Dollar General Corporation (DG)

Q2 2011 Earnings Conference Call

August 30, 2011 10:00 ET

Executives

Mary Winn Gordon – Vice President of Investor Relations and Public Relations

Rick Dreiling – Chairman and Chief Executive Officer

David Tehle – Chief Financial Officer

Analysts

Deborah Weinswig – Citi

Scot Ciccarelli – RBC Capital Markets

Colin McGranahan – Bernstein

Emily Shanks – Barclays Capital

Meredith Adler – Barclays

Joseph Parkhill – Morgan Stanley

Wayne Hood – BMO Capital

John Zolidis – Buckingham Research Group

Matt Nemer – Wells Fargo

Mark Montagna – Avondale Partners

Mark Mandel – ThinkEquity

Kelly – Telsey Advisory Group

TheStreet Recommends

Anthony Chukumba – BB&T Capital Markets

Michael Exstein – Credit Suisse

Presentation

Operator

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Ladies and gentlemen, this is the Dollar General Corporation Second Quarter 2011 Conference Call on Tuesday, August 30, 2011 at 9 o’clock AM Central Time. Good morning and thank you for participating in today’s call which is being recorded by Conference America. No other recordings or rebroadcast of this session are allowed without the company’s permission.

It is now my pleasure to turn the call over to Ms. Mary Winn Gordon, Dollar General’s Vice President of Investor Relations and Public Relations. Ms. Gordon, you may begin.

Mary Winn Gordon – Vice President of Investor Relations and Public Relations

Thank you and good morning everyone. On the call today are Rick Dreiling, our Chairman and Chief Executive Officer and David Tehle, our Chief Financial Officer. We will first go through our prepared remarks and then we’ll open the call up for questions.

Before Rick begins, I will provide some cautionary comments regarding our forward-looking statements and non-GAAP disclosures. Today’s comments will include forward-looking statements such as those about our expectations, plans, strategies, objectives, and anticipated financial and operating results, including, but not limited to our comments regarding our forecasted 2011 financial performance, planned merchandizing, operating and best control initiatives, store growth and capital expenditures, as well as our expectations with regards to starting consumer and economic trends. You can identify forward-looking statements because they do not relate solely to historical matters or they contain words such as believe, anticipate, project, plan, expect, forecast, guidance, experience will likely result, or will continue and similar statement. Because they have subject to significant risks and uncertainties, we cannot assure you that forward-looking statements will prove to be correct or that any trends will continue.

Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our second quarter earnings release issued this morning, our 2010 10-K filed on March 22, 2011, and in the comments that will be made on this call. You should not unduly rely on these statements, which speak only as of today’s date. Dollar General disclaims any obligation to update or revise any information discussed in this call.

In addition, we will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning’s earnings press release, which can be found on our website at dollargeneral.com under Investor Information press releases. You should not consider any of this information as a substitute for the most comparable GAAP measure, because not all companies use identical calculations. These presentations may not be comparable to other similarly titled measures of other companies.

It’s now my pleasure to turn the call over to Rick.

Rick Dreiling – Chairman and Chief Executive Officer

Thank Mary Winn and good morning and thank you all for joining us today. We had yet another great quarter. I am very pleased with our financial results as well as the operational progress the Dollar General team delivered.

Sales exceeded our expectations as we expanded our overall share of the consumables market. Our most recent Nielsen data shows that we have continued to increase our market share in units and dollars on a four-week, 12-week, 24-week, and 52-week basis. Our comp store sales accelerated from the first quarter and we continued to successfully expand our store base. However, the macroeconomic environment has remained difficult for consumers who continue to face high unemployment rates, high gasoline, and high food cost.

Our results gives us confidence that we are continuing to meet our customer’s expectations even though we have had to pass-through some of our unavoidable cost increases. I am very pleased that we have been able to grow market share profitably while balancing the challenges of pricing and rising input cost.

Key financial highlights of the second quarter include total sales growth of 11.2% over last year’s second quarter to $3.6 billion including a same-store sales increase of 5.9%. As you would expect in this environment, sales growth was primarily driven by consumables with our strongest results in food, snacks, and perishables. Pet supplies and health and beauty care performed very well also.

On an annual basis, our sales reached $205 per square foot, that’s up from $199 a year ago. Our gross margin rate declined 11 basis points from last year to 32.1% in the second quarter. SG&A as a percentage of sales was down 54 basis points and our operating profit increased by 16% to 9.8% of sales, a 43 basis point improvement over last year and a new second quarter record.

Our strong cash flow has enabled us to repurchase all of our senior notes significantly decreasing our interest expense with an even more dramatic effect going forward. Adjusted for the impact of the debt repurchase, second quarter net income grew by 25% over the prior year to $181 million or $0.52 per share.

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