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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, 1997
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 to be filed 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 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 14, 1997 was $2,723,858 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 14, 1997
was 108,567,948.
Documents Incorporated by Reference
Document Where Incorporated in Form of 10-K
Portions of the Registrant's Proxy Part III
Statement Relating to the
Annual Meeting of Stockholders
to be held on June 2, 1997
2
PART I
Item 1. Business
General
The following text contains references to years 1998, 1997, 1996,
and 1995 which represent fiscal years ending or ended January 30,
1998, January 31, 1997, January 31, 1996 and January 31, 1995,
respectively. The Company's fiscal year ends on the Friday closest
to January 31.
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 2,734 stores (as of January 31, 1997)
in 24 states. The 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! A Better Life . . . for
our Customers. A Superior Investment . . . for our Shareholders.
A Partnership in Total Development . . . with our Employees." 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,
consumable basic 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, and domestics as well as some packaged food
products. 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. As a result of the
holiday season, the Company's net sales and net income are higher
in the fourth quarter than other quarters. The first quarter is
usually the least profitable largely a result of the traditionally
slow after-Christmas sales period.
3
Merchandise
The merchandise sales mix of the Company has shifted by 9%
incrementally to hardlines' sales over the past three-year period
and 5% 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 and food items, an expanded selection of
brand-name merchandise and the continued lowering of prices. The
following table shows an approximate percentage of 1997, 1996, and
1995 Dollar General Store net sales by product category.
PERCENTAGE OF SALES
1997 1996 1995
HARDLINES 75% 70% 66%
SOFTLINES 25% 30% 34%
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 6% of the Company's purchases during 1997.
The Company buys quality first-run merchandise and currently
supplements approximately 5% of 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. Approximately
20% of the Company's softline merchandise and 40% of the hardline
merchandise in both 1997 and 1996 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 3,000 items. The majority of
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 merchants 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. The South Boston, Virginia
distribution center is scheduled to begin operations in June 1997.
The Dollar General Store:
The typical Dollar General Store has approximately 6,400 square
feet of selling space and is operated by a manager, an assistant
manager and two or more sales clerks. In 1997, the Company
realized total rental costs of $3.85 per average square foot of
selling space. Approximately 70% of the Dollar General Stores are
situated in communities with populations of 20,000 or less. As of
January 31, 1997, 67% of stores were located in strip shopping
centers, 15% were in downtown store buildings, and 18% were
freestanding buildings. The Company has not had difficulty
locating suitable store sites in the past, and the Company does not
anticipate experiencing difficulty in finding suitable locations in
the future. The Company's policy is to negotiate low-cost,
short-term leases, usually three to five years, with multiple
renewal options when available. These leases allow the Company to
close unsatisfactory locations at a minimal cost to the Company.
4
The Company opened 360 new stores in 1997, and expects to open
approximately 400 to 450 stores in 1998. The Company's store
growth is summarized in the following table:
BEGINNING STORES STORES NET STORES STORES AT
FISCAL YEAR OF YEAR OPENED CLOSED OPENED YEAR END
1997 2,416 360 42 318 2,734
1996 2,059 397 40 357 2,416
1995 1,800 302 43 259 2,059
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 1997 was 2.7% of net sales,
compared with 3.4% for 1996 and 3.0% for 1995. As a result of
increased shrinkage in 1996, management implemented a comprehensive
action plan to reduce shrinkage. The Company successfully expanded
its program by taking interim inventories to include a cross
section of all stores as opposed to the previous practice of
including only stores with substandard inventory control or stores
with a history of inventory control problems. This change allows
the Company to predict and react to emerging inventory control
trends. Also, the Company modified its employee cash bonus program
so that inventory shrinkage results are more heavily weighted in
determining bonus eligibility. The Company also accelerated the
delivery of merchandise to stores to every week from every two
weeks. The Company believes this change helped the stores and the
distribution centers reduce shrinkage by reducing the inventory
levels needed in stores and distribution centers.
At January 31, 1997, the Company served as wholesaler for eight
retail stores operating under the Dollar General name but owned by
third parties. Revenues from sales to these retail stores
accounted for less than 0.2% of the Company's net sales in 1997.
Employees:
At March 31, 1997, the Company and its subsidiaries employed
approximately 25,400 full- and part-time employees, including
regional managers, district managers, store managers, distribution
center and administrative personnel, compared with approximately
22,000 at March 31, 1996. None of the Company's employees is
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, variety, convenience, discount drug and other
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.
5
Executive Officers of the Company:
The names, ages and positions of the Company's executive officers
as of April 1, 1997, are as follows:
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
Cal Turner, Jr. 57 Chairman of the Board 1966
and Chief Executive Officer
Bruce Krysiak 46 President 1997
Bob Carpenter 49 Vice President, 1981
Chief Administrative Officer,
and Secretary
Michael Ennis 43 Vice President 1988
Real Estate and Store Development
Troy Fellers 55 Vice President 1991
Distribution
Tom Hartshorn 46 Vice President 1992
Merchandising Operations
Ron Humphrys 47 Vice President 1992
Logistics
Holger Jensen 50 Vice President 1994
Management Information Services
Stonie O'Briant 42 Vice President 1995
Merchandising
Philip Richards 49 Vice President 1996
Chief Financial Officer
Randy Sanderson 42 Vice President 1996
Controller
Leigh Stelmach 57 Executive Vice President 1989
All executive officers of the Company serve at the pleasure of the
Board of Directors. Messrs. Turner, Carpenter, Ennis, Fellers,
Humphrys 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. Krysiak joined the Company in January 1997 as President. Prior
to joining the Company, he served as Chief Operating Officer of The
Circle K Corporation, an owner and operator of convenience stores,
from May 1995 to April 1996. May 1995, Mr. Krysiak served as
Senior Vice President of Marketing for the Southland Corporation.
