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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1996
Commission file number 0-4769
DOLLAR GENERAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
KENTUCKY 61-0502302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
104 Woodmont Boulevard
Suite 500
Nashville, Tennessee 37205
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (615) 783-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of the Exchange on
Title of Class which Registered
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if the disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Aggregate market value of the voting stock held by non-affiliates
of the registrant as of April 1, 1996 is $1,525,295,136 based upon
the last reported sale price on such date by the New York Stock
Exchange.
The number of shares of common stock outstanding on April 1, 1996
was 68,551,000.
Documents Incorporated by Reference
Document Where Incorporated in Form
Portions of the Registrant's Proxy of 10-K
Statement Relating to the Part III
Annual Meeting of Stockholders
to be held on June 3, 1996
2
PART I
Item 1. Business
General
The following text contains references to years 1997, 1996, 1995,
and 1994 which represent fiscal years ending or ended January 31,
1997, January 31, 1996, January 31, 1995 and January 31, 1994,
respectively.
Dollar General Corporation (the "Company") was organized in 1939 as
J.L. Turner and Son, Inc. under the laws of the Commonwealth of
Kentucky. In 1968, the Company changed its name to Dollar General
Corporation. Today, the Company seeks profitable growth by
providing value in consumable basic merchandise to low-, middle-
and fixed-income families. The Company sells this general
merchandise at retail through a chain of 2,416 small, Company-owned
stores (as of January 31, 1996) in 24 states. The Company-owned
stores, located predominantly in small towns in the midwestern and
southeastern United States, operate under the name "Dollar General
Stores."
The Company's mission is "SERVING OTHERS! Serving Our Customers .
. . with greatest everyday value. Serving Our Shareholders . . .
with superior return on investment. Serving Our Employees . . . as
partners in total development. In order to carry out its mission,
the Company has developed a strategy which includes the following
principal elements:
LOW-, MIDDLE- AND FIXED-INCOME CUSTOMERS. The Company seeks
to serve the consumable basic merchandise needs of low-,
middle- and fixed-income consumers.
EVERYDAY LOW PRICES. The Company's strategy is to offer
quality merchandise at everyday low prices. The Company
emphasizes even-dollar price points and believes its prices
are generally below those of its competitors. The majority of
products in Dollar General Stores are priced at $10 or less,
with nearly 50% of the products priced at $1 or less. The
most expensive items generally are priced at $35.
FOCUSED ASSORTMENT OF MERCHANDISE. The Company is committed
to offering a focused assortment of quality, consumable basic
merchandise in a number of core categories. The Company
offers such basic merchandise as health and beauty aids,
cleaning supplies, housewares, stationery, seasonal goods,
non-fashion apparel for the family, shoes and domestics. The
Company strives at all times to be "in-stock" in consumable
basic merchandise in its core categories.
LOW OPERATING COSTS. The Company maintains strict overhead
cost controls and seeks to locate stores in neighborhoods
where store rental and operating costs are low. Also, to
improve operating efficiencies, the Company continues to
utilize new technology when it proves to be cost effective.
The Company's business is seasonal in nature. Due to the holiday
season, the fourth quarter usually reflects significantly higher
net sales and net income than other quarters. The first quarter is
usually the least profitable due largely to the traditionally slow
after-Christmas sales period.
3
Merchandise
The merchandise sales mix of the Company has shifted by 5%
incrementally to hardlines' sales over the past three-year period
and 4% during the past year. The increase in sales of hardline
merchandise occurred in part because of a determined commitment to
keep hardlines in stock, an increased emphasis on private label
("DG Signature") products, an expanded selection of brand-name
merchandise and the continued lowering of prices. The following
table shows an approximate percentage of 1996, 1995, and 1994
Dollar General Store sales by product category.
PERCENTAGE OF SALES
1996 1995 1994
HARDLINES 70% 66% 65%
SOFTLINES 30% 34% 35%
The Company believes that its merchandising strategy generates
frequent repeat customer traffic. The Company is able to offer
everyday low prices to its customers in large part because its
buying staff negotiates low purchase prices. The Company purchases
its merchandise from a wide variety of suppliers, with no supplier
accounting for more than 5% of the Company's purchases during 1996.
The Company buys quality first-run merchandise and supplements its
inventory with manufacturers' overruns, closeouts and irregulars
which sell at a discount from regular retail prices. This
supplemental merchandise is purchased by the Company from
manufacturers on a regular basis. During 1996, approximately 5% of
the Company's purchases were manufacturers' overruns, closeouts or
irregular merchandise. Approximately 20% of the Company's softline
merchandise and 40% of the hardline merchandise in both 1996 and in
1995 consisted of brand-name merchandise. Because the Company
offers quality, consumable basic merchandise, it believes the risk
of inventory obsolescence is low. The Company reviews its
inventory to identify aged merchandise and sells it at reduced
prices to remove it from inventory.
In order to fulfill the commitment to maintain high in-stock levels
of core merchandise, the Company limits its stock keeping units
(SKUs) per store to approximately 2,500 items. Most of these items
are priced at $1 and in increments of $1, with the most expensive
item generally priced at $35. The Company believes even-dollar
pricing more easily demonstrates value to the customer. In
addition, the Company believes even-dollar pricing disciplines its
buyers to continually negotiate purchase prices that conform to a
limited number of retail price points.
Dollar General Stores regularly receive merchandise shipments from
Company distribution centers in Scottsville, Kentucky; Homerville,
Georgia; and Ardmore, Oklahoma and limited shipments directly from
suppliers.
4
The Dollar General Store
The typical Dollar General Store has approximately 6,300 square
feet of selling space and is operated by a manager, an assistant
manager and two or more sales clerks. In 1996, the Company
realized total rental costs of $3.66 per average square foot of
selling space. Approximately 75% of the Dollar General Stores are
situated in communities with populations of 25,000 or less. As of
January 31, 1996, 67% of stores were located in strip shopping
centers, 16% were in downtown store buildings, and 17% were
freestanding. Store sites have been relatively easy to find, and
the Company does not anticipate difficulty in finding suitable
locations in the future. The Company's policy is to negotiate
low-cost, short-term leases, usually three years, with multiple
renewal options when available. These leases allow closing of
unsatisfactory locations at a minimal cost to the Company.
The Company opened 397 new stores in 1996, a company record high,
and expects to open approximately 350 stores in 1997. The
Company's store growth is summarized by the following table:
BEGINNING STORES STORES NET STORES STORES AT
FISCAL YEAR OF YEAR OPENED CLOSED OPENED YEAR END
1996 2,059 397 40 357 2,416
1995 1,800 302 43 259 2,059
1994 1,617 251 68 183 1,800
In addition to opening new Dollar General Stores, management is
continually working to improve the performance of the existing
stores. The Company continually reviews and modifies when
necessary its internal accounting and auditing measures to control
inventory levels and to reduce inventory shrinkage. The total
Company inventory shrinkage for 1996 was 3.41%, compared with 2.98%
for 1995 and 3.06% for 1994. The Company's management finds this
increase in shrinkage unacceptable and has implemented for 1997 a
comprehensive action plan to reduce shrinkage. As a part of this
plan, the Company intends to expand its program of taking interim
inventories so that the interim sample includes a cross section of
all stores as opposed to the current practice of including only
stores suspected of substandard inventory control or that have a
history of inventory control issues. This change should allow the
Company to better predict emerging inventory control trends. Also
as a part of this action plan, the Company has modified its bonus
program so that inventory shrinkage results are more heavily
weighted in determining bonus eligibility. The Company also
intends to accelerate the delivery of merchandise to stores from
every two weeks to delivering merchandise weekly. The Company
expects this change will help the stores and the distribution
centers reduce shrinkage and increase inventory turns.
In addition, at January 31, 1996, the Company served as wholesaler
for 10 retail stores operating under the Dollar General name but
owned by others. Revenues from sales to these retail stores
amounted to less than 0.20% of the Company's gross revenue in 1996.
