dollargeneral10k2008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended February 1, 2008
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,
TN 37072
(Address
of principal executive offices, zip code)
|
|
Registrant’s
telephone number, including area code: (615)
855-4000
|
|
Securities
registered pursuant to Section 12(b) of the Act:
None
|
|
Securities
registered pursuant to Section 12(g) of the
Act: None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes [ ] No
[X]
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 [ ] No [X]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
[ ] |
Accelerated
filer |
[ ] |
|
|
|
|
Non-accelerated Filer |
[X] |
Smaller
reporting company |
[ ] |
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
aggregate fair market value of the registrant’s common stock outstanding and
held by non-affiliates as of August 3, 2007 was $663,400, all of which was owned
by employees of the registrant and not traded on a public market. For this
purpose, directors, executive officers and greater than 10% record shareholders
are considered the affiliates of the registrant.
The
registrant had 555,481,897 shares of common stock outstanding on March 17,
2008.
INTRODUCTION
General
This
report contains references to years 2008, 2007, 2006, 2005, 2004 and 2003, which
represent fiscal years ending or ended January 30, 2009, February 1, 2008,
February 2, 2007, February 3, 2006, January 28, 2005, and January 30, 2004,
respectively. All of the discussion and analysis in this report
should be read with, and is qualified in its entirety by, the Consolidated
Financial Statements and related notes.
Forward
Looking Statements
“Forward-looking
statements” within the meaning of the federal securities laws are included
throughout this report, particularly under the headings “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation,” among others. You can identify these statements because they are not
solely statements of historical fact or they use words such as “may,” “will,”
“should,” “expect,” “believe,” “anticipate,” “project,” “plan,” “expect,”
“estimate,” “objective,” “forecast,” “goal,” “intend,” “will likely result,” or
“will continue” and similar expressions that concern our strategy, plans or
intentions. For example, all statements relating to our estimated and projected
earnings, costs, expenditures, cash flows and financial results, our plans and
objectives for future operations, growth or initiatives, or the expected outcome
or impact of pending or threatened litigation are forward-looking
statements.
All
forward-looking statements are subject to risks and uncertainties that may
change at any time, so our actual results may differ materially from those that
we expected. We derive many of these statements from our operating budgets and
forecasts, which are based on many detailed assumptions that we believe are
reasonable. However, it is very difficult to predict the impact of known
factors, and we cannot anticipate all factors that could affect our actual
results. Important factors that could cause actual results to differ materially
from the expectations expressed in our forward-looking statements are disclosed
under “Risk Factors” in Part I, Item 1A and elsewhere in this document
(including, without limitation, in conjunction with the forward-looking
statements themselves and under the heading “Critical Accounting Policies and
Estimates”). All written and oral forward-looking statements we make in the
future are expressly qualified in their entirety by these cautionary statements
as well as other cautionary statements that we make from time to time in our
other SEC filings and public communications. You should evaluate all of our
forward-looking statements in the context of these risks and
uncertainties.
The
important factors referenced above may not contain all of the material factors
that are important to you. In addition, we cannot assure you that we will
realize the results or developments we expect or anticipate or, even if
substantially realized, that they will result in the consequences or affect us
or our operations in the way we expect. The forward-looking statements included
in this report are made only as of the date hereof. We undertake no obligation
to publicly update or revise any forward-looking statement as a result of new
information, future events or otherwise, except as otherwise required by
law.
PART
I
General
We are
the largest discount retailer in the United States by number of stores, with
8,222 stores located in 35 states, primarily in the southern, southwestern,
midwestern and eastern United States, as of February 29, 2008. We
serve a broad customer base and offer a focused assortment of everyday items,
including basic consumable merchandise and other home, apparel and seasonal
products. A majority of our products are priced at $10 or less and
approximately 30% of our products are priced at $1 or less.
We offer
a compelling value proposition for our customers based on convenient store
locations, easy in and out shopping and quality name brand and private label
merchandise at highly competitive everyday low prices. We believe our
combination of value and convenience distinguishes us from other discount,
convenience and drugstore retailers, who typically focus on either value or
convenience. Our business model is focused on strong and sustainable sales
growth, attractive margins and limited maintenance capital expenditure and
working capital needs, which results in significant cash flow from operations
(before interest).
We were
founded in 1939 as J.L. Turner and Son, Wholesale. We opened our
first dollar store in 1955, when we were first incorporated as a Kentucky
corporation under the name J.L. Turner & Son, Inc. We changed our
name to Dollar General Corporation in 1968 and reincorporated as a Tennessee
corporation in 1998.
