DOLLAR GENERAL CORPORATION General
This discussion and analysis is based on, should be read with, and is qualified
in its entirety by, the accompanying unaudited condensed consolidated financial
statements and related notes, as well as our consolidated financial statements
and the related Management's Discussion and Analysis of Financial Condition and
Results of Operations as contained in our Annual Report on Form 10-K for the
fiscal year ended
Executive Overview
We are the largest discount retailer in
We believe our convenient store formats, locations, and broad selection of
high-quality products at compelling values have driven our substantial growth
and financial success over the years and through a variety of economic cycles.
We are mindful that the majority of our customers are value-conscious, and many
have low and/or fixed incomes. As a result, we are intensely focused on helping
our customers make the most of their spending dollars. Our core customers are
often among the first to be affected by negative or uncertain economic
conditions and among the last to feel the effects of improving economic
conditions, particularly when trends are inconsistent and of an uncertain
duration. The primary macroeconomic factors that affect our core customers
include unemployment and underemployment rates, wage growth, changes in
We remain committed to our long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus. These priorities include: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our diverse teams through development, empowerment and inclusion.
We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount. As we work to provide everyday low prices and meet our customers' affordability needs, we remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing, and pricing and markdown optimization. Several of our strategic and other sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.
Historically, our sales in our consumables category, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales in our non-consumables categories, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. Prior to 2020, our sales mix had continued to shift toward consumables, and, within consumables, toward lower margin departments such as perishables. This trend did not occur in 2020 or the first quarter of 2021, as we saw a significant increase in demand in many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix
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shift into non-consumable categories during those periods. Beginning in the second quarter of 2021 and continuing thereafter, we began to see some reversion toward the prior mix trends. We continue to expect some sales mix challenges to persist as the mix trend reversion toward consumables has returned to pre-pandemic levels. Several of our initiatives, including certain of those discussed below, are intended to address these mix challenges; however, there can be no assurances that these efforts will be successful.
We also experienced a shift in customer behavior toward trip consolidation, as customers shopped our stores less frequently in 2020 and 2021 than in 2019 but had a larger average transaction amount. In the first quarter of 2022, we saw a continuation of the trend toward a larger transaction amount, which we believe was driven primarily by inflation, and, to a lesser degree, our merchandising efforts. In addition, although we believe our sales in recent periods were negatively impacted by the global and domestic supply chain challenges and disruptions discussed further below, primarily in the form of lower merchandise in-stock levels in our stores, we have seen some improvement in our in-stock levels in the first quarter of 2022. However, these supply chain challenges are ongoing, and there can be no assurance that we will continue to experience improvements in in-stock levels or when in-stock levels will return to historical pre-pandemic levels.
We continue to implement and invest in certain strategic initiatives that we
believe will help drive profitable sales growth, both with new and existing
customers, and capture long-term growth opportunities. Such opportunities
include providing our customers with additional shopping access points and even
greater convenience by leveraging and developing digital tools and technology,
such as our
Further, our non-consumables initiative, which offers a new, differentiated and
limited assortment that will change throughout the year, continues to contribute
to improved overall sales and gross margin performance in stores where it has
been deployed. We have significantly expanded the number of stores with either
the full or the "lite" version of our non-consumables initiative offering, and
plan to complete the rollout in the vast majority of our
Additionally, we are continuing to grow the footprint of pOpshelf, a unique
retail concept that incorporates certain of the lessons learned from the
non-consumables initiative in a differentiated format that is focused on
categories such as seasonal and home décor, health and beauty, home cleaning
supplies, and party and entertainment goods. At the end of the first quarter of
2022, we operated 66 standalone pOpshelf locations and 25 pOpshelf
store-within-a-store concepts within existing Dollar
Our "DG Fresh" initiative, a self-distribution model for frozen and refrigerated products that is designed to reduce product costs, enhance item assortment, improve our in-stock position, and enhance sales, has positively contributed to our sales performance since we completed the initial rollout in the second quarter of 2021, driven by higher in-stock levels and the introduction of new products in select stores. In addition, DG Fresh has benefitted gross profit through improved initial markups on inventory purchases, which were partially offset by increased distribution and transportation costs. DG Fresh now wholly or partially serves essentially all stores across the chain, and we expect the overall net benefit to our financial results to continue throughout 2022. Moving forward, we plan to focus on additional optimization of the distribution footprint and product assortment within DG Fresh to further drive profitable sales growth.
