Dollar General Corporation Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended May 4, 2007
Commission
file number: 001-11421
DOLLAR
GENERAL CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
TENNESSEE
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
61-0502302
(I.R.S.
Employer
Identification
No.)
|
|
100
MISSION RIDGE
GOODLETTSVILLE,
TENNESSEE 37072
(Address
of Principal Executive Offices, Zip Code)
|
|
Registrant’s
telephone number, including area code: (615)
855-4000
|
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 whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X] Accelerated
filer [ ] Non-accelerated
filer
[ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
number of shares of common stock outstanding on June 4, 2007, was
314,875,658.
PART
I—FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DOLLAR
GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
May
4,
2007
|
|
February
2,
2007
|
ASSETS
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
204,417
|
|
$
|
189,288
|
Short-term
investments
|
|
27,371
|
|
|
29,950
|
Merchandise
inventories
|
|
1,444,313
|
|
|
1,432,336
|
Income
taxes receivable
|
|
14,624
|
|
|
9,833
|
Deferred
income taxes
|
|
37,860
|
|
|
24,321
|
Prepaid
expenses and other current assets
|
|
57,572
|
|
|
57,020
|
Total
current assets
|
|
1,786,157
|
|
|
1,742,748
|
Net
property and equipment
|
|
1,212,198
|
|
|
1,236,874
|
Deferred
income taxes
|
|
12,418
|
|
|
-
|
Other
assets, net
|
|
63,536
|
|
|
60,892
|
Total
assets
|
$
|
3,074,309
|
|
$
|
3,040,514
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of long-term obligations
|
$
|
7,186
|
|
$
|
8,080
|
Accounts
payable
|
|
484,949
|
|
|
555,274
|
Accrued
expenses and other
|
|
258,090
|
|
|
253,558
|
Income
taxes payable
|
|
48
|
|
|
15,959
|
Total
current liabilities
|
|
750,273
|
|
|
832,871
|
Long-term
obligations
|
|
260,373
|
|
|
261,958
|
Deferred
income taxes
|
|
-
|
|
|
41,597
|
Other
liabilities
|
|
266,886
|
|
|
158,341
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
Preferred
stock
|
|
-
|
|
|
-
|
Common
stock
|
|
157,298
|
|
|
156,218
|
Additional
paid-in capital
|
|
525,830
|
|
|
486,145
|
Retained
earnings
|
|
1,114,170
|
|
|
1,103,951
|
Accumulated
other comprehensive loss
|
|
(941)
|
|
|
(987)
|
Other
shareholders’ equity
|
|
420
|
|
|
420
|
Total
shareholders’ equity
|
|
1,796,777
|
|
|
1,745,747
|
Total
liabilities and shareholders’ equity
|
$
|
3,074,309
|
|
$
|
3,040,514
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
DOLLAR
GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In
thousands except per share amounts)
|
For
the 13 weeks ended
|
|
May
4,
2007
|
|
May
5,
2006
|
Net
sales
|
$
|
2,275,267
|
|
|
$
|
2,151,387
|
|
Cost
of goods sold
|
|
1,642,207
|
|
|
|
1,567,113
|
|
Gross
profit
|
|
633,060
|
|
|
|
584,274
|
|
Selling,
general and administrative
|
|
577,692
|
|
|
|
502,989
|
|
Operating
profit
|
|
55,368
|
|
|
|
81,285
|
|
Interest
income
|
|
(2,573)
|
|
|
|
(2,450)
|
|
Interest
expense
|
|
6,167
|
|
|
|
7,247
|
|
Income
before income taxes
|
|
51,774
|
|
|
|
76,488
|
|
Income
taxes
|
|
16,899
|
|
|
|
28,818
|
|
Net
income
|
$
|
34,875
|
|
|
$
|
47,670
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.11
|
|
|
$
|
0.15
|
|
Diluted
|
$
|
0.11
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
313,567
|
|
|
|
313,997
|
|
Diluted
|
|
315,928
|
|
|
|
315,233
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
|
|
DOLLAR
GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
For
the 13 weeks ended
|
|
May
4,
2007
|
|
May
5,
2006
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
$
|
34,875
|
|
$
|
47,670
|
Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
50,451
|
|
|
48,778
|
Deferred
income taxes
|
|
(4,948)
|
|
|
5,602
|
Noncash
share-based compensation
|
|
3,469
|
|
|
1,740
|
Tax
benefit from stock option exercises
|
|
(3,529)
|
|
|
(1,461)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
Merchandise
inventories
|
|
(11,977)
|
|
|
(161,704)
|
Prepaid
expenses and other current assets
|
|
(552)
|
|
|
(12,429)
|
Accounts
payable
|
|
(62,870)
|
|
|
69,467
|
Accrued
expenses and other
|
|
25,647
|
|
|
6,118
|
Income
taxes
|
|
(1,736)
|
|
|
(20,236)
|
Other
|
|
456
|
|
|
339
|
Net
cash provided by (used in) operating activities
|
|
29,286
|
|
|
(16,116)
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
Purchases
of property and equipment
|
|
(34,101)
|
|
|
(77,102)
|
Purchases
of short-term investments
|
|
-
|
|
|
(10,476)
|
Sales
of short-term investments
|
|
6,000
|
|
|
6,000
|
Purchases
of long-term investments
|
|
(5,670)
|
|
|
(10,809)
|
Proceeds
from sale of property and equipment
|
|
169
|
|
|
303
|
Net
cash used in investing activities
|
|
(33,602)
|
|
|
(92,084)
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
-
|
|
|
116,500
|
Repayments
of borrowings under revolving credit facility
|
|
-
|
|
|
(51,500)
|
Repayments
of long-term obligations
|
|
(2,653)
|
|
|
(2,364)
|
Payment
of cash dividends
|
|
(15,712)
|
|
|
(15,686)
|
Proceeds
from exercise of stock options
|
|
34,281
|
|
|
10,934
|
Repurchases
of common stock
|
|
-
|
|
|
(79,947)
|
Tax
benefit from stock option exercises
|
|
3,529
|
|
|
1,461
|
Other
financing activities
|
|
-
|
|
|
69
|
Net
cash provided by (used in) financing activities
|
|
19,445
|
|
|
(20,533)
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
15,129
|
|
|
(128,733)
|
Cash
and cash equivalents, beginning of period
|
|
189,288
|
|
|
200,609
|
Cash
and cash equivalents, end of period
|
$
|
204,417
|
|
$
|
71,876
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing and financing
activities:
|
|
|
|
|
|
Purchases
of property and equipment awaiting processing for payment,
included
in Accounts payable
|
$
|
10,639
|
|
$
|
16,344
|
Purchases
of property and equipment under capital lease obligations
|
$
|
163
|
|
$
|
877
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
DOLLAR
GENERAL CORPORATION AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis
of
presentation
The
accompanying unaudited condensed consolidated financial statements of Dollar
General Corporation and its subsidiaries (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”) for interim financial information and are presented in
accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation
S-X.
Such financial statements consequently do not include all of the disclosures
normally required by GAAP or those normally made in the Company’s Annual Report
on Form 10-K. Accordingly, the reader of this Quarterly Report on Form 10-Q
should refer to the Company’s Annual Report on Form 10-K for the year ended
February 2, 2007 for additional information.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the Company’s customary accounting practices. In
management’s opinion, all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the consolidated financial position as
of
May 4, 2007 and results of operations for the 13-week quarterly accounting
periods ended May 4, 2007 and May 5, 2006 have been made.
Ongoing
estimates of inventory shrinkage and initial markups and markdowns are included
in the interim cost of goods sold calculation. Because the Company’s business is
moderately seasonal, the results for interim periods are not necessarily
indicative of the results to be expected for the entire year.
Certain
financial statement amounts relating to prior periods have been reclassified
to
conform to the current period presentation, including the separate disclosure
of
noncash share-based compensation on the condensed consolidated statement of
cash
flows.
As
discussed in Note 7, effective February 3, 2007, the Company changed its
accounting for income taxes in connection with the adoption of Financial
Accounting Standards Board (“FASB”) Interpretation 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement 109 (“FIN
48”).
2. Agreement
and plan of merger
On
March
11, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Buck Holdings L.P., a Delaware limited partnership (“Parent”)
and Buck Acquisition Corp., a Tennessee corporation and wholly owned subsidiary
of Parent (“Merger Sub”).
Pursuant
to
the Merger Agreement, Merger Sub will be merged with and into the Company (the
“Merger”), with the Company surviving the Merger as a wholly owned subsidiary of
Parent. Merger Sub and Parent are affiliates of Kohlberg Kravis Roberts &
Co., L.P. (“KKR”). Pursuant to the Merger Agreement, at the effective time of
the Merger, each
outstanding
share of common stock of the Company, other than any shares held by any
wholly-owned subsidiary of the Company and any shares owned by Parent or Merger
Sub or held by the Company, will be cancelled and converted into the right
to
receive $22.00 in cash, without interest (the “Merger Consideration”). In
addition, immediately prior to the effective time of the Merger, all shares
of
Company restricted stock and restricted stock units will, unless otherwise
agreed by the holder and Parent, vest and be converted into the right to receive
the Merger Consideration. All options to acquire shares of Company common stock
will vest immediately prior to the effective time of the Merger and holders
of
such options will, unless otherwise agreed by the holder and Parent, be entitled
to receive an amount in cash equal to the excess, if any, of the Merger
Consideration over the exercise price per share of Company common stock subject
to the option.
The
Board
of Directors of the Company unanimously approved the Merger Agreement and
amended the Company’s Shareholder Rights Plan to exempt the Merger from that
Plan’s operation.
Consummation
of the Merger is not subject to a financing condition but is subject to
customary closing conditions, including approval of the Merger Agreement by
the
Company’s shareholders,
regulatory approval and other customary closing conditions. The
Merger Agreement places specified restrictions on certain of the Company’s
business activities, including but not limited to: acquisitions or dispositions
of assets, capital expenditures, modifications of debt, leasing activities,
compensatory changes, dividend increases, investments and share repurchases.
The
accompanying condensed consolidated financial statements do not include any
financial reporting impacts related to the potential consummation of the Merger,
including but not limited to potential changes in the basis of accounting and
acceleration of vesting of restricted stock, stock units or options.
A
special
meeting of shareholders has been scheduled for June 21, 2007 for the purpose
of
voting on the proposed merger.
Subsequent
to the announcement of the Merger Agreement, the Company announced that Merger
Sub has commenced a cash tender offer to purchase any and all of the Company’s
$200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010.
The
tender offer is contingent upon the closing of the Merger.
Also
subsequent
to the announcement of the Merger Agreement, the Company and its directors
were
named in seven putative class actions alleging claims for breach of fiduciary
duty arising out of the proposed sale of the Company to KKR, all as described
more fully under “Legal Proceedings” in Note 6 below.
3. Strategic
initiatives
In
its
Quarterly Report on Form 10-Q for the quarterly period ended August 4, 2006,
the
Company announced it was considering modifying its historical inventory
management model and accelerating its enhanced real estate strategy. The outcome
of these deliberations is set forth below.
Inventory
management
In
November 2006, the Company’s Board of Directors approved management’s
recommendation to discontinue the Company’s historical inventory packaway model
by the end of fiscal 2007. With few exceptions, the Company plans to eliminate,
through end-of-season and other markdowns, existing seasonal, home products
and
basic clothing packaway merchandise by the close of fiscal 2007 to allow for
increased levels of newer, current-season merchandise. In connection with this
strategic change, the Company incurred higher markdowns and writedowns on
inventory in the second half of 2006 and the first quarter of 2007 than in
the
comparable prior-year periods. Markdowns which were expected to reduce inventory
below cost were considered in the Company’s lower of cost or market estimate and
recorded at such time as the utility of the underlying inventory was deemed
to
be impaired. During 2006, the Company recorded lower of cost or market inventory
impairment estimates, which resulted in a reserve balance of
approximately $45.6 million as of February 2, 2007. This reserve was reduced
by
$12.3 million during the first quarter of 2007, to account for sales of products
with markdowns below cost, higher than anticipated shrink during the period,
and
adjustments to the estimates of the remaining below cost markdowns to be taken,
resulting in a balance of approximately $33.3 million as of May 4, 2007. The
inventory for which these impairment estimates have been recorded is expected
to
be sold during 2007. Markdowns which are not below cost impact the Company’s
gross profit in the period in which such markdowns are taken. The amount of
the
below-cost inventory adjustment is based on management’s assumptions regarding
the timing and adequacy of markdowns and the final adjustment may vary
materially from the amount recorded depending on various factors, including
timing of the execution of the plan, retail market conditions and the accuracy
of assumptions used by management in developing these estimates.
Exit
and disposal activities
In
November 2006, the Company’s Board of Directors approved management’s
recommendation to close, in addition to those stores that might be closed in
the
ordinary course of business, approximately 400 stores by the end of fiscal
2007
(281 of which have been closed as of May 4, 2007), and the Company has incurred
or expects to incur the following pretax costs associated with the closing
of
these stores (in millions):
|
Estimated
Total
(a)
|
Incurred
in
2006
|
Incurred
in
2007
|
Remaining
|
Lease
contract termination costs (b)
|
$
|
36.6
|
|
$
|
5.7
|
|
$
|
$
|
15.3
|
|
$
|
15.6
|
|
One-time
employee termination benefits
|
|
0.9
|
|
|
0.3
|
|
|
|
0.3
|
|
|
0.3
|
|
Other
associated store closing costs
|
|
8.1
|
|
|
0.2
|
|
|
|
2.2
|
|
|
5.7
|
|
Inventory
liquidation fees
|
|
4.6
|
|
|
1.6
|
|
|
|
1.5
|
|
|
1.5
|
|
Asset
impairment & accelerated depreciation
|
|
9.0
|
|
|
8.3
|
|
|
|
0.3
|
|
|
0.4
|
|
Inventory
markdowns below cost
|
|
7.8
|
|
|
6.7
|
|
|
|
1.1
|
|
|
-
|
|
Total
|
$
|
67.0
|
|
$
|
22.8
|
|
$
|
$
|
20.7
|
|
$
|
23.5
|
|
|
(a)
Reflects estimates as of May 4, 2007, which, in total, are $6.0 million
less than estimates as of February 2, 2007.
|
(b)
Including estimated reversals of deferred rent accruals totaling
$0.8
million, of which $0.1 million is reflected in 2006, $0.3 million
is
reflected in 2007, and $0.4 million is
remaining.
|
Other
associated store closing costs as listed in the table above primarily include
the removal of any usable assets as well as real estate consulting and other
services.
