US: Discounter Dollar General H1 profits up

September 5, 2012

Dollar General Corporation Reports Strong Second Quarter Results

Second Quarter Same-Store Sales Increased 5.1%; Total Sales Improved 10.4%

Adjusted Operating Profit Increased 10.9%; Reported Operating Profit Increased 10.6%

Adjusted Net Income Increased 27%; Adjusted EPS Increased 33% to $0.69

Reported Net Income Increased 47%; Reported EPS Increased 52% to $0.64

Company Raises Earnings Guidance

Announces Additional $500 Million Share Repurchase Authorization

GOODLETTSVILLE, Tenn.--(BUSINESS WIRE)-- Dollar General Corporation (NYSE: DG) today reported strong sales, operating profit and net income for its fiscal 2012 second quarter (13 weeks) ended August 3, 2012.

"Dollar General had another strong quarter," said Rick Dreiling, chairman and chief executive officer. "Our same-store sales increase of 5.1 percent demonstrates the ongoing execution of the initiatives around our key operating priorities and is evidence of our continued importance to our customers."

"We are pleased with the start of our third quarter and have refined our expectation for full year same-store sales growth to 4 to 5 percent, an increase from our previous expectation of 3 to 5 percent. In addition, we are raising our full year adjusted earnings per share guidance to a range of $2.77 to $2.85, including a $0.04 per share benefit from the settlement of an income tax audit in the second quarter, from our previous guidance of $2.68 to $2.78. We are well positioned to continue to broaden our appeal to more customers and to provide them with convenience and everyday low prices they can depend on."

Second Quarter Highlights

The Company's net income increased by 47 percent to $214 million in the 2012 second quarter, compared to net income of $146 million in the 2011 second quarter. Adjusted net income, as defined in the accompanying table, increased 27 percent to $231 million in the 2012 quarter, compared to $181 million in the 2011 quarter. Diluted earnings per share ("EPS") increased to $0.64 in the 2012 second quarter from $0.42 in the 2011 quarter. Adjusted diluted EPS increased by 33 percent to $0.69 in the 2012 second quarter from $0.52 in the 2011 second quarter.

Sales increased 10.4 percent to $3.95 billion in the 2012 second quarter compared to $3.58 billion in the 2011 second quarter. Same-store sales, based on a comparison of the 13-week periods ended August 3, 2012 and August 5, 2011, increased 5.1 percent, with increases in customer traffic and average transaction amount driving the performance. Consumables sales continued to increase at a higher rate than non-consumables in the 2012 quarter, with the most significant growth related to changes in and further expansion of the Company's candy and snacks and perishable foods. Sales growth was also strong in the Company's home and seasonal categories, as well as certain departments in apparel, including accessories, sleepwear and intimates.

Operating profit increased by 10.6 percent to $387 million and was essentially unchanged at 9.8 percent of sales. Excluding expenses resulting from secondary offerings of the Company's common stock of $0.9 million in the 2012 period, operating profit increased 10.9 percent to $388 million.

Gross profit, as a percentage of sales, was 32.0 percent in 2012 period compared to 32.1 percent in the 2011 period. The most significant factors positively affecting the gross profit rate in the 2012 second quarter were higher initial inventory markups, transportation efficiencies coupled with lower fuel cost, and the impact of a significant LIFO charge in the 2011 period. A heavier consumables weighting within the sales mix, higher markdowns and a lesser impact from price increases offset the improvements to the gross profit rate. The 2012 period reflects a LIFO benefit of $0.5 million compared to a provision of $10.7 million in the 2011 quarter.

Selling, general and administrative expenses ("SG&A"), as a percentage of sales, was 22.2 percent compared to 22.3 percent in the 2011 quarter, a decrease of 15 basis points (a decrease of 17 basis points, excluding the items described above relating to operating profit). The improvement in SG&A, as a percentage of sales, is primarily due to the impact of additional efficiencies in workforce utilization and lower workers' compensation, general liability and benefits expenses, in addition to the impact of increased sales. Higher advertising costs, in part due to the Company's entrance into new markets, and fees associated with the continued increase in debit card usage partially offset the improvements.