Mr. Krysiak also served three years as President and Chief
Executive Officer of Bayless Southwest, Inc., four years as
Chairman and Chief Executive Officer of Retail Planning Associates,
and four years as Chairman of Giant Joint Venture.
6
Mr. Carpenter currently serves as Vice President, Chief
Administrative Officer and Secretary. He 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 Vice President, and Chief Administrative
Officer in 1993.
Mr. Ennis was named Vice President--Real Estate and Store
Development in 1996. Mr. Ennis joined the Company as Vice
President--Merchandising in February 1988 and was named Vice
President Merchandising Operations in 1993.
Mr. Fellers became Vice President--Distribution in March 1991. He
joined the Company in September 1989 as Director of Distribution.
Mr. Hartshorn joined the Company as Vice President--Operations in
January 1992 and was named Vice President--Merchandising Operations
in 1993.
Mr. Humphrys became Vice President--Logistics 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., an office supply
retailer, from 1991 until 1994.
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.
Mr. Richards joined the Company in June 1996 as Vice
President Chief Financial Officer. Prior to joining the Company, he
served for five years as Vice President of MIS for Woolworth
Corporation.
Mr. Sanderson joined the Company in November 1996 as Vice
President Controller. Prior to November 1996, he served as Vice
President and Controller of Famous-Barr, a division of the May
Department Stores Company. During his 22-year career with the May
Department Stores Company, Mr. Sanderson had responsibility for a
variety of financial and accounting functions at both the corporate
and operating division level.
Mr. Stelmach joined the Company in June 1989 as Vice
President--Merchandising/ Operations and was named Executive Vice
President--Operations in 1993.
7
Item 2. Properties:
As of January 31, 1997, the Company operated 2,734 retail stores
located in 24 states. The following table sets forth the number of
stores located in each state.
STATE NUMBER OF STORES STATE NUMBER OF STORES
Alabama 105 Mississippi 72
Arkansas 93 Missouri 161
Delaware 10 Nebraska 13
Florida 175 North Carolina 108
Georgia 119 Ohio 141
Illinois 127 Oklahoma 117
Indiana 143 Pennsylvania 97
Iowa 58 South Carolina 70
Kansas 66 Tennessee 192
Kentucky 166 Texas 356
Louisiana 100 Virginia 140
Maryland 31 West Virginia 74
Substantially all of the Company's stores are located in leased
premises. Individual store leases vary as to their respective
terms, rental provisions and expiration dates. In 1997, the
Company's aggregate store rental expense was approximately $67.3
million, or $3.85 per average square foot of selling space.
Leases for 1,924 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 and close unsatisfactory
locations at a minimal cost to the Company.
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. In
addition, the Company owns distribution centers in Homerville,
Georgia and Ardmore, Oklahoma. The Homerville and Ardmore
facilities contain approximately 500,000 and 718,000 square feet of
warehouse space, respectively. During the second quarter of 1997,
the Company began construction of a distribution facility in South
Boston, Virginia containing approximately 718,000 square feet. This
facility will begin receiving merchandise from vendors in April
1997 and is scheduled to begin shipping merchandise in June 1997.
The Company's executive offices are located in approximately 23,000
square feet of leased space in Nashville, Tennessee. The Company's
lease expires in 2001. In November 1996, the Company announced
plans to begin constructing an administrative office complex in
Goodlettsville, Tennessee in 1998. The Company intends to
consolidate administrative operations currently located in its
Scottsville, Kentucky and Nashville, Tennessee offices into the new
facility. The Goodlettsville office complex will be approximately
20 miles from the existing Nashville office and approximately 50
miles from the Scottsville office.
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, 1997.
8
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters:
The Company's common stock is traded on the New York Stock Exchange
under the symbol "DG". The following table sets forth 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 on
the New York Stock Exchange. Prices have been restated to reflect
five-for-four common stock split distributed February 12, 1997, and
April 26, 1996 and have been rounded to the nearest one-eighth.
All dividends, as adjusted, have been rounded to the nearest whole
cent.
FISCAL FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
HIGH $21 1/4 $23 3/8 $27 3/4 $26 3/4
LOW 15 19 5/8 21 7/8 22 1/4
DIVIDEND AS
DECLARED .05 .05 .05 .05
DIVIDEND AS
ADJUSTED .04 .04 .04 .04
FISCAL FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
HIGH $18 1/8 $21 5/8 $21 3/4 $18 3/4
LOW 14 3/8 13 3/4 15 3/8 12 5/8
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 14, 1997, was 3,539. 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:
(Dollars in thousands; all per share amounts and operating data are
in amounts indicated).
JANUARY JANUARY JANUARY JANUARY JANUARY
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993
SUMMARY OF OPERATIONS:
Net sales $2,134,398 $1,764,188 $1,448,609 $1,132,995 $920,698
Gross profit $ 604,795 $ 503,619 $ 420,679 $ 325,998 $267,109
Income before taxes on income $ 185,017 $ 141,546 $ 118,288 $ 78,004 $ 58,222
Net income $ 115,100 $ 87,818 $ 73,634 $ 48,557 $ 35,574
Net income as a % of sales 5.4 5.0 5.1 4.3 3.9
PER SHARE RESULTS:
Net income(a) $ 1.30 $ 1.00 $ .85 $ .58 $ .43
Net income as Adjusted (b) $ 1.04 $ .80 $ .68 $ .46 $ .34
Cash dividends per common share
As declared $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
As adjusted $ 0.16 $ 0.13 $ 0.10 $ 0.07 $ 0.06
Weighted average shares(000) (a) 88,495 87,789 86,261 84,101 82,883
Weighted average shares(000) (b) 110,619 109,736 107,826 105,126 103,604
FINANCIAL POSITION:
Assets $ 718,147 $ 679,996 $ 540,868 $ 397,237 $316,394
Long-term obligations $ 2,582 $ 3,278 $ 4,767 $ 5,711 $ 7,013
Shareholders' equity $ 485,529 $ 420,011 $ 323,756 $ 240,717 $189,765
Inventory turn 2.8 2.5 3.0 3.1 2.7
Return on avg. assets % 16.5 14.4 15.7 13.6 12.9
Return on avg. equity % 25.4 23.6 26.1 22.6 20.9
OPERATING DATA:
Company stores at
end of period 2,734 2,416 2,059 1,800 1,617
Franchise stores at
end of period 8 10 11 13 14
Year-end selling
square foot (000) 17,480 15,302 12,726 10,724 9,341
Hardlines sales % 75 70 66 65 64
Softlines sales % 25 30 34 35 36
(a)Based on common and common equivalent shares before adjustment for the
February 12, 1997, five-for-four common stock split.
