Dollar General Fourth Quarter Conference Call Notes

Dollar General (DG) has reported fourth-quarter earnings of $0.51 a share, excluding non-recurring items, $0.08 better than the consensus estimate.

Earnings quality was solid. Although a lower-than-expected tax rate added $0.02 a share versus the tear-sheet average, the brunt of the beat was driven by a higher-than-expected gross margin, which accounted for the remainder of the beat.

Revenues rose 11.9% year over year. Same-store sales increased 7.4% versus 9.4% last year. Customer traffic and average transaction amount both contributed to the same-store sales increase. Sales were strongest in the consumables and seasonal categories.

The gross margin increased by 275 basis points on a year over year basis to 32.2% of sales from 29.4% of sales in the 2008 period. SG&A expenses were down 40 basis points year over year.

For the full year, the company is guiding earnings to a range of $1.55 – $1.63. The consensus stands at $1.57.

Notes From The Call:

Sales and Comps:

Sales increased 12.8% to a record $11.8 billion in fiscal 2009. Same-store sales rose 9.5%, on top of a 9% gain in 2008. Every region had positive comps.

Total net sales increased across all four merchandise categories led by 14% growth in both consumables and seasonal. DG saw good sell-through of holiday seasonal merchandise, and they are encouraged by the progress in their apparel area.

Margin Discussion:

Gross margin for the quarter was 32.2%, an increase of 275 basis points from the prior year quarter. Margins benefited mostly from private label product growth, better product sourcing, and lower shrinkage.

In 2010 they expect expansion of their private label products to help improve the gross margin further. In 2009, private label penetration was more than 21% of their consumables sales, with about 1300 SKUs. The private brand initiatives will be supported by a new comprehensive in-store marketing campaign.

Another opportunity for gross margin expansion will come from direct sourcing of merchandise. During 2009, they realigned and overhauled the organizational responsibilities of the Hong Kong office and expanded into India. Going forward, they are developing new sourcing alternatives such as improved sourcing for apparel products.

In 2010, shrinkage should decrease due to the relocation of high shrink items, additional closed-circuit TV, scan-based trading, and automated exception-based reporting.

Balance Sheet:

Total debt declined by $734 million last year, to $3.4 billion. The company used excess cash and the proceeds from the IPO to retire debt. The ratio of long-term obligations, net of cash to adjusted EBITDA, decreased from 4.1 at year-end 2008 to 2.5 at year-end 2009.

At year-end total merchandise inventories at costs were $1.52 billion compared to $1.41 billion in '08. That is an increase of 7.4% or 1.7% on a per store basis. Increases in the consumables and seasonal inventories were partially offset by decreases in apparel and home product inventories. Annual inventory turns improved to 5.3 times in 2009 compared to 5.2 times in 2008.

Cash flow from operating activities was $669 million, up 16% from the $575 million generated in 2008.

Store Openings:

In 2009, DG opened 500 new stores and remodeled or relocated an additional 450. In 2010, the plan is to open stores in their new customer-centric format, which has an improved layout. They plan to open 600 new customer-centric stores while also remodeling or relocating an additional 500 stores to fit the new model. The new store format improves the store’s appearance and creates a better shopping environment based on extensive customer insights from focus groups and from proprietary market basket data. By the end of fiscal 2010, they plan to have 1500 stores in the new format.

Fiscal 2010 Guidance:

• Total sales growth of 8%-10%.
• Same-store sales growth of 4%-6%.
• Adjusted operating profit growth of 15%-20%.
• Tax rate of 38%-39%.
• Earnings excluding non-recurring items to increase at an annual rate of 18% - 24% to $1.55 - $1.63 a share. The consensus stands at $1.57.
• Capital expenditures of $325 million to $350 million.