We have
expanded rapidly in recent years, increasing our total number of stores from
5,540 as of February 1, 2002, to 8,229 as of February 2, 2007, an 8.2%
compounded annual growth rate (“CAGR”). Over the same period, we grew
our net sales from $5.3 billion to $9.2 billion (11.5% CAGR), driven by growth
in number of stores as well as same store sales growth. In the fourth quarter of
fiscal 2006, we announced our plans to slow new store growth in 2007 and to
close approximately 400 stores in order to improve our profitability and to
enable us to focus on improving the performance of existing stores. In 2007, we
opened 365 new stores and closed 400 stores. We also relocated or remodeled 300
existing stores. We generated net sales in 2007 of $9.5 billion, an increase of
3.5% over 2006, including a same-store sales increase of 2.1%.
Merger
with KKR
On July
6, 2007, we completed a merger (the “Merger”) in which our former shareholders
received $22.00 in cash, or approximately $6.9 billion in total, for each share
of our common stock held. In addition, fees and expenses related to the Merger
and the related financing transactions totaling $102.6 million, principally
consisting of investment banking fees, management fees, legal fees and stock
compensation expense ($39.4 million), are reflected in the 2007 results of
operations. As a result of the Merger, we are a subsidiary of Buck Holdings,
L.P. (“Parent”), a Delaware limited partnership controlled by investment funds
affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR” or “Sponsor”).
KKR, GS Capital Partners VI
Fund, L.P. and affiliated
funds (affiliates of Goldman, Sachs & Co.), Citi Private Equity,
Wellington Management Company, LLP, CPP Investment Board (USRE II) Inc., and
other equity co-investors (collectively, the “Investors”) indirectly own a
substantial portion of our capital stock through their investment in
Parent.
The
Merger consideration was funded through the use of our available cash, cash
equity contributions from the Investors, equity contributions of certain members
of our management and the debt financings discussed below. Our outstanding
common stock is now owned by Parent and certain members of management. Our
common stock is no longer registered with the Securities and Exchange Commission
(“SEC”) and is no longer traded on a national securities exchange.
We
entered into the following debt financings in conjunction with the
Merger:
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a $2.3 billion senior secured term loan facility, which
matures on July 6, 2014 (the “Term Loan
Facility”).
|
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a senior secured asset-based revolving credit facility of up
to $1.125 billion (of which $432.3 million was drawn at closing
and $132.3 million was paid down on the same day), subject to
borrowing base availability, which matures July 6, 2013 (the “ABL
Facility” and, with the Term Loan Facility, the “New Credit
Facilities”).
|
|
|
· |
We
issued $1.175 billion aggregate principal amount of 10.625% senior
notes due 2015, which mature on July 15, 2015, and $725 million
aggregate principal amount of 11.875%/12.625% senior subordinated toggle
notes due 2017, which mature on July 15, 2017. We repurchased $25
million of the 11.875%/12.625% senior subordinated toggle notes due 2017
in the fourth quarter of fiscal
2007. |
Overall
Business Strategy
Our
mission is “Serving Others.” To carry out this mission, we have developed a
business strategy of providing our customers with a focused assortment of
everyday low priced merchandise in a convenient, small-store
format.
Our
Customers. In general, we locate our stores and base our
merchandise selection on the needs of households seeking value and convenience,
with an emphasis on rural and small markets. However, much of our
merchandise, intended to serve the basic consumable, household, apparel and
seasonal needs of these targeted customers, also appeals to a much broader and
higher income customer base.
Our
Stores. The traditional Dollar General® store has, on average,
approximately 6,900 square feet of selling space and generally serves customers
who live within five miles of the store. Of our 8,222 stores
operating as of February 29, 2008, more than half serve communities
with populations of 20,000
or less. We believe that our target customers prefer the convenience
of a small, neighborhood store with a focused merchandise assortment at value
prices. Our Dollar General Market® stores are larger than the average Dollar
General store, having on average approximately 17,000 square feet of selling
space, and carry, among other items, an expanded assortment of grocery products
and perishable items. As of February 29, 2008, we operated 57 Dollar
General Market stores.
Our
Merchandise. Our merchandising strategy combines a low-cost
operating structure with a focused assortment of products, consisting of quality
basic consumable, household, apparel and seasonal merchandise at competitive
everyday low prices. Our strategic combination of name brands, quality private
label products and other great value brands allows us to offer our customers a
compelling value proposition. We believe our merchandising strategy and focused
assortment generate frequent repeat customer purchases and encourage customers
to shop at our stores for their everyday household needs.
Our
Prices. We distribute quality, consumable merchandise at
everyday low prices. Our strategy of a low-cost operating structure
and a focused assortment of merchandise allows us to offer quality merchandise
at competitive prices. As part of this strategy, we emphasize
even-dollar prices on many of our items. In the typical Dollar
General store, the majority of the products are priced at $10 or less, with
approximately 30% of the products priced at $1 or less.