To support our other operating priorities, we remain focused on capturing growth
opportunities. In the first quarter of 2022, we opened 239 new stores, remodeled
532 stores, and relocated 32 stores. Although we are seeing inflationary
pressures in building costs, we remain on track to open approximately 1,110 new
stores (including planned pOpshelf stores and up to ten stores in
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We continue to innovate within our channel and are able to utilize the most productive of our various Dollar General store formats based on the specific market opportunity. We expect store format innovation to allow us to capture additional growth opportunities within our existing markets. We are now using two larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and expect the 8,500 square foot format, along with our existing Dollar General Plus format of a similar size, to become our base prototypes for the majority of new stores, replacing our traditional 7,300 square foot format and higher-cooler count Dollar General Traditional Plus format. The larger formats allow for expanded high-capacity-cooler counts; an extended queue line; and a broader product assortment, including the non-consumable initiative, a larger health and beauty section, and produce in select stores. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base. These lessons contribute to innovation in developing new formats, with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.
We have established a position as a low-cost operator, always seeking ways to reduce or control costs that do not affect our customers' shopping experiences. We plan to continue enhancing this position over time while employing ongoing cost discipline to reduce certain expenses as a percentage of sales. Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term competitiveness and profitability.
We are continuing to deploy "Fast Track", an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor efficiencies within our stores. The completed first phase of Fast Track involved sorting process optimization within our non-refrigerated distribution centers, as well as increased shelf-ready packaging, to allow for greater store-level stocking efficiencies, while the ongoing second phase involves adding a self-checkout option, which we plan to have in up to 11,000 stores by the end of 2022. These and the other strategic initiatives discussed above have required and will require us to incur upfront expenses for which there may not be an immediate return in terms of sales or enhanced profitability.
To further optimize our cost structure and facilitate greater operational control within our supply chain, we plan to double the size of our private tractor fleet in 2022. We had more than 950 tractors in our fleet at the end of the first quarter of 2022, and our goal is to have more than 1,400 tractors in the fleet by the end of 2022.
Certain of our operating expenses, such as wage rates and occupancy costs, have continued to increase in recent years, due primarily to market forces, including labor availability, increases in minimum wage rates and increases in property rents. Further federal, state and/or local minimum wage increases could have a material negative impact on our operating expenses, although the magnitude and timing of such impact is uncertain. In addition, we have experienced challenges such as increased costs and disruptions in our business as a result of various global events, including the COVID-19 pandemic and its associated impacts. Such challenges include incremental transportation, distribution, and payroll costs, as well as supply chain disruptions. We continue to experience materially higher supply chain costs and, in some instances, shipping delays, as a result of shipping capacity shortages, port congestion and industry labor shortages. We expect continued inflationary pressures due to higher input costs and higher fuel prices will continue to affect us as well as our vendors and customers, resulting in higher commodity, transportation and other costs, all of which may result in continued pressure to our operating results, and their extent and duration are unknown. To the extent that these inflationary pressures result in a recessionary environment, we may experience adverse effects on our business, results of operations and cash flows. While we expect some challenges to persist, certain of our initiatives and plans are intended to help offset these challenges; however, they are somewhat dependent on the scale and timing of the increased costs, among other factors. There can be no assurance that our mitigation efforts will be successful.
Our diverse teams are a competitive advantage, and we proactively seek ways to continue investing in their development. Our goal is to create an environment that attracts, develops, and retains talented personnel, particularly at the store manager level, because employees who are promoted from within our company generally have longer tenures and are greater contributors to improvements in our financial performance.
To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in the first quarter of 2022. We expect to continue our share repurchase activity and to pay quarterly cash dividends for the foreseeable future, subject to Board discretion and approval.
We utilize key performance indicators ("KPIs") in the management of our business. Our KPIs include same-store sales, average sales per square foot, and inventory turnover. Same-store sales are calculated based upon our stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. We include stores that
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have been remodeled, expanded or relocated in our same-store sales calculation. Changes in same-store sales are calculated based on the comparable 52 calendar weeks in the current and prior years. The method of calculating same-store sales varies across the retail industry. As a result, our calculation of same-store sales is not necessarily comparable to similarly titled measures reported by other companies. Average sales per square foot is calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Each of these measures is commonly used by investors in retail companies to measure the health of the business. We use these measures to maximize profitability and for decisions about the allocation of resources.