Interest expense was $36 million in the 2012 second quarter, a decrease of $25 million from the 2011 second quarter, due to lower average outstanding borrowings and a lower average interest rate. During the second quarter, the remaining $451 million of the Company's 11.875%/12.625% senior subordinated notes was redeemed and $500 million of 4.125% senior notes were issued. Other (income) expense in the 2012 second quarter includes a non-operating loss of $29.0 million ($17.7 million, net of income taxes, or approximately $0.05 per diluted share) resulting from the redemption, partially offset by a $2.5 million pretax gain resulting from the settlement of interest rate swaps. Other (income) expense in the 2011 second quarter includes a loss of $58.1 million ($35.4 million, net of income taxes, or approximately $0.10 per diluted share) resulting from the redemption of $839.3 million aggregate principal amount of the Company's 10.625% senior notes due 2015.

The effective income tax rate for the 2012 quarter was 34.1 percent compared to a rate of 36.8 percent for the 2011 quarter. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act's Retention Credit were more than offset by decreases totaling $14.5 million (or approximately $0.04 per diluted share) associated with the adjustment of accruals due to the favorable resolution of income tax audits.

26-Week Period Results

For the 26-week period ended August 3, 2012, total sales increased 11.7 percent over the comparable 2011 period, to $7.85 billion. Same-store sales, based on a comparison of the 26-week periods ended August 3, 2012 and August 5, 2011, increased 5.9 percent.

Operating profit increased by 14.9 percent to $772 million and, as a percentage of sales, increased 27 basis points to 9.8 percent. Excluding expenses resulting from secondary offerings of the Company's common stock of $1.9 million in the 2012 period and litigation settlement expenses of $13.1 million in the 2011 period, operating profit increased by 13.0 percent to $773 million and as a percentage of sales increased 11 basis points to 9.9 percent.

The gross profit rate, as a percentage of sales, was 31.7 percent in the 2012 26-week period compared to 31.8 percent in the comparable 2011 period. Consumables, which generally have lower markups than non-consumables, represented a greater percentage of sales in the 2012 period than in the 2011 period. Higher initial markups were offset by lower price increases and higher markdowns than in the 2011 period. Improved efficiencies resulted in lower distribution and transportation costs as a percentage of sales. The 2012 period reflects a LIFO provision of $1.1 million compared to a $14.2 million provision in the 2011 period.

SG&A expense was 21.9 percent of sales in the 2012 period compared to 22.3 percent in the 2011 period, an improvement of 35 basis points. Excluding the items described above relating to operating profit, SG&A, as percentage of sales, improved by 18 basis points largely due to improved utilization of retail store labor and the impact of increased sales. Various other cost reduction efforts affecting expenses also contributed to the overall decrease in SG&A as a percentage of sales. Costs that increased at a rate higher than the increase in sales include fees associated with the increased use of debit cards and advertising costs.

Interest expense was $73 million in the 2012 period, a decrease of $53 million from the 2011 period, due to lower average outstanding borrowings and a lower average interest rate. Other (income) expense in the 2012 period includes pretax losses totaling $29.0 million resulting from the Company's redemption of its 11.875%/12.125% senior subordinated notes, a $2.5 million pretax gain resulting from the settlement of interest rate swaps, and a pretax loss of $1.6 million resulting from the amendment of the senior secured revolving credit facility in the first quarter. Other (income) expense in the 2011 period includes pretax losses totaling $60.3 million resulting from the Company's repurchase of its 10.625% senior notes.

The effective income tax rate for the 2012 period was 36.2 percent compared to a rate of 37.5 percent for the 2011 period. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act's Retention Credit were more than offset by decreases totaling $14.5 million (or $0.04 per diluted share) associated with the adjustment of accruals due to the favorable resolution of income tax audits.

The Company reported net income of $428 million, or $1.27 per diluted share for the 2012 26-week period, compared to net income of $303 million, or $0.88 per diluted share for the 2011 26-week period. Excluding adjustments as described in the accompanying reconciliation, adjusted net income for the 2012 26-week period increased by 28 percent to $446 million, or $1.32 per diluted share, compared to adjusted net income of $348 million, or $1.01 per diluted share, in the 2011 26-week period.