5
Employees
At March 31, 1996, the Company and its subsidiaries employed
approximately 22,000 full- and part-time employees including
regional managers, district managers, store managers, clerks, and
distribution center personnel compared with approximately 19,000 at
March 31, 1995. None of the Company's employees are represented by
a labor union.
Competition
The business in which the Company is engaged is highly competitive.
The Company competes with discount stores which also sell
popularly-priced merchandise and with all types of retailers,
including department stores, variety stores, mail order chains and
specialty stores. Some of the largest retail merchandising
companies in the nation have stores in some of the areas where the
Company operates. Management believes that it competes primarily
by offering quality, consumable basic merchandise at an everyday
low price. Dollar General Stores operate on a cash basis and do
not accept credit sales.
Executive Officers of the Company
The names, ages and positions of the Company's executive officers
as of April 1, 1996, are as follows:
EXECUTIVE
NAME AGE POSITION OFFICER SINCE:
Cal Turner, Jr. 56 Chairman of the Board 1966
President and Chief
Executive Officer
Bob Carpenter 48 Vice President and Chief 1981
Administrative Officer
Walter Carter 48 Vice President 1994
Distribution and MIS
Michael Ennis 42 Vice President 1988
Merchandising Operations
Troy Fellers 54 Vice President 1991
Distribution
Tom Hartshorn 45 Vice President 1992
Merchandising Operations
Ron Humphrys 46 Vice President 1992
Operations Support
Holger Jensen 49 Vice President 1994
Management Information Services
Stonie O'Briant 41 Vice President
Merchandising 1995
Leigh Stelmach 56 Executive Vice President 1989
Operations
6
All executive officers of the Company serve at the pleasure of the
Board of Directors. Messrs. Turner, Carpenter, Ennis, Fellers and
Stelmach have been employed by the Company as executive officers
for more than the past five years. The following is a brief
summary of the business experience of the executive officers:
Mr. Turner joined the Company in 1965 and was elected President and
Chief Executive Officer in 1977. Mr. Turner has served as Chairman
of the Board since January, 1989.
Mr. Carpenter joined the Company in 1981 as Vice
President--Administration and General Counsel. From 1987 to 1993,
Mr. Carpenter served as Vice President-- Administration, Chief
Counsel and Corporate Secretary. Mr. Carpenter was named Chief
Administrative Officer in 1993.
Mr. Carter joined the Company as Vice President--Development in
October 1994, and became Vice President--Distribution and MIS in
December of 1995. Prior to that he held several senior management
positions at Fred's, Inc. including Executive Vice President from
1993 to 1994, Senior Vice President of Operations from 1989 to
1992, and Senior Vice President of Administration and Distribution
from 1987 to 1989.
Mr. Ennis joined the Company as Vice President--Merchandising in
February 1988 and was named Vice President Merchandising Operations
in 1993. From April 1986 to February 1988, Mr. Ennis served as
Regional Merchandise Manager for McCrory/T.G.& Y. and as Regional
Vice President, from June 1985 to April 1986.
Mr. Fellers became Vice President--Distribution in March 1991. He
joined the Company in September 1989 as Director of Distribution.
From 1986 to September 1989, Mr. Fellers was Facility Manager of a
major distribution complex of McCrory Stores in Clinton, South
Carolina.
Mr. Hartshorn joined the Company as Vice President--Operations in
January 1992 and was named Vice President Merchandising Operations
in 1993. Prior to that he was Director--Store Operations for
McCrory Stores/T.G.& Y. During his career with McCrory/T.G.& Y.,
he held positions in store management as well as district and
regional field management. He served with McCrory/T.G.& Y. from
1967 until joining the Company in 1992.
Mr. Humphrys became Vice President--Operations Support in March
1993. From March 1992 to March 1993 he was Vice
President--Merchandise Development. He has worked for the Company
since 1971 and has held a variety of positions in merchandising.
Mr. Jensen joined the Company in his current capacity--Vice
President Management Information Services--in April, 1994. Prior
to joining the Company, he served as Vice President of Management
Information Systems for OW Office Warehouse, Inc. from 1991 until
1994. Prior to that he was Director of MIS for K's Merchandise
Mart from 1990 to 1991, a Management Consultant for Retail
Management Consulting from 1987 to 1990, and Consultant and Vice
President of MIS for Wickes Companies, Inc. from 1985 to 1987.
7
Mr. O'Briant became Vice President--Merchandising in 1995. Mr.
O'Briant joined the Company in 1991 as Hardlines Merchandise
Manager and in 1992 was named General Merchandise Manager. Before
joining Dollar General, Mr. O'Briant spent 17 years with Fred's,
Inc. where he served in a number of executive merchandising
positions.
Mr. Stelmach joined the Company in June 1989 as Vice President--
Merchandising/Operations and was named Executive Vice
President--Operations in 1993. Prior to that he was President and
Chief Operating Officer of Fred's Stores where he held various
senior management positions.
Item 2. Properties
As of January 31, 1996, the Company operated 2,416 retail stores
located in states as follows:
STATE NUMBER OF STORES STATE NUMBER OF STORES
Alabama 94 Mississippi 68
Arkansas 82 Missouri 149
Delaware 10 Nebraska 12
Florida 156 North Carolina 94
Georgia 106 Ohio 120
Illinois 124 Oklahoma 96
Indiana 133 Pennsylvania 83
Iowa 54 South Carolina 58
Kansas 56 Tennessee 175
Kentucky 157 Texas 277
Louisiana 90 Virginia 125
Maryland 31 West Virginia 66
Virtually all of the Company's stores are on leased premises. The
individual store leases vary as to their respective terms, rental
provisions and expiration dates. In 1996, the Company's store
rental expense was $56,057,000, or $3.66 per average square foot
of selling space. Leases for 1,724 locations contain option
renewals for additional terms ranging from one to five years. It
is the Company's policy to negotiate short-term leases so that it
can adjust quickly to shifts in population and business centers.
The Company owns a distribution complex and administrative offices
in Scottsville, Kentucky. The Company's total warehouse area in
Scottsville, Kentucky is approximately 590,000 square feet. The
Company owns distribution centers in Homerville, Georgia and
Ardmore, Oklahoma. The Ardmore facility began operation in
January 1995 and was subsequently expanded. The Homerville and
Ardmore facilities measure approximately 500,000 and 750,000 square
feet, respectively. During the second quarter of 1997, the Company
plans to begin construction on a fourth distribution facility
measuring approximately 750,000 square feet in South Boston,
Virginia.
The Company also maintains executive offices of approximately
21,000 square feet of leased space in Nashville, Tennessee. The
Company's five-year lease runs to September 1996 and has a
five-year renewal option.
8
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party, or to which any of
its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter
ended January 31, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
The range of the high and low closing prices of the Company's
common stock for each quarter during the two most recent fiscal
years as reported in 1996 on the New York Stock Exchange and as
reported in 1995 on the Nasdaq National Market System, is shown in
the table below. Prices have been restated to reflect a five-for-four
common stock split distributed April 26, 1996, and have been
rounded to the nearest one-eighth. All dividends, as adjusted,
have been rounded to the nearest whole cent. On February 1, 1995,
the Company's common stock was listed and began trading on the New
York Stock Exchange under the symbol "DG."
FISCAL FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
HIGH $22 5/8 $27 $27 1/4 $23 3/8
LOW 18 17 1/4 19 1/4 15 3/4
DIVIDEND AS
DECLARED .05 .05 .05 .05
DIVIDEND AS
ADJUSTED .04 .04 .04 .04
FISCAL FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
HIGH $16 7/8 $17 5/8 $19 1/4 $20 3/4
LOW 12 3/4 13 1/4 13 17 1/4
DIVIDEND AS
DECLARED .05 .05 .05 .05
DIVIDEND AS
ADJUSTED .03 .03 .03 .03
The approximate number of shareholders of the Company's common
stock as of April 1, 1996, was 3,300. Under the Company's credit
facilities, the Company is prevented from paying dividends per
annum in excess of 50% of its reported net income.
