10-QPeriod: Q2 FY2007

DOLLAR GENERAL CORP Quarterly Report for Q2 Ended May 5, 2006

Filed June 1, 2006For Securities:DG

Summary

Dollar General Corporation (DG) reported its first-quarter results for the period ending May 5, 2006. While net sales increased by 8.8% to $2.15 billion, driven by new store openings and a modest same-store sales increase of 1.6%, profitability declined. Net income fell by 26.5% to $47.7 million, or $0.15 per diluted share, compared to $64.9 million, or $0.20 per diluted share, in the prior year period. This decline was primarily attributed to a lower gross profit rate, impacted by a shift in sales mix towards lower-margin highly consumable products and an increase in markdowns, as well as higher selling, general, and administrative (SG&A) expenses, notably in advertising and labor costs. Despite the earnings decrease, the company continued its expansion, opening 182 new stores and remaining on track to meet its 800-store goal for the year. Investments were made in operational initiatives such as testing new store layouts, developing the "Dollar General Market" concept, and implementing the "EZstore" project to reduce labor costs. The company also completed a 10 million share repurchase program. Investors should note the ongoing legal challenges, particularly the class-action lawsuits regarding the classification of store managers, which could materially impact financial statements if decided unfavorably.

Key Highlights

  • 1Net sales increased 8.8% to $2.15 billion, driven by new store openings and a 1.6% same-store sales increase.
  • 2Net income decreased 26.5% to $47.7 million, resulting in diluted EPS of $0.15, down from $0.20 in the prior year.
  • 3Gross profit margin declined 132 basis points due to a shift in sales mix towards lower-margin highly consumable products and increased markdowns.
  • 4SG&A expenses increased as a percentage of sales, driven by higher advertising, store occupancy, and labor costs.
  • 5The company opened 182 new stores and is on pace to achieve its 2006 target of 800 new stores.
  • 6A $10 million share repurchase program was completed during the quarter.
  • 7The company is facing significant legal challenges related to employee classification, with a trial scheduled for July 2006.

Frequently Asked Questions

The decrease in net income was primarily driven by a lower gross profit rate and higher selling, general, and administrative (SG&A) expenses. The gross profit rate declined due to a shift in the sales mix towards lower-margin highly consumable products, increased markdowns, and higher transportation costs. SG&A expenses rose due to increased advertising costs, higher store occupancy costs, and increased labor expenses related to the company's initiatives.

Dollar General opened 182 new stores in the quarter and expects to open a total of 800 new stores for the fiscal year 2006, indicating a continued aggressive expansion strategy.

The company is involved in several significant legal proceedings, most notably a collective action lawsuit (Brown v. Dolgencorp, Inc.) alleging that store managers were improperly classified as exempt employees and thus should have received overtime pay. A trial is scheduled for July 2006, and an unfavorable outcome could have a material adverse effect on the company's financial statements. Other lawsuits concerning wage and hour claims and potential pay discrimination are also ongoing.

Effective February 4, 2006, Dollar General adopted SFAS 123(R) and began recognizing compensation expense for share-based payments based on fair value. For the first quarter of 2006, this adoption resulted in a $1.0 million reduction in pre-tax income and a $0.6 million reduction in net income, with a negligible impact on earnings per share.