Our
Cost Controls. We aggressively manage our overhead cost structure and
typically seek to locate stores in neighborhoods where rental and operating
costs are relatively low. Our stores typically have low fixed costs,
with lean staffing of usually two to three employees in the store at any
time. In 2005 and 2006, we implemented “EZstoreTM”,
our initiative designed to improve inventory flow from our distribution centers,
or DCs, to consumers. EZstore has allowed us to reallocate store labor hours to
more customer-focused activities, improving the work content in our
stores.
We also
attempt to control operating costs by implementing new technology when feasible,
including improvements in recent years to our store labor scheduling and store
replenishment systems in addition to other improvements to our supply chain and
warehousing systems.
Recent
Strategic Initiatives—Project
Alpha. In 2007, we executed strategic initiatives launched in
the fourth quarter of 2006 aimed at improving our merchandising and real estate
strategies, which we refer to collectively as “Project Alpha.” Project Alpha was
based upon a comprehensive analysis of the performance of each of our stores and
the impact of our inventory management model on our ability to effectively serve
our customers.
The
execution of this merchandising initiative has moved us away from our
traditional inventory packaway model, where unsold seasonal, apparel and home
products inventory items were stored on-site and returned to the sales floor to
be sold year after year, until the items were eventually sold, damaged or
discarded. Project Alpha is an attempt to better meet our customers’
needs and to ensure an appealing, fresh merchandise selection. In connection
with this initiative, in fiscal 2007 we began taking end-of-season markdowns on
current-year non-replenishable
merchandise. With limited
and planned exceptions, we eliminated, through end-of-season and other
markdowns, our seasonal, home products and basic clothing packaway merchandise
and out of season current year merchandise by the end of fiscal 2007. In
addition to allowing us to carry newer, fresher merchandise, particularly in our
seasonal, apparel and home categories, we believe this strategy change has
enhanced the appearance of our stores and will continue to positively impact
customer satisfaction as well as our store employees’ ability to manage
stores.
Project
Alpha also encompassed significant improvements to our real estate practices. We
are fully integrating the functions of site selection, lease renewals,
relocations, remodels and store closings and have defined and are implementing
rigorous analytical processes for decision-making in those areas. As a first
step in our initiative to revitalize our store base, we performed a
comprehensive real estate review resulting in the identification of
approximately 400 underperforming stores, all of which we closed by mid-2007.
These closings were in addition to stores that are typically closed in the
normal course of business, which over the last 10 years constituted
approximately 1% to 2% of our store base per year. We believe our rate of store
closings should return to historic levels in 2008 and future
years. While we believe we have significant opportunities for future
store growth, we have moderated our new store growth rate to enable us to focus
on improving the performance of existing stores. Those efforts include
increasing the number of store remodels and relocations in order to improve
productivity and enhance the shopping experience for our customers.
As a
result of opening new stores and remodeling existing stores, as of February 29,
2008, over 1,000 stores are operating in our racetrack format, which is
designed with improved merchandise adjacencies and wider, more open aisles to
enhance the overall guest shopping experience. We plan to continue to enhance
this new store layout to further drive sales growth and margin enhancements
through improved merchandising.
Our
Industry
We
compete in the deep discount segment of the U.S. retail industry. Our
competitors include traditional “dollar stores,” as well as other retailers
offering discounted convenience items. The “dollar store” sector differentiates
itself from other forms of retailing in the deep discount segment by offering
consistently low prices in a convenient, small-store format. Unlike other
formats that have suffered with the rise of Wal-Mart and other discount
supercenters, the “dollar store” sector has grown despite the presence of the
discount supercenters. We believe it is our
substantial convenience advantage, at prices comparable to those of
supercenters, that allows Dollar General to compete so effectively.
We
believe that there is considerable room for growth in the “dollar store” sector.
According to AC Nielsen, “dollar stores” have been able to increase their
penetration across all income brackets in the last 6 years. Though traditional
“dollar stores” have high customer penetration, according to Information
Resources, Inc. “IRI,” the sector as a whole accounts for only approximately
1.2% of total consumer product goods spending, which we believe leaves ample
room for growth. Our merchandising initiatives are aimed at increasing our
stores’ share of customer spending.
See “Our
Competitive Strengths” and “Competition” below for additional information
regarding our competitive situation.