9
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY (Dollars in thousands except per share amounts and operating data)
JANUARY JANUARY JANUARY JANUARY JANUARY
31,1996 31,1995 31,1994 31,1993 31,1992
SUMMARY OF OPERATIONS:
Net Sales $1,764,188 $1,448,609 $1,132,995 $920,698 $754,426
Gross profit $ 503,619 $ 420,679 $ 325,998 $267,109 $215,481
Income before Taxes on Income $ 141,546 $ 118,288 $ 78,004 $ 58,222 $ 34,680
Net Income $ 87,818 $ 73,634 $ 48,557 $ 35,574 $ 21,502
Net Income as a % of Sales 5.0 5.1 4.3 3.9 2.9
PER SHARE RESULTS:
Net Income(a) $ 1.25 $ 1.07 $ .72 $ .54 $ .33
Net Income as Adjusted (b) $ 1.00 $ .85 $ .58 $ .43 $ .27
Cash Dividends per Common Share
As declared $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
As adjusted (c) $ 0.16 $ 0.12 $ 0.09 $ 0.07 $ 0.05
Weighted Average Shares (000)(a) 70,231 69,009 67,281 66,306 64,236
Weighted Average Shares (000)(b) 87,789 86,261 84,101 82,883 80,295
FINANCIAL POSITION:
Assets $ 679,996 $ 540,868 $ 397,237 $316,394 $237,346
Long-term Obligations $ 3,278 $ 4,767 $ 5,711 $ 7,013 $ 8,314
Shareholders' Equity $ 420,011 $ 323,756 $ 240,717 $189,765 $150,986
Inventory Turn 2.5 3.0 3.1 2.7 2.6
Return on Avg. Assets (%) 14.4 15.7 13.6 12.9 9.7
Return on Avg. Equity (%) 23.6 26.1 22.6 20.9 15.2
OPERATING DATA:
Company Owned Stores at
End of Period 2,416 2,059 1,800 1,617 1,522
Franchise Stores at
End of Period 10 11 13 14 14
Year-end Selling Sq. Footage (000) 15,302 12,726 10,724 9,341 8,522
Hardlines Sales % 70 66 65 64 60
Softlines Sales % 30 34 35 36 40
(a) Based on common and common equivalent shares before adjustment
for the April 26, 1996, five-for-four common stock split.
(b) Based on common and common equivalent shares as adjusted to
give retroactive effect to the April 26, 1996, five-for-four
common stock split.
(c) As adjusted to give retroactive effect to the April 26, 1996,
five-for-four common stock split.
10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This discussion and analysis contain both historical and forward-looking
information. The forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Actual results may differ
materially from those projected in the forward-looking statements.
Forward-looking statements may be significantly impacted by certain
risks and uncertainties, including, but not limited to, those
described in this Annual Report on Form 10-K for the year ended
January 31, 1996.
The following text contains references to years 1997, 1996, 1995
and 1994 which represent fiscal years ending or ended January 31,
1997, 1996, 1995 and 1994, respectively.
General
During 1996, Dollar General achieved record sales, record earnings,
and record new store growth levels. In addition, the Company
recorded the lowest net operating expense to net sales ratio ever
achieved. The Company completed the installation of new technology
in its Ardmore, Oklahoma distribution center, a major investment in
the Company's growth strategy. The Company's commitment to provide
consumable, basic merchandise at everyday low prices and to reduce
its expense-to-sales ratio is evidenced by its decision to
eliminate a solo direct-mail circular in 1996. For the eighth
consecutive year, the Company increased its total store units
ending the year with 2,416 stores. The Company opened 397 new
stores during 1996, the largest number of single-year new store
openings in the Company's history. Despite the start-up costs
associated with opening these new stores and the initial
inefficiencies of the Ardmore, Oklahoma distribution center, the
Company increased earnings per share by more than 15% for the ninth
consecutive year.
The Company opened 397 new stores in 1996 compared with 302 in 1995
and 251 in 1994. The 1996 new stores, net of 40 closed stores,
added 2,576,000 square feet to the Company's total sales space,
providing the Company with an aggregate of 15,302,000 selling
square feet at the end of the year. In 1996, the average store
measured 6,300 square feet compared with 6,200 in 1995 and 6,000 in
1994. The three states in which the greatest number of new stores
were opened during 1996 were Texas (120), Oklahoma (29), and North
Carolina (28). The approximate size of the average new store was
6,600 square feet, unchanged from 1995. In 1997, the Company
expects to open approximately 350 new stores with Texas being the
largest growth area. In 1996, the Company also remodeled or
relocated 311 stores compared with 297 in 1995 and 277 in 1994.
During the last three years, the Company has opened, remodeled, or
relocated 1,835 stores, accounting for more than 75% of the total
stores at year end.
The Ardmore distribution center was expanded from approximately
500,000 to about 750,000 square feet during 1996 enabling it to
service up to 1,400 stores and allowing for future store expansion
in the region. During 1997, the Company will begin construction of
its fourth distribution facility to support its continued rapid
store expansion program. This facility, to be constructed in South
Boston, Virginia, will measure approximately 750,000 square feet,
and will use the same technology implemented in the Ardmore
distribution center. The construction of this new distribution
facility will give the Company excess capacity during fiscal 1998
which should allow the Company to upgrade the technology in its
Scottsville, Kentucky and Homerville, Georgia distribution centers.
The Company
11
will also begin upgrading its merchandising and financial systems
through new technology and computer software solutions during 1997.
Additionally, the Company is considering upgrading its point-of-sale
systems to capture stock-keeping unit (SKU) information.
Organizationally, the Company is actively pursuing the placement of
two key executive officers. The Company has been in search of a
Chief Financial Officer (CFO) since the resignation of its former
CFO in August 1995. The Company intends to hire a President to
focus on the day-to-day operations of the business thereby
separating that function from the CEO and allowing the CEO to focus
on strategic planning and employee development.
For 1997, the Company has converted to a 52/53 week reporting
calendar. The fiscal year-end will be the Friday closest to
January 31 each year. Fiscal 1997 will end January 31, 1997. This
will give the Company more uniformity in its external and internal
reporting. The Company will restate 1996 on this adjusted basis
for comparative quarterly financial reporting during 1997. The
only significant shift between quarterly results will be the
allocation of advertising costs resulting from ad periods being
split between quarters on the 52/53 week calendar.
Results of Operations
Operating results, relative to the Company's performance over the
past several years, were impaired primarily as a result of the
inefficiencies associated with the start up of the Ardmore
distribution center. During the first half of 1996, the inefficient
distribution of merchandise to stores led to below standard
in-stock levels for basic merchandise and imbalances in inventory
positions resulting in lost sales. Also, some seasonal merchandise
for the Spring season was distributed to the stores too late for
proper presentation, resulting in carryover inventories. In
addition, the retailing environment in general was sluggish during
the third and fourth quarters, contributing to increased
inventories. These conditions collectively led to slower inventory
turns (2.5 for 1996 as compared with 3.0 and 3.1 for 1995 and 1994,
respectively) which required more merchandise to be financed
through short-term borrowings resulting in higher interest costs.
The Company also experienced higher levels of merchandise shrinkage
during 1996, which management believes is the result of higher
inventory levels in the stores. Total company retail shrinkage was
3.41% of sales in 1996 compared to 2.98% in 1995 and 3.06% in 1994.
The Company will implement several new shrinkage control programs
during 1997, as well as reduce inventory levels, all of which
should improve shrinkage results. The Company will continue its
program of interim physical inventories for stores that have had
high shrinkage history or that have characteristics of high
shrinkage stores. In addition, the Company will randomly select a
representative sample from all other stores not covered in the
above-mentioned program to be inventoried throughout 1997. Results
from these store inventories should reveal to management any
additional problem areas or trends that can be addressed
immediately. The 1997 company bonus program has been modified to
place greater emphasis on inventory shrinkage results.