Liability
balances related to activities discussed above for stores closed to date are
as
follows (in millions):
|
Balance,
February
2,
2007
|
2007
Expenses
|
2007
Payments
and
Other
|
Balance,
May
4,
2007
|
Lease
contract termination costs
|
$
|
5.0
|
|
$
|
15.6
|
|
$
|
2.4
|
|
$
|
18.2
|
|
One-time
employee termination benefits
|
|
0.3
|
|
|
0.3
|
|
|
0.6
|
|
|
-
|
|
Other
associated store closing costs
|
|
0.2
|
|
|
2.2
|
|
|
1.4
|
|
|
1.0
|
|
Inventory
liquidation fees
|
|
0.3
|
|
|
1.5
|
|
|
1.8
|
|
|
-
|
|
Total
|
$
|
5.8
|
|
$
|
19.6
|
|
$
|
6.2
|
|
$
|
19.2
|
|
All
expenses associated with exit and disposal activities are included in selling,
general and administrative (“SG&A”) expenses with the exception of the
below-cost inventory adjustments, which are included in cost of goods sold
in
the condensed consolidated statement of income for the first quarter of 2007.
As
noted above, the Company expects to incur additional charges in future periods
when the related expenses are incurred. The estimated amount and timing of
these
future costs and charges are dependent on various factors, including timing
of
the execution of the plan, the outcome of negotiations with landlords and/or
potential sublease tenants, and final inventory levels.
4. Share-based
payments
The
Company has a shareholder-approved stock incentive plan under which stock
options, restricted stock, restricted stock units and other equity-based awards
may be granted to officers, directors and key employees. Effective February
4,
2006, the Company adopted Statement of Financial Accounting Standards 123
(Revised 2004) “Share-Based Payment,” (“SFAS 123(R)”). Under SFAS 123(R), the
fair value of each option grant is separately estimated. The fair value of
each
option is amortized into compensation expense on a straight-line basis between
the grant date for the award and each vesting date. The Company has estimated
the fair value of all stock option awards as of the date of the grant by
applying the Black-Scholes-Merton option pricing valuation model. The
application of this valuation model involves assumptions that are judgmental
and
highly sensitive in the determination of compensation expense. The weighted
average for key assumptions used in determining the fair value of options
granted in the 13-week periods ended May 4, 2007 and May 5, 2006 are as
follows:
|
|
13
Weeks Ended
|
|
|
May
4,
2007
|
|
May
5,
2006
|
Expected
dividend yield
|
|
0.91
|
%
|
|
0.82
|
%
|
Expected
stock price volatility
|
|
18.5
|
%
|
|
28.7
|
%
|
Weighted
average risk-free interest rate
|
|
4.5
|
%
|
|
4.7
|
%
|
Expected
term of options (years)
|
|
5.7
|
|
|
5.7
|
|
For
the
13-week periods ended May 4, 2007 and May 5, 2006, the fair value method of
SFAS
123(R) resulted in share-based compensation expense (a component of SG&A)
for outstanding stock options and a corresponding reduction of pre-tax income
in
the amount of $1.4 million and $1.0 million, respectively.
The
Company generally issues new shares when options are exercised. A summary of
stock option activity during the 13 weeks ended May 4, 2007 is as follows:
|
Options
Issued
|
|
Weighted
Average
Exercise
Price
|
Balance,
February 2, 2007
|
|
19,398,881
|
|
|
|
$
|
18.38
|
|
Granted
|
|
1,997,198
|
|
|
|
|
21.15
|
|
Exercised
|
|
(2,091,451)
|
|
|
|
|
16.39
|
|
Canceled
|
|
(187,100)
|
|
|
|
|
19.90
|
|
Balance,
May 4, 2007
|
|
19,117,528
|
|
|
|
$
|
18.88
|
|
All
stock
options granted in the 13-week periods ended May 4, 2007 and May 5, 2006 under
the terms of the Company’s stock incentive plan were non-qualified stock options
issued at a price equal to the fair market value of the Company’s common stock
on the date of grant, were originally scheduled to vest ratably over a four-year
period, and expire 10 years following the date of grant.
A
summary
of activity related to nonvested restricted stock and restricted stock unit
awards during the 13-week period ended May 4, 2007 is as follows:
|
Nonvested
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
Balance,
February 2, 2007
|
|
748,631
|
|
|
|
$
|
16.63
|
|
Granted
|
|
708,108
|
|
|
|
|
21.15
|
|
Vested
|
|
(94,283)
|
|
|
|
|
18.66
|
|
Canceled
|
|
(10,037)
|
|
|
|
|
20.29
|
|
Balance,
May 4, 2007
|
|
1,352,419
|
|
|
|
$
|
18.83
|
|
The
Company accounts for nonvested restricted stock and restricted stock unit awards
in accordance with the provisions of SFAS 123(R). The Company calculates
compensation expense as the difference between the market price of the
underlying stock on the date of grant and the purchase price, if any, and
recognizes such amount on a straight-line basis over the period in which the
recipient earns the nonvested restricted stock and restricted stock unit award.
The
purchase price was set at zero for all nonvested restricted stock and restricted
stock unit awards in the 13-week periods ended May 4, 2007 and May 5, 2006,
and
such awards are scheduled to vest ratably over a three-year period from the
respective grant dates. The Company recognized compensation expense relating
to
its nonvested restricted stock and restricted stock unit awards of approximately
$2.1 million and $0.8 million in the 13-week periods ended May 4, 2007 and
May
5, 2006, respectively.
The
Company recognized total compensation expense relating to share-based awards
of
approximately $3.5 million and $1.8 million in the 2007 and 2006 periods,
respectively.
Under
SFAS 123(R), the benefits of tax deductions in excess of recognized compensation
cost are reported as a financing cash flow. For the 13-week periods ended May
4,
2007 and May 5, 2006, this excess tax benefit was approximately $3.5 million
and
$1.5 million, respectively.
5. Earnings
per share
Earnings
per share is computed as follows (in thousands, except per share
data):
|
|
13
Weeks Ended May 4, 2007
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share Amount
|
Basic
earnings per share
|
|
$
|
34,875
|
|
313,567
|
|
$
|
0.11
|
Effect
of dilutive stock awards
|
|
|
|
|
2,361
|
|
|
|
Diluted
earnings per share
|
|
$
|
34,875
|
|
315,928
|
|
$
|
0.11
|
|
|
13
Weeks Ended May 5, 2006
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share Amount
|
Basic
earnings per share
|
|
$
|
47,670
|
|
313,997
|
|
$
|
0.15
|
Effect
of dilutive stock awards
|
|
|
|
|
1,236
|
|
|
|
Diluted
earnings per share
|
|
$
|
47,670
|
|
315,233
|
|
$
|
0.15
|
Basic
earnings per share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share was determined based on the dilutive effect of stock options and
other
common stock equivalents using the treasury stock method.
6. Commitments
and contingencies
Legal
proceedings
On
October 10, 2005, the Company was served with a lawsuit entitled Moldoon,
et al. v. Dolgencorp, Inc., et al.
(Western
District of Louisiana, Lake Charles Division, CV05-0852, filed May 19, 2005),
filed as a putative collective action in which five current or former store
managers claim to have been improperly classified as exempt executive employees
under the Fair Labor Standards Act (“FLSA”). Plaintiffs seek injunctive relief,
back wages, liquidated damages and attorneys’ fees. To date, Plaintiffs have not
asked the Court to certify any class.
On
August
7, 2006, a lawsuit entitled Cynthia
Richter, et al. v. Dolgencorp, Inc., et al.
was
filed in the United States District Court for the Northern District of Alabama
(Case No. 7:06-cv-01537-LSC) in which the plaintiff alleges that she and other
current and former Dollar General store managers were improperly classified
as
exempt executive employees under the FLSA and seeks to recover overtime pay,
liquidated damages, and attorneys’ fees and costs. On August 15, 2006, the
Richter
plaintiff
filed a motion in which she asked the court to certify a
nationwide
class of current and former store managers. The Company opposed the plaintiff’s
motion. On March 23, 2007, the Court conditionally certified a nationwide
class
of individuals who worked for Dollar General as Store Managers since August
7,
2003. Although the number of persons who will be included in the class has
not
been determined, the parties have agreed to, and the Court is expected to
approve, the Notice that will be sent to the class.
On
May
30, 2007, the Court stayed all proceedings in the case, including the sending
of
the Notice, for an initial period of 60 days, during which time the Court will
evaluate, among other things, a recently filed appeal in the Eleventh Circuit
involving claims similar to those raised in this action. During the 60-day
stay,
the statute of limitations will be tolled for potential class members. At its
conclusion, the Court will determine whether to extend the stay or to permit
this action to proceed. Following the close of the discovery period the Company
will have an opportunity to seek decertification of the class, and the Company
expects to file such a motion.
The
Company believes that its store managers are and have been properly classified
as exempt employees under the FLSA and that the actions described above are
not
appropriate for collective action treatment. The Company intends to vigorously
defend these actions. However, at this time, it is not possible to predict
whether the courts will permit these actions to proceed collectively, and no
assurances can be given that the Company will be successful in its defense
on
the merits or otherwise. If the Company is not successful in its efforts to
defend these actions, the resolution or resolutions could have a material
adverse effect on the Company’s financial statements as a whole.
On
May
18, 2006, the Company was served with a lawsuit entitled Tammy
Brickey, Becky Norman, Rose Rochow, Sandra Cogswell and Melinda Sappington
v.
Dolgencorp, Inc. and Dollar General Corporation
(Western
District of New York, Case 6:06-cv-06084-DGL, originally filed on February
9,
2006 and amended on May 12, 2006 (“Brickey”)).
The
Brickey
plaintiffs seek to proceed collectively under the FLSA and as a class under
New
York, Ohio, Maryland and North Carolina wage and hour statutes on behalf of,
among others, individuals employed by the Company as assistant store managers
who claim to be owed wages (including overtime wages) under those statutes.
At
this time, it is not possible to predict whether the court will permit this
action to proceed collectively or as a class. However, the Company believes
that
this action is not appropriate for either collective or class treatment, and
believes that its wage and hour policies and practices comply with both federal
and state law. The Company plans to vigorously defend this action; however,
no
assurances can be given that the Company will be successful in its defense
on
the merits or otherwise, and, if it is not, the resolution of this action could
have a material adverse effect on the Company’s financial statements as a whole.
On
March
7, 2006, a complaint was filed in the United States District Court for the
Northern District of Alabama (Janet
Calvert v. Dolgencorp, Inc.,
Case
No. 2:06-cv-00465-VEH (“Calvert”)),
in
which the plaintiff, a former store manager, alleged that she was paid less
than
male store managers because of her sex, in violation of the Equal Pay Act and
Title VII of the Civil Rights Act of 1964, as amended (“Title VII”). On March 9,
2006, the Calvert
complaint was amended to include seven additional plaintiffs, who also allege
to
have been paid less than males because of their sex, and to add allegations
of
sex discrimination in promotional
opportunities
and undefined terms and conditions of employment. In addition to allegations
of
intentional sex discrimination, the amended Calvert
complaint also alleges that the Company’s employment policies and practices have
a disparate impact on females. The amended Calvert
complaint seeks to proceed collectively under the Equal Pay Act and as a
class
under Title VII, and requests back wages, injunctive and declaratory relief,
liquidated damages and attorney’s fees and costs.
At
this
time, it is not possible to predict whether the court will permit Calvert
to
proceed collectively or as a class. However, the Company believes that the
case
is not appropriate for class or collective treatment and believes that its
policies and practices comply with the Equal Pay Act and Title VII. The Company
intends to vigorously defend the action; however, no assurances can be given
that the Company will be successful in its defense on the merits or otherwise.
If the Company is not successful in defending the Calvert
action,
its resolution could have a material adverse effect on the Company’s financial
statements as a whole.
On
September 8, 2005, the Company received a request for information from the
Environmental Protection Agency (EPA) with respect to Krazy String, a product
that was offered for sale in the Company’s stores. The EPA asserted that
Krazy String contained an aerosol that included an ozone depleting substance
in
violation of the Clean Air Act. On July 12, 2006, the Company agreed to an
Administrative Compliance Order requiring the destruction of the Krazy String
remaining in inventory. After advising the Company that it was considering
imposing a penalty in connection with Krazy String, on February 5, 2007,
the EPA proposed a penalty of approximately $800,000. The Company believed
that
amount to be excessive under applicable EPA policies. After additional
discussions with the EPA on May 7, 2007, the Company and the EPA agreed in
principle on May 31, 2007 to resolve this matter through payment by the Company
of a $155,826 penalty. The Company expects to finalize this settlement within
the next 90 days.
Subsequent
to the announcement of the Agreement and Plan of Merger among the Company,
Buck
Holdings L.P. and Buck Acquisition Corp (each of Buck Holdings L.P. and Buck
Acquisition Corp is an affiliate of KKR, as more fully described in Note 2),
the
Company and its directors were named in seven putative class actions alleging
claims for breach of fiduciary duty arising out of the proposed sale of the
Company to KKR. Each of the complaints alleged, among other things, that
Dollar General’s directors engaged in “self-dealing” by agreeing to recommend
the transaction to the shareholders of Dollar General and that the consideration
available to Dollar General shareholders in the proposed transaction is unfairly
low. On motion of the plaintiffs, each of these cases was transferred to the
Sixth Circuit Court for Davidson County, Twentieth Judicial District, at
Nashville (the “Court”). By order April 26, 2007, the seven lawsuits were
consolidated in the Court under the caption, “In re: Dollar General,” Case No.
07MD-1. On May 23, 2007, the Court entered an order requiring the plaintiffs
in
the consolidated actions to file a consolidated complaint within 30 days.
According to the terms of the order, the consolidated complaint will supersede
all previously-filed complaints. The Company believes that the foregoing lawsuit
is without merit and intends to defend the action vigorously.