(b)Based on common and common equivalent shares as adjusted to give retroactive
effect to the February 12, 1997, five-for-four
common stock split.
(c)As adjusted to give retroactive effect to the February 12, 1997,
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 contains 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.
Although the Company believes the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, 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, general transportation and distribution delays or interruptions,
inventory risks due to shifts in market demand, changes in product mix, costs
and delays associated with building, opening and operating a new distribution
center and the risk factors listed in this Annual Report on Form 10-K for the
year ended January 31, 1997. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
The following text contains references to years 1998, 1997, 1996 and 1995
which represent fiscal years ending or ended January 31, 1998, 1997, 1996
and 1995, respectively. This discussion and analysis should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements, including the notes thereto.
GENERAL
During 1997, Dollar General achieved record sales, record earnings and
continued its rapid pace of new store openings. In addition, the Company
recorded a net operating expense to net sales ratio below 20% for the first
time.
For the ninth consecutive year, the Company increased its total store units.
By adding a net 318 units, the Company ended the year with 2,734 stores.
This increase in store units represents the second largest increase of new
store openings in the Company's history. Despite the start-up costs associated
with opening these stores, the minimum wage increase and increased freight
costs associated with the Company's move to weekly store deliveries, the
Company increased earnings per share by more than 15% for the tenth
consecutive year. In addition, the Company recorded net income in excess
of $100 million for the first time. Over the last five years, the Company
as posted a five-year average annual compound growth rate in net sales and
net income of 23% and 40%, respectively.
The Company opened 360 new stores in 1997 compared with 397 in 1996 and 302
in 1995. The 1997 new stores, net of 42 closed stores, added approximately
2,178,000 square feet to the Company's total sales space, providing the
Company with an aggregate of approximately 17,480,000 selling square feet at
the end of the year. In 1997, the average store measured 6,400 square feet
compared with 6,300 in 1996 and 6,200 in 1995. The three states in which
the greatest number of new stores were opened during 1997 were Texas (82),
Ohio (25), and Tennessee (23). In 1997, the approximate size of the
average new store was 6,400 square feet, compared with 6,600 in 1996.
In 1998, the Company anticipates opening approximately 400 to 450 new
stores within its current 24 state market and with a focus on store
openings within 250 miles of a distribution center. In 1997, the Company
remodeled or relocated 168 stores compared with 311 in 1996 and 297 in 1995.
During the last three years, the Company has opened, remodeled, or relocated
1,835 stores, accounting for approximately 67% of the total stores at year end.
11
In 1997, the Company focused on several key distribution initiatives. The
Company implemented weekly deliveries to all stores, eliminated split.
deliveries (i.e., where a store's weekly delivery is split among two or
more trucks) and began construction of a 718,000 square foot distribution
center in South Boston, Virginia.
In 1998, the Company will expand that focus. The South Boston Distribution
Center will begin to receive merchandise in April 1997, and June 1997, the
Company is scheduled to begin deliveries gradually in order to reduce the
potential for disruption in service to the stores. The Company will also
begin a two-year process of upgrading its distribution facility in
Scottsville, Kentucky. This year, the Company is expanding its Scottsville
Distribution Center from approximately 500,000 to 718,000 square feet and is
upgrading its sortation system which should be completed in time to support
the Christmas season.
In 1998, the Company will continue to work on the implementation of several
technology projects that began last year, including a new merchandising
system and a new general ledger system. In addition, point-of-sale (POS)
scanners will be installed in all stores this year. The POS rollout began
February 1, 1997, and all stores are scheduled to be using the POS system
by the end of 1998. Management believes the collection of stock-keeping-unit
(SKU) information through the POS system will enable the Company to better
balance store inventories, increase inventory turn and improve in-stock levels.
Two key executive officers joined the Company in 1997. The Company hired a
new Chief Financial Officer (CFO) to fill the opening left by the August 1995
resignation of its previous CFO. The President's position, which was
previously combined with the Chief Executive Officer's (CEO) position, was
filled in January 1997. The President will focus on the day-to-day
operations of the business allowing the CEO to focus on strategic planning,
employee development and other corporate matters.
RESULTS OF OPERATIONS
Operating results, as compared with the Company's performance last year,
were improved overall. The Company improved its timely distribution of
merchandise to stores which led to improved in-stock levels for basic
merchandise. The Company's primary merchandising objectives in 1997 were
to lower store inventories, reduce hanging apparel and create additional
space for more consumable items. The Company was successful in achieving
these objectives. In 1997, average store inventory decreased by 9.7%
while average store softlines inventory decreased 19.1% on a flat sales
comparison of softlines sales compared with the prior year. Customer demand
continues to dictate an intensified focus on everyday low pricing and
consumable basic merchandise, which resulted in the Company's sales mix
further shifting to hardlines from softlines during the year
(75% hardlines/25% softlines in 1997; 70% hardlines/30% softlines in 1996;
66% hardlines/34% softlines in 1995). Management believes that during 1998
the sales mix should continue to shift toward hardlines. In response, the
Company has designed a new store layout and product mix. The new store
layout reflects a 65%/35% hardlines to softlines space allocation versus
the current 50%/50% allocation. The new store layout allocates more space to
the faster-moving consumable merchandise. In addition, the Company will add
400 to 500 net new items. All stores opened during 1998 will reflect this
new format. The Company began reformatting its existing stores in March 1997
and expects to finish reformatting all stores by the end of 1998.