Highlights of our 2022 first quarter results of operations, compared to the 2021
first quarter, and our financial condition at
Net sales increased 4.2% to
? same-stores decreased 0.1%. Average sales per square foot for all stores over
the 52-week period ended
Gross profit, as a percentage of net sales, was 31.3% in the 2022 period and
? 32.8% in the 2021 period, a decrease of 151 basis points, primarily reflecting
an increased proportion of sales of products in our consumables category and an
increased LIFO provision.
SG&A expense, as a percentage of net sales, was 22.8% in the 2022 period
? compared to 22.0% in the 2021 period, an increase of 78 basis points, primarily
due to higher retail labor and store occupancy costs as a percentage of net
sales.
? Operating profit decreased 17.9% to
to
? Interest expense decreased by
The effective income tax rate for the 2022 period was 21.8% compared to a rate
? of 22.0% for the 2021 period, primarily due to the decrease in income before
income taxes while rate impacting items remained materially the same.
Net income was
? compared to net income of
2021 period.
Cash generated from operating activities was
? period, a decrease of
due primarily to increased inventory purchases.
Total cash dividends of
? the 2022 period, compared to
comparable 2021 period.
Inventory turnover was 4.3 times on a rolling four-quarter basis. On a per
? store basis, inventories at
balances at
The above discussion is a summary only. Readers should refer to the detailed
discussion of our results of operations below in the current year period as
compared with the prior year period as well as our financial condition at
Results of Operations
Accounting Periods. We utilize a 52-53 week fiscal year convention that ends on
the Friday nearest to
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quarter accounting periods for 2022 and 2021 contained herein refer to the
13-week accounting periods ended
Seasonality. The nature of our business is somewhat seasonal. Primarily because
of sales of Christmas-related merchandise, operating profit in our fourth
quarter (November, December and January) has historically been higher than
operating profit in each of the first three quarters of the fiscal year.
Expenses, and to a greater extent operating profit, vary by quarter. Results of
a period shorter than a full year may not be indicative of results expected for
the entire year. Furthermore, the seasonal nature of our business may affect
comparisons between periods. Consumer behavior driven by the COVID-19 pandemic
and the
The following table contains results of operations data for the 13-week periods of 2022 and 2021, and the dollar and percentage variances among those periods:
13 Weeks Ended 2022 vs. 2021
(amounts in millions, except April 29, April 30, Amount %
per share amounts) 2022 2021 Change Change
Net sales by category:
Consumables $ 6,960.5 $ 6,378.1 $ 582.4 9.1 %
% of net sales 79.54 % 75.92 %
Seasonal 961.4 1,050.4 (89.0) (8.5)
% of net sales 10.99 % 12.50 %
Home products 539.8 571.3 (31.5) (5.5)
% of net sales 6.17 % 6.80 %
Apparel 289.7 401.1 (111.5) (27.8)
% of net sales 3.31 % 4.77 %
Net sales $ 8,751.4 $ 8,401.0 $ 350.4 4.2 %
Cost of goods sold 6,013.0 5,645.3 367.7 6.5
% of net sales 68.71 % 67.20 %
Gross profit 2,738.4 2,755.7 (17.3) (0.6)
% of net sales 31.29 % 32.80 %
Selling, general and administrative expenses 1,992.2 1,846.8 145.4 7.9
% of net sales 22.76 % 21.98 %
Operating profit 746.2 908.9 (162.7) (17.9)
% of net sales 8.53 % 10.82 %
Interest expense 39.7 40.4 (0.7) (1.8)
% of net sales 0.45 % 0.48 %
Income before income taxes 706.5 868.5 (162.0) (18.7)
% of net sales 8.07 % 10.34 %
Income tax expense 153.8 190.7 (36.9) (19.3)
% of net sales 1.76 % 2.27 %
Net income $ 552.7 $ 677.7 $ (125.1) (18.5) %
% of net sales 6.32 % 8.07 %
Diluted earnings per share $ 2.41 $ 2.82 $ (0.41) (14.5) %
13 WEEKS ENDED
Gross Profit. For the 2022 period, gross profit decreased by 0.6%, and as a percentage of net sales decreased by 151 basis points to 31.3%, compared to the 2021 period. For the past several years a greater percentage of our sales have
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come from our consumables category, which generally has a lower gross profit rate than our other product categories, creating downward pressure on our overall gross profit rate. However, beginning in early 2020 and continuing through early 2021, our non-consumables sales increased at a higher rate than consumables sales, altering the sales mix between consumables and non-consumables categories. Since that time, our sales growth and mix have shifted back to consumables, which contributed to the decrease in the gross profit rate in the current period. In addition, an increased LIFO provision, increased transportation costs, an increase in markdowns as a percentage of sales and increased distribution costs were key factors contributing to the decrease in the gross profit rate along with an increase in inventory damages. These factors were partially offset by higher inventory markups.
