10-QPeriod: Q2 FY2009

DOLLAR GENERAL CORP Quarterly Report for Q2 Ended May 2, 2008

Filed June 16, 2008For Securities:DG

Summary

Dollar General Corporation (DG) reported its first quarter results for the period ended May 2, 2008. The company experienced a significant year-over-year increase in net sales, growing by 5.6% to $2.40 billion, driven by a 5.4% increase in same-store sales. This sales growth was primarily fueled by an increase in customer transactions and average transaction value, particularly in the highly consumable product category. The company's gross profit margin improved to 28.8% from 27.8% in the prior year, attributed to lower markdowns and better shrink and damage control. Despite the sales and gross profit improvements, net income saw a substantial decrease of 83.0% to $5.9 million compared to $34.9 million in the same period last year. This decline was largely due to a significant increase in interest expense ($100.9 million from $6.2 million), driven by debt financing related to the prior year's merger. The company also reported higher operating profit, indicating improved operational performance apart from financing costs. Management highlighted improved inventory turnover and strong operating cash flow as key positives.

Key Highlights

  • 1Net sales increased by 5.6% to $2.40 billion, driven by a 5.4% same-store sales growth.
  • 2Gross profit margin improved to 28.8% from 27.8% due to lower markdowns and improved shrink/damage management.
  • 3Operating profit saw a significant increase of 99.7% to $110.6 million, reflecting operational efficiencies.
  • 4Net income decreased by 83.0% to $5.9 million, primarily due to a substantial rise in interest expense following the 2007 merger.
  • 5Operating cash flow improved significantly to $151.6 million from $29.3 million in the prior year, driven by working capital management, particularly accounts payable.
  • 6The company opened 73 new stores and maintained its plan to open 200 new stores for the full fiscal year.
  • 7Inventory turnover improved to 5.0 times from 4.3 times on a rolling four-quarter basis.

Frequently Asked Questions

The substantial decrease in net income was primarily driven by a significant increase in interest expense. This increase is a direct result of the debt financing incurred to fund the merger completed in July 2007.

The company improved its gross profit margin to 28.8% from 27.8% mainly due to lower markdowns and better control over inventory shrink and damages. Efficiencies in logistics also helped mitigate the impact of higher fuel costs.

The 2007 merger with KKR and other investors was accounted for as a reverse acquisition. This means the financial statements for the period ended May 2, 2008 (Successor) reflect a new basis of accounting due to purchase accounting, making direct comparison with the prior year's Predecessor period challenging, especially concerning asset valuations and financial structure.

Dollar General opened 73 new stores in the first quarter of 2008 and remains on track to open a total of 200 new stores for the full fiscal year. Additionally, the company plans to remodel or relocate 400 stores in fiscal 2008.