driven by store labor and rent, although management expects modest operating margin leverage in 2000.

Why did operating cash flow decline sharply in 1999?

Operating cash flow fell to $140.4 million from $218.6 million. The main cause was the reversal of about $68 million in advances received in 1998 from sale/leaseback transactions, which reduced accrued expenses. Inventory growth of $174 million, tied to new stores and distribution centers, also absorbed cash. Capital spending of $152.7 million was funded from operations and property sale proceeds of $67.2 million.

What are the company's capital needs and funding plans for 2000?

Capital expenditures are projected at $270-280 million, including about $202 million for new, relocated, and remodeled stores and roughly $17-18 million each for technology upgrades and transportation equipment. The company plans to fund this with operating cash flow, existing credit facilities (a $175 million revolver and $105 million in seasonal lines), and potential future financing. Management says its existing facilities are sufficient for working capital needs in 2000.

What are the main risks for investors?

Key risks include reliance on continued rapid store expansion, execution risk in opening 675-700 stores and two new DCs, and dependence on a customer base concentrated in low- and fixed-income households across 24 mainly midwestern and southeastern states. Interest rate exposure is modest, with a 1% rate change estimated to affect pre-tax income by about $3.6 million. Inventory risk is considered low because of the consumable basics focus, and the company reports no material pending litigation.

DG 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 27, 2000. Cited figures are marked; the original filing is the authoritative source.

Dollar General's 10-K for fiscal 1999 (year ended January 28, 2000) shows a retailer executing a rapid store-expansion strategy while maintaining strong profitability.

Net sales rose 20.7% to $3.89 billion^a, driven by 607 net new stores and a 6.4% same-store sales increase. Net income grew 20.5% to $219.4 million, and diluted EPS was $0.81, up from $0.68. Gross margin held steady at 28.2%, and SG&A rose modestly to 19.3% of sales, mainly from higher store labor and rent.

Return on average equity was 26.6%, and the balance sheet remained conservative, with total debt of only $2.4 million^b at year-end and short-term borrowings fully repaid. The key investor considerations are growth-related capital needs and margin pressure ahead. Management plans 675-700 new stores and 200-250 relocations in 2000, with capital expenditures of roughly $270-280 million, nearly double 1999's $152.7 million.

Management expects total sales to rise at least 20%^c and earnings to grow at least 20%, but it also anticipates a slight gross margin decline from higher distribution costs and lower initial markups, and a higher interest expense ratio. The company is also building out distribution capacity, with new DCs in Alachua, Florida and Zanesville, Ohio. The filing also highlights a few structural points.

Operations are concentrated in 24 states, primarily in the Midwest and Southeast, and the customer base is largely low- and fixed-income households. Cash flow from operations weakened to $140.4 million^d from $218.6 million, largely because of the reversal of 1998 sale/leaseback advances in accrued expenses.

Inventory growth of $174 million absorbed much of the cash. Investors should therefore watch whether the company can sustain its growth rate and margins while funding a much larger capital program.

02—Key points

Key Highlights

Net sales grew 20.7% to $3.89 billion, driven by 607 net new stores and a 6.4% same-store sales increase.
Net income rose 20.5% to $219.4 million; diluted EPS was $0.81 versus $0.68 in 1998.
Gross margin was stable at 28.2%, while SG&A increased to 19.3% of sales on higher store labor and rent costs.
The store base reached 4,294 locations in 24 states, with 646 openings in 1999 and plans for 675-700 new stores in 2000.
Balance sheet is conservative: total debt was $2.4 million at year-end, all short-term borrowings were repaid, and shareholders' equity rose to $925.9 million.
Operating cash flow fell to $140.4 million from $218.6 million, largely due to reversal of 1998 sale/leaseback advances and $174 million in inventory growth.
2000 guidance calls for at least 20% sales and earnings growth, with capex of $270-280 million and a slight gross margin decline expected.

03—Questions

Frequently Asked Questions

How is Dollar General growing, and how sustainable is that growth?
Growth comes mainly from new store openings, with 607 net additions in 1999 and a 2000 plan of 675-700 new stores plus 200-250 relocations. Same-store sales rose 6.4% in 1999, following 8.3% and 8.4% in the two prior years. Sustainability depends on the company's ability to keep finding viable sites in its existing markets and on continued same-store gains from its consumable basics strategy.
Are margins under pressure?
Gross margin was essentially flat at 28.2%, but management expects a slight decline in 2000 because of higher DC expense from operating an additional distribution center and lower initial markups. SG&A rose to 19.3% of sales, driven by store labor and rent, although management expects modest operating margin leverage in 2000.
Why did operating cash flow decline sharply in 1999?
Operating cash flow fell to $140.4 million from $218.6 million. The main cause was the reversal of about $68 million in advances received in 1998 from sale/leaseback transactions, which reduced accrued expenses. Inventory growth of $174 million, tied to new stores and distribution centers, also absorbed cash. Capital spending of $152.7 million was funded from operations and property sale proceeds of $67.2 million.
What are the company's capital needs and funding plans for 2000?
Capital expenditures are projected at $270-280 million, including about $202 million for new, relocated, and remodeled stores and roughly $17-18 million each for technology upgrades and transportation equipment. The company plans to fund this with operating cash flow, existing credit facilities (a $175 million revolver and $105 million in seasonal lines), and potential future financing. Management says its existing facilities are sufficient for working capital needs in 2000.
What are the main risks for investors?
Key risks include reliance on continued rapid store expansion, execution risk in opening 675-700 stores and two new DCs, and dependence on a customer base concentrated in low- and fixed-income households across 24 mainly midwestern and southeastern states. Interest rate exposure is modest, with a 1% rate change estimated to affect pre-tax income by about $3.6 million. Inventory risk is considered low because of the consumable basics focus, and the company reports no material pending litigation.

04—Continue

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