In
addition to the matters described above, the Company is involved in other legal
actions and claims arising in the ordinary course of business. The Company
believes, based upon
information
currently available, that such other litigation and claims, both individually
and in the aggregate, will be resolved without a material effect on the
Company’s financial statements as a whole. However, litigation involves an
element of uncertainty. Future developments could cause these actions or
claims
to have a material adverse effect on the Company’s financial statements as a
whole.
7. Income
taxes
The
Company adopted the provisions of FIN 48 effective February 3, 2007. The
adoption resulted in an $8.9 million decrease in retained earnings and a
reclassification of certain amounts between deferred income taxes and other
noncurrent liabilities to conform to the balance sheet presentation requirements
of FIN 48. As of the date of adoption, the total reserve for uncertain tax
benefits was $77.9 million. This reserve excludes the federal income tax benefit
for the uncertain tax positions related to state income taxes, which is now
included in deferred tax assets. As a result of the adoption of FIN 48, the
reserve for interest expense related to income taxes was increased to $15.3
million and a reserve for potential penalties of $1.9 million related to
uncertain income tax positions was recorded. As of the date of adoption,
approximately $27.1 million of the reserve for uncertain tax positions would
impact our effective income tax rate if we were to recognize the tax benefit
for
these positions.
Subsequent
to the adoption of FIN 48, the Company has elected to record income tax related
interest and penalties as a component of the provision for income tax
expense.
In
the
quarter ended May 4, 2007, the Internal Revenue Service completed an examination
of the Company’s federal income tax returns through fiscal year 2003 resulting
in a net income tax refund. There are no unresolved issues related to this
examination. In connection with this examination, the Company and the Internal
Revenue Service agreed to extend the statute of limitations related to the
2003
fiscal year through October 2007. Accordingly, the 2003 fiscal year
could be subject to further examination by the Internal Revenue Service
until that date, however, the Company believes that such further
examination is unlikely. Also remaining open for examination are the
Company's 2004 and later fiscal years. None of the Company’s federal income tax
returns are currently under examination by the Internal Revenue Service. The
Company has various state income tax examinations that are currently in
progress. The estimated liability related to these state income tax examinations
is included in the Company’s reserve for uncertain tax positions. Generally, the
Company’s tax years ended in 2004 and forward remain open for examination by the
various state taxing authorities.
As
of May
4, 2007, the total reserves for uncertain tax benefits, interest expense related
to income taxes and potential income tax penalties were $77.8 million, $14.2
million and $1.5 million, respectively, of which a total of $84.3
million is reflected in other noncurrent liabilities in the condensed
consolidated balance sheet. The Company believes that it is reasonably possible
that the reserve for uncertain tax positions may be reduced by approximately
$6.2 million in the coming twelve months as a result of the settlement of
currently ongoing state income tax examinations.
The
effective income tax rate for the 13-week period ended May 4, 2007 was 32.6%,
or
5.1% lower than the rate of 37.7% for the 13-week period ended May 5, 2006.
The
decrease in
the
effective income tax rate was primarily due to the following: an approximate
1.2% decrease as a result of the renewal, in late 2006, of the federal laws
which allow the Company to claim federal job credits for certain newly hired
employees; and an approximate decrease of 6.3% in the 2007 period related
to the
settlement of income tax contingencies that did not occur in the 2006 period.
These decreases were partially offset by the following items which increased
the
effective income tax rate: an approximate 0.7% increase due principally to
state
income tax expense resulting from state law changes in the States of New
York
and Texas; an approximate 0.1% increase due to lower state job related tax
credits (principally job credits earned in 2006 for the Company’s South Carolina
distribution center that did not reoccur in 2007); an increase of approximately
1.7% due to the post-FIN 48 inclusion of income tax related interest expense
in
the amount reported as income tax expense in 2007; and an increase of
approximately 0.7% related to non-deductible expenses incurred in connection
with the proposed Merger.
8. Segment
reporting
The
Company manages its business on the basis of one reportable segment. As of
May
4, 2007, all of the Company’s operations were located within the United States,
with the exception of a Hong Kong subsidiary, the assets and revenues of which
are not material. The following data is presented in accordance with SFAS No.
131, “Disclosures about Segments of an Enterprise and Related
Information.”
|
|
13
Weeks Ended
|
(In
thousands)
|
|
May
4,
2007
|
|
May
5,
2006
|
Classes
of similar products:
|
|
|
|
|
|
|
Highly
consumable
|
|
$
|
1,523,793
|
|
$
|
1,455,984
|
Seasonal
|
|
|
336,449
|
|
|
309,583
|
Home
products
|
|
|
215,046
|
|
|
211,665
|
Basic
clothing
|
|
|
199,979
|
|
|
174,155
|
Net
sales
|
|
$
|
2,275,267
|
|
$
|
2,151,387
|
9. Guarantor
subsidiaries
All
of
the Company’s subsidiaries, except for its not-for-profit subsidiary, the assets
and revenues of which are not material (the “Guarantors”), have fully and
unconditionally guaranteed on a joint and several basis the Company’s
obligations under certain outstanding debt obligations. Each of the Guarantors
is a direct or indirect wholly-owned subsidiary of the Company.
The
following consolidating schedules present condensed financial information on
a
combined basis.
(In
thousands)
|
As
of May 4, 2007
|
|
DOLLAR
GENERAL CORPORATION
|
GUARANTOR
SUBSIDIARIES
|
ELIMINATIONS
|
CONSOLIDATED
TOTAL
|
BALANCE
SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
113,533
|
|
|
$
|
90,884
|
|
|
$
|
-
|
|
|
$
|
204,417
|
|
Short-term
investments
|
|
|
-
|
|
|
|
27,371
|
|
|
|
-
|
|
|
|
27,371
|
|
Merchandise
inventories
|
|
|
-
|
|
|
|
1,444,313
|
|
|
|
-
|
|
|
|
1,444,313
|
|
Income
taxes receivable
|
|
|
21,037
|
|
|
|
-
|
|
|
|
(6,413)
|
|
|
|
14,624
|
|
Deferred
income taxes
|
|
|
8,626
|
|
|
|
29,234
|
|
|
|
-
|
|
|
|
37,860
|
|
Prepaid
expenses and other current
assets
|
|
|
169,257
|
|
|
|
1,130,040
|
|
|
|
(1,241,725)
|
|
|
|
57,572
|
|
Total
current assets
|
|
|
312,453
|
|
|
|
2,721,842
|
|
|
|
(1,248,138)
|
|
|
|
1,786,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
215,158
|
|
|
|
2,229,975
|
|
|
|
-
|
|
|
|
2,445,133
|
|
Less
accumulated depreciation and
amortization
|
|
|
120,377
|
|
|
|
1,112,558
|
|
|
|
-
|
|
|
|
1,232,935
|
|
Net
property and equipment
|
|
|
94,781
|
|
|
|
1,117,417
|
|
|
|
-
|
|
|
|
1,212,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
9,899
|
|
|
|
2,519
|
|
|
|
-
|
|
|
|
12,418
|
|
Other
assets, net
|
|
|
2,760,254
|
|
|
|
45,982
|
|
|
|
(2,742,700)
|
|
|
|
63,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,177,387
|
|
|
$
|
3,887,760
|
|
|
$
|
(3,990,838)
|
|
|
$
|
3,074,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term
obligations
|
|
$
|
-
|
|
|
$
|
7,186
|
|
|
$
|
-
|
|
|
$
|
7,186
|
|
Accounts
payable
|
|
|
1,111,885
|
|
|
|
612,082
|
|
|
|
(1,239,018)
|
|
|
|
484,949
|
|
Accrued
expenses and other
|
|
|
29,785
|
|
|
|
231,012
|
|
|
|
(2,707)
|
|
|
|
258,090
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
6,461
|
|
|
|
(6,413)
|
|
|
|
48
|
|
Total
current liabilities
|
|
|
1,141,670
|
|
|
|
856,741
|
|
|
|
(1,248,138)
|
|
|
|
750,273
|
|
Long-term
obligations
|
|
|
199,853
|
|
|
|
1,636,664
|
|
|
|
(1,576,144)
|
|
|
|
260,373
|
|
Other
liabilities
|
|
|
39,087
|
|
|
|
227,799
|
|
|
|
-
|
|
|
|
266,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
157,298
|
|
|
|
23,853
|
|
|
|
(23,853)
|
|
|
|
157,298
|
|
Additional
paid-in capital
|
|
|
525,830
|
|
|
|
673,611
|
|
|
|
(673,611)
|
|
|
|
525,830
|
|
Retained
earnings
|
|
|
1,114,170
|
|
|
|
469,092
|
|
|
|
(469,092)
|
|
|
|
1,114,170
|
|
Accumulated
other comprehensive loss
|
|
|
(941)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(941)
|
|
Other
shareholders’ equity
|
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
420
|
|
Total
shareholders’ equity
|
|
|
1,796,777
|
|
|
|
1,166,556
|
|
|
|
(1,166,556)
|
|
|
|
1,796,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,177,387
|
|
|
$
|
3,887,760
|
|
|
$
|
(3,990,838)
|
|
|
$
|
3,074,309
|
|
(in
thousands)
|
As
of February 2, 2007
|
|
DOLLAR
GENERAL CORPORATION
|
|
GUARANTOR
SUBSIDIARIES
|
|
ELIMINATIONS
|
|
CONSOLIDATED
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
114,310
|
|
|
$
|
74,978
|
|
|
$
|
-
|
|
|
$
|
189,288
|
|
Short-term
investments
|
|
-
|
|
|
|
29,950
|
|
|
|
-
|
|
|
|
29,950
|
|
Merchandise
inventories
|
|
-
|
|
|
|
1,432,336
|
|
|
|
-
|
|
|
|
1,432,336
|
|
Income tax receivable
|
|
4,896
|
|
|
|
4,937
|
|
|
|
-
|
|
|
|
9,833
|
|
Deferred
income taxes
|
|
5,099
|
|
|
|
19,222
|
|
|
|
-
|
|
|
|
24,321
|
|
Prepaid
expenses and other
current
assets
|
|
139,913
|
|
|
|
1,086,890
|
|
|
|
(1,169,783)
|
|
|
|
57,020
|
|
Total
current assets
|
|
264,218
|
|
|
|
2,648,313
|
|
|
|
(1,169,783)
|
|
|
|
1,742,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
213,781
|
|
|
|
2,217,030
|
|
|
|
-
|
|
|
|
2,430,811
|
|
Less
accumulated depreciation
and
amortization
|
|
115,201
|
|
|
|
1,078,736
|
|
|
|
-
|
|
|
|
1,193,937
|
|
Net
property and equipment
|
|
98,580
|
|
|
|
1,138,294
|
|
|
|
-
|
|
|
|
1,236,874
|
|
Other
assets, net
|
|
2,686,697
|
|
|
|
43,622
|
|
|
|
(2,669,427)
|
|
|
|
60,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
3,049,495
|
|
|
$
|
3,830,229
|
|
|
$
|
(3,839,210)
|
|
|
$
|
3,040,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term
obligations
|
$
|
-
|
|
|
$
|
8,080
|
|
|
$
|
-
|
|
|
$
|
8,080
|
|
Accounts
payable
|
|
1,076,028
|
|
|
|
647,153
|
|
|
|
(1,167,907)
|
|
|
|
555,274
|
|
Accrued
expenses and other
|
|
13,327
|
|
|
|
242,107
|
|
|
|
(1,876)
|
|
|
|
253,558
|
|
Income
taxes payable
|
|
-
|
|
|
|
15,959
|
|
|
|
-
|
|
|
|
15,959
|
|
Total
current liabilities
|
|
1,089,355
|
|
|
|
913,299
|
|
|
|
(1,169,783)
|
|
|
|
832,871
|
|
Long-term
obligations
|
|
199,842
|
|
|
|
1,584,526
|
|
|
|
(1,522,410)
|
|
|
|
261,958
|
|
Deferred
income taxes
|
|
(793)
|
|
|
|
42,390
|
|
|
|
-
|
|
|
|
41,597
|
|
Other
liabilities
|
|
15,344
|
|
|
|
142,997
|
|
|
|
-
|
|
|
|
158,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
156,218
|
|
|
|
23,853
|
|
|
|
(23,853)
|
|
|
|
156,218
|
|
Additional
paid-in capital
|
|
486,145
|
|
|
|
673,611
|
|
|
|
(673,611)
|
|
|
|
486,145
|
|
Retained
earnings
|
|
1,103,951
|
|
|
|
449,553
|
|
|
|
(449,553)
|
|
|
|
1,103,951
|
|
Accumulated
other
comprehensive
loss
|
|
(987)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(987)
|
|
Other
shareholders’ equity
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
420
|
|
Total
shareholders’ equity
|
|
1,745,747
|
|
|
|
1,147,017
|
|
|
|
(1,147,017)
|
|
|
|
1,745,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
$
|
3,049,495
|
|
|
$
|
3,830,229
|
|
|
$
|
(3,839,210)
|
|
|
$
|
3,040,514
|
|
(In
thousands)
|
For
the 13 weeks ended
May
4, 2007
|
|
DOLLAR
GENERAL CORPORATION
|
GUARANTOR
SUBSIDIARIES
|
ELIMINATIONS
|
CONSOLIDATED
TOTAL
|
STATEMENTS
OF INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
53,535
|
|
|
$
|
2,275,267
|
|
|
$
|
(53,535)
|
|
|
$
|
2,275,267
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
1,642,207
|
|
|
|
-
|
|
|
|
1,642,207
|
|
Gross
profit
|
|
|
53,535
|
|
|
|
633,060
|
|
|
|
(53,535)
|
|
|
|
633,060
|
|
Selling,
general and administrative
|
|
|
45,440
|
|
|
|
585,787
|
|
|
|
(53,535)
|
|
|
|
577,692
|
|
Operating
profit
|
|
|
8,095
|
|
|
|
47,273
|
|
|
|
-
|
|
|
|
55,368
|
|
Interest
income
|
|
|
(24,498)
|
|
|
|
(820)
|
|
|
|
22,745
|
|
|
|
(2,573)
|
|
Interest
expense
|
|
|
4,915
|
|
|
|
23,997
|
|
|
|
(22,745)
|
|
|
|
6,167
|
|
Income
before income taxes
|
|
|
27,678
|
|
|
|
24,096
|
|
|
|
-
|
|
|
|
51,774
|
|
Income
taxes
|
|
|
12,342
|
|
|
|
4,557
|
|
|
|
-
|
|
|
|