Merchandise Inventories

As of August 3, 2012, total merchandise inventories, at cost, were $2.15 billion compared to $1.97 billion as of July 29, 2011, an increase of three percent on a per-store basis. Inventory turns were 5.2 times as of August 3, 2012 (based on a 53-week period).

Capital Expenditures

Total additions to property and equipment in the 26-week 2012 period were $304 million, including: $86 million for improvements, upgrades, remodels and relocations of existing stores; $72 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $69 million for stores purchased or built by the Company; $63 million for distribution and transportation-related capital expenditures; and $12 million for information systems upgrades and technology-related projects. During the 26-week period, the Company opened 295 new stores and remodeled or relocated 416 stores.

Additional Share Repurchase Authorization

The Company's Board of Directors has authorized the Company to purchase up to an additional $500 million of its common stock, which is over and above the $15 million remaining under the previous $500 million authorization approved in December of 2011. This brings the total authorizations to $1 billion. The Company has repurchased $485 million, or 11.7 million shares, under the December 2011 authorization. The new repurchase authorization has no expiration date and allows repurchases from time to time in the open market or in privately negotiated transactions, which could include repurchases from Buck Holdings, L.P. (which is controlled by affiliates of KKR and Goldman Sachs & Co.) or other related parties if appropriate. The timing and number of shares purchased depends on a variety of factors, such as price, market conditions and other factors.

Fiscal 2012 Financial Outlook

The Company continues to expect total sales for the 2012 fiscal year to increase 8 to 9 percent over the 53-week 2011 fiscal year, or 10 to 11 percent on a comparable 52-week basis. Same-store sales, based on a comparable 52-week period, are now expected to increase 4 to 5 percent, an increase from the previous expectation of the low end of 3 percent. For the year, operating profit, excluding expenses resulting from secondary offerings of the Company's stock, is expected to be between $1.64 billion and $1.66 billion, as compared to the Company's previous guidance of between $1.62 billion and $1.66 billion. Specifically, SG&A for the 2012 13-week fourth quarter is expected to increase approximately 4 percent over SG&A in the 2011 14-week fourth quarter, after excluding $10.3 million relating to the acceleration of equity-based compensation and other expenses relating to a secondary offering of the Company's stock in the 2011 fourth quarter. In the second half of the year, the Company expects gross profit, as a percentage of sales, to increase over the comparable prior year period, resulting in a modest increase for the full year.

The Company now expects full year interest expense to be in the range of $130 million to $140 million as compared to the Company's previous guidance of between $145 million and $155 million.

Diluted EPS for the 52-week fiscal year, adjusted to exclude losses resulting from redemption of the senior subordinated notes, charges or expenses relating to amendments to or refinancing of any notes, loans or revolving credit facilities, the settlement of interest rate swaps and expenses resulting from secondary stock offerings, is expected to be approximately $2.77 to $2.85, including approximately $0.04 from the favorable resolution of tax audits in the second quarter. The revised guidance is based on approximately 337 million weighted average diluted shares and an expected income tax rate of 37 to 38 percent. This is an increase from the Company's previous guidance of $2.68 to $2.78 per share, based on approximately 336 million weighted average diluted shares and an expected full year 2012 effective tax rate between 38 and 39 percent. The revised 2012 expected tax rate includes the $14.5 million favorable adjustment resulting from the tax audit resolution. Excluding the adjustment, the tax rate would exceed the 2011 rate due principally to the expiration of federal jobs related tax credits for employees hired after December 31, 2011 as well as certain federal jobs credits that only applied to 2011.

The Company plans to open approximately 625 new stores, including 40 Dollar General Market stores in 2012. In addition, the Company plans to remodel or relocate a total of approximately 575 stores, an increase from the Company's previous estimate of 550. Square footage is expected to increase by approximately 7 percent. Capital expenditures are expected to be in the range of $600 million to $650 million. Approximately 65 percent of capital spending is for investment in store growth and development, including new stores, remodels, relocations and purchases of existing store locations; approximately 15 percent is for transportation, distribution and special projects; the remaining 20 percent is for maintenance capital.

The volatility of the macroeconomic environment continues to pressure the consumer and impact the Company's cost of purchasing and delivering merchandise to its stores. Management continues to closely monitor customers' responses to the economic and competitive climates.

Original source: Dollar General