10-QPeriod: Q3 FY2019

DOLLAR GENERAL CORP Quarterly Report for Q3 Ended Nov 2, 2018

Filed December 4, 2018For Securities:DG

Summary

Dollar General Corporation (DG) reported strong financial performance for the third quarter and first nine months of fiscal year 2018, ending November 2, 2018. Net sales increased by 8.7% year-over-year for the quarter and 9.4% for the year-to-date period, driven primarily by a 2.8% increase in same-store sales for the quarter and 2.9% for the year-to-date period. This same-store sales growth was mainly attributed to an increase in the average transaction amount, reflecting higher item retail prices, while customer traffic remained relatively stable. Diluted earnings per share saw a significant increase, rising to $1.26 for the quarter and $4.14 year-to-date, compared to $0.93 and $3.02 in the prior year, respectively. This improvement was substantially influenced by a lower effective income tax rate resulting from the Tax Cuts and Jobs Act. Despite a slight decrease in gross profit margin due to factors like increased LIFO provision and a shift in sales mix towards lower-margin consumables, operating profit increased, showcasing effective cost management in selling, general, and administrative expenses. The company continued its strategic store expansion and remodel initiatives, underscoring its commitment to profitable growth and market presence.

Key Highlights

  • 1Net sales increased by 8.7% to $6.42 billion in the third quarter and 9.4% to $18.98 billion for the first nine months of fiscal year 2018.
  • 2Same-store sales increased by 2.8% for the third quarter and 2.9% for the first nine months, driven primarily by an increase in average transaction amount.
  • 3Diluted earnings per share rose significantly to $1.26 for the quarter and $4.14 year-to-date, compared to $0.93 and $3.02 in the prior year, respectively.
  • 4Gross profit margin decreased slightly to 29.5% for the quarter due to increased LIFO provision and sales mix shifts, but overall gross profit still grew.
  • 5Selling, General & Administrative (SG&A) expenses as a percentage of net sales improved to 22.6% from 22.9% in the prior year's quarter, indicating cost control.
  • 6The effective income tax rate decreased significantly to 20.0% for the quarter (21.1% year-to-date) compared to 35.8% (36.8% year-to-date) in the prior year, largely due to the Tax Cuts and Jobs Act.
  • 7The company actively repurchased shares, spending $647.5 million in the first nine months of fiscal 2018, and paid dividends totaling $231.2 million in the same period.

Frequently Asked Questions

Net sales increased primarily due to a rise in same-store sales, which grew by 2.8% for the quarter and 2.9% year-to-date. This growth was mainly driven by an increase in the average transaction amount, resulting from higher average item retail prices, while customer traffic remained stable.

The gross profit margin decreased by 39 basis points to 29.5% for the quarter due to several factors, including an increase in the LIFO (Last-In, First-Out) provision, a higher proportion of sales coming from the consumables category (which generally has a lower gross profit rate), increased transportation costs, and higher markdowns. These were partially offset by an improved rate of inventory shrinkage.

The TCJA significantly reduced Dollar General's effective income tax rate. For the third quarter, the rate was 20.0% compared to 35.8% in the prior year, and year-to-date it was 21.1% compared to 36.8%. This lower tax rate has a substantial positive impact on net income and earnings per share.

Inventory turnover remained unchanged at 4.7 times on a rolling four-quarter basis. Inventories on a per-store basis increased by 4.0% year-over-year. The company is focused on managing inventory effectively, with specific category increases in consumables, seasonal, and home products, while apparel inventory decreased.