16,899
|
|
Equity
in subsidiaries’ earnings, net
of taxes
|
|
|
19,539
|
|
|
|
-
|
|
|
|
(19,539)
|
|
|
|
-
|
|
Net
income
|
|
$
|
34,875
|
|
|
$
|
19,539
|
|
|
$
|
(19,539)
|
|
|
$
|
34,875
|
|
(In
thousands)
|
For
the 13 weeks ended
May
5, 2006
|
|
DOLLAR
GENERAL CORPORATION
|
GUARANTOR
SUBSIDIARIES
|
ELIMINATIONS
|
CONSOLIDATED
TOTAL
|
STATEMENTS
OF INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
38,653
|
|
|
$
|
2,151,387
|
|
|
$
|
(38,653)
|
|
|
$
|
2,151,387
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
1,567,113
|
|
|
|
-
|
|
|
|
1,567,113
|
|
Gross
profit
|
|
|
38,653
|
|
|
|
584,274
|
|
|
|
(38,653)
|
|
|
|
584,274
|
|
Selling,
general and administrative
|
|
|
34,329
|
|
|
|
507,313
|
|
|
|
(38,653)
|
|
|
|
502,989
|
|
Operating
profit
|
|
|
4,324
|
|
|
|
76,961
|
|
|
|
-
|
|
|
|
81,285
|
|
Interest
income
|
|
|
(22,382)
|
|
|
|
(1,748)
|
|
|
|
21,680
|
|
|
|
(2,450)
|
|
Interest
expense
|
|
|
3,798
|
|
|
|
25,129
|
|
|
|
(21,680)
|
|
|
|
7,247
|
|
Income
before income taxes
|
|
|
22,908
|
|
|
|
53,580
|
|
|
|
-
|
|
|
|
76,488
|
|
Income
taxes
|
|
|
8,412
|
|
|
|
20,406
|
|
|
|
-
|
|
|
|
28,818
|
|
Equity
in subsidiaries’ earnings, net
of taxes
|
|
|
33,174
|
|
|
|
-
|
|
|
|
(33,174)
|
|
|
|
-
|
|
Net
income
|
|
$
|
47,670
|
|
|
$
|
33,174
|
|
|
$
|
(33,174)
|
|
|
$
|
47,670
|
|
(In
thousands)
|
For
the 13 weeks ended
May
4, 2007
|
|
DOLLAR
GENERAL CORPORATION
|
GUARANTOR
SUBSIDIARIES
|
ELIMINATIONS
|
CONSOLIDATED
TOTAL
|
STATEMENTS
OF CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,875
|
|
|
$
|
19,539
|
|
|
$
|
(19,539)
|
|
|
$
|
34,875
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,448
|
|
|
|
45,003
|
|
|
|
-
|
|
|
|
50,451
|
|
Deferred
income taxes
|
|
|
(4,158)
|
|
|
|
(790)
|
|
|
|
-
|
|
|
|
(4,948)
|
|
Noncash
share-based compensation
|
|
|
3,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,469
|
|
Tax
benefit from stock option exercises
|
|
|
(3,529)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,529)
|
|
Equity
in subsidiaries’ earnings, net
|
|
|
(19,539)
|
|
|
|
-
|
|
|
|
19,539
|
|
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
-
|
|
|
|
(11,977)
|
|
|
|
-
|
|
|
|
(11,977)
|
|
Prepaid expenses and other current assets
|
|
|
(764)
|
|
|
|
212
|
|
|
|
-
|
|
|
|
(552)
|
|
Accounts
payable
|
|
|
(3,913)
|
|
|
|
(58,957)
|
|
|
|
-
|
|
|
|
(62,870)
|
|
Accrued
expenses and other
|
|
|
4,868
|
|
|
|
20,779
|
|
|
|
-
|
|
|
|
25,647
|
|
Income
taxes
|
|
|
(12,638)
|
|
|
|
10,902
|
|
|
|
-
|
|
|
|
(1,736)
|
|
Other
|
|
|
(486)
|
|
|
|
942
|
|
|
|
-
|
|
|
|
456
|
|
Net
cash provided by operating activities
|
|
|
3,633
|
|
|
|
25,653
|
|
|
|
-
|
|
|
|
29,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,849)
|
|
|
|
(30,252)
|
|
|
|
-
|
|
|
|
(34,101)
|
|
Sales
of short-term investments
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
6,000
|
|
Purchases
of long-term investments
|
|
|
-
|
|
|
|
(5,670)
|
|
|
|
-
|
|
|
|
(5,670)
|
|
Proceeds
from sale of property and equipment
|
|
|
50
|
|
|
|
119
|
|
|
|
-
|
|
|
|
169
|
|
Net
cash used in investing activities
|
|
|
(3,799)
|
|
|
|
(29,803)
|
|
|
|
-
|
|
|
|
(33,602)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of long-term obligations
|
|
|
(138)
|
|
|
|
(2,515)
|
|
|
|
-
|
|
|
|
(2,653)
|
|
Payment
of cash dividends
|
|
|
(15,712)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,712)
|
|
Proceeds
from exercise of stock options
|
|
|
34,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,281
|
|
Changes
in intercompany note balances, net
|
|
|
(22,571)
|
|
|
|
22,571
|
|
|
|
-
|
|
|
|
-
|
|
Tax
benefit from stock option exercises
|
|
|
3,529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,529
|
|
Net
cash provided by (used in) financing
activities
|
|
|
(611)
|
|
|
|
20,056
|
|
|
|
-
|
|
|
|
19,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
(777)
|
|
|
|
15,906
|
|
|
|
-
|
|
|
|
15,129
|
|
Cash
and cash equivalents, beginning of period
|
|
|
114,310
|
|
|
|
74,978
|
|
|
|
-
|
|
|
|
189,288
|
|
Cash
and cash equivalents, end of period
|
|
$
|
113,533
|
|
|
$
|
90,884
|
|
|
$
|
-
|
|
|
$
|
204,417
|
|
(In
thousands)
|
For
the 13 weeks ended
May
5, 2006
|
|
DOLLAR
GENERAL CORPORATION
|
GUARANTOR
SUBSIDIARIES
|
ELIMINATIONS
|
CONSOLIDATED
TOTAL
|
STATEMENTS
OF CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
47,670
|
|
|
$
|
33,174
|
|
|
$
|
(33,174)
|
|
|
$
|
47,670
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,287
|
|
|
|
43,491
|
|
|
|
-
|
|
|
|
48,778
|
|
Deferred
income taxes
|
|
|
(171)
|
|
|
|
5,773
|
|
|
|
-
|
|
|
|
5,602
|
|
Noncash
share-based compensation
|
|
|
1,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,740
|
|
Tax
benefit from stock option exercises
|
|
|
(1,461)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,461)
|
|
Equity
in subsidiaries’ earnings, net
|
|
|
(33,174)
|
|
|
|
-
|
|
|
|
33,174
|
|
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
-
|
|
|
|
(161,704)
|
|
|
|
-
|
|
|
|
(161,704)
|
|
Prepaid
expenses and other current assets
|
|
|
(4,115)
|
|
|
|
(8,314)
|
|
|
|
-
|
|
|
|
(12,429)
|
|
Accounts
payable
|
|
|
11,294
|
|
|
|
58,173
|
|
|
|
-
|
|
|
|
69,467
|
|
Accrued
expenses and other
|
|
|
5,845
|
|
|
|
273
|
|
|
|
-
|
|
|
|
6,118
|
|
Income
taxes
|
|
|
(1,269)
|
|
|
|
(18,967)
|
|
|
|
-
|
|
|
|
(20,236)
|
|
Other
|
|
|
67
|
|
|
|
272
|
|
|
|
-
|
|
|
|
339
|
|
Net
cash provided by (used in) operating
activities
|
|
|
31,713
|
|
|
|
(47,829)
|
|
|
|
-
|
|
|
|
(16,116)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,754)
|
|
|
|
(74,348)
|
|
|
|
-
|
|
|
|
(77,102)
|
|
Purchases
of short-term investments
|
|
|
(6,000)
|
|
|
|
(4,476)
|
|
|
|
-
|
|
|
|
(10,476)
|
|
Sales
of short-term investments
|
|
|
6,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000
|
|
Purchases
of long-term investments
|
|
|
-
|
|
|
|
(10,809)
|
|
|
|
-
|
|
|
|
(10,809)
|
|
Proceeds
from sale of property and equipment
|
|
|
136
|
|
|
|
167
|
|
|
|
-
|
|
|
|
303
|
|
Net
cash used in investing activities
|
|
|
(2,618)
|
|
|
|
(89,466)
|
|
|
|
-
|
|
|
|
(92,084)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
|
116,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116,500
|
|
Repayments
of borrowings under revolving
credit
facility
|
|
|
(51,500)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,500)
|
|
Repayments
of long-term obligations, net
|
|
|
234
|
|
|
|
(2,598)
|
|
|
|
-
|
|
|
|
(2,364)
|
|
Payment
of cash dividends
|
|
|
(15,686)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,686)
|
|
Proceeds
from exercise of stock options
|
|
|
10,934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,934
|
|
Repurchases
of common stock
|
|
|
(79,947)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(79,947)
|
|
Changes
in intercompany note balances, net
|
|
|
(121,536)
|
|
|
|
121,536
|
|
|
|
-
|
|
|
|
-
|
|
Tax
benefit from stock option exercises
|
|
|
1,461
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,461
|
|
Other
financing activities
|
|
|
68
|
|
|
|
1
|
|
|
|
-
|
|
|
|
69
|
|
Net
cash provided by (used in) financing
activities
|
|
|
(139,472)
|
|
|
|
118,939
|
|
|
|
-
|
|
|
|
(20,533)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(110,377)
|
|
|
|
(18,356)
|
|
|
|
-
|
|
|
|
(128,733)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
110,410
|
|
|
|
90,199
|
|
|
|
-
|
|
|
|
200,609
|
|
Cash
and cash equivalents, end of period
|
|
$
|
33
|
|
|
$
|
71,843
|
|
|
$
|
-
|
|
|
$
|
71,876
|
|
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Accounting
Periods.
We
follow the concept of a 52-53 week fiscal year that ends on the Friday nearest
to January 31. The following text contains references to years 2007 and 2006,
which represent 52-week fiscal years ending or ended February 1, 2008 and
February 2, 2007, respectively. Consequently, references to quarterly accounting
periods for 2007 and 2006 contained herein refer to 13-week accounting periods.
This discussion and analysis is based on, should be read with, and is qualified
in its entirety by, the Condensed Consolidated Financial Statements and the
notes thereto. It also should be read in conjunction with the Forward-Looking
Statements/Risk Factors disclosure set forth in Part II, Item 1A of this
report.
Purpose
of Discussion.
We
intend for this discussion to provide the reader with information that will
assist in understanding our company and the critical economic factors that
affect our company. In addition, we hope to help the reader understand our
financial statements, the changes in certain key items in those financial
statements from period to period, and the primary factors that accounted for
those changes, as well as how certain accounting principles affect our financial
statements.
Proposed
Merger. On
March
11, 2007, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Buck Holdings L.P. (“Parent”) and Buck Acquisition Corp.
(“Merger Sub”), affiliates of Kohlberg Kravis Roberts & Co. (“KKR”), whereby
Merger Sub will be merged with and into us (the “Merger”). In the event the
Merger is consummated, we will continue as the surviving corporation and as
a
wholly owned subsidiary of Parent. A special meeting of shareholders has been
scheduled for June 21, 2007 for the purpose of voting on the proposed
merger.
Executive
Overview
The
nature of our business is moderately seasonal. Primarily because of sales of
holiday-related merchandise, sales in the fourth quarter have historically
been
higher than sales achieved in each of the first three quarters of the fiscal
year. Expenses, and to a greater extent operating income, vary by quarter.
Results of a period shorter than a full year may not be indicative of results
expected for the entire year. Furthermore, the seasonal nature of our business
may affect comparisons between periods.
For
the
quarter ended May 4, 2007, we had net income of $34.9 million, or $0.11 per
diluted share compared to net income of $47.7 million, or $0.15 per diluted
share for the quarter ended May 5, 2006. In summary, revenues increased by
$123.9 million in the 2007 period, or 5.8%, aided by new stores and a same-store
sales increase of 2.4%, while gross profit increased $48.8 million, or 8.4%,
resulting in a 0.7% increase in gross profit as a percentage of sales as
compared to the prior year period. The increase in gross profit was offset
by an
increase in selling, general and administrative expenses of $74.7 million,
or
2.0% as a percentage of sales, including expenses of approximately $29.6 million
relating to the closings of underperforming
stores
and expenses of $6.1 million incurred in connection with the proposed Merger.
See detailed discussions below for additional comments on financial performance
in the current year period as compared with the prior year
period.
Since
the
approval of the Merger by our Board of Directors, our management team has been
working with representatives from KKR on further evaluating our strategic and
operating initiatives. To date, we have not made significant changes to our
operating initiatives and plans in place.
We
have
made significant progress in our efforts, first announced in November 2006,
to
minimize the amount of merchandise in our stores that we carry over to
subsequent periods (“packaway”). We identified the targeted packaway inventories
in 2006 and launched programs to sell-through this inventory, eliminating over
half of the targeted merchandise by the end of fiscal 2006. As of May 4, 2007,
approximately $100 million of such merchandise, at cost, remains to be
sold. We are on schedule to achieve our plans with regard to the sale of
existing packaway inventories by
the
end of fiscal 2007. We
also
plan to sell virtually all current-year non-replenishable merchandise by taking
end-of-season markdowns to permit increased levels of newer, current-season
merchandise in the future.
Also
in
November 2006, we announced significant changes to our real estate strategy,
including our intention to close, by the end of fiscal 2007, approximately
400
stores that do not meet our revised real estate criteria. As of May 4, 2007,
we
have closed 281 of the targeted stores, 153 of which were closed in the first
quarter of 2007. In addition to store closings, our current plans are to remodel
or relocate approximately 200 stores and to decelerate new store openings to
approximately 300 new stores in fiscal 2007. In the first quarter, we opened
124
new stores, closed 171 stores, remodeled 25 stores and relocated 15 stores.
