Financial Analysis
A financial analysis is important in understanding how a company is performing. It shows whether or not the strategies that have been implemented are actually effective for the company. To analyze how Dollar General is performing, this section of the paper will mainly focus on the income statement, balance sheet, and other performance metrics.
Revenue
(Obtained from Mergent Online and Dollar General Corporation Financials)
When analyzing the income statement, there is a continuous increase in revenue of about 1.5 billion dollars between each fiscal year from 2013-2017. This trend is linked to the expansion of Dollar General locations. Dollar General stores saw a 4.4% increase in same store sales of new locations put up in the 2017 fiscal year (Cite 10K). By the end of fiscal year 2017, management expects that 75% of the U.S. population will be within five miles of a Dollar General location (Sharma, 2017). The fact that three out of every four people in the country will live within a short drive of a store location demonstrates how entrenched it is. Currently there are 14,600 Dollar General stores, and plans for further expansion in 2018 have been put in motion. One strategy Dollar General is implementing to its advantage by opening these new stores is the strategy of gaining greater geographical reach. Dollar General is expanding its locations not only in metropolitan areas, but also in rural, small towns where there is an opportunity for the stores to thrive. The store offers everyday, yet necessary items, seasonal items, and basic clothing. Many people visit these stores, not for the customer service or aesthetic of them, but for the convenience. This can explain why consumables generated the largest portion of revenue of the store’s merchandise, as seen in Figure 2 below. The store takes advantage of the fact that many people view it in some aspects, as a convenience store, making it easy for them to quickly pick up items they may have forgotten or have ran out of.
Figure 2 (Retrieved from 2017 10K Report)
The fact that Dollar General stores are now within a 3-5 mile radius or no more than 10 minute drive of most neighborhoods, allows for greater accessibility to the items households may need, which is often more convenient for the customer. Sales as a whole increased by 11% in the third quarter of 2017 compared to 2016, and this is mostly attributed to increases in customer traffic linked to the more store locations (Dollar General Reports, 2018). Many stores individually saw increases in same store sales as well.
Selling, General, and Administrative Expenses
SG&A expenses have increased in dollar amount over the 2013-2017 fiscal years. There was a 494 million dollar increase during the 2017 fiscal year. This stemmed from the increase of retail labor expenses as a result of the company investing more money into store manager compensation and higher incentive compensation (Dollar General Reports, 2018). The other expenses associated with this increase were attributed to the two hurricanes (Harvey and Irma) that hit in the third quarter of the fiscal year. The hurricanes’ negative impact included the loss of inventory as well as expenses needed for repairs for damages of buildings and equipment. The 353 million dollar increase that occured in 2016 was associated mostly with the acquisition of of former Walmart express store locations and also lease termination costs. Dollar General purchased 41 former Walmart Express stores in order to relocate their existing stores to the new sites by October 2016 (Fortune, 2016). The increase that occurred in the 2014 fiscal year was due to significantly higher incentive compensation expense, as well as expenses linked to the attempted acquisition of Family Dollar stores, which Family Dollar declined the 9 billion dollar cash offer that was made. A decrease in general liability expenses in 2014 contributed to the overall improvement in SG&A as a percentage of sales; however, in dollar amount, the company still saw an increase in their SG&A expenses (Dollar General Reports, 2014 ).
Dollar General was able lower their utility costs and advertising costs in 2017, as well as their waste management costs with the help of recycling; however, hurricane expenses unfortunately offset these savings.
Income Statement (Obtained from Mergent Online)
Common size statements allow for easier analysis of a company between time periods. Dollar General’s margins have been relatively consistent over the past 4 years. Majority of revenue made was allocated to direct costs, at 69%. Sixty-eight percent of Dollar Trees revenue went to direct costs, while 74% of Walmart’s. Dollar General’s direct costs were strongly linked to COGS factors the company has to improve on, like their trucking and warehouse choices for example. The next largest category that obtained Dollar General’s revenue was the selling, general, and administrative expenses, which accounted for 22% of revenue in the 2017 fiscal year. This increase was due to the company’s investment in manager compensation and training initiatives and also expenses that occured due to the natural disasters that occured in 2017 (Dollar General Reports, 2017). Noteworthy for comparison is the fact that though its competitor Walmart is doing better in terms of the percentage of revenue that must go to SG&A, their number reflects the newly strategized shift of focus to growing sales via e-commerce as opposed to opening new stores. This helps keep SG&A, as well as operating costs lower in comparison to the Dollar General and the Dollar Tree. Dollar General currently does not compete at this level of online commerce. While Dollar General is cognizant of the changing customer shopping experience, they are not competing on this metric, and likely will not be anytime soon due to the fact that online shopping is not a priority in their model. With the recent announcement of Amazon offering $5.99 Prime to individuals who qualify for the Medicaid program though, Dollar General would be wise to prepare and strategize to combat the potential negative impact this could have on their company considering a portion of their target market would fall into this group (Stevens, 2018).