In 1997, the Company will accelerate store deliveries from a bi-weekly
to a weekly schedule. Management believes that the weekly
inventory distribution should increase in-stock levels and improve
inventory turns. The Company does not anticipate a material
increase in distribution costs because distribution trailers will
carry merchandise to a greater number of stores in a single trip.
12
Furthermore, the accelerated deliveries should reduce the financing
cost of inventory.
In 1996, gross margin declined to 28.55% of sales from 29.04% in
1995 and 28.77% in 1994. As mentioned above, higher store
shrinkage primarily contributed to this decline. Because of these
1996 shrinkage results, the Company will reserve for shrinkage
during the first three quarters of 1997 at a higher rate than it
reserved in 1996. Customer demand has dictated an intensified
focus on everyday low pricing and consumable, basic merchandise,
which resulted in the Company's sales mix shifting to hardline
departments from softline departments during the year (70%
hardlines/30% softlines in 1996 versus 66% hardlines/34% softlines
in 1995). This led to lower margins on sales of current purchases
which also deteriorated the total gross margin percentage. During
1997, the sales mix should continue to shift towards hardlines.
Higher distribution costs associated with the start-up of the
Ardmore distribution center will contribute to lower beginning
inventory margins in 1997. Actual distribution costs during 1997
should trend lower as a percent of sales resulting from
efficiencies gained through the fully functional Ardmore facility.
Faster inventory turns through weekly deliveries and more
productive distribution facilities support the Company's role as a
customer-driven distributor of consumable basics.
Net operating expense as a percent of sales continued to decline
during 1996 as the Company eliminated its November circular. The
Company's only direct-mail ads in fiscal 1996 were in May, August
and December 1995. The Company intends to eliminate its August
back-to-school, solo direct-mail circular in 1997. Another
improvement in net operating expense during 1996 was lower self-insurance
expense primarily the result of improved claims
prevention and management. Reductions in losses from more focused
safety programs should continue to lower expenses as a percentage
of sales during 1997. Also, there was a reduction in employee
incentive-based compensation expense to reflect lower performance
levels. The Company reduced its store labor to sales ratio during
the last half of 1996 by better managing new store openings and
quickly adjusting to below-plan sales levels. Higher depreciation
resulting from the continued accelerated store growth rate
partially offset these gains.
The following table sets forth certain items in the consolidated
statements of income expressed as a percentage of net sales for the
periods indicated.
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Gross profit 28.5 29.0 28.8
Selling, general
and administrative
expense 20.1 20.7 21.7
Interest expense 0.4 0.2 0.2
Income before
taxes on income 8.0 8.1 6.9
Provision for
taxes on income 3.0 3.0 2.6
Net income 5.0% 5.1% 4.3%
13
Net Sales
Net sales for 1996 totaled $1.76 billion, an increase of 21.8%, or
$315.6 million more than the 1995 level of $1.45 billion. The
increase resulted from 357 net new stores operating during the year
and a same-store sales increase of 5.1%. The Company defines same
stores as those stores that were opened before the beginning of the
prior fiscal year and that have remained open throughout both the
prior and current fiscal years. While the same-store sales
increase in 1996 was substantial by industry comparisons, it was
the first year during the past five years that the Company did not
achieve double-digit growth. Management believes the decline in
same-store sales growth resulted primarily from operating
inefficiencies associated with the start-up of its new Ardmore
distribution center during the first seven months of the year and
an overall sluggish retailing environment, especially during the
fourth quarter.
The sales mix during 1996 shifted in favor of hardlines which
comprised 70% of sales compared with 66% in 1995 and 65% in 1994.
As the Company focuses more on consumable, basic merchandise, the
sales mix should continue to shift to hardlines. The Company
retrofitted 580 store layouts during 1996 to balance the
presentation of apparel and basic merchandise. The Company will
continue retrofitting stores in 1997.
Net sales for 1995 totaled $1.45 billion, an increase of 27.9%, or
$315.6 million more than the 1994 level of $1.13 billion. The
increase resulted from 259 net new stores opened during the year
and a same-store sales increase of 13.5%.
Gross profit
Gross profit for 1996 was $503.6 million, compared with $420.7
million in 1995 and $326.0 million in 1994. Gross profit as a
percent of sales was 28.5% for 1996 and 29.0% for 1995. This 50
basis point decline was primarily a result of higher store
inventory shrinkage, lower margins on sales of current purchases,
and a lower LIFO reserve credit which more than offset higher
margins on beginning inventories. Higher inventory levels during
the last half of 1996 contributed to the higher shrinkage. Lower
margins on sales of current purchases resulted primarily from the
shift in sales mix to hardlines along with continued price
rollbacks.
Gross profit as a percent of sales was 29.0% in 1995 and 28.8% in
1994. This 20 basis point increase was principally the result of
lower markdowns, an increased LIFO reserve credit and higher
markups on purchases which more than offset the effect of lower
markups on beginning inventories and reduced purchase discounts.
Selling, General, and Administrative Expense
During 1996, the Company realized a company record low net
operating expense to sales of 20.1%. Selling, general and
administrative expense for 1996 was $354.7 million compared with
$299.6 million or 20.7% of sales in 1995 and $245.8 million or
21.7% of sales in 1994. Total selling, general and administrative
expense increased 18.4% primarily from opening and operating 357
net new stores. The lower operating expense ratio achieved in 1996
resulted from (i) a reduction in employee incentive-based
compensation expense reflecting lower performance levels, (ii)
lower advertising costs through the elimination of the November
solo direct-mail circular, and (iii) lower self-insurance expense
primarily the result of improved claims prevention and management.
These improvements were partially offset by higher depreciation
related to accelerated new store openings and higher rent expense
as a percent of sales resulting from lower than anticipated sales
volumes.
14
Selling, general and administration expense for 1995 increased
21.9% principally as a result of opening 259 net new stores. Self
insurance expense, supplies, advertising costs, health insurance,
and utility expense in 1995 all declined as a percent of sales as a
result of cost controls and significant sales increases. These
decreases more than offset increases in depreciation and incentive
compensation.
Interest Expense
In 1996, interest expense increased 164.3% to $7.4 million from
$2.8 million in 1995. Interest expense was $2.2 million in 1994.
This significant increase was primarily the result of higher
average short-term borrowings throughout the year caused by slower
inventory turns, which required more merchandise to be financed
through short-term borrowings rather than through accounts payable.
Daily average total debt outstanding equaled $104.3 million during
1996 compared with $57.6 million in 1995 and $41.4 million in 1994.
Interest expense increased 27.7% in 1995 as a result of higher
interest rates and higher average short-term borrowings.
Provision for Taxes on Income
The effective income tax rates for 1996, 1995 and 1994 were 38.0%,
37.8% and 37.8%, respectively. The increase in the 1996 rate
resulted primarily from the expiration of the Targeted Jobs Tax
Credit program during the year. The Company expects its tax rate
to remain at 38.0% for 1997.
Return on Equity and Assets
The ratio of net earnings to average shareholders' equity was 23.6%
in 1996 compared with 26.1% in 1995 and 22.6% in 1994. Return on
average assets was 14.4% in 1996 compared with 15.7% in 1995 and
13.6% in 1994. Both of these ratios declined during 1996 as
compared with 1995 as a result of lower percentage earnings
increases. Return on average assets was also negatively impacted
by the significant inventory increases in 1996.
Liquidity and Capital Resources
Working Capital
Working capital increased to $262.5 million in 1996 compared with
$201.2 million in 1995, an increase of 30.5%. The year-end current
ratio for 1996 and 1995 was 2.0. Increases in merchandise
inventories and short-term borrowings offset decreases in cash and
accounts payable. Inventory turns declined in 1996 primarily the
result of distribution inefficiencies during the first half of the
year and lower than anticipated sales volumes during the last half
of the year.