The
majority of these new, remodeled and relocated stores are in our new “racetrack”
store layout.
We
estimate that we will recognize total pre-tax selling, general and
administrative (“SG&A”) charges associated with the elimination of the
targeted packaway inventories and the closing of these 400 under-performing
stores of approximately $102.6 million. Of this total, approximately $29.6
million was reflected in our results of operations in the first quarter of
2007
and $33.4 million was reflected in the third and fourth quarters of 2006, as
follows (in millions):
|
Estimated
Total
|
Incurred
in
2006
|
Incurred
in
2007
|
Remaining
|
Lease
contract termination costs
|
$
|
36.6
|
|
$
|
5.7
|
|
$
|
$ |
15.3
|
|
$
|
15.6
|
|
One-time
employee termination benefits
|
|
0.9
|
|
|
0.3
|
|
|
|
0.3
|
|
|
0.3
|
|
Other
associated store closing costs
|
|
8.1
|
|
|
0.2
|
|
|
|
2.2
|
|
|
5.7
|
|
Inventory
liquidation fees
|
|
4.6
|
|
|
1.6
|
|
|
|
1.5
|
|
|
1.5
|
|
Asset
impairment & accelerated depreciation
|
|
9.0
|
|
|
8.3
|
|
|
|
0.3
|
|
|
0.4
|
|
Other
costs (a)
|
|
43.4
|
|
|
17.3
|
|
|
|
10.0
|
|
|
16.1
|
|
Total
|
$
|
102.6
|
|
$
|
33.4
|
|
$
|
$ |
29.6
|
|
$
|
39.6
|
|
|
(a)
Includes incremental store labor, advertising and other
costs.
|
The
remaining costs outlined in the table above are currently expected to be
incurred during 2007, with the majority expected to be incurred in the second
quarter. However, the
amount
and timing of these costs and charges as well as the amount of below-cost
inventory estimates and adjustments may vary materially depending on various
factors, including timing in the execution of the plan, the outcome of
negotiations with landlords and/or potential sublease tenants, the accuracy
of
assumptions used by management in developing these estimates, final inventory
levels, the timing and adequacy of markdowns, and retail market
conditions.
We
expect
markdowns from retail to continue at higher than historical levels as we sell
through the remaining packaway inventory. We currently expect the gross profit
rate to sales to be in the following ranges: 27 to 28 percent in fiscal 2007,
28
to 29 percent in fiscal 2008 and 29 to 30 percent in fiscal 2009. We expect
to
increase our sales mix of merchandise categories with higher gross profit rates,
such as home, apparel and seasonal merchandise, as we become increasingly able
to improve our merchandise assortments and stock our stores with more current
inventory. Achievement of our gross profit targets is contingent upon this
expected sales mix improvement as well as effective inventory management and
reductions in inventory shrink and damages.
In
addition to the strategic initiatives discussed above, we are now increasingly
focused on generating increased cash flows and improving profitability and
we
are in the early stages of implementing certain targeted retail practices which
are expected to positively impact our gross profit, sales productivity and
capital efficiency, including:
· |
Better
merchandising and category management, SKU rationalization and space
reallocation with an increased focus on gross margin, returns per
square
foot and shrink reduction;
|
· |
Optimizing
our real estate strategies by establishing a comprehensive real estate
review program based on new processes and technology directed with
a more
disciplined approach;
|
· |
Implementing
zone pricing across our store base;
|
· |
Increasing
foreign direct sourcing;
|
· |
Increasing
private label penetration with greater consistency; and
|
· |
Improving
distribution and transportation logistics.
|
Results
of Operations
The
following table contains results of operations data for the first 13 weeks
of
each of 2007 and 2006, and the dollar and percentage variances among those
periods:
|
13
Weeks Ended
|
|
2007
vs. 2006
|
(amounts
in millions, excluding per share amounts)
|
May
4,
2007
|
|
May
5,
2006
|
|
Amount
change
|
|
%
change
|
Net
sales by category:
|
|
|
|
|
|
|
|
|
|
|
|
Highly
consumable
|
$
|
1,523.8
|
|
$
|
1,456.0
|
|
$
|
67.8
|
|
4.7
|
%
|
%
of net sales
|
|
66.97%
|
|
|
67.68%
|
|
|
|
|
|
|
Seasonal
|
|
336.4
|
|
|
309.6
|
|
|
26.9
|
|
8.7
|
|
%
of net sales
|
|
14.79%
|
|
|
14.39%
|
|
|
|
|
|
|
Home
products
|
|
215.0
|
|
|
211.7
|
|
|
3.4
|
|
1.6
|
|
%
of net sales
|
|
9.45%
|
|
|
9.84%
|
|
|
|
|
|
|
Basic
clothing
|
|
200.0
|
|
|
174.2
|
|
|
25.8
|
|
14.8
|
|
%
of net sales
|
|
8.79%
|
|
|
8.10%
|
|
|
|
|
|
|
Net
sales
|
$
|
2,275.3
|
|
$
|
2,151.4
|
|
$
|
123.9
|
|
5.8
|
%
|
Cost
of goods sold
|
|
1,642.2
|
|
|
1,567.1
|
|
|
75.1
|
|
4.8
|
|
%
of net sales
|
|
72.18%
|
|
|
72.84%
|
|
|
|
|
|
|
Gross
profit
|
|
633.1
|
|
|
584.3
|
|
|
48.8
|
|
8.3
|
|
%
of net sales
|
|
27.82%
|
|
|
27.16%
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
577.7
|
|
|
503.0
|
|
|
74.7
|
|
14.9
|
|
%
of net sales
|
|
25.39%
|
|
|
23.38%
|
|
|
|
|
|
|
Operating
profit
|
|
55.4
|
|
|
81.3
|
|
|
(25.9)
|
|
(31.9)
|
|
%
of net sales
|
|
2.43%
|
|
|
3.78%
|
|
|
|
|
|
|
Interest
income
|
|
(2.6)
|
|
|
(2.5)
|
|
|
(0.1)
|
|
5.0
|
|
%
of net sales
|
|
(0.11)%
|
|
|
(0.11)%
|
|
|
|
|
|
|
Interest
expense
|
|
6.2
|
|
|
7.2
|
|
|
(1.1)
|
|
(14.9)
|
|
%
of net sales
|
|
0.27%
|
|
|
0.34%
|
|
|
|
|
|
|
Income
before income taxes
|
|
51.8
|
|
|
76.5
|
|
|
(24.7)
|
|
(32.3)
|
|
%
of net sales
|
|
2.28%
|
|
|
3.56%
|
|
|
|
|
|
|
Income
taxes
|
|
16.9
|
|
|
28.8
|
|
|
(11.9)
|
|
(41.4)
|
|
%
of net sales
|
|
0.74%
|
|
|
1.34%
|
|
|
|
|
|
|
Net
income
|
$
|
34.9
|
|
$
|
47.7
|
|
$
|
(12.8)
|
|
(26.8)
|
%
|
%
of net sales
|
|
1.53%
|
|
|
2.22%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
$
|
0.11
|
|
$
|
0.15
|
|
$
|
0.04
|
|
(26.7)
|
%
|
Weighted
average diluted shares
|
|
315.9
|
|
|
315.2
|
|
|
0.7
|
|
0.2
|
|
13
WEEKS ENDED MAY 4, 2007 AND MAY 5, 2006
Net
Sales.
The
$123.9 million increase in net sales resulted from opening 104 net new stores
since May 5, 2006, and a same-store sales increase of 2.4% for the 2007 period
compared to the 2006 period. The increase in same-store sales accounted for
approximately $50.3 million of the increase in sales while stores opened since
the end of the first quarter of 2006 were the primary contributor to the
remaining $73.6 million sales increase during the 2007 period.
We
monitor our sales internally by the four major categories noted above: highly
consumable, seasonal, home products and basic clothing. Generally, over the
past
several years, sales in the highly consumable category have become a greater
percentage of our overall sales mix while the sales of home products and basic
clothing have declined as a percentage of total
sales,
which has had a negative impact on our gross profit. We believe the shift has
been caused in part by changes in customers’ needs and also by our efforts to
attract and retain customers by broadening consumable product offerings and
including more recognizable brands. We are pleased with the sales of our higher
margin seasonal and basic clothing categories in the first quarter of 2007,
recognizing that these increases were aided by markdowns taken in connection
with our efforts to eliminate packaway inventories and to sell through new
merchandise in the current season. Because of the impact of sales mix on gross
profit, we continually review our merchandise mix and strive to adjust it when
appropriate. Maintaining an appropriate sales mix among the four categories
is
an integral part of achieving our gross profit and sales goals.
A
portion
of our same-store sales
increase in the 2007 period compared to the 2006 period was attributable to
increased sales in the highly consumable, seasonal, and basic clothing
categories, which had overall increases of $67.8 million, or 4.7%, $26.9
million, or 8.7%, and $25.8 million, or 14.8%, respectively. Same-store sales
were also positively impacted by an increase in the average dollar value of
transactions during the period. We believe that future same-store sales growth
is dependent upon an increase in the number of customer transactions as well
as
an increase in the dollar value of the average transaction.
Gross
Profit. Our
gross
profit rate, as a percent of sales, increased by 66 basis points in the 2007
period as compared with the 2006 period due to a number of factors, including
but not limited to: an increase in markups on purchases during the period;
a
reduction in receipts during the 2007 period as compared to the 2006 period
in
the highly consumable category, which generally has lower average markups;
and
higher sales (as a percentage of total sales) in our seasonal and basic clothing
categories, which generally have higher average markups. These factors were
partially offset by lower average markups on our beginning inventory in the
2007
period as compared with the 2006 period, and an increase in our shrink rate,
expressed in retail dollars as a percentage of sales, to 3.64% in the 2007
period compared to 3.31% in the 2006 period. The gross profit rate was also
unfavorably impacted by higher markdowns in the 2007 period, which were
partially offset by a reduction of our lower of cost or market inventory
impairment estimate at the end of the first quarter of 2007.
Selling,
General and Administrative (“SG&A”) Expense.
The
increase in SG&A expense as a percentage of sales in the 2007 period as
compared with the 2006 period was due to a number of factors, including but
not
limited to increases in the following expense categories: lease contract
termination costs (increased $15.1 million) due primarily to the closing of
153
stores in the current year period related to the strategic real estate
initiatives discussed above; professional fees (increased 193.7%) due primarily
to fees associated with the proposed Merger and strategic initiatives; repairs
and maintenance (increased 47.7%) due to increased store maintenance, including
activity associated with the strategic initiatives; a $5.1 million increase
in
SG&A expenses resulting from hurricane-related insurance recoveries during
the prior year period; incentive compensation expense (increased 88.7%) which
is
based upon our operating performance and changes to our 2007 bonus plan; health
benefits costs (increased 46.0%) due primarily to increased claims; and store
occupancy costs (increased 9.1%) primarily due to rising average monthly rentals
associated with our leased store locations. These increases were partially
offset by a 9.1% reduction in insurance costs primarily related to workers’
compensation due to
the
impact of changes in estimate of loss development factors and a 3.1% decline
in
depreciation and amortization expense due primarily to reduced depreciation
on
leasehold improvements.
Interest
Income.
Interest
income was relatively constant in the 2007 period compared to the 2006 period,
as increased earnings on short-term investments of
approximately $0.9 million, primarily due to higher average investment balances,
were offset by a $0.9 million decline in interest income in 2007 compared to
2006 due to the second quarter 2006 acquisition of the entity which held legal
title to and from which we formerly leased the South Boston distribution center
(“DC”), and the related elimination of the notes receivable which represented
debt issued by this entity.
Interest
Expense.
The
decrease in interest expense in the 2007 period compared to the 2006 period
is
due primarily to a decrease of $1.2 million on financing obligations which
were
related to the acquisition of the South Boston DC and were eliminated in 2006
as
described above and a decrease in interest related to income tax contingencies
of $1.0 million which, subsequent to the adoption of FIN 48, is now included
in
income tax expense. In the 2006 period, we increased our interest expense
related to income tax contingencies in response to changes in anticipated state
tax audit settlements. These decreases were partially offset by a reduction
in
capitalized interest expense of $1.2 million.
Income
Taxes. The
effective income tax rate for the 13-week period ended May 4, 2007 was 32.6%,
or
5.1% lower than the rate of 37.7% for the 13-week period ended May 5, 2006.
The
decrease in the effective income tax rate was primarily due to the following:
an
approximate 1.2% decrease as a result of the renewal, in late 2006, of the
federal laws which allow us to claim federal job credits for certain newly
hired
employees; and an approximate decrease of 6.3% in the 2007 period related to
the
settlement of income tax contingencies that did not occur in the 2006 period.
These decreases were partially offset by the following items which increased
the
effective income tax rate: an approximate 0.7% increase due principally to
state
income tax expense resulting from state law changes in the States of New York
and Texas; an approximate 0.1% increase due to lower state job related tax
credits (principally job credits earned in 2006 for our South Carolina
distribution center that did not reoccur in 2007); an increase of approximately
1.7% due to the post-FIN 48 inclusion of income tax related interest expense
in
the amount reported as income tax expense in 2007; and an increase of
approximately 0.7% related to non-deductible expenses incurred in connection
with the proposed Merger.
Recently
Adopted Accounting Standard
We
adopted the provisions of FIN 48 effective February 3, 2007. The adoption
resulted in an $8.9 million decrease in retained earnings and a reclassification
of certain amounts between deferred income taxes and other noncurrent
liabilities to conform to the balance sheet presentation requirements of FIN
48.
As of the date of adoption, the total reserve for uncertain tax benefits was
$77.9 million. This reserve excludes the federal income tax benefit for the
uncertain tax positions related to state income taxes which is now included
in
deferred tax assets. As a result of the adoption of FIN 48, the reserve for
interest expense related to income taxes was increased to $15.3 million and
a
reserve for potential penalties of $1.9 million related to uncertain income
tax
positions was recorded. As of the date of adoption, approximately $27.1
million
of the reserve for uncertain tax positions would impact our effective income
tax
rate if we were to recognize the tax benefit for these
positions.