During 1997, inventory shrinkage improved significantly. Inventory shrinkage
declined to 2.7% of net sales from 3.4% in 1996. Management attributes much
of the improvement to a reduction in excess inventories and implementation
of several shrinkage reduction programs. The Company will continue these
programs in 1998. The Company will also initiate cycle inventories in 1998,
permitting the booking of actual inventory
12
shrinkage throughout the year instead of only at year-end. This process
should allow for the early identification of adverse trends that can be
addressed immediately.
In August 1996, the federal minimum wage law was changed to increase minimum
wage from $4.25 per hour to $4.75 per hour effective October 1, 1996 and
from $4.75 per hour to $5.15 per hour effective September 1, 1997. The Company
estimates that this change resulted in an increase in wage expense, above
otherwise expected levels, of approximately $2.1 to $2.3 million for 1997
and will result in an approximate $8.0 million increase in wage expense in
1998. The Company believes the financial impact of the minimum wage increase
to operations for 1997 was partially offset by increased sales and employee
productivity, and those factors will continue to partially offset the estimated
increase in 1998 wage expense.
The following table sets forth certain items in the consolidated statements
of income expressed as a percentage of net sales for the periods indicated.
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Gross profit 28.3 28.5 29.0
Selling, general
and administrative
expense 19.4 20.1 20.7
Interest expense 0.2 0.4 0.2
Income before
taxes on income 8.7 8.0 8.1
Provision for
taxes on income 3.3 3.0 3.0
Net income 5.4% 5.0% 5.1%
Net Sales:
Net sales totaled $2.13 billion for 1997, $1.76 billion for 1996
and $1.45 billion for 1995. These totals represent an increase of
21.0% in 1997, 21.8% in 1996 and 27.9% in 1995. These increases
resulted from 318 net new stores and a same-store sales increase of
8.2% in 1997, 357 net new stores and a same-store sales increase of
5.1% in 1996 and 259 net new stores and a same-store sales increase
of 13.5% in 1995. The Company defines same stores as those which
opened before the beginning of the prior fiscal year and have
remained open throughout both the prior and current fiscal years.
Based upon anticipated net new store growth and same-store sales
increases for 1998, management anticipates net sales growth in 1998
to be comparable with 1997 and 1996.
Gross Profit:
Gross profit for 1997 was $604.8 million, compared with $503.6
million in 1996 and $420.7 million in 1995. Gross profit as a
percent to net sales was 28.3% for 1997, 28.5% for 1996, and 29.0%
for 1995. The lower margin percent in 1997 resulted primarily from
the further shift in sales mix to hardlines along with continued
lower prices, which was partially offset by significantly lower
store inventory shrinkage. Management believes the gross margin
trend in 1997 will continue in 1998.
Selling, General and Administrative Expense:
During 1997, the Company realized a record low net operating
expense to net sales ratio of 19.4%. Selling, general and
administrative expense for 1997 was $415.1 million, with $354.7
million, or 20.1% of net sales in 1996 and $299.6 million or 20.7%
of net
13
sales, in 1995. Total selling, general and administrative expense
increased 17.3%, primarily from opening and operating 318 net new
stores. The lower operating expense ratio achieved in 1997
resulted from (i) improved labor productivity and store level
controls, (ii) lower advertising costs through the elimination of
the "back-to-school" direct-mail circular, and (iii) lower self-insurance
expense primarily the result of improved claims prevention and management.
Partially offsetting these improvements were increases to the Company's
incentive bonus costs. All other expense categories remained relatively flat
as a percent of sales.
Total selling, general and administrative expense for 1996
increased 18.4% primarily from opening and operating 357 net new
stores. The 20.1% net operating expense to net sales ratio in 1996
was the result of a reduction in employee incentive-based
compensation expense reflecting lower performance levels, lower
advertising costs and lower self-insurance expense. These
reductions 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.
Interest Expense:
In 1997, interest expense decreased 37% to $4.7 million as compared
with interest expense of $7.4 million in 1996 and $2.8 million in
1995. This significant decrease was primarily the result of lower
average short-term borrowings throughout the year caused by lower
inventory levels, which required less merchandise to be financed
through short-term borrowings. Daily average total debt
outstanding equaled $88.0 million during 1997 compared with $104.3
million in 1996 and $57.6 million in 1995.
Provision for Taxes on Income:
The effective income tax rates for 1997, 1996 and 1995 were 37.8%,
38.0% and 37.8%, respectively. The Company anticipates its 1998
tax rate to remain at 37.8%.
Return on Equity and Assets:
The ratio of net income to average shareholders' equity was 25.4%
in 1997 compared with 23.6% in 1996 and 26.1% in 1995. Return on
average assets was 16.5% in 1997 compared with 14.4% in 1996 and
15.7% in 1995. In 1997, both of these ratios improved versus 1996
as a result of higher percentage net income increases. Return on
average assets was also positively impacted by lower inventory
levels in 1997 compared with 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital:
Working capital increased to $280.1 million in 1997 compared with
$262.5 million in 1996 and $201.2 million in 1995, or an increase
of 6.7% in 1997 and 30.5% in 1996. The year-end current ratio
improved to 2.2 in 1997 from 2.0 both in 1996 and 1995.
1997 1996 1995
Cash and cash equivalents (000) $ 6,563 $ 4,344 $ 33,045
Working capital (000) $280,134 $262,529 $201,190
Current ratio 2.2 2.0 2.0
14
Cash Flows from Operating Activities:
Net cash provided by operating activities was $170.1 million in
1997 compared with net cash used by operations of $17.8 million in
1996 and net cash provided by operations of $43.3 million in 1995.