1996 1995 1994
Cash and cash equivalents (000) $ 4,344 $ 33,045 $ 35,365
Working capital (000) $262,529 $201,190 $166,785
Current ratio 2.0 2.0 2.1
Inventory turn at retail 2.5 3.0 3.1
Cash Flows from Operating Activities
Net cash used by operating activities was $17.8 million in 1996
compared with net cash provided by operations of $43.3 million in
1995. Cash used to purchase merchandise inventories increased by
$132.3 million while accounts payable decreased $8.5 million, more
than offsetting cash generated from net earnings including cash
from depreciation and amortization. The higher level of inventory
15
was the result of 357 net new store openings, and slower inventory
turns as a result of distribution inefficiencies and lower than
expected sales volumes in 1996. Slower inventory turns also
required the Company to finance more merchandise through short-term
borrowings than accounts payable.
Net cash provided by operations equaled $43.3 million in 1995 as
compared with $36.2 million in 1994 principally as a result of
increased earnings. Inventories increased by $96.1 million as a
result of opening 259 net new stores in 1995 and the initial
stocking of the new Ardmore facility. Trade accounts payable
increased as a result of greater inventory purchases. Accrued
expenses increased due to larger reserves for self-insurance and
incentive compensation.
Cash Flows from Investing Activities
Capital expenditures in 1996 totaled $60.5 million compared with
$65.8 million in 1995 and $35.0 million in 1994. The Company
opened 397 new stores and relocated or remodeled 311 stores at a
cost of $33.3 million in 1996 compared with $25.9 million in 1995.
Capital expenditures during 1994 for new, relocated and remodeled
stores totaled $20.8 million.
Distribution related capital expenditures totaled $16.8 million in
1996 resulting primarily from expansions to existing distribution
facilities and the purchase of new trailers. In 1995, the Company
spent $23.3 million to complete the initial phase of the Ardmore
distribution center.
Capital expenditures during 1997 are projected to be $75 to $85
million. Approximately $30 million will be spent for the
construction of the South Boston, Virginia distribution center. An
additional $27 million will be spent on new, relocated and
remodeled stores. The remaining balance will be spent on new
information technology systems and distribution and transportation
needs. The Company expects that its capital expenditure
requirements will be met through internally generated funds
supplemented by short-term borrowings. Capital expenditures in the
last three years are summarized in the following table (amounts in
thousands except number of stores):
1996 1995 1994
New stores $26,290 $17,664 $12,478
Number of stores 397 302 251
Remodels/relocations $ 7,019 $ 8,374 $ 8,331
Number of stores 311 297 277
Distribution facilities and
equipment $16,816 $28,448 $ 2,162
Retail information systems $ 876 $ 1,916 $ 4,843
Other $ 9,520 $ 9,375 $ 7,156
Total $60,521 $65,777 $34,970
Cash Flows from Financing Activities
Total debt (including current maturities and short-term borrowings)
was $77.0 million in 1996, $35.8 million in 1995, and $25.0 million
in 1994. Long-term debt at January 31, 1996, was $3.3 million, a
decrease of $1.5 million from 1995. The ratio of total debt
(including current maturities and short-term borrowings) to equity
increased to 18.3% in 1996 from 11.1% in 1995 primarily resulting
from slower turning merchandise inventories. Average daily use of
short-term debt increased 93.2% to $99.6 million in 1996, primarily
as a result of the 37.1% increase in merchandise inventories.
16
Because of the significant impact of seasonal buying (e.g., Spring
and Christmas purchases), the Company's working capital
requirements vary significantly during the year. These working
capital requirements were financed by short-term borrowings under
the Company's $170 million revolving credit/term loan agreement and
short-term bank lines of credit totaling $135 million at January
31, 1996. The Company's maximum outstanding short-term debt in
1996 was $227.4 million in October 1995.
Seasonal working capital requirements will continue to be met
through cash flow provided by operations and supplemented by the
revolving credit/term loan facility and short-term bank lines of
credit. The revolving credit/term loan agreement is effective
until June 30, 1997, and, along with short-term bank lines of
credit, should be sufficient to cover the Company's maximum
projected short-term borrowing needs during 1997. Short-term bank
lines of credit will be up for renewal at various dates throughout
1997, and the Company expects substantially all of these agreements
will be renewed.
1996 1995 1994
Total debt/equity 18.3% 11.1% 10.4%
Long-term debt/equity 0.8% 1.5% 2.4%
Average daily use of debt:
Short-term (000) $ 99,564 $ 51,528 $34,102
Long-term (000) $ 4,718 $ 6,035 $ 7,335
Total (000) $104,282 $ 57,563 $41,437
Maximum outstanding
short-term debt (000) $227,397 $116,712 $70,909
Effects of Inflation and Changing Prices
The Company believes that inflation and/or deflation had a limited
impact on its overall operations during 1996, 1995 and 1994. In
particular, the effect of deflation on cost of goods sold has been
minimal as reflected by the small decline in LIFO reserves in 1996,
1995 and 1994.
Accounting Pronouncements
During October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company will adopt this standard during 1997, electing the
disclosure method of accounting. Additionally, the Company will
adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" during 1996.
The adoption of this standard is not expected to materially affect
1997 earnings.
17
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
At January 31, 1996 and 1995
(Dollars in thousands except per share amounts)
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 4,344 $ 33,045
Merchandise inventories 488,362 356,111
Deferred income taxes 11,989 11,785
Other current assets 11,548 9,212
Total current assets 516,243 410,153
Property and equipment, at cost:
Land 240 266
Buildings 35,050 33,693
Furniture, fixtures and equipment 207,338 153,401
242,628 187,360
Less accumulated depreciation 84,041 62,108
Net property and equipment 158,587 125,252
Other assets 5,166 5,463
$679,996 $540,868
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,536 $ 1,441
Short-term borrowings 72,146 29,600
Accounts payable 103,176 111,675
Accrued expenses 62,099 61,037
Income taxes 14,757 5,210
Total current liabilities 253,714 208,963
Long-term debt 3,278 4,767
Deferred income taxes 2,993 3,382
Commitments
Shareholders' equity:
Preferred stock, stated value $.50 per share:
Shares authorized: 5,000,000
Issued:1996-1,716,000; 1995-1,716,000 858 858
Common Stock, par value $.50 per share:
Shares authorized: 100,000,000
Issued:1996-85,524,000; 1995-67,942,000 42,762 33,971
Additional paid-in capital 303,609 283,323
Retained earnings 273,309 207,436
620,538 525,588
Less treasury stock, at cost:
Shares:1996-13,404,000; 1995-11,472,000 200,527 201,832
Total shareholders' equity 420,011 323,756
$679,996 $540,868
The accompanying notes are an integral part of the consolidated
financial statements.
18CONSOLIDATED STATEMENTS OF INCOME
January 31, 1996, 1995 and 1994
(Dollars in thousands except per share amounts)
1996 1995 1994
% of Net % of Net % of Net
Amount Sales Amount Sales Amount Sales
Net sales $1,764,188 100.0% $1,448,609 100.0% $1,132,995 100.0%
Cost of goods sold 1,260,569 71.5 1,027,930 71.0 806,997 71.2
Gross profit 503,619 28.5 420,679 29.0 325,998 28.8
Selling, general and
administrative 354,712 20.1 299,592 20.7 245,802 21.7
Operating profit 148,907 8.4 121,087 8.3 80,196 7.1
Interest expense 7,361 0.4 2,799 0.2 2,192 0.2
Income before taxes
on income 141,546 8.0 118,288 8.1 78,004 6.9
Provision for taxes
on income 53,728 3.0 44,654 3.0 29,447 2.6
Net income $ 87,818 5.0% $ 73,634 5.1% $ 48,557 4.3%
Net income per common
and common equivalent
share $ 1.25 $ 1.07 $ 0.72
Weighted average number
of common and common
equivalent shares
outstanding (000) 70,231 69,009 67,281
As adjusted to give
retroactive effect to
the five-for-four
common stock split
distributed April 26, 1996:
Net income per common
and common equivalent
share $ 1.00 $ 0.85 $ 0.58
Weighted average number
of common and common
equivalent shares
outstanding (000) 87,789 86,261 84,101
The accompanying notes are an integral part of the consolidated
financial statements.