Subsequent
to the adoption of FIN 48, the Company has elected to record income tax related
interest and penalties as a component of the provision for income tax
expense.
Liquidity
and Capital Resources
Current
Financial Condition / Recent Developments.
At May
4, 2007, we had total debt (including the current portion of long-term
obligations) of $267.6 million and $204.4 million of cash and cash equivalents,
compared with total debt of $270.0 million and $189.3 million of cash and cash
equivalents at February 2, 2007. Our net debt position remained relatively
constant during the first 13 weeks of 2007 due to the factors outlined
below.
Our
inventory balance represented approximately 47% of our total assets as of May
4,
2007. Our proficiency in managing our inventory balances can have a significant
impact on our cash flows from operations during a given period or fiscal year.
In addition, inventory purchases can be somewhat seasonal in nature, such as
the
purchase of warm-weather or Christmas-related merchandise. Inventory turns,
calculated on a rolling annualized basis using balances from each quarter,
were
4.3 times for the period ended May 4, 2007 compared to 4.1 times for the period
ended May 5, 2006 (a 53-week period).
As
described in Note 6 to the Condensed Consolidated Financial Statements, we
are
involved in a number of legal actions and claims, some of which could
potentially result in material cash payments. Adverse developments in those
actions could materially and adversely
affect our liquidity. We also have certain income tax-related contingencies
as
more fully described below under “Critical Accounting Policies and Estimates”.
Estimates of these contingent liabilities are included in our Condensed
Consolidated Financial Statements. However, future negative developments could
have a material adverse effect on our liquidity.
We
have a
credit facility with a maximum commitment of $400 million (with the ability
to
increase to $500 million upon our mutual agreement with the lenders) that
expires in June 2011. In addition to revolving loans, the credit facility
includes a $15 million swingline loan sub-limit and a $75 million letter of
credit sub-facility. Outstanding swingline loans and letters of credit reduce
the borrowing capacity under the credit facility. At May 4, 2007, we had no
outstanding borrowings and $23.8 million in letters of credit outstanding under
the credit facility and were in compliance with all financial covenants
contained in the credit facility.
We
have
$200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010.
This indebtedness was incurred to assist in funding our growth. Interest on
the
notes is payable semi-annually on June 15 and December 15 of each year. On
June
4, 2007, we announced that Merger Sub has commenced a cash tender offer to
purchase any and all of these notes in connection with the anticipated Merger.
The tender offer is contingent upon the closing of the Merger.
Significant
terms of our outstanding debt obligations could have an effect on our ability
to
incur additional debt financing. Our credit facility contains financial
covenants, which include
limits
on
certain debt to cash flow ratios, a fixed charge coverage test, and minimum
allowable consolidated net worth. Our credit facility also places certain
specified limitations on secured and unsecured debt. Our outstanding notes
discussed above place certain specified limitations on secured debt and place
certain limitations on our ability to execute sale-leaseback
transactions.
At
May 4,
2007 and February 2, 2007, we had commercial letter of credit facilities
totaling $200.0 million, of which $57.9 million and $116.1 million,
respectively, were outstanding for the funding of imported merchandise
purchases.
We
believe that our existing cash balances, anticipated cash flows from operations,
our credit facility, and our anticipated ongoing access to the capital markets,
if necessary, will be sufficient to meet our foreseeable liquidity and capital
resource needs.
Cash
flows from operating activities.
The
most significant components of the change in cash flows from operating
activities in the 2007 period as compared to the 2006 period were changes
in inventory balances, which increased by 1% overall during the first quarter
of
2007 compared to an 11% overall increase during the first quarter of 2006.
Significant changes in inventory levels occurred in the highly consumable
category, which increased by 2% in the 2007 period as compared to a 15% increase
in the 2006 period; the seasonal category, which increased by 2% in the 2007
period as compared to a 16% increase in the 2006 period; and the home products
category, which declined by 7% in the 2007 period as compared to a 6% increase
in the 2006 period. Related to and partially offsetting the changes in inventory
balances were offsetting changes in accounts payable balances. The $62.9 million
decline in accounts payable balances during the 2007 period was primarily due
to
a seasonal reduction in import merchandise payables. The decline in net income,
as described in more detail above, partially offset the increase in cash flows
from operating activities in the 2007 period as compared to the 2006
period.
Cash
flows from investing activities.
Significant components of property and equipment purchases in the 2007 period
included the following approximate amounts: $15 million for new stores; $5
million for improvements and upgrades to existing stores; $3 million for
distribution and transportation-related capital expenditures; and $2 million
for
systems-related capital projects. During the 2007 period, we opened 124 new
stores, remodeled 25 stores and relocated 15 stores.
Significant
components of our property and equipment purchases in the 2006 period included
the following approximate amounts: $22 million for the EZstore project (an
initiative designed to improve inventory flow from DCs to consumers); $17
million for new stores; $15 million for distribution and transportation-related
capital expenditures; and $9 million for capital projects in existing stores.
During the 2006 period, we opened 182 new stores.
Net
sales
of short-term investments of $6.0 million and purchases of long-term investments
of $5.7 million during the 2007 period, and net purchases of short-term and
long-term investments of $4.5 million and $10.8 million, respectively, during
the 2006 period relate primarily to our captive insurance
subsidiary.
Capital
expenditures for the 2007 fiscal year are projected to be approximately $180
to
$200 million. We anticipate funding our 2007 capital requirements with cash
flows from operations and our credit facility, if necessary.
Cash
flows from financing activities.
We had
no borrowings under our credit facility in the 2007 period and borrowings,
net
of repayments, of $65.0 million during the 2006 period. We repurchased
approximately 4.5 million shares of our common stock during the 2006 period
at a
total cost of $79.9 million. We paid cash dividends of $15.7 million, or $0.05
per share, on outstanding common stock during each of the 2007 and 2006 periods.
These uses of cash were offset by proceeds from the exercise of stock options
of
$34.3 and $10.9 million, respectively, during the 2007 and 2006
periods.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect reported amounts and related
disclosures. In addition to the estimates presented below, there are other
items
within our financial statements that require estimation but are not deemed
critical as defined below. We believe these estimates are reasonable and
appropriate. However, if actual experience differs from the assumptions and
other considerations used, the resulting changes could have a material effect
on
the financial statements taken as a whole.
Management
believes the following policies and estimates are critical because they involve
significant judgments, assumptions, and estimates. Management has discussed
the
development and selection of the critical accounting estimates with the Audit
Committee of our Board of Directors, and the Audit Committee has reviewed the
disclosures presented below relating to those policies and
estimates.
Merchandise
Inventories.
Merchandise inventories are stated at the lower of cost or market with cost
determined using the retail last-in, first-out (“LIFO”) method. Under our retail
inventory method (“RIM”), the calculation of gross profit and the resulting
valuation of inventories at cost are computed by applying a calculated
cost-to-retail inventory ratio to the retail value of sales. The RIM is an
averaging method that has been widely used in the retail industry due to its
practicality. Also, it is recognized that the use of the RIM will result in
valuing inventories at the lower of cost or market (“LCM”) if markdowns are
currently taken as a reduction of the retail value of inventories.
Inherent
in the RIM calculation are certain significant management judgments and
estimates including, among others, initial markups, markdowns, and shrinkage,
which significantly impact the gross profit calculation as well as the ending
inventory valuation at cost. These significant estimates, coupled with the
fact
that the RIM is an averaging process, can, under certain circumstances, produce
distorted cost figures. Factors that can lead to distortion in the calculation
of the inventory balance include:
· |
applying
the RIM to a group of products that is not fairly uniform in terms
of its
cost and selling price relationship and
turnover;
|
· |
applying
the RIM to transactions over a period of time that include different
rates
of gross profit, such as those relating to seasonal
merchandise;
|
· |
inaccurate
estimates of inventory shrinkage between the date of the last physical
inventory at a store and the financial statement date;
and
|
· |
inaccurate
estimates of LCM and/or LIFO
reserves.
|
Factors
that reduce potential distortion include the use of historical experience in
estimating the shrink provision, as discussed below, and the utilization of
an
independent statistician to assist in the LIFO sampling process and index
formulation. As part of this process, we also perform an inventory-aging
analysis for determining obsolete inventory. Our policy is to write down
inventory to an LCM value based on various management assumptions including
estimated below-cost markdowns and sales required to liquidate such aged
inventory in future periods. Inventory is reviewed on a quarterly basis and
adjusted as appropriate to reflect write-downs determined to be necessary.
The
estimated amount of the below-cost inventory write-downs for the strategic
merchandising initiatives discussed above in the “Executive Overview” is based
on management’s assumptions regarding the timing and adequacy of markdowns and
the final adjustment may vary materially from the estimate depending on various
factors, including timing of the execution of the plan, retail market conditions
and the accuracy of assumptions used by management in developing these
estimates.
Factors
such as slower inventory turnover due to changes in competitors’ tactics,
consumer preferences, consumer spending and unseasonable weather patterns,
among
other factors, could cause excess inventory requiring greater than estimated
markdowns to entice consumer purchases, resulting in an unfavorable impact
on
our consolidated financial statements. Sales shortfalls due to the above factors
could cause reduced purchases from vendors and associated vendor allowances
that
would also result in an unfavorable impact on our consolidated financial
statements.
We
calculate our shrink provision based on actual physical inventory results during
the fiscal period and an accrual for estimated shrink occurring subsequent
to a
physical inventory through the end of the fiscal reporting period. This accrual
is calculated as a percentage of sales at each retail store, at a department
level, and is determined by dividing the book-to-physical inventory adjustments
recorded during the previous twelve months by the related sales for the same
period for each store. To the extent that subsequent physical inventories yield
different results than this estimated accrual, our effective shrink rate for
a
given reporting period will include the impact of adjusting the estimated
results to the actual results. Although we perform physical inventories in
virtually all of our stores on an annual basis, the same stores do not
necessarily get counted in the same reporting periods from year to year, which
could impact comparability in a given reporting period.
Property
and Equipment.
Property and equipment are recorded at cost. We group our assets into relatively
homogeneous classes and generally provide for depreciation on a straight-line
basis over the estimated average useful life of each asset class, except for
leasehold
improvements,
which are amortized over the shorter of the applicable lease term or the
estimated useful life of the asset. The valuation and classification of these
assets and the assignment of useful depreciable lives involves significant
judgments and the use of estimates.
Impairment
of Long-lived Assets. We
review
the carrying value of all long-lived assets for impairment on an annual basis
or
more frequently whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. In accordance with Statement
of Financial Accounting Standards (“SFAS”) 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” we review for impairment stores open more
than two years for which current cash flows from operations are negative.
Impairment results when the carrying value of the assets exceeds the
undiscounted future cash flows over the life of the lease. Our estimate of
undiscounted future cash flows over the lease term is based upon historical
operations of the stores and estimates of future store profitability which
encompasses many factors that are subject to variability and difficult to
predict. If a long-lived asset is found to be impaired, the amount recognized
for impairment is equal to the difference between the carrying value and the
asset’s fair value. The fair value is estimated based primarily upon future cash
flows (discounted at our credit adjusted risk-free rate) or other reasonable
estimates of fair market value.
Insurance
Liabilities.
We
retain a significant portion of the risk for our workers’ compensation, employee
health insurance, general liability, property loss and automobile coverage.
These costs are significant primarily due to the large employee base and number
of stores. Provisions are made to this insurance liability on an undiscounted
basis based on actual claim data and estimates of incurred but not reported
claims developed by independent actuaries utilizing historical claim trends.
If
future claim trends deviate from recent historical patterns, we may be required
to record additional expenses or expense reductions, which could be material
to
our future financial results.
Contingent
Liabilities - Income Taxes.
Income
tax reserves are determined using the methodology established by the Financial
Accounting Standards Board (“FASB”) Interpretation 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement 109 (“FIN
48”). FIN 48, which was adopted by the Company as of February 3, 2007, requires
companies to assess each income tax position taken using a two step process.
A
determination is first made as to whether it is more likely than not that the
position will be sustained, based upon the technical merits, upon examination
by
the taxing authorities. If the tax position is expected to meet the more likely
than not criteria, the benefit recorded for the tax position equals the largest
amount that is greater than 50% likely to be realized upon ultimate settlement
of the respective tax position. Uncertain tax positions require determinations
and estimated liabilities to be made based on provisions of the tax law which
may be subject to change or varying interpretation. If our determinations and
estimates prove to be inaccurate, the resulting adjustments could be material
to
our future financial results.
Contingent
Liabilities - Legal Matters. We
are
subject to legal, regulatory and other proceedings and claims. We establish
liabilities as appropriate for these claims and proceedings based upon the
probability and estimability of losses and to fairly present, in conjunction
with the disclosures of these matters in our financial statements and SEC
filings, management’s view
of
our
exposure. We review outstanding claims and proceedings with external counsel
to
assess probability and estimates of loss. We re-evaluate these assessments
each
quarter or as new and significant information becomes available to determine
whether a liability should be established or if any existing liability should
be
adjusted. The actual cost of resolving a claim or proceeding ultimately may
be
substantially different than the amount of the recorded liability. In addition,
because it is not permissible under GAAP to establish a litigation liability
until the loss is both probable and estimable, in some cases there may be
insufficient time to establish a liability prior to the actual incurrence
of the
loss (upon verdict and judgment at trial, for example, or in the case of
a
quickly negotiated settlement). See Note 6 to the Condensed Consolidated
Financial Statements.
Lease
Accounting and Excess Facilities.
The
majority of our stores are subject to short-term leases (usually with initial
or
primary terms of 3 to 5 years) with multiple renewal options when available.
We
also have stores subject to build-to-suit arrangements with landlords, which
typically carry a primary lease term of between 7 and 10 years with multiple
renewal options. Approximately half of our stores have provisions for contingent
rentals based upon a percentage of defined sales volume. We recognize contingent
rental expense when the achievement of specified sales targets is considered
probable. We recognize rent expense over the term of the lease. We record
minimum rental expense on a straight-line basis over the base, non-cancelable
lease term commencing on the date that we take physical possession of the
property from the landlord, which normally includes a period prior to store
opening to make necessary leasehold improvements and install store fixtures.