The cash generated from net income before depreciation and deferred
taxes coupled with the lower amount of cash used to purchase
merchandise contributed favorably to the year-end net cash provided
position. The lower level of inventory was the result of reduced
softlines purchases and increased sales of faster-turning
consumable merchandise.
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. In 1996, 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 income
including cash from depreciation and amortization. The higher
inventory level was the result of 357 net new stores openings, and
slower inventory turns as a result of distribution inefficiencies
and lower than expected sales volumes in 1996.
Cash Flows from Investing Activities
Capital expenditures in 1997 totaled $84.4 million compared with
$60.5 million in 1996 and $65.8 million in 1995. The Company
opened 360 new stores and relocated or remodeled 168 stores at a
cost of $27.0 million in 1997. Capital expenditures during 1996
and 1995 for new, relocated and remodeled stores totaled $33.3
million and $25.9 million, respectively.
Distribution-related capital expenditures totaled $38.6 million in
1997 resulting primarily from the costs associated with the
construction of the South Boston Distribution Center. In 1996, the
Company spent $16.8 million for expansion of existing distribution
facilities and the purchase of new distribution trailers. In 1995,
the Company spent $23.3 million to complete the initial phase of
the Ardmore, Oklahoma Distribution Center.
15
Capital expenditures during 1998 are projected to be $100 to $105
million. This includes approximately $41 million for new stores and
new fixtures to support the new prototype in all stores; $45
million for the upgrades of the current distribution centers and
the start of a fifth distribution center; and $15 million for the
new POS system and various technology projects. The Company
believes that its capital expenditure requirements will be met
through internally generated funds. Capital expenditures in the
last three years are summarized in the following table.
(amounts in thousands except number of stores)
1997 1996 1995
New stores $22,321 $26,290 $17,664
Number of stores 360 397 302
Remodels/relocations $ 4,630 $ 7,019 $ 8,374
Number of stores 168 311 297
Distribution facilities andequipment $38,640 $16,816 $28,448
Retail information systems $ 7,837 $ 876 $ 1,916
Other $10,983 $ 9,520 $ 9,375
Total $84,411 $60,521 $65,777
Cash Flows from Financing Activities:
Total debt at year-end (including current maturities and
short-term borrowings) was $43.1 million in 1997, $77.0 million in
1996, and $35.8 million in 1995. Long-term debt at January 31,
1997, was $2.6 million, a decrease of $0.7 million from 1996. The
ratio of total debt (including current maturities and short-term
borrowings) to equity decreased to 8.9% in 1997 from 18.3% in 1996
primarily as a result of lower average borrowing levels and
interest rates. Average daily use of short-term debt decreased
11.7% to $88.0 million in 1997, primarily as a result of lower
inventory levels throughout the year.
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 $170 million at
January 31, 1997. The Company's maximum outstanding short-term
indebtedness in 1997 was $184.7 million in November 1996.
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, 1998, and, along with short-term bank lines of
credit, should be sufficient to cover the Company's maximum
projected short-term borrowing needs during 1998. Short-term bank
lines of credit will be up for renewal at various dates throughout
1998, and the Company currently anticipates all of these
agreements will be renewed.
1997 1996 1995
Total debt/equity 8.9% 18.3% 11.1%
Long-term debt/equity 0.5% 0.8% 1.5%
Average daily use of debt:
Short-term (000) $ 87,952 $ 99,564 $ 51,528
Long-term (000) $ 2,930 $ 4,718 $ 6,035
Total (000) $ 90,882 $104,282 $ 57,563
Maximum outstanding
short-term debt (000) $184,725 $227,397 $116,712
16
EFFECTS OF INFLATION AND CHANGING PRICES
The Company believes that inflation and/or deflation had a limited
impact on its overall operations during 1997, 1996 and 1995. In
particular, the effect of deflation on cost of goods sold has been
minimal as reflected by the small decline in LIFO reserves in
1997, 1996 and 1995.
ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" for the year ended January 30, 1998.
This accounting pronouncement requires the disclosure of basic
and diluted earnings per share. The Company believes that, upon
adoption, diluted earnings per share will approximate earnings per
share as previously reported. Because the concept of basic
earnings per share does not include the impact of common stock
equivalents, such as preferred stock and stock options, basic
earnings per share will be significantly higher than diluted
earnings per share.