Gross Profit Margin
The gross profit margin shows the proportion of revenue that remains after cost of goods sold have been accounted for. The gross profit margin has fluctuated since 2015. The main cause of this trend was the increase in cost of goods sold during those years following the 2015 fiscal year. These increases in COGS can be linked to the fact that Dollar General still uses third party trucking companies to get their merchandise from the warehouse to the stores. Also, Dollar General leases temporary warehouses to better meet their distribution needs. Despite the increase in revenue that was occurring as well, the increase of COGS still impacted the end result of gross profit by decreasing it. For example, the decrease that occured in the 2017 fiscal year was strongly linked to the grocery deflation that occured in the economy. This affected Dollar General’s cost of goods sold due to the fact that the company could not sell the merchandise they purchased at the intended price they desired at the time of purchase. Because the goods that Dollar General sells are so commoditized, their prices had to be lowered in order to compete with other competitors who also were feeling the effects of deflation. Another factor that affected GPM in the 2017 fiscal year was the change in the SNAP benefits criteria. The changes took effect in states that had the highest concentration of Dollar General Stores: Alabama, Florida, Georgia, and Tennessee (Ramakrishnan, 2016). This left a portion of Dollar General’s target market not able to frequent the store and shop as often, if at all.
Operating Profit Margin
A decrease in operating income can be a cause of concern for a company’s financial health.
Dollar General’s operating profit during this span of time fluctuated as well. The decrease that occured in the 2017 fiscal year was largely due to an uncontrollable factor from the company’s standpoint. In that fiscal year, hurricanes Harvey and Irma hit the Texas area, causing much damage. Dollar General stores felt the effects of this in the lost and damaged inventory they encountered. Many of the buildings and equipment were damaged as well, which was more expense the company incurred. Just in the Houston area alone, there were 110 Dollar General Locations, many of which were negatively impacted by the storms. The decrease that occured in the 2014 fiscal year, which was linked to increases in the price of energy that year as well as Dollar General experiencing increases in rent that year.
Net Profit Margin
One of the main factors to consider in an analysis is a company’s net profit. This is the final amount of profit after all expenses have been deducted out. This is what Dollar General gets to keep as earnings. The percentage of net profit from total revenue increased in the 2017 compared to the previous years. In the 2017 fiscal year, the company reported 6.56% as their net profit margin. This in means that for every one dollar of sales the company recorded last year, around $0.06 of income was made. This is not a particularly large amount of income, but it is worth considering the fact that the discount retailing industry as a whole is not one of the most lucrative industries when looking at net profitability. Dollar General’s ability to keep this much of profit is impressive considering the nature of the business it is in. There is a link that can be seen with this margin and Dollar General’s business strategy of convenience. Customers are usually in a closer proximity to a Dollar General store than other larger grocery stores, like a Walmart. Because of this customers are likely to go to Dollar General to quickly grab whatever item they may need, even if it means they will have to pay a few more cents, because that is more convenient than the alternative. This convenience factor is a large reason why Dollar General is leading compared to its competitors shown.
Balance Sheet (Obtained from Mergent Online)
The balance sheet shows the company’s assets, liabilities, and shareholders equity within a time period. Current assets are important to consider in an analysis because they show what can be used to fund routine operations and also to pay for expenses. Inventories made up the majority of the current assets at 28%. Next to cash, inventory is the most liquid asset the Dollar General has. Inventory should be monitored carefully because too much can cause cash flow issues and other expenses, as can be seen in how inventory has impacted Dollar General’s gross profit margin. Dollar General’s inventory has increased slightly over the years due to the opening of new stores as well as remodeling efforts that allowed for more freezer space and inventory per square foot that had to be filled. The issue is that it is not being managed well and Dollar General is feeling the effects of that in various metrics as can be seen in the performance ratios section. Due to the business that it is in, Dollar General does not have any accounts receivables. Since it’s target market is middle income families who bring in around $40,000 or less a year, there is no reason to offer credit via accounts receivables, as opposed to bigger discount retailers who may have corporations shopping there.