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 31, 1996, 1995 and 1994
(Dollars in thousands except per share amounts)
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock
Balance, January 31, 1993 $ 0 $17,820 $ 57,246 $119,580 $ 4,881
Net income 48,557
5-for-4 stock split, September 17, 1993 4,150 (4,150)
5-for-4 stock split, April 15, 1994 5,278 (5,278)
Cash dividends, $.20 per common share (7,544)
Reissuance of treasury stock
under employee stock incentive
plans (790,104 common shares) 2,474 (1,306)
Tax benefit from exercise of options 5,796
Transfer to employee stock ownership
plan (12,979 common shares) 341 (22)
Balances, January 31, 1994 $ 0 $27,248 $ 65,857 $151,165 $ 3,553
Net income 73,634
5-for-4 stock split, March 6, 1995 6,723 (6,723)
Cash dividends, $.20 per common share (9,868)
Cash dividends, $.45 per preferred share (772)
Reissuance of treasury stock
under employee stock incentive
plans (1,296,797 common shares) 6,702 (2,205)
Tax benefit from exercise of options 10,581
Transfer to employee stock ownership
plan (25,314 common shares) 514 (43)
Issuance of preferred stock
(1,715,742 preferred shares) 858 199,669
Purchase of treasury stock
(8,578,710 common shares) 200,527
Balances, January 31, 1995 $858 $33,971 $283,323 $207,436 $201,832
Net income 87,818
5-for-4 stock split, April 26, 1996 8,552 (8,552)
Cash dividends, $.20 per common share (11,463)
Cash dividends, $.90 per preferred share (1,930)
Issuance of common stock under employee
stock incentive plans (462,436 shares) 231 4,435
issuance of treasury stock
under employee stock incentive
plans (747,853 common shares) 7,515 (1,305)
Tax benefit from exercise of options 7,932
Transfer to employee stock ownership
plan (15,979 common shares) 8 404
Balances, January 31, 1996 $858 $42,762 $303,609 $273,309 $200,527
The accompanying notes are an integral part of the consolidated
financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
Cash flows from operating activities:
Net income $ 87,818 $ 73,634 $ 48,557
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,245 17,263 11,729
Deferred income taxes (593) (1,302) (2,072)
Change in operating assets and liabilities:
Merchandise inventories (132,251) (96,069) (43,199)
Accounts payable (8,499) 30,637 17,013
Accrued expenses 1,062 13,131 10,236
Income taxes 9,547 6,773 (5,578)
Other (98) (810) (490)
Net cash (used in) provided by operating activities (17,769) 43,257 36,196
Cash flows used in investing activities:
Purchase of property and equipment (60,521) (65,777) (34,970)
Cash flows from financing activities:
Issuance of short-term borrowings 150,109 100,710 62,009
Repayments of short-term borrowings (107,563) (88,971) (54,009)
Repayments of long-term debt (1,394) (944) (1,300)
Payment of cash dividends (13,393) (10,640) (7,544)
Proceeds from exercise of stock options 13,486 8,907 3,780
Tax benefit from stock option exercises 7,932 10,581 5,796
Issuance of preferred stock 0 200,527 0
Purchase of treasury stock 0 (200,527) 0
Other 412 557 361
Net cash provided by financing activities 49,589 20,200 9,093
Net (decrease) increase in cash and
cash equivalents (28,701) (2,320) 10,319
Cash and cash equivalents, beginning of year 33,045 35,365 25,046
Cash and cash equivalents, end of year $ 4,344 $ 33,045 $ 35,365
Supplemental cash flow information
Cash paid during year for:
Interest $ 7,745 $ 2,760 $ 1,980
Income taxes $ 36,854 $ 28,345 $ 31,542
The accompanying notes are an integral part of the consolidated
financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
The Company sells general merchandise on a retail basis
through company-owned stores (2,416 at January 31, 1996)
located predominately in small towns in the midwestern and
southeastern United States. The Company has distribution
centers in Scottsville, Kentucky; Homerville, Georgia and
Ardmore, Oklahoma.
Basis of presentation
The following notes contain references to years 1996, 1995 and
1994 which represent fiscal years ended January 31, 1996,
January 31, 1995, and January 31, 1994. The consolidated
financial statements include all subsidiaries. Intercompany
transactions have been eliminated.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments
with an original maturity of three months or less.
Inventories
Inventories are stated at cost using the retail last-in,
first-out (LIFO) method which is not in excess of market. The
excess of current cost over LIFO cost was $20.6 million, $22.2
million and $27.0 million at January 31, 1996, 1995 and 1994,
respectively. The LIFO reserves decreased by $1.6 million in
1996, $4.8 million in 1995 and $1.3 million in 1994.
Preopening costs
Preopening costs for new stores are expensed as incurred.
Property and equipment
Property and equipment are recorded at cost. The Company
provides for depreciation of buildings and equipment on a
straight line basis over the following estimated useful
lives: buildings, 25 to 39 years; furniture, fixtures and
equipment, 5 to 10 years. Depreciation expense was $25.1
million, $17.1 million and $11.6 million in 1996, 1995 and
1994, respectively.
Insurance claims provisions
The Company retains a portion of the risk for its workers'
compensation, employee health insurance, general liability,
property, and automobile coverages. Accordingly, provisions
are made for the Company's actuarially determined estimates of
future claim costs for such risks. To the extent that
subsequent claim costs vary from those estimates, current
earnings are charged or credited.
22
Net income per common and common equivalent share
Net income per common and common equivalent share is based on
the weighted average number of shares of common stock
outstanding during each year, after giving effect to the
assumed exercise of all dilutive stock options using the
treasury stock method and the treatment of convertible
preferred stock shares as common stock equivalents. Net
income per common and common equivalent shares is also
presented in the accompanying consolidated statements of
income on an adjusted basis, which gives retroactive effect to
a five-for-four stock split declared March 25, 1996, for
shareholders of record on April 10, 1996, and paid on April
26, 1996.
Management estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
2. Cash and Short-Term Borrowings:
The cash management system provides for daily investment of
available balances and the funding of outstanding checks when
presented for payment.
Outstanding but unpresented checks totaling $45.2 million and
$48.3 million at January 31, 1996 and 1995, respectively, have
been included in accounts payable. Upon presentation for
payment, they will be funded through available cash balances
or the revolving credit/term loan agreement.
The Company had lines of credit with banks totaling $135.0
million at January 31, 1996, and $95.0 million at January 31,
1995. The lines are subject to periodic review by the lending
institutions which may increase or decrease the amounts
available. There were borrowings outstanding under these
lines of $7.1 million at January 31, 1996, and no borrowings
at January 31, 1995. Additionally, the Company had a $205.0
million facility at January 31, 1996, and a $145.0 million
facility at January 31, 1995, available for the issuance of
letters of credit. At January 31, 1996 and 1995, the Company
had outstanding letters of credit totaling $125.0 million and
$111.0 million, respectively.
The Company also has a $170.0 million revolving credit/term
loan agreement which expires in June 1997. Before
renegotiation in June 1995, $65.0 million was available under
this facility. Borrowings under this facility were $65.0
million and $29.6 million at January 31, 1996 and 1995,
respectively. Interest rates on amounts borrowed under this
agreement can float with the prime commercial lending rate or
can be fixed not to exceed the New York certificate of deposit
rate plus 0.375%, the Adjusted Eurodollar rate plus 0.25%, or
the Banker's Acceptance rate plus 0.45%, all for periods of up
to six months. The weighted average interest rates were 6.2%
and 6.9% at January 31, 1996 and 1995, respectively.