17
Item 8. Financial Statements and Supplementary Data
Assets
Current assets:
Cash and cash equivalents $ 6,563 $ 4,344
Merchandise inventories 476,103 488,362
Deferred income taxeS 3,689 11,989
Other current assets 18,244 11,548
Total current assets 504,599 516,243
Property and equipment, at cost:
Land 240 240
Buildings 39,828 35,050
Furniture, fixtures and equipment 281,849 207,338
321,917 242,628
Less accumulated depreciation 113,381 84,041
Net property and equipment 208,536 158,587
Other assets 5,012 5,166
$718,147 $679,996
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,030 $ 1,536
Short-term borrowings 38,469 72,146
Accounts payable 103,523 103,176
Accrued expenses 70,441 62,099
Income taxes 10,002 14,757
Total current liabilities 224,465 253,714
Long-term debt 2,582 3,278
Deferred income taxes 5,571 2,993
Commitments
Shareholders' equity:
Preferred stock, stated value $.50 per share:
Shares authorized: 5,000,000
Issued:1997-1,716,000; 1996-1,716,000 858 858
Common Stock, par value $.50 per share:
Shares authorized: 200,000,000
Issued:1997-106,210,000; 1996-85,524,000 53,105 42,762
Additional paid-in capital 329,948 303,609
Retained earnings 302,145 273,309
686,056 620,538
Less treasury stock, at cost:
Shares:1997-16,755,000; 1996-13,404,000 200,527 200,527
Total shareholders' equity 485,529 420,011
$718,147 $679,996
The accompanying notes are an integral part of the consolidated
financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
For the years ended January 31, 1997, 1996 and 1995
(Dollars in thousands except per share amounts)
1997 1996 1995
% of Net % of Net % of Net
Amount Sales Amount Sales Amount Sales
Net sales $2,134,398 100.0% $1,764,188 100.0% $1,448,609 100.0%
Cost of goods sold 1,529,603 71.7 1,260,569 71.5 1,027,930 71.0
Gross profit 604,795 28.3 503,619 28.5 420,679 29.0
Selling, general and
administrative 415,119 19.4 354,712 20.1 299,592 20.7
Operating profit 189,676 8.9 148,907 8.4 121,087 8.3
Interest expense 4,659 0.2 7,361 0.4 2,799 0.2
Income before taxes
on income 185,017 8.7 141,546 8.0 118,288 8.1
Provisions for taxes
on income 69,917 3.3 53,728 3.0 44,654 3.0
Net income $ 115,100 5.4% 87,818 5.0% $ 73,634 5.1%
Net income per common
and common equivalent
share $ 1.30 $ 1.00 $ 0.85
Weighted average number
of common and common
equivalent shares
outstanding (000) 88,495 87,789 86,261
As adjusted to give
retroactive effect to
the five-for-four
common stock split
distributed February 12, 1997:
Net income per common
and common equivalent
share $ 1.04 $ 0.80 $ 0.68
Weighted average number
of common and common
equivalent shares
outstanding (000) 110,619 109,736 107,826
The accompanying notes are an integral part of the consolidated financial
statements.
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended January 31, 1997, 1996 and 1995
(Dollars in thousands except per share amounts)
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock
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, $0.20 per common share (9,868)
Cash dividends, $0.45 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, $0.20 per common share (11,463)
Cash dividends, $1.13 per preferred share (1,930)
Issuance of common stock under employee
stock incentive plans (462,436 shares) 231 4,435
Reissuance 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
Net Income 115,100
5-for-4 stock split, February 12, 1997 10,621 (10,621)
Cash dividends, $0.20 per common share (14,442)
Cash dividends, $ 1.41 per preferred share (2,413)
Issuance of common stock
under employee stock incentive
plans (1,416,781 common shares) 709 17,019
Repurchase of common stock (2,000,000 shares) (1,000) (58,788)
Tax benefit from exercise of options 8,809
Transfer to employee stock ownership
plan (26,347 common shares) 13 511
Balances, January 31, 1997 $858 $ 53,105 $329,948 $302,145 $200,527
The accompanying notes are an integral part of the consolidated
financial statements.
20
1997 1996 1995
Cash flows from operating activities:
Net income $115,100 $ 87,819 $ 73,634
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 30,965 25,245 17,263
Deferred income taxes 10,878 (593) (1,302)
Change in operating assets and liabilities:
Merchandise inventories 12,259 (132,251) (96,069)
Accounts payabls 347 (8,499) 30,637
Accrued expenses 8,342 1,062 13,131
Income taxes (4,755) 9,547 6,773
Other (3,045) (98) (810)
Net cash provided by (used in)
operating activities 170,091 (17,769) 43,257
Cash flows used in investing activities:
Purchase of property and equipment (84,411) (60,521) (65,777)
Cash flows from financing activities:
Issuance of short-term borrowings 193,692 150,109 100,710
Repayments of short-term borrowings (227,369) (107,563) (88,971)
Issuance of long-term debt 1,677
Repayments of long-term debt (1,879) (1,394) (944)
Payment of cash dividends (16,856) (13,393) (10,640)
Proceeds from exercise of stock options 17,729 13,486 8,907
Repurchase of common stock (59,788)
Tax benefit from stock option exercises 8,809 7,932 10,581
Issuance of preferred stock 200,527
Purchase of treasury stock (200,527)
Other 524 412 557
Net cash (used in) provided by financing activities (83,461) 49,589 20,200
Net increase (decrease) in cash and
cash equivalents 2,219 (28,701) (2,320)
Cash and cash equivalents, beginning of year 4,344 33,045 35,365
Cash and cash equivalents, end of year $ 6,563 $ 4,344 $ 33,045
Supplemental cash flow information
Cash paid during year for:
Interest $ 5,761 $ 7,745 $ 2,760
Income taxes $ 55,646 $ 36,854 $ 28,345
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
stores (2,734 at January 31, 1997) located predominantly in small
towns in the midwestern and southeastern United States. The
Company has distribution centers in Scottsville, Kentucky;
Homerville, Georgia; Ardmore, Oklahoma and South Boston, Virginia.
Basis of presentation
The following notes contain references to years 1997, 1996 and 1995
which represent fiscal years ended January 31, 1997, 1996 and 1995,
respectively. 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 $18.4 million, $20.6 million and
$22.2 million at January 31, 1997, 1996 and 1995, respectively.
The LIFO reserves decreased by $2.2 million in 1997, $1.6 million
in 1996 and $4.8 million in 1995.
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 $30.8 million, $25.1 million and $17.1
million in 1997, 1996 and 1995, respectively.
Insurance claims provisions:
In 1996, the Company established The Greater Cumberland Insurance
Company, a Vermont-based, wholly-owned subsidiary captive insurance
company. This insurance company charges Dollar General's
subsidiary companies competitive premium rates to insure worker's
compensation and non-property general liability claims risk. The
insurance company is adequately funded and currently insures no
unrelated risk.
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.
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 January 13, 1997, for
shareholders of record on February 3, 1997, and paid on February
12, 1997.
22
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 $45.9 million and $45.2
million at January 31, 1997 and 1996, respectively, have been
included in accounts payable. Upon presentation for payment, they
will be funded through available cash balances or the Company's
revolving credit/term loan agreement.