Dollar General’s property, plant, and equipment has been increasing each fiscal following 2014. The company has been steadily expanding their store locations each fiscal year. This most recent fiscal year, the company spent over 5 billion dollars on buildings (new and remodel projects), equipment, and land. In the most recent fiscal year the company opened 1,015 new stores and 837 in the previous. This industry is rather capital intensive, which is why 41% of total assets were the company’s property, plant, and equipment.
Cash is another important area to look at when analyzing a company’s financials. Cash can be both helpful or harmful, depending on circumstances. Because of its liquidity, cash can be a means of protection for a company in a difficult time and can be helpful. However, cash does not create a return, so unless the company has a plan or strategy to use that cash on, it will not be very helpful and will make for a loss of earning opportunity. An example of how having cash available was useful was the attempted cash purchase of the Family Dollar stores in 2015. Although this deal did not go through, Dollar General was able to make an attractive cash offer for this business venture. Dollar General’s cash saw a relatively large decrease of cash by 421 million dollars in 2015 due primarily to the repurchasing of common stock and also investment in capital expenditures. Since then, the company has been able to increase its cash amount each fiscal year.
*****Look for common equity/debt info and add here.
Asset Utilization
Inventory Turnover
Dollar General’s business model is to sell everyday necessity items, the occasional seasonal items, and basic clothing. In order to positively impact line one of the income statement, the company would have to move the inventory quickly and preferably in large quantities. Dollar General has not been doing this well in comparison to its competitors. The inventory turnover ratio shows that on average, Dollar General turns over their inventory about 4.8 times. It’s competitors Dollar Tree and Walmart turnover their inventory 5.1 and 8.2 times respectively. Walmart is a different operation in comparison; Dollar General doesn’t operate at the level. However, the company is still not performing as high in this area, and it’s likely due to the high inventory carry costs the company incurs. Dollar General had many items that customers were not interested in purchasing, and not enough of the items that they were. This caused inventory to stay on the shelves for longer periods than desired, which in turn caused inventory to be held in the warehouses longer. There were still costs associated with this merchandise that Dollar General incurred though. This has affected their inventory turnover ratio for many fiscal years now.
Fixed Asset Turnover (FAT)
The fixed asset turnover ratio measures how effectively a company generates sales from its property, plant, and equipment investments. Dollar General leads in this area compared to its competitors. There is no base number for this ratio that determines how efficiently a company is performing in this area, so comparisons must be made with other companies in the industry to see how well a company is performing. Dollar General leads in this area in comparison to Dollar Tree and Walmart. In the most recent fiscal year, Dollar General’s rate was 9.17. This can be interpreted as Dollar General brought in $9.17 in revenue per dollar in fixed assets. Dollar Tree and Walmart’s rates were 6.93 and 4.65 respectively. Dollar General’s rates decreased by .10 in 2016 and 0.04 in 2017. Decreases should continue to be monitored in order see if a trend is beginning. Dollar General has been heavily investing in their expansion efforts over the last few fiscal years. A higher FAT means the company is doing a more efficient job at generating as much revenue from their fixed assets like buildings, equipment, land, etc. as possible. Fixed assets typically require higher amounts of capital than other areas. Noteworthy is the fact that this ratio is taken from the net fixed assets portion of the balance sheet. New stores do not decline very quickly, so net fixed assets usually increase dollar for dollar because of that. But this ratio includes both new and older stores, stores that the company has invested in and brought their costs up because of it. So even though Dollar General’s FAT decreased recently, the company is still doing better than its competitors considering these factors.
Total Asset Turnover
The next ratio that should be looked at is the Total Asset Turnover (TAT) ratio. It shows how well a company can bring in revenue with every dollar of total assets. Dollar General had the highest TAT in the most recent fiscal year. During this year, the company was able to bring in $1.95 in revenue for every one dollar in total assets. Since the 2013 fiscal year, an increasing trend has occurred in the TAT ratio. The industry average as a whole in the most recent fiscal year was 2.59. Dollar General is turning over total assets at a lower rate than the industry. A large cause of this is Dollar General’s poor inventory management system. That asset is factored into this ratio, and the company’s poor performance in that area has affected their TAT. This is also linked to why the spread between fixed asset turnover and total asset turnover is so large. In 2017 the FAT was 9.17 and the TAT was 1.95
Return on Assets (ROA)
The ROA measures how efficient a company is at converting their assets into profit. Return on assets is composed of two elements: net profit margin and total asset turnover. This breakdown shows how well a company is putting to use its assets and how well they are at managing their costs. The company saw the largest increase of ROA between fiscal years 2016 and 2017, increasing from 10.75% to 12.79%. This means that Dollar General is returning 12.79% from their assets back to net profit. At their lowest, in 2013, they returned 9.67%. As of 2015, the company has had the highest ROA of its competitors Dollar Tree and Walmart. There has been an increasing trend in ROA within these five fiscal years. This is largely due to the increases of dollar amounts in net income the company recorded on their income statements which helped to drive up ROA. The increasing ROA percentage shows improved profitability on the company’s part.
