10-QPeriod: Q3 FY2007

DOLLAR GENERAL CORP Quarterly Report for Q3 Ended Nov 3, 2006

Filed December 12, 2006For Securities:DG

Summary

Dollar General Corporation reported a net loss of $5.3 million ($0.02 per diluted share) for the third quarter ended November 3, 2006, a significant shift from the $64.4 million net income ($0.20 per diluted share) reported in the same period last year. This downturn was primarily driven by substantial inventory markdowns, totaling $71.2 million, related to a strategic decision to discontinue its historical 'packaway' inventory model and focus on newer, current-season merchandise. The company also incurred costs associated with the planned closure of approximately 400 stores by the end of fiscal year 2007. Despite the quarterly loss, net sales saw a modest increase of 7.6% year-over-year, reaching $2.21 billion, attributed to new store openings and a 2.0% same-store sales increase. For the first 39 weeks of fiscal year 2006, net income declined to $87.9 million ($0.28 per diluted share) from $204.9 million ($0.63 per diluted share) in the prior year, while net sales grew by 8.4%. Management is undertaking these significant strategic changes to improve customer experience and store productivity, with expectations of better gross profit margins in fiscal years 2008 and 2009.

Key Highlights

  • 1Reported a net loss of $5.3 million for the third quarter of fiscal year 2006, compared to a net income of $64.4 million in the prior year period.
  • 2Net sales increased by 7.6% to $2.21 billion for the quarter, driven by new store openings and a 2.0% same-store sales increase.
  • 3Implemented significant strategic initiatives, including discontinuing the 'packaway' inventory model and planning to close approximately 400 stores by the end of fiscal year 2007.
  • 4Incurred $71.2 million in below-cost inventory markdowns as part of the inventory strategy shift, significantly impacting gross profit.
  • 5Total debt increased to $503.8 million, while cash and cash equivalents decreased to $90.9 million compared to the prior fiscal year-end.
  • 6Authorized a new common stock repurchase program of up to $500 million, scheduled to expire on December 31, 2008.
  • 7Adoption of SFAS 123(R) for share-based payments resulted in a small increase in SG&A expense and a slight reduction in net income for the periods presented.

Frequently Asked Questions

The net loss was primarily due to significant below-cost inventory markdowns totaling $71.2 million, which were taken as part of a strategic shift to discontinue the company's historical 'packaway' inventory model and focus on newer, current-season merchandise. Additionally, the company incurred costs related to the planned closure of approximately 400 stores.

Net sales increased by 7.6% to $2.21 billion in the third quarter, driven by new store openings and a 2.0% same-store sales increase. However, the significant inventory markdowns and associated costs led to a substantial decline in gross profit and resulted in a net loss for the quarter. Management expects these strategic changes to enhance customer experience and improve gross profit margins in fiscal years 2008 and 2009.

Dollar General plans to decelerate new store growth in the near term, opening approximately 300 stores in fiscal 2007 and 400 in fiscal 2008, with plans to return to a higher growth rate thereafter. A key part of the real estate strategy includes closing approximately 400 underperforming stores by the end of fiscal 2007.

The company's total debt increased to $503.8 million by November 3, 2006, while cash and cash equivalents decreased to $90.9 million. They also amended their revolving credit facility to provide $400 million in borrowing capacity. Management believes their current cash balances, expected operational cash flows, and the credit facility are sufficient to meet their liquidity needs.