When a lease contains a predetermined fixed escalation of the minimum rent,
we
recognize the related rent expense on a straight-line basis and record the
difference between the recognized rental expense and the amounts payable under
the lease as deferred rent. We also receive tenant allowances, which we record
as deferred incentive rent and amortize as a reduction to rent expense over
the
term of the lease. We reflect as a liability any difference between the
calculated expense and the amounts actually paid. Improvements of leased
properties are amortized over the shorter of the life of the applicable lease
term or the estimated useful life of the asset.
For
store
closures where a lease obligation still exists, we record the estimated future
liability associated with the rental obligation on the date the store is closed
in accordance with SFAS 146, “Accounting for Costs Associated with Exit or
Disposal Activities.” Based on an overall analysis of store performance and
expected trends, management periodically evaluates the need to close
underperforming stores. Liabilities are established at the point of closure
for
the present value of any remaining operating lease obligations, net of estimated
sublease income, and at the communication date for severance and other exit
costs, as prescribed by SFAS 146. Key assumptions in calculating the liability
include the timeframe expected to terminate lease agreements, estimates related
to the sublease potential of closed locations, and estimation of other related
exit costs. If actual timing and potential termination costs or realization
of
sublease income
differ from our estimates, the resulting liabilities could vary from recorded
amounts. These liabilities are reviewed periodically and adjusted when
necessary.
Share-Based
Payments.
Our
share-based stock option awards are valued on an individual grant basis using
the Black-Scholes-Merton closed form option pricing model. The application
of
this valuation model involves assumptions that are judgmental and highly
sensitive in the
valuation
of stock options, which affects compensation expense related to these options.
These assumptions include the term that the options are expected to be
outstanding, an estimate of the volatility of our stock price, applicable
interest rates and the dividend yield of our stock. Other factors involving
judgments that affect the expensing of share-based payments include estimated
forfeiture rates of share-based awards. If our estimates differ materially
from
actual experience, we may be required to record additional expense or reductions
of expense, which could be material to our future financial
results.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
have been no material changes to the disclosures relating to this item from
those set forth in our Annual Report on Form 10-K for the fiscal year ended
February 2, 2007.
ITEM
4. CONTROLS
AND PROCEDURES
(a) Disclosure
Controls and Procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information relating to us and our consolidated subsidiaries required to be
disclosed in our periodic filings under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,
summarized and reported in a timely manner in accordance with the requirements
of the Exchange Act, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. We carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the
Chief
Financial Officer, of the effectiveness of the design and operation of these
disclosure controls and procedures, as such term is defined in Exchange Act
Rule
13a-15(e), as of May 4, 2007. Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer each concluded that our disclosure
controls and procedures were effective as of May 4, 2007.
(b) Changes
in Internal Control Over Financial Reporting.
There
have been no changes in our internal control over financial reporting
(as
defined in Exchange Act Rule 13a-15(f)) identified in connection with the
evaluation of our internal control over financial reporting as required by
Exchange Act Rule 13a-15(d) that occurred during the quarter ended May 4, 2007
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
The
information contained in Note 6 to the Condensed Consolidated Financial
Statements under the heading “Legal Proceedings” contained in Part I, Item 1 of
this Form 10-Q is incorporated herein by this reference.
ITEM
1A. RISK
FACTORS
Investing
in our securities involves a degree of risk. Persons buying our securities
should carefully consider the risks described below and the other information
contained in this report and other filings that we make from time to time with
the SEC, including our consolidated financial statements and accompanying notes.
If any of the following risks actually occurs, our business, financial
condition, results of operation or cash flows could be materially adversely
affected. In any such case, the trading price of our securities could decline
and you could lose all or part of your investment. The risks described below
are
not the only ones facing us and are not intended to be a complete discussion
of
all potential risks or uncertainties. Additional risks not presently known
to us
or that we currently deem immaterial may also impair our business
operations.
Some
of the statements in our reports are not statements of historical fact; instead,
they are what are known as “forward-looking statements” that may or may not come
to fruition. Certain
of the discussions in this report and in the documents incorporated by reference
into this report may express or imply projections of revenues or expenditures;
plans and objectives for future operations, growth or initiatives (such as
the
proposed merger; expectations regarding certain planned real estate and
merchandising strategic and operational changes and their related timing,
charges and cost estimates and anticipated results and benefits; the expected
number of new store openings, relocations and remodels; our gross profit rate;
the expected sale of inventory and our plans with respect to product assortment,
inventory levels and the impact of seasonality; and other potential initiatives
and plans referred to in “Results of Operations - Executive Overview”); expected
future economic performance; the expected outcome or impact of pending or
threatened litigation; our anticipated effective tax rate; or the anticipated
levels of borrowings under our amended credit facility and the expected use
of
those funds. These and similar statements regarding events or results which
we
expect will or may occur in the future are forward-looking statements concerning
matters that involve risks and uncertainties that may cause actual results
to
differ materially from those projected. Forward-looking statements generally
may
be identified through the use of words such as “believe,” “anticipate,”
“project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,”
“intend,” “will likely result,” or “will continue” and similar
expressions.
Although
when we make forward-looking statements we believe they are based on reasonable
assumptions within the bounds of our knowledge of our business, a number of
factors could cause our actual results to differ materially from those that
are
projected. Factors and risks that may cause actual results to differ from this
forward-looking information include, but are not limited to, those described
below, as well as other factors discussed throughout this document, including,
without limitation, the factors described under “Critical Accounting Policies
and Estimates” or, from time to time, in our SEC filings, press releases and
other communications. We cannot assure you that the results or developments
expected or anticipated by us will be realized or, even if substantially
realized, that those results or developments will result in the expected
consequences for us or affect us or our operations in the way that we expect.
There
have been no material changes to the risk factors set forth in Part I, Item
1A
of the Company’s Annual Report on Form 10-K for the fiscal year ended February
2, 2007.
We
caution readers to evaluate all forward-looking information in the context
of
these risks and uncertainties and not to place undue reliance on forward-looking
statements made in this document which speak only as of the document’s date. We
have no obligation, and do not
intend, to publicly update or revise any of these forward-looking statements
to
reflect events or circumstances occurring after the date of this document or
to
reflect the occurrence of unanticipated events. We advise you, however, to
consult any further disclosures we may make on related subjects in the documents
we file with or furnish to the SEC or in our other public disclosures.
Investors
should also be aware that while we do, from time to time, communicate with
securities analysts and others, it is against our policy to selectively disclose
to them any material nonpublic information or other confidential commercial
information. Shareholders should not assume that we agree with any statement
or
report issued by any analyst regardless of the content of the statement or
report. To the extent that reports issued by securities analysts contain any
financial projections, forecasts or opinions, those reports are not our
responsibility.
General
economic factors may adversely affect our financial performance.
General
economic conditions in one or more of the markets we serve may adversely affect
our financial performance. A general slowdown in the economy, higher interest
rates, higher fuel and other energy costs, inflation, higher levels of
unemployment, higher consumer debt levels, higher tax rates and other changes
in
tax laws, and other economic factors could adversely affect consumer demand
for
the products we sell, change our sales mix of products to one with a lower
average gross profit and result in slower inventory turnover and greater
markdowns on inventory. Higher interest rates, higher commodities rates, higher
fuel and other energy costs, transportation costs, inflation, higher costs
of
labor, insurance and healthcare, foreign exchange rate fluctuations, higher
tax
rates and other changes in tax laws, changes in other laws and regulations
and
other economic factors increase our cost of sales and operating, selling,
general and administrative expenses, and otherwise adversely affect the
operations and operating results of our stores.
Our
plans depend significantly on initiatives designed to improve the efficiencies,
costs and effectiveness of our operations, and failure to achieve or sustain
these plans could affect our performance adversely. We
have
had, and expect to continue to have, initiatives (such as those relating to
marketing, advertising, merchandising, promotions and real estate) in various
stages of testing, evaluation, and implementation, upon which we expect to
rely
to improve our results of operations and financial condition. These initiatives
are inherently risky and uncertain, even when tested successfully, in their
application to our business in general. It is possible that successful testing
can result partially from resources and attention that cannot be duplicated
in
broader implementation. Testing and general implementation also can be affected
by other risk factors described herein that reduce the results expected.
Successful systemwide implementation relies on consistency of training,
stability of workforce, ease of execution, and the absence of offsetting factors
that can influence results adversely. Failure to achieve successful
implementation of our initiatives or the cost of these initiatives exceeding
management’s estimates could adversely affect our results of operations and
financial condition. Please
reference the discussion of the initiatives in the “Executive Overview” portion
of Management’s Discussion and Analysis.
Because
our business is moderately seasonal, with the highest portion of sales occurring
during the fourth quarter, adverse events during the fourth quarter could
materially
affect
our financial statements as a whole.
We
generally recognize a significant portion of our net sales and net income
during
the Christmas selling season, which occurs in the fourth quarter of our fiscal
year. In anticipation of this holiday, we purchase substantial amounts of
seasonal inventory
and hire many temporary employees. A seasonal merchandise inventory imbalance
could result if for any reason our net sales during the Christmas selling
season
were to fall below either seasonal norms or expectations. If for any reason
our
fourth quarter results were substantially below expectations, our profitability
and operating results could be adversely affected by unanticipated markdowns,
especially in seasonal merchandise. Lower than anticipated sales in the
Christmas selling season would also negatively affect our ability to absorb
the
increased seasonal labor costs.
We
face intense competition that could limit our growth opportunities and reduce
our profitability.
The
retail business is highly competitive. We
operate in the discount retail merchandise business, which is highly competitive
with respect to price, store location, merchandise quality, assortment and
presentation, in-stock consistency, and customer service. This competitive
environment subjects us to the risk of reduced profitability because of the
lower prices, and thus the lower margins, required to maintain our competitive
position. Also, companies operating in the discount retail merchandise sector
(due to customer demographics and other factors) have limited ability to
increase prices in response to increased costs (including vendor price
increases). This limitation may adversely affect our margins and profitability.
We
compete for customers, employees, store sites, products and services and in
other important aspects of our business with many other local, regional and
national retailers. We compete with retailers operating discount, mass
merchandise, drug, convenience, variety and specialty stores, supermarkets
and
supercenter-type stores.
Certain
of our competitors have greater financial, distribution, marketing and other
resources than we do. These other competitors
compete
in a variety of ways, including aggressive promotional activities, merchandise
selection and availability, services offered to customers, location, store
hours, in-store amenities and price. If we fail to respond effectively to
competitive pressures and changes in the retail markets, it could adversely
affect our financial performance.
Although
the retail industry as a whole is highly fragmented, certain segments of the
retail industry have recently undergone and continue to undergo some
consolidation, which can significantly alter the competitive dynamics of the
retail marketplace. This consolidation may result in competitors with greatly
improved financial resources, improved access to merchandise, greater market
penetration and other improvements in their competitive positions. These
business combinations could result in the provision of a wider variety of
products and services at competitive prices by these consolidated companies,
which could adversely affect our financial performance. Competition
for customers has intensified in recent years as larger competitors have moved
into, or increased their presence in, our geographic markets. We remain
vulnerable to the marketing power and high level of consumer recognition of
these larger competitors and to the risk that these competitors or others could
venture into the “dollar store” industry in a significant way. Generally, we
expect an increase in competition.
Natural
disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts
and geo-political events could adversely affect our financial performance.
The
occurrence of one or more natural disasters, such as hurricanes and earthquakes,
unusually adverse weather conditions, pandemic outbreaks, boycotts and
geo-political events, such as civil unrest in
countries
in which our suppliers are located and acts of terrorism, or similar disruptions
could adversely affect our operations and financial performance. These events
could result in physical damage to one or more of our properties, increases
in fuel (or other energy) prices, the
temporary or permanent closure of one or more of our stores or DCs, delays
in
opening new stores, the temporary lack of an adequate work force in a market,
the temporary or long-term disruption in the supply of products from some
local
and overseas suppliers, the temporary disruption in the transport of goods
from
overseas, delay in the delivery of goods to our DCs or stores, the temporary
reduction in the availability of products in our stores and disruption to
our
information systems. These events also can have indirect consequences such
as
increases in the costs of insurance following a destructive hurricane season.
These factors could otherwise disrupt and adversely affect our operations
and
financial performance.
Risks
associated with the domestic and foreign suppliers from whom our products are
sourced could adversely affect our financial performance.
The
products we sell are sourced from a wide variety of domestic and international
suppliers. Political and economic instability in the countries in which foreign
suppliers are located, the financial instability of suppliers, suppliers’
failure to meet our supplier standards, labor problems experienced by our
suppliers, the availability of raw materials to suppliers, merchandise quality
issues, currency exchange rates, transport availability and cost, inflation,
and
other factors relating to the suppliers and the countries in which they are
located are beyond our control. In addition, the United States’ foreign trade
policies, tariffs and other impositions on imported goods, trade sanctions
imposed on certain countries, the limitation on the importation of certain
types
of goods or of goods containing certain materials from other countries and
other
factors relating to foreign trade are beyond our control. Disruptions
due to labor stoppages, strikes or slowdowns, or other disruptions, involving
our vendors or the transportation and handling industries also may negatively
affect our ability to receive merchandise and thus may negatively affect
sales.
These
and other factors affecting our suppliers and our access to products could
adversely affect our financial performance. In
addition, our ability to obtain indemnification from foreign suppliers may
be
hindered by the manufacturers’ lack of understanding of U.S. product liability
or other laws, which may make it more likely that we may be required to respond
to claims or complaints from customers as if we were the manufacturer of the
products. As we increase our imports of merchandise from foreign vendors, the
risks associated with foreign imports will increase.
We
are dependent on attracting and retaining qualified employees while also
controlling labor costs. Our
future performance depends on our ability to attract, retain and motivate
qualified employees. Many of these employees are in entry-level or part-time
positions with historically high rates of turnover. Availability
of personnel varies widely from location to location. Our ability to meet our
labor needs generally, including our ability to find qualified personnel to
fill
positions that become vacant at our existing stores and DCs, while controlling
our labor costs, is subject to numerous external factors, including the
availability of a sufficient number of qualified persons in the work force
of
the markets in which we are located, unemployment levels within those markets,
prevailing wage rates and changes in minimum wage laws, changing demographics,
health and other insurance costs and changes in employment legislation.