Selling, General & Administrative Expenses ("SG&A"). SG&A was 22.8% as a percentage of net sales in the 2022 period compared to 22.0% in the comparable 2021 period, an increase of 78 basis points. The primary expenses that were a greater percentage of net sales in the current year period were retail labor, store occupancy costs, depreciation and amortization and utilities, partially offset by reductions in incentive compensation and winter storm related disaster expenses.
Interest Expense. Interest expense decreased by
Income Taxes. The effective income tax rate for the 2022 period was 21.8% compared to a rate of 22.0% for the 2021 period which represents a net decrease of 0.2 percentage points. The tax rate for the 2022 period was lower than the comparable 2021 period primarily due to a decrease in pre-tax earnings in the 2022 period compared to the 2021 period while rate impacting items, such as the benefits from stock-based compensation and federal tax credits, remained materially the same in amount in both the 2022 and 2021 periods.
Liquidity and Capital Resources
At
We believe our cash flow from operations and existing cash balances, combined with availability under the Revolving Facility, the CP Notes and access to the debt markets, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending, anticipated dividend payments and share repurchases for a period that includes the next twelve months as well as the next several years. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.
For the remainder of fiscal 2022, we anticipate potential combined borrowings
under the Revolving Facility and our CP Notes to be a maximum of approximately
Revolving Credit Facility
Our Revolving Facility consists of a
Borrowings under the Revolving Facility bear interest at a rate equal to an
applicable interest rate margin plus, at our option, either (a) LIBOR or (b) a
base rate (which is usually equal to the prime rate). The applicable interest
rate margin for borrowings as of
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The Revolving Facility contains a number of customary affirmative and negative
covenants that, among other things, restrict, subject to certain exceptions, our
(including our subsidiaries') ability to: incur additional liens; sell all or
substantially all of our assets; consummate certain fundamental changes or
change in our lines of business; and incur additional subsidiary indebtedness.
The Revolving Facility also contains financial covenants that require the
maintenance of a minimum fixed charge coverage ratio and a maximum leverage
ratio. As of
As of
Commercial Paper
We may issue the CP Notes from time to time in an aggregate amount not to exceed
Senior Notes
In
We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder's Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.
The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.
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Current Financial Condition / Recent Developments
Our inventory balance represented approximately 54% of our total assets
exclusive of operating lease assets, goodwill and other intangible assets as of
As discussed in Note 7 to the unaudited condensed consolidated financial statements, we are involved in various legal matters, some of which could potentially result in material cash payments. Adverse developments in these matters could materially and adversely affect our liquidity.
Our senior unsecured debt is rated "Baa2," by Moody's with a stable outlook and
"BBB" by
Unless otherwise noted, all references to the 2022 and 2021 periods in the
discussion of cash flows from operating, investing and financing activities
below refer to the 13-week periods ended
Cash flows from operating activities. Cash flows from operating activities were
On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. Total merchandise inventories increased by 8% in the 2022 period and decreased by 3% in the 2021 period, with changes in our four inventory categories as follows: consumables increased by 5% compared to an 1% decrease; seasonal increased 13% compared to a 6% decrease; home products increased by 23% compared to a 3% decrease; and apparel was unchanged compared to a 10% decrease.
Cash flows from investing activities. Significant components of property and
equipment purchases in the 2022 period included the following approximate
amounts:
Significant components of property and equipment purchases in the 2021 period
included the following approximate amounts:
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Capital expenditures for 2022 are currently projected to be in the range of
Cash flows from financing activities. Net commercial paper borrowings increased
by
Share Repurchase Program
As of
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