23
3. Accrued Expenses:
Accrued expenses consist of the following:
(in thousands) 1996 1995
Compensation and benefits $15,142 $20,560
Taxes (other than taxes on income) 9,381 6,512
Insurance 26,399 24,351
Other 11,177 9,614
Total accrued expenses $62,099 $61,037
4. Income taxes:
The provision for taxes consists of the following:
(in thousands) 1996 1995 1994
Currently payable:
Federal $46,758 $40,349 $27,680
State 7,563 5,607 3,839
Total currently payable 54,321 45,956 31,519
Deferred:
Federal (500) (1,103) (1,752)
State (93) (199) (320)
Total deferred (593) (1,302) (2,072)
Total provision $53,728 $44,654 $29,447
Deferred tax expense (credit) is recognized for the future tax
consequences of temporary differences between the amounts reported
in the Company's financial statements and the tax basis of its
assets and liabilities. Primary differences giving rise to the
Company's deferred tax assets and liabilities are as follows:
1996 1995
(in thousands) Assets Liabilities Assets Liabilities
Inventories $ 1,237 $ 1,177
Property and equipment $2,993 $3,382
Accrued insurance 10,752 10,125
Other 0 483
Total deferred taxes $11,989 $2,993 $11,785 $3,382
24
Reconciliation of the federal statutory rate and the effective
income tax rate follows:
1996 1995 1994
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.4 3.0 3.0
Tax credits (0.2) (0.7) (0.4)
Other (0.2) 0.5 0.2
Effective income tax rate 38.0% 37.8% 37.8%
5. Long-Term Debt:
Long-term debt consists of the following:
(in thousands) 1996 1995
Industrial revenue bonds payable
through 1998, 6.6% in 1996 and 1995 $1,000 $1,500
Mortgage note payable to Kentucky
Development Finance Authority through
1998, 6.4% (LIBOR plus 0.5%) in 1996
and 5.8% (LIBOR plus 0.5%) in 1995 3,111 3,889
Other 703 819
4,814 6,208
Less current portion 1,536 1,441
Net long-term debt $3,278 $4,767
Certain loan agreements contain restrictive covenants which, among
other things, require the Company to maintain minimum amounts of
tangible net worth and working capital and restrict payment of
dividends, repurchases of capital stock and additional borrowings.
Approximate maturities on long-term obligations in the years ending
January 31, 1997, through 2001 are (in millions): $1.5; $1.5; $0.8;
$0.8 and $0.1.
6. Commitments:
At January 31, 1996, the Company and certain subsidiaries were
committed for retail store space in the following fiscal years
under noncancelable operating lease agreements requiring
minimum annual rental payments of (in millions): 1997, $48.6;
1998, $46.4; 1999, $36.5; 2000, $22.4; 2001, $9.9 and $2.9 in
later fiscal years. Most leases included renewal options for
periods ranging from two to five years, and provisions for
contingent rentals based upon a percentage of defined sales
volume.
Rent expense under all operating store leases was as follows:
(in thousands) 1996 1995 1994
Minimum rentals $46,166 $35,318 $28,104
Contingent rentals 9,891 8,391 6,247
Total rentals $56,057 $43,709 $34,351
7. Employee Benefits:
The Company has two noncontributory defined contribution
retirement plans covering substantially all full-time
employees. Expense for these plans was approximately $3.0
million, $3.5 million and $2.6 million in 1996, 1995 and 1994,
respectively. The Company funds all benefit-plan costs as
accrued.
8. Capital Stock:
The authorized capital stock of the Company consists of common
stock and preferred stock.
On August 22, 1994, the Company exchanged 1,715,742 shares of
Series A Convertible Junior Preferred Stock for the 8,578,710
shares of Dollar General common stock owned by CTS, Inc., a
personal holding company controlled by members of the Turner
family, the founders of Dollar General. The Series A
Convertible Junior Preferred Stock was authorized by the Board
of Directors out of the authorized but unissued preferred
stock approved by the Company's shareholders in 1992. The
exchange, negotiated and recommended by a special committee of
the Company's Board of Directors, came in response to a
request from CTS, Inc. to consider a transaction to meet
estate planning needs of the Turner family. The Series A
Convertible Junior Preferred Stock is (i) convertible into
common stock pursuant to the terms and conditions set forth in
the Restated Articles of Incorporation and (ii) is voted with
the common stock on all matters presented to the holders of
common stock. The Series A Convertible Junior Preferred Stock
is not convertible at the option of the holder until August
22, 1996; however, under certain circumstances the preferred
stock may be converted into common stock prior to such date.
In the three years following August 22, 1996, the conversion
ratio increases from 90% of the initial exchange ratio of five
shares of common stock for each share of Series A Convertible
Junior Preferred Stock converted (adjusted for all intervening
stock splits or adjustments) to 100% of the initial exchange
ratio (as adjusted). Additionally, the Series A Convertible
Junior Preferred Stock is not transferrable by the holders
thereof.
9. Stock Option Plans:
The Company has stock option plans under which options to
purchase common stock may be granted to officers, directors
and key employees. Plan activity (as adjusted for the April
26, 1996, five-for-four common stock split) is summarized as
follows:
26
Shares Under Plans Option Price Per Share
Balance, January 31, 1993 5,667,856 $1.42 to $9.26
Granted 3,634,975 9.26 to 13.95
Exercised (1,727,118) 1.90 to 8.11
Canceled (299,152) 1.90 to 13.77
Balance, January 31, 1994 7,276,561 1.42 to 13.95
Granted 2,177,006 13.04 to 20.00
Exercised (2,221,839) 1.90 to 13.77
Canceled (436,477) 4.52 to 16.32
Balance, January 31, 1995 6,795,251 1.42 to 20.00
Granted 1,819,496 16.30 to 23.70
Exercised (1,547,976) 1.90 to 16.48
Canceled (121,139) 6.10 to 23.70
Balance, January 31, 1996 6,945,632 $1.42 to $23.70
At January 31, 1996 and 1995, options for 1,365,829 and 1,412,448
shares were exercisable. At January 31, 1996 and 1995, shares
available for granting of stock options under the Company's stock
option plans were 4,652,993 and 1,136,186 shares, respectively.
All unexercised options expire not later than the year 2006.
10. Quarterly Financial Data (unaudited):
The following is selected unaudited quarterly financial data
for the fiscal years ended January 31, 1996 and 1995. Amounts
are in thousands except per share data.
Quarter First Second Third Fourth Year
1996:
Net Sales $343,392 $408,204 $437,218 $575,374 $1,764,188
Gross Profit 96,281 113,945 128,365 165,028 503,619
Net Income 11,576 17,691 20,008 38,543 87,818
Net Income Per Share (a) 0.17 0.25 0.28 0.55 1.25
Net Income Per Share (b) 0.13 0.20 0.23 0.44 1.00
1995:
Net Sales $287,086 $317,323 $359,430 $484,770 $1,448,609
Gross Profit 79,980 87,708 105,579 147,412 420,679
Net Income 9,514 13,960 17,294 32,866 73,634
Net Income Per Share (a) 0.14 0.20 0.25 0.47 1.07
Net Income Per Share (b) 0.11 0.16 0.20 0.38 0.85
(a) Based on common and common equivalent shares before adjustment
for April 26, 1996, five-for-four common stock split.
(b) Based on common and common equivalent shares as adjusted to
give retroactive effect to the April 26, 1996, five-for-four
common stock split.
27
Cost of goods sold was determined in the first, second and
third quarters utilizing estimates of inventory shrinkage,
inflation and markdowns. Cost of goods sold for the fourth
quarter includes an adjustment of these estimates based upon
actual results. Such adjustments decreased fourth quarter
cost of goods sold by $1.4 million in 1996 and $1.4 million in
1995.
11. Subsequent Event:
The Company's Board of Directors authorized on March 25, 1996,
a five-for- four common stock split for shareholders of record
on April 10, 1996, which was paid April 26, 1996.
28
Report of Independent Accountants
To the Shareholders and
Board of Directors
Dollar General Corporation
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of
Dollar General Corporation and Subsidiaries as of January 31, 1996
and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three fiscal
years in the period ended January 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Dollar General Corporation and Subsidiaries as of
January 31, 1996 and 1995, and the consolidated results of their
operation and their cash flows for each of the fiscal years in the
period ended January 31, 1996 in conformity with generally accepted
accounting principles.