Increased turnover also can have significant indirect costs, including more
recruiting and training needs, store disruptions due to management changeover
and potential delays in new store openings or adverse customer reactions to
inadequate customer service levels due to
personnel
shortages. Competition for qualified employees exerts upward pressure on
wages
paid to attract such personnel.
Also,
our
stores are decentralized and are managed through a network of geographically
dispersed management personnel. Our inability to effectively and efficiently
operate our stores, including the ability to control losses resulting from
inventory and cash shrinkage, may negatively affect our sales and/or operating
margins.
Our
planned future growth will be impeded, which would adversely affect sales,
if we
cannot open new stores on schedule or if we close a number of stores materially
in excess of anticipated levels.
Our
growth is dependent on both increases in sales in existing stores and the
ability to open new stores. Our ability to timely open new stores and to expand
into additional market areas depends in part on the following factors: the
availability of attractive store locations; the absence of occupancy delays;
the
ability to negotiate favorable lease terms; the ability to hire and train new
personnel, especially store managers; the ability to identify customer demand
in
different geographic areas; general economic conditions; and the availability
of
sufficient funds for expansion. In addition, many of these factors affect our
ability to successfully relocate stores. Many of these factors are beyond our
control. Delays or failures in opening new stores, or achieving lower than
expected sales in new stores, or drawing a greater than expected proportion
of
sales in new stores from existing stores, could materially adversely affect
our
growth. In addition, we may not anticipate all of the challenges imposed by
the
expansion of our operations and, as a result, may not meet our targets for
opening new stores or expanding profitably.
Some
of
our new stores may be located in areas where we have little or no meaningful
experience. Those markets may have different competitive conditions, market
conditions, consumer tastes and discretionary spending patterns than our
existing markets, which may cause our new stores to be less successful than
stores in our existing markets.
Some
of
our new stores will be located in areas where we have existing units. Although
we have experience in these markets, increasing the number of locations in
these
markets may cause us to over-saturate markets and temporarily or permanently
divert customers and sales from our existing stores, thereby adversely affecting
our overall profitability.
We
are dependent upon the smooth functioning of our distribution network, the
capacity of our DCs, and the timely receipt of
inventory.
We
rely
upon the ability to replenish depleted inventory through deliveries to our
DCs
from vendors and from the DCs to our stores by various means of transportation,
including shipments by sea and truck. Labor shortages in the transportation
industry could negatively affect transportation costs. In addition, long-term
disruptions to the national and international transportation infrastructure
that
lead to delays or interruptions of service would adversely affect our business.
The
efficient operation of our business is heavily dependent upon our information
systems.
We
depend
on a variety of information technology systems for the efficient functioning
of
our business. We rely on certain software vendors to maintain and periodically
upgrade many of these systems so that they can continue to support our business.
The software programs supporting many of our systems were licensed to us by
independent software developers. The
inability
of these developers or us to continue to maintain and upgrade these information
systems and software programs would disrupt or reduce the efficiency of our
operations if we were unable to convert to alternate systems in an efficient
and
timely manner. In addition, costs and potential problems and interruptions
associated with the implementation of new or upgraded systems and technology
or
with maintenance or adequate support of existing systems could also disrupt
or
reduce the efficiency of our operations. We also rely heavily on our information
technology staff. If we cannot meet our staffing needs in this area, we may
not
be able to fulfill our technology initiatives while continuing to provide
maintenance on existing systems.
We
are subject to governmental regulations, procedures and requirements. A
significant change in, or noncompliance with, these regulations could have
a
material adverse effect on profitability. Our
business is subject to numerous federal, state and local regulations. Changes
in
these regulations, particularly those governing the sale of products, may
require extensive system and operating changes that may be difficult to
implement and could increase our cost of doing business. Untimely compliance
or
noncompliance with applicable regulations or untimely or incomplete execution
of
a required product recall can result in the imposition of penalties, including
loss of licenses or significant fines or monetary penalties.
Our
current insurance program may expose us to unexpected costs and negatively
affect our profitability. Historically,
our insurance coverage has reflected deductibles, self-insured retentions,
limits of liability and similar provisions that we believe are prudent based
on
the dispersion of our operations. However, there are types of losses we may
incur but against which we cannot be insured or which we believe are not
economically reasonable to insure, such as losses due to acts of war, employee
and certain other crime and some natural disasters. If we incur these losses,
our business could suffer. Certain material events may result in sizable losses
for the insurance industry and adversely impact the availability of adequate
insurance coverage or result in excessive premium increases. To offset negative
insurance market trends, we may elect to self-insure, accept higher deductibles
or reduce the amount of coverage in response to these market changes. In
addition, we self-insure a significant portion of expected losses under our
workers’ compensation, automobile liability, general liability and group health
insurance programs. Unanticipated changes in any applicable actuarial
assumptions and management estimates underlying our recorded liabilities for
these losses, including expected increases in medical and indemnity costs,
could
result in materially different amounts of expense than expected under these
programs, which could have a material adverse effect on our financial condition
and results of operations. Although
we continue to maintain property insurance for catastrophic events, we are
effectively self-insured for losses up to the amount of our deductibles. If
we
experience a greater number of these losses than we anticipate, our
profitability could be adversely affected.
Litigation
may adversely affect our business, financial condition and results of
operations. Our
business is subject to the risk of litigation by employees, consumers,
suppliers, shareholders, government agencies, or others through private actions,
class actions, administrative proceedings, regulatory actions or other
litigation. The outcome of litigation, particularly class action lawsuits and
regulatory actions, is difficult to assess or quantify. Plaintiffs in these
types of lawsuits may seek recovery of very large or indeterminate amounts,
and
the magnitude of the potential loss relating to these lawsuits may remain
unknown for substantial periods of time. In addition, certain of these lawsuits,
if decided adversely to us or
settled
by us, may result in liability material to our financial statements as a
whole
or may negatively affect our operating results if changes to our business
operation are required. The cost to defend future litigation may be significant.
There also may be adverse publicity associated with litigation that could
negatively affect customer perception of our business, regardless of whether
the
allegations are valid or whether we are ultimately found liable. As a result,
litigation may adversely affect our business, financial condition and results
of
operations. Please
see Note 6 to the consolidated financial statements for further details
regarding certain of these pending matters.
In
addition, from time to time, third parties may claim that our trademarks or
product offerings infringe upon their proprietary rights. Any such claim,
whether or not it has merit, could be time-consuming and distracting for
executive management, result in costly litigation, cause changes to our private
label offerings or delays in introducing new private label offerings, or require
us to enter into royalty or licensing agreements. As a result, any such claim
could have a material adverse effect on our business, results of operations
and
financial condition.
Our
credit facility and other debt instruments place financial and other
restrictions on us. Our
debt
obligations and financings have certain financial covenants and limits on our
ability to incur additional indebtedness, to sell assets and to make certain
payments. The lender’s ongoing obligation to extend credit under these
financings will depend upon our compliance with these and other covenants.
In
addition, we may need to incur additional indebtedness which may have important
consequences, including placing us at a competitive disadvantage compared to
our
competitors that may have proportionately less debt, limiting our flexibility
in
planning for changes in our business and the industry and making us more
vulnerable to economic downturns and adverse developments in our
business.
Our
profitability could decline if we substantially exceed our anticipated
borrowings under our amended credit facility.
The
amount of borrowings under our amended credit facility may fluctuate materially,
particularly given the seasonality of our business, depending on various
factors, including the time of year, our need to acquire merchandise inventory,
changes to our merchandising plans and initiatives, changes to our capital
expenditure plans and the occurrence of other events or transactions that may
require funding through the amended credit facility. If these borrowings under
our amended credit facility exceed our anticipated levels, our interest expense
would increase beyond our expectations and a decrease in our profitability
could
result.
Our
annual and quarterly operating results may fluctuate significantly and could
fall below the expectations of securities analysts and investors due to a number
of factors, some of which are beyond our control, resulting in a decline in
the
price of our securities. Our
annual and quarterly operating results may fluctuate significantly because
of
several factors, including those described above. Accordingly, results for
any
one quarter are not necessarily indicative of results to be expected for any
other quarter or for any year, and revenues and net income for any particular
future period may decrease. In the future, operating results may fall below
the
expectations of securities analysts and investors. In that event, the price
of
our securities could decrease.
Failure
to complete the proposed merger could adversely affect
us. On
March
11, 2007, we entered into a merger agreement with affiliates of Kohlberg Kravis
Roberts & Co. L.P.
(“KKR”).
There is no assurance that the merger agreement and the merger will be approved
by our shareholders or that the other conditions to the completion of the merger
will be satisfied. The current market price of our common stock may reflect
a
market assumption that the merger will be completed, and a failure to complete
the merger could result in a decline in the market price of our common stock.
Consummation of the merger is subject to the following risks:
· |
the
occurrence of any event, change or other circumstances that could
give
rise to a termination of the merger
agreement;
|
· |
the
outcome of any legal proceedings that have been or may be instituted
against us, members of our Board of Directors and others relating
to the
merger agreement, including the terms of any settlement of such legal
proceedings that may be subject to court
approval;
|
· |
the
inability to complete the merger due to the failure to obtain shareholder
approval or the failure to satisfy other conditions to consummation
of the
merger;
|
· |
the
failure by KKR or its affiliates to obtain the necessary debt financing
arrangements set forth in the commitment letter received in connection
with the merger; and
|
· |
the
failure of the merger to close for any other
reason.
|
In
addition, in connection with the merger we will be subject to several risks,
including the following:
· |
there
may be substantial disruption to our business and a distraction of
our
management and employees from day-to-day operations, because matters
related to the merger may require substantial commitments of their
time
and resources;
|
· |
uncertainty
about the effect of the merger may adversely affect our credit rating
and
our relationships with our employees, suppliers and other persons
with
whom we have business relationships;
|
· |
certain
costs relating to the merger, such as legal, accounting and financial
advisory fees, are payable by us whether or not the merger is completed;
and
|
· |
under
certain circumstances, if the merger is not completed, we may be
required
to pay the buyer a termination fee of up to $225 million.
|
Provisions
in
our charter, Tennessee law and our shareholder rights plan may discourage
potential acquirors of our company, which could adversely affect the value
of
our securities. Our
charter contains provisions that may have the effect of making it more difficult
for a third party to acquire or attempt to acquire control of our company.
In
addition, we are subject to certain provisions of Tennessee law that limit,
in
some cases, our ability to engage in certain business combinations with
significant shareholders. Also, our shareholder rights plan may inhibit
accumulations of substantial amounts of our common stock without the approval
of
our Board of Directors.
These
provisions, either alone, or in combination with each other, give our current
directors and executive officers a substantial ability to influence the outcome
of a proposed acquisition of our company. These provisions would apply even
if
an acquisition or other significant corporate transaction was considered
beneficial by some of our shareholders. If a change in control or change in
management is delayed or prevented by these provisions, the market price of
our
securities could decline.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table contains information regarding purchases of the Company’s common
stock made during the quarter ended May 4, 2007 by or on behalf of the Company
or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities
Exchange Act of 1934:
|
Period
|
|
Total
Number
of
Shares Purchased (a)
|
|
Average
Price Paid per Share
|
|
Total
Number
of
Shares Purchased as Part of Publicly Announced Plans or Programs
(b)
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs (b)
|
|
|
|
02/03/07-02/28/07
|
|
232
|
|
$17.16
|
|
|
-
|
|
|
$500,000,000
|
|
|
|
|
03/01/07-03/31/07
|
|
629
|
|
$21.18
|
|
|
-
|
|
|
$500,000,000
|
|
|
|
|
04/01/06-05/04/07
|
|
4,201
|
|
$21.15
|
|
|
-
|
|
|
$500,000,000
|
|
|
|
|
Total
|
|
5,062
|
|
$20.97
|
|
|
-
|
|
|
$500,000,000
|
|
|
(a)
Includes 891 shares purchased in open market transactions in satisfaction of
our
obligations under certain employee benefit plans and 4,171 shares accepted
in
lieu of cash to pay employee tax liabilities upon lapse of restrictions on
restricted stock.
(b)
On
November 29, 2006, we announced that our Board of Directors had approved a
share
repurchase program of up to $500 million of outstanding shares of our common
stock. Under the authorization, purchases may be made in the open market or
in
privately negotiated transactions from time to time subject to market
conditions. This repurchase authorization expires on December 31,
2008.
ITEM
6. EXHIBITS
See
Exhibit Index immediately following the signature page hereto, which Exhibit
Index is incorporated by reference as if fully set forth herein.
SIGNATURES
Pursuant
to the requirements 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, both on behalf of the Registrant and in his capacity as
principal financial and accounting officer of the Registrant.
|
DOLLAR
GENERAL CORPORATION
|
|
|
|
|
|
|
Date: June
7, 2007
|
By:
|
/s/
David M. Tehle
|
|
|
David
M. Tehle
|
|
|
Executive
Vice President and Chief Financial
Officer
|
EXHIBIT
INDEX
10.1 |
|
Agreement
and Plan of Merger, dated as of March 11, 2007, by and among Buck
Holdings, L.P., Buck Acquisition Corp., and Dollar General Corporation
(incorporated by reference to the Company’s Current Report on Form 8-K
dated March 12, 2007, filed March 12, 2007). |
|
|
|
10.2 |
|
Second
Amendment to Rights Agreement, dated as of March 12, 2007, between
Dollar
General Corporation and Registrar and Transfer Company, as Rights Agent
(incorporated by reference to the Company’s Current Report on Form 8-K
dated March 13, 2007, filed March 13, 2007). |
|
|
|
10.3 |
|
Dollar
General Corporation 2007 TeamShare Bonus Program for Named Executive
Officers. |
|
|
|
10.4 |
|
Form
of Restricted Stock Unit Award Agreement and Election Forms in connection
with restricted stock unit grants made to outside directors pursuant
to
the Dollar General Corporation 1998 Stock Incentive
Plan. |
|
|
|
31 |
|
Certifications
of CEO and CFO under Exchange Act Rule 13a-14(a). |
|
|
|
32 |
|
Certifications
of CEO and CFO under 18 U.S.C. 1350. |
42