The Company had lines of credit with banks totaling $170.0 million
at January 31, 1997, and $135.0 million at January 31, 1996. 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 $8.5 million at January
31, 1997, and $7.1 million at January 31, 1996.
The Company also has a $170.0 million revolving credit/term loan
agreement which expires in June 1998. Borrowings under this
facility were $30.0 million and $65.0 million at January 31, 1997
and 1996, 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 5.6% and 6.2% at
January 31, 1997 and 1996, respectively.
Additionally, the Company had a $260.0 million facility at January
31, 1997, and a $205.0 million facility at January 31, 1996,
available for the issuance of letters of credit. At January 31,
1997 and 1996, the Company had outstanding letters of credit
totaling $59.3 million and $125.0 million, respectively.
3.Accrued Expenses:
Accrued expenses consist of the following:
(in thousands) 1997 1996
Compensation and benefits $24,976 $15,142
Taxes (other than taxes on income) 8,392 9,381
Insurance 25,785 26,399
Other 11,288 11,177
Total accrued expenses $70,441 $62,099
23
4.Income taxes
The provision for taxes consists of the following:
(in thousands) 1997 1996 1995
Currently payable:
Federal $54,015 $46,758 $40,349
State 5,604 7,563 5,607
Total currently payable 59,619 54,321 45,956
Deferred:
Federal 8,710 (500) 1,103)
State 1,588 (93) (199)
Total deferred 10,298 (593) (1,302)
Total provision $69,917 $53,728 $44,654
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:
1997 1996
(in thousands) Assets Liabilities Assets Liabilities
Inventories $ 956 $ 1,237
Property and equipment $5,432 $2,993
Accrued insurance 2,008 10,752
Other 725 139
Total deferred taxes $3,689 $5,571 $11,989 $2,993
Reconciliation of the federal statutory rate and the effective income tax
rate follows:
1997 1996 1995
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 2.8 3.4 3.0
Tax credits (0.2) (0.7)
Other (0.2) 0.5
Effective income tax rate 37.8% 38.0% 37.8%
5. Long-Term Debt:
Long-term debt consists of the following:
(in thousands) 1997 1996
Mortgage note payable to Kentucky Development
Finance Authority through 1998,
6.4% (LIBOR plus 0.5%) in 1997 and
5.8% (LIBOR plus 0.5%) in 1996 2,333 3,111
Other 2,279 1,703
4,612 4,814
Less current portion 2,030 1,536
Net long-term debt $2,582 $3,278
24
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, 1998, through 2001 are (in millions): $2.0; $1.4; $1.0;
$0.1 and $0.1.
6.Commitments:
At January 31, 1997, 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): 1998, $55.7; 1999, $41.5;
2000, $24.1; 2001, $8.7; 2002, $2.9 and $1.4 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) 1997 1996 1995
Minimum rentals $57,054 $46,166 $35,318
Contingent rentals $10,232 9,891 8,391
Total rentals $67,286 $56,057 $43,709
7.Employee Benefits:
The Company has two noncontributory defined contribution retirement
plans covering substantially all full-time employees. Expense for
these plans was approximately $4.7 million, $3.0 million and $3.5
million in 1997, 1996 and 1995, 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 C.T.S, 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 C.T.S, 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 convertible at the option of the holder. During 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 transferable by
the holders thereof.
25
9.Stock Incentive Plans:
The Company has established stock incentive plans under which
options to purchase common stock may be granted to executive
officers, directors, key employees and non-employee directors.
All options granted in 1997 and 1996, under the 1995 Employee Stock
Incentive Plan, the 1995 Outside Directors Stock Option Plan, the
1993 Employee Stock Incentive Plan and the Dollar General
Corporation 1989 Employee Stock Incentive Plan, were non-qualified
stock options issued at a price equal to fair market value of the
Company's common stock on the date of grant. The option term is
ten years and options vest in nine and one-half years from the date
of grant for employees and one year in the case of non-employee
directors. However, if certain performance criteria established by
the Corporate Governance and Compensation Committee are attained,
the vesting of these options will be accelerated.
Although the plans permit various types of stock-based compensation
to be awarded, in addition to stock options, the Company has issued
only stock options under these plans.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans.
The exercise price of options awarded under these plans has been
equal to the fair market value of the underlying common stock on
the date of grant. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation
cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards
under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, net income and earnings per share would
have been reduced to the pro forma amounts indicated in the table
below.
(amounts are in thousands except per share data) 1997 1996
Net income - as reported $115,100 $87,818
Net income - pro forma $111,618 $86,281
Earnings per share - as reported $ 1.04 $ 0.80
Earnings per share - pro forma $ 1.01 $ 0.79
Earnings per share have been adjusted for the February 12, 1997,
five-for-four common stock split.
