Double-digit sales drive DG's profits

Don Hogsett, June 7, 2004

Paying down debt and hacking away at interest costs, while building sales at a double-digit pace, Dollar General Stores Corp. drove first-quarter profits up 12.5 percent, to $67.8 million from $60.3 million last year.

Sales at the chain of low-cost neighborhood stores advanced 11.4 percent, to $1.7 billion from $1.6 billion last year, fueled by continued rapid expansion and the opening of 601 new stores. Same-store sales grew 3 percent.

Providing a lift to the bottom line, in addition to the stronger sales, Dollar General slashed its interest costs 31.5 percent, to $6.4 million from $9.4 million last year, yielding a cash savings of almost $3 million. Leading up the big reduction in interest expense, the retailer reduced its total long-term debt 19.8 percent, or $64.4 million, to $261.6 million from $326 million during the same period a year ago.

Improvement in the gross margin rate was largely offset by higher costs during the opener. Average gross margin widened 50 basis points, or half a percentage point, to 29.3 percent from 28.8 percent the preceding year. Helped by the combination of stronger margins and rising sales, gross margin dollars rose 11.2 percent, to $114.6 million from $103 million. Margin improvement, the retailer said, stemmed from higher average markup on beginning inventories and inventories purchased during the quarter, partially offset by increased markdowns.

Offsetting the growing strength in margins were higher costs, which climbed 60 basis points, or six-tenths of a percentage point, to 22.8 percent of sales from 22.2 percent the prior year. Rising costs were due largely to the company's 2004 store workflow project, increases in workers' compensation and other insurance programs, along with higher rental costs on leased facilities.

Merchandise inventories were tightly controlled, rising just 6.4 percent, to $1.3 billion from $1.2 billion, substantially behind the 11.4 percent increase in sales. Inventory turns improved to four times in the 2004 quarter from 3.9 times the year before.

Dollar General Corp.

Qtr. 4/30 (x000) 2004 2003 % chg
Sales $1,747,959 $1,569,064 11.4
Oper. income (EBIT) 114,550 102,951 11.3
Net income 67,849 60,332 12.5
Per share (diluted) 0.20 0.18 11.1
Average gross margin 29.3% 28.8%
SG&A expenses 22.8% 22.2%

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