Debt to Equity
The debt to equity ratio is a means of seeing whether a company funds its operations more by creditors or investors. It calculates how much debt the company has compared to every dollar amount of the shareholder’s investments. Dollar General has had a fluctuating debt to equity ratio over the span of these five fiscal years. In the most recent fiscal, the ratio was 1.04, meaning for every dollar in equity, the company had $1.04 in debt. Only in the 2014 fiscal year did Dollar General fund more with equity than they did with debt. Typically, lower debt signals to lenders that their interest would be better protected in the event that there would be a decline in business. Dollar General did see a decrease in their debt to equity ratio of about eleven cents, dropping from 1.15 to 1.04.
Dollar General took part in a large share repurchasing effort this past fiscal year, this caused their equity funding to drop. A 1.0 billion dollar share repurchasing program was authorized in the 2017 fiscal year. The company engaged in stock repurchasing in the other fiscal years listed as well.
Times Interest Earned
The times interest earned ratio how capable a company is of paying their interest owed on debt obligations on a pre-tax basis. It shows how many times the company can pay these interest expenses. This is one ratio lenders would look at in order to see if a company can afford to take on any additional debt. The higher the ratio is, the less risky the company is seen in terms of solvency. Dollar General’s TIE was highest in the 2015 fiscal year when it was at 22.32, meaning Dollar General could meet their total interest payments owen on its outstanding long term debt 22.32 times. Since then the ratio has decreased, but not significantly.
Dollar General is leading in this metric when comparing to its competitors. It can pay back its interest expenses three times more than Dollar Tree can and twice as much as Walmart. Currently, Dollar General has a Baa2 bond rating, meaning that they are only a moderate credit risk. If the company is able to increase their bond rating, they potentially could get more favorable interest rates. This in turn would lower their borrowing costs.
Return on Equity
The current ratio essentially answers the question ‘Can we pay our bills this year?’ It shows how well a company can stay afloat in the short term. The higher this number is, the better it is considered; however a ratio of at least 1.0 is usually seen as a good indication that a company will be able to pay back its short term debts. Dollar General was in the best shape to pay its short term debts back in 2014, where they were able to pay them 1.78 times. Since then, they have experienced a decrease in their ratio, particularly noticeable in 2016, likely due to the rather large decrease in cash that occurred that fiscal year. Since then, there has been a slight increase, now with the ratio up to 1.43 times in the 2017 fiscal year. Throughout the last five years, the Dollar Tree has had a greater current ratio than Dollar General. Dollar Tree’s average ratio over the span of that time period was 1.93 as opposed to Dollar General’s average of 1.63. Walmart on the other hand fell behind both companies with an average of 0.88. Walmart did not make it to the 1.0 mark at all in the time span considered. Dollar General is still operating over 1.0 times, so as of now the company seems likely to be in a good position to pay back it’s bills this year.
The quick is another liquidity measure that can be used in analyzing a company’s performance. This ratio shows the dollar amount of quickly liquid assets (those that can be converted to cash in the short term) available to cover each dollar amount of current liabilities. Like the current ratio, any rate over 1.0 is normally a good indication of a company’s ability to cover their bills. Dollar General has not been performing well on this metric at all. The highest the ratio has been in the last five fiscal years was in 2014 at 0.28, meaning the company has $0.28 of short term liquid assets to cover every $1 of current liabilities. Since then, the ratio has dropped to below .10 in each fiscal year that followed. This number does not necessarily mean that Dollar General is heading for bankruptcy. There are some circumstances that can cause this. For example in the retail industry, especially discount retailing, a low quick ratio can be an indication that the company relies strongly on the inventory asset to pay short term bills. As will be discussed later, Dollar General’s inventory turnover ratio is not particularly high for the industry that it is in, and this is likely affecting the quick ratio.