/s/Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 11, 1996, except as to the
information presented in Note 11
for which the date is April 26, 1996
29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by reference
from the information contained on pages 2 through 8 and page 23,
under the caption, "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," of the Company's Proxy Statement relating to
the Annual Meeting of Stockholders to be held on June 3, 1996.
Information regarding the Company's executive officers is contained
herein at Part I, pursuant to General Instruction G(3).
Item 11. Executive Compensation
Information regarding executive compensation is incorporated herein
by reference from the information under the captions "Executive
Compensation" and "Election of Directors - Compensation of
Directors" in the Company's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on June 3, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
This information is incorporated herein by reference from the
information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership by Officers and
Directors" in the Company's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on June 3, 1996.
Item 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference from the
information under the caption "Transactions with Management and
Others" of the Company's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on June 3, 1996.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
The following Financial Statements are incorporated
herein by reference from Part II, Item 8 of this report:
Consolidated Balance Sheets, January 31, 1996 and 1995
Consolidated Statements of Income for the years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, are inapplicable
or the information is included in the Consolidated Financial
Statements, and therefore, have been omitted.
(3) Exhibits:
3(a) Restated Articles of Incorporation, as amended
(incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended January 31, 1993).
3(b) Bylaws as amended February 1, 1993
(incorporated by reference to the Annual Report
on Form 10-K for the fiscal year ended January
31, 1993).
4 Articles V, VII and X of the Registrant's
Articles of Incorporation (included in Exhibit
3(a)).
10(a) Loan Agreement dated August 19, 1992, as
amended, by and among Dollar General
Corporation, Dolgencorp, Inc. And NationsBank
of North Carolina, N.A. (incorporated herein by
reference to the Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
10(b) Amendments to Loan Agreement dated December 23,
1993 and October 31, 1994 (incorporated herein
by reference to the Annual Report on Form 10-K
for the fiscal year ended January 31, 1995) and
Amendment to Loan Agreement dated June 14, 1995
(incorporated herein by reference to the
Quarterly Report on Form 10-Q for the second
quarter of 1996).
10(c) Exchange Agreement dated August 22, 1994, by
and among Dollar General Corporation,
Dolgencorp, Inc. and stockholders of C.T.S.,
Inc. (incorporated by reference to the
Registrant's Current Report on Form 8-K dated
August 22, 1994, Exhibit 10.1).
31
10(d) Registration Rights Agreement dated August 22,
1994, by and among Dollar General Corporation,
Turner Children Trust dated January 21, 1980,
Cal Turner, Jr., James Stephen Turner, Laura Jo
Dugas and Elizabeth Turner Campbell
(incorporated by reference to the Registrant's
current Report on Form 8-K dated August 22,
1994, Exhibit 10.2).
MANAGEMENT CONTRACT OR COMPENSATORY PLANS
10(e) Dollar General Corporation 1988 Outside
Directors' Stock Option Plan, as amended,
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 13,
1989).
10(f) Dollar General Corporation 1989 Employee Stock
Incentive Plan, as amended (incorporated herein
by reference to the Registrant's definitive
Proxy Statement for the Annual meeting of
Stockholders held June 13, 1989).
10(g) 1993 Employee Stock Incentive Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 7,
1993).
10(h) 1993 Outside Directors Stock Option Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 7,
1993).
10(i) 1995 Employee Stock Incentive Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual meeting of Stockholders held June 5,
1995).
10(j) 1995 Outside Directors Stock Option Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual meeting of Stockholders held June 5,
1995).
11 Statement re: Computation of Earnings Per Share.
13 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
(b) No report on Form 8-K was filed by the Company during the
last quarter of fiscal 1996.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DOLLAR GENERAL CORPORATION
Date: April 29, 1996 By:
CAL TURNER, JR., PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
NAME TITLE DATE
Chairman of the Board, April 29, 1996
CAL TURNER, JR. President and Chief
Executive Officer
(Principal Executive Officer)
Vice President, Chief April 29, 1996
BOB CARPENTER Administrative Officer,
(Acting Principal Financial
and Accounting Officer)
Director April 29, 1996
CAL TURNER
Director April 29, 1996
WALLACE N. RASMUSSEN
Director April 29, 1996
JOHN B. HOLLAND
Director April 29, 1996
WILLIAM S. WIRE, II
Director April 29, 1996
JAMES L. CLAYTON
Director April 29, 1996
DAVID M. WILDS
Director April 29, 1996
REGINALD D. DICKSON
Director April 29, 1996
BARBARA M. KNUCKLES
33
JAMES D. COCKMAN DIRECTOR April 29, 1996
34
INDEX TO EXHIBITS
3(a) Restated Articles of Incorporation, as amended (incorporated
by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
3(b) Bylaws as amended February 1, 1993
(incorporated by reference to the Annual Report
on Form 10-K for the fiscal year ended January
31, 1993).
4 Articles V, VII and X of the Registrant's
Articles of Incorporation (included in Exhibit
3(a)).
10(a) Loan Agreement dated August 19, 1992, as
amended, by and among Dollar General
Corporation, Dolgencorp, Inc. and NationsBank
of North Carolina, N.A. (incorporated herein by
reference to the Annual Report on Form 10-K for
the fiscal year ended January 31, 1993.)
10(b) Amendments to Loan Agreement dated December 23,
1993 and October 31, 1994 (incorporated herein
by reference to the Annual Report on Form 10-K
for the fiscal year ended January 31, 1995) and
Amendment to Loan Agreement dated June 14, 1995
(incorporated herein by reference to the
Quarterly Report on Form 10-Q for the second
quarter of 1996).
10(c) Exchange Agreement dated August 22, 1994, by
and among Dollar General Corporation,
Dolgencorp, Inc. and stockholders of C.T.S.,
Inc. (incorporated by reference to the
Registrant's Current Report on Form 8-K dated
August 22, 1994, Exhibit 10.1).
10(d) Registration Rights Agreement dated August 22,
1994, by and among Dollar General Corporation,
Turner Children Trust dated January 21, 1980,
Cal Turner, Jr., James Stephen Turner, Laura Jo
Dugas and Elizabeth Turner Campbell
(incorporated by reference to the Registrant's
current Report on Form 8-K dated August 22,
1994, Exhibit 10.2).
MANAGEMENT CONTRACT OR COMPENSATORY PLANS
10(e) Dollar General Corporation 1988 Outside
Directors' Stock Option Plan, as amended,
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 3,
1996).
10(f) Dollar General Corporation 1989 Employee Stock
Incentive Plan, as amended (incorporated herein
by reference to the Registrant's definitive
Proxy Statement for the Annual meeting of
Stockholders held June 13, 1989).
10(g) 1993 Employee Stock Incentive Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 7,
1993).
10(h) 1993 Outside Directors Stock Option Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders held June 7,
1993).
10(i) 1995 Employee Stock Incentive Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual meeting of Stockholders held June 5,
1995).
10(j) 1995 Outside Directors Stock Option Plan
(incorporated herein by reference to the
Registrant's definitive Proxy Statement for the
Annual meeting of Stockholders held June 5,
1995).
11 Statement re: Computation of Earnings Per
Share.
13 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
35
Exhibit 11
DOLLAR GENERAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Net Income Per Common Share
Net income per common share is based upon the actual weighted
average number of shares outstanding during each period plus the
assumed exercise of all dilutive stock options as follows:
Years ended January 31
(In thousands)
1996 1995 1994
Actual weighted average number of 71,525 77,019 80,837
shares outstanding during the
period Common Stock Equivalents:
Dilutive effect of stock options
using the "Treasury Stock Method" 2,860 3,256 3,264
1,715,742 Shares of Convertible
Preferred Stock Issued August
22, 1994 13,404 5,986 ------
Weighted Average Shares 87,789 86,261 84,101
The above amounts have been adjusted to reflect the five-for-four
common stock split declared on March 25, 1996, to shareholders of
record April 10, 1996, and paid on April 26, 1996.
36