This summary is based on the third quarter fiscal 2008 earnings call conducted by Dollar General Corporation (DG) on December 3, 2008.
Management:
Senior Director of Investor Relations: Emma Jo Kauffman
Chief Executive Officer, Director: Richard W. Dreiling
Chief Financial Officer, Executive Vice President: David M. Tehle
Key Investors Issues
- The average price of diesel was $3.97 per gallon, an increase of 34% from the 2007 quarter.
- The company reported a net loss of $7.3 million compared to a net loss of $33 million in the 2007 quarter.
- Sales were $2.60 billion, up $286.1 million or 12.4% from last year.
Third Quarter Highlights
Sales were $2.60 billion, up $286.1 million or 12.4% from last year.
- Highly consumables sales increased 16.6%, basic clothing increased 4.1%, seasonal sales increased 3.0% and home products increased 1.7% from last year.
- Same-store sales increased 10.6% with positive comparable store sales in all four of merchandising categories in every geographic region. Increased traffic and average ticket each contributed to the sales increase.
- Gross profit rate was 29.7% compared to 28% in the 2007 quarter, an increase of 175 basis points. This increase was the result of higher average markups, improved inventory shrink, lower markdowns, and improved transportation and logistics efficiencies which more than offset fuel cost increases and an additional $15.7 million non-cash LIFO charge resulting from continued inflationary pressures.
- The average price of diesel was $3.97 per gallon, an increase of 34% from the 2007 quarter but down from the all-time high of $4.67 per gallon last quarter.
- SG&A improved 68 basis points to 24.4% of sales from 25.1% in the 2007 quarter. The 2008 quarter includes approximately $6.5 million of incremental merger-related expenses consisting primarily of severance and legal expenses. SG&A in the 2007 quarter included $7 million of Alpha related strategic store closing costs and a $3.4 million accrual related to distribution center leases which resulted from the merger. In addition both 2007 and 2008 quarters include $10 million of leasehold intangible amortization.
- Excluding these strategic and merger-related items, the company leveraged SG&A by 42 basis points due to the impact of higher sales volumes in addition to having lower workers’ compensation expense, lower waste management costs resulting from cardboard recycling efforts, and lower depreciation expense. The impact of these improvements was partially offset by higher incentive compensation associated with 2008 financial performance.
- Statement of operations reflects a charge of $34.5 million net of anticipated insurance proceeds relating to the proposed settlement of the shareholder lawsuit that arose out of the merger with KKR.
- The company reported a net loss of $7.3 million after recording the $34.5 million charge related to the shareholder lawsuit compared to a net loss of $33 million in the 2007 quarter. Adjusted EBITDA which is defined in credit facility and is considered a material component to the calculation of certain covenants was $228.6 million, up $86.5 million or 61% from last year’s third quarter.
- The company opened 175 new stores and closed 23 and it has remodeled or relocated 356 stores this year through the third quarter.
- Total inventories were $1.62 billion, up 9% in total or 7% on a per-store basis from the year ago period. This increase in inventories is primarily due to higher store inventory levels needed to support higher sales volumes as well as the rollout of the new plan-o-grams.
- Accounts payable to inventory ratio increased to 44% at the end of the third quarter, up from 37% in the year ago period. Inventory turns on a four quarter basis were 5.0 times compared to 4.6 times a year ago.
- The company had total outstanding debt at the end of the quarter of $4.18 billion including $2.3 billion outstanding under senior secured term loan with no borrowings under asset based revolver.
- Ratio of long-term obligations to adjusted EBITDA has fallen to 4.7 times from 7.1 times at the close of the merger in July of 2007.
Year-to-Date Financial Highlights
- Net sales were $7.61 billion, up 9.7% from the prior year including a same-store sales increase of 8.8% on top of a 2.8% same-store sales increase in the comparable 2007 period.
- While sales have been driven primarily by highly consumables, same-store sales are positive in each of four merchandising categories and in every geographic region.
- Gross profit increased by $320.3 million to 29.2% of sales compared to 27.4% of sales in the 2007 period, an increase of 177 basis points.
- Major contributors to gross margin expansion include higher average markups, a decrease in inventory shrink, lower markdowns, and leverage on distribution and transportation costs partially offset by a $31.8 million increase in LIFO reserve.
- SG&A decreased as a percentage of sales to 24.1% from 25% in the 2007 period, an improvement of 91 basis points. Excluding certain merger-related and non-comparable items between the two periods, the company leveraged SG&A by 46 basis points.
- Net income was $26.3 million compared to a net loss of $68.2 million for the combined pre-imposed merger 2007 period.
- EBITDA was $531.3 million compared to $230.7 million in the 2007 period. Net income and EBITDA in the 2007 period were impacted by $102.6 million pre-tax of transaction and other merger-related costs.
- Adjusted EBITDA was $637 million, up 48% from the 2007 period.
- The company generated $261.1 million of cash from operating activities resulting primarily from strong operating performance and improvements in working capital management.
- The company has spent $159.7 million on capital expenditures including approximately $99 million for improvements and upgrades to existing stores, $22 million for remodels and relocations, $15 million for new stores, $11 million for systems related capital projects, and $9 million for distribution and transportation upgrades.
Fiscal 2008 Outlook
The company continues to anticipate capital expenditures for the year will be in the range of $200 million to $220 million which includes the opening of an additional 25 to 30 stores and the relocation or remodel of approximately 45 stores in the fourth quarter.
Key questions from the third quarter earnings call conducted by Dollar General Corporation on December 3, 2008.
Emily Shanks (Barclays Capital):
You had gross profit margin improvement. What the magnitude of that improvement by way of contribution was between average higher markups as well as the decreased shrink?
David M. Tehle: We do not break that out specifically in terms of the basis points. The markup was provided by sharper purchasing on the part of our merchants as well as some higher rebates we were able to get from our vendors as well as some pricing initiatives that we took; and then after that the inventory shrink and the lower markdowns versus last year also had a large impact on margin; and then followed by the improved transportation and logistics costs, some of the things we are doing to increase cube in the trucks and change our transportation routes and things of that nature.