The pro forma effects on net income for 1997 and 1996 are not
representative of the pro forma effect on net income in future
years because they do not take into consideration pro forma
compensation expense related to grants made prior to 1996. The
fair value of options granted during 1997 and 1996 is $6.86 and
$5.53 per share, respectively.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions:
1997 1996
Expected divided yield 0.7% 0.7%
Expected stock price volatility 40.0% 40.0%
Weighted average risk-free interest rate 6.0% 6.6%
Expected life of options (years) 3.0 3.0
26
The summary of the status of all of the Company's stock incentive plans as of
January 31, 1997, 1996 and 1995 and changes during the years then ended is
presented below:
Range of Option Weighted Average
Shares Under Plans Prices Per Share Exercise Price
Balance, January 31, 1994 9,581,507 $ 1.14 to $12.19 - -
Granted 2,397,778 10.43 to 16.00 - -
Exercised (2,777,135) 1.53 to 11.02 - -
Canceled (527,988) 3.62 to 13.06 - -
Balance, January 31, 1995 8,674,162 1.14 to 16.00 $10.26
Granted 2,306,109 13.04 to 18.96 16.87
Exercised (1,934,728) 1.53 to 13.18 8.95
Canceled (361,324) 4.87 to 18.96 11.67
Balance, January 31, 1996 8,684,219 1.14 to 18.96 12.99
Granted 3,089,872 19.20 to 24.70 21.39
Exercised (1,771,397) 1.53 to 18.96 11.01
Canceled (831,308) 1.74 to 24.30 14.24
Balance, January 31, 1997 9,171,386 $ 1.14 to $24.70 $17.19
At January 31, 1997 and 1996, options for 1,646,345 and 1,707,285
shares were exercisable, respectively. The following table
summarizes information about stock options outstanding at January
31, 1997:
Options Outstanding Options Exercisable
Number Weighted Average Number Weighted
Range of Outstanding Remaining Weighted Average Exercisable Exercise
Exercise Prices at 1/31/97 Contracted Life Exercise Price at 1/31/97 Price
$ 1.14 to $10.00 2,941,601 6.1 years $ 9.15 1,199,838 $ 8.00
10.01 to 17.00 3,014,105 7.8 15.30 388,479 13.23
17.01 to 24.70 3,215,680 9.4 21.60 58,028 17.81
$17.01 to $24.70 9,171,386 7.8 years $17.18 1,646,345 $10.76
At January 31, 1997 and 1996, shares available for granting of stock options
under the Company's stock option plans were 3,845,136 and 5,816,241 shares,
respectively. All unexercised options expire not later than the year 2007.
27
10.Quarterly Financial Data (unaudited):
The following is selected unaudited quarterly financial data for the fiscal
years ended January 31, 1997 and 1996. Amounts are in thousands except per
share data.
Quarter First Second Third Fourth Year
1997:
Net Sales $455,856 $494,389 $508,977 $675,176 $2,134,398
Gross Profit 123,374 133,728 148,634 199,059 604,795
Net Income 15,024 21,885 26,642 51,549 115,100
Net Income Per Share (a) $ 0.17 $ 0.25 $ 0.30 $ 0.59 $ 1.30
Net Income Per Share (b) $ 0.14 $ 0.20 $ 0.24 $ 0.47 $ 1.04
1996: (c)
Net Sales $374,520 $403,719 $429,898 $556,051 $1,764,188
Gross Profit 104,758 113,074 125,898 159,889 503,619
Net Income 12,314 17,524 19,200 38,780 87,818
Net Income Per Share (a) $ 0.14 $ 0.20 $ 0.22 $ 0.44 $ 1.00
Net Income Per Share (b) $ 0.11 $ 0.16 $ 0.18 $ 0.35 $ .80
(a)Based on common and common equivalent shares before adjustment
for the February 12, 1997, five-for-four common stock split.
(b)Based on common and common equivalent shares as adjusted to give
retroactive effect to the February 12, 1997, five-for-four common
stock split.
(c)The quarterly financial data presented for the quarters ended
May 5, August 4 and November 3, 1995 and January 31, 1996 has been
restated to retroactively reflect the adoption of a retail 52/53
week reporting calendar effective February 1, 1996. For the
quarterly periods ended April 30, July 31, and October 31, 1995 and
January 31, 1996, the Company reported net income of $11,576,000,
$17,691,000, $20,008,000 and $38,543,000, respectively, or $0.11,
$0.16, $0.18 and $0.35, respectively, per common and common
equivalent share, as restated for the February 13, 1997 stock
split.
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 $4.9
million in 1997 and by $1.4 million in 1996.
11.Subsequent Event:
On February 12, 1997, the Company effected a five-for-four
common stock split payable to shareholders of record on
February 3, 1997.
28
Consent 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, 1997
and 1996, 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, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three fiscal years
in the period ended January 31, 1997 in conformity with general
accepted accounting principles.
/S/Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 5, 1997
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 the Company's directors is incorporated
herein by reference from the information contained under the
caption, "Section 16(a) Beneficial Ownership Reporting
Compliance," in the Company's Proxy Statement relating to the
Annual Meeting of Stockholders to be held on June 2, 1997.
Information regarding the Company's executive officers is contained
herein in Part I pursuant to General Instruction G(3).
Item 11. Executive Compensation
Information regarding executive compensation is incorporated herein
by reference from the information contained 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, 2, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
This information is incorporated hereby by reference from the
information contained 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 2, 1997.
Item 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference from the
information contained under the caption "Transactions with
Management and Others" in the Company's Proxy Statement relating to
the Annual Meeting of Stockholders to be held on June 2, 1997.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) (1) Consolidated Financial Statements: See Item 8
(2)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: See Index to exhibits on pages 33 to 34.
(b)No report on Form 8-K was filed by the Company during the
quarter ended January 31, 1997.
31
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 28, 1997 By:/s/ Cal Turner, Jr.
CAL TURNER, JR.,
CHIEF EXECUTIVE OFFICER
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
/s/ Cal Turner, Jr. Chairman of the Board April 28, 1997
CAL TURNER, JR. and Chief Executive Officer
(Principal Executive Officer)
/s/ Philip Richards Vice President-Chief April 28, 1997
PHILIP RICHARDS Financial Officer
/s/ Cal Turner Director April 28, 1997
CAL TURNER
/s/Wallace N. Rasmussen Director April 28, 1997
WALLACE N. RASMUSSEN
/s/John B. Holland Director April 28, 1997
JOHN B. HOLLAND
/s/William S. Wire, II Director April 28, 1997
WILLIAM S. WIRE, II
/s/James L. Clayton Director April 28, 1997
JAMES L. CLAYTON
/s/ David M. Wilds Director April 28, 1997
DAVID M. WILDS
/s/Reginald D. Dickson Director April 28, 1997
REGINALD D. DICKSON
/s/Barbara M. Knuckles Director April 28, 1997
BARBARA M. KNUCKLES
32
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).
33
11 Statement re: Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.