Our
Competitive Strengths
Market
Leader in an Attractive Sector with a Growing Customer
Base. We are the largest discount retailer in the U.S. by
number of stores, with 8,222 stores in 35 states as of February 29,
2008. We are the largest player in the U.S. small box deep discount
segment, with sales in excess of 1.4 times that of our nearest competitor in
2007. We believe we are well positioned to further increase our
market share as we continue to execute our business strategy and implement our
operational initiatives. Our target customers are those seeking value
and convenience. According to Nielsen Media Research as of mid-2007,
approximately 64% of households shopped at least once at a discount store (up
from 59% in 2001).
Consistent
Sales Growth and Strong Cash Flow Generation. For 18 consecutive years,
we have experienced positive annual same store sales
growth. Approximately two-thirds of our net sales come from the sale
of consumable products, which are less susceptible to economic pressures (such
as increased fuel costs and unemployment), with the remaining one-third
comprised mainly of seasonal, basic clothing and home products which are subject
to little trend or fashion risk. We have a low cost operating model
with attractive operating margins, low capital expenditures and low working
capital needs, resulting in generation of significant cash flow from operations
(before interest).
Differentiated
Value Proposition. Our ability to deliver highly competitive everyday low
prices in a convenient location and shopping format provides our customers with
a compelling shopping experience and distinguishes us from other discount
retailers, as well as convenience and drugstore retailers.
Compelling
Unit Economics. The traditional Dollar General store size,
design and location requires an initial investment of approximately $250,000
including inventory. The low initial investment and maintenance capital
expenditures, when combined with strong average unit volumes, provide for a
quick recovery of store start-up costs. The ability of our stores to
generate strong cash flows with minimal investment results in a short payback
period.
Efficient
Supply Chain. We believe our distribution network is an
integral component of our efforts to reduce transportation expenses and
effectively support our growth. In recent years, we have made
significant investments in technological improvements and upgrades which have
increased our efficiency and capacity to support our merchandising and
operations initiatives as well as future store growth.
Experienced
and Motivated Management Team. In January 2008, we hired
Richard Dreiling, who has 38 years of retail experience, to serve as our Chief
Executive Officer. Over the past two years we strengthened our
management team with the hiring of David Beré, our President and Chief Operating
Officer. We also replaced a majority of our senior merchandising and real estate
teams. In connection with the Merger, we entered into agreements with
certain
members of management
pursuant to which they elected to invest in Dollar General in an aggregate
amount of approximately $10.4 million.
Seasonality
Our
business is seasonal to a certain extent. Generally, our highest
sales volume occurs in the fourth quarter, which includes the Christmas selling
season, and the lowest occurs in the first quarter. In addition, our
quarterly results can be affected by the timing of new store openings and store
closings, the amount of sales contributed by new and existing stores, as well as
the timing of certain holidays. We purchase substantial amounts of inventory in
the third quarter and incur higher shipping costs and higher payroll costs in
anticipation of the increased sales activity during the fourth
quarter. In addition, we carry merchandise during our fourth quarter
that we do not carry during the rest of the year, such as gift sets, holiday
decorations, certain baking items, and a broader assortment of toys and
candy.
The
following table reflects the seasonality of net sales, gross profit, and net
income (loss) by quarter for each of the quarters of the current fiscal year as
well as each of the quarters of the two most recent fiscal years. All of the
quarters reflected below are comprised of 13 weeks with the exception of the
fourth quarter of our fiscal year ended February 3, 2006, which was comprised of
14 weeks.
(in
millions)
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended February 1, 2008(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,275.3 |
|
|
$ |
2,347.6 |
|
|
$ |
2,312.8 |
|
|
$ |
2,559.6 |
|
Gross
profit(b)
|
|
|
633.1 |
|
|
|
623.2 |
|
|
|
646.8 |
|
|
|
740.4 |
|
Net
income (loss)(b)
|
|
|
34.9 |
|
|
|
(70.1 |
) |
|
|
(33.0 |
) |
|
|
55.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended February 2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
2,151.4 |
|
|
|
2,251.1 |
|
|
|
2,213.4 |
|
|
|
2,554.0 |
|
Gross
profit(b)
|
|
|
584.3 |
|
|
|
611.5 |
|
|
|
526.4 |
|
|
|
646.0 |
|
Net
income (loss)(b)
|
|
|
47.7 |
|
|
|
45.5 |
|
|
|
(5.3 |
) |
|
|
50.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended February 3, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
1,977.8 |
|
|
|
2,066.0 |
|
|
|
2,057.9 |
|
|
|
2,480.5 |
|
Gross
profit
|
|
|
563.3 |
|
|
|
591.5 |
|
|
|
579.0 |
|
|
|
730.9 |
|
Net
income |
|
|
|
64.9 |
|
|
|
75.6 |
|
|
|
64.4 |
|
|
|
145.3 |
|
(a)
|
For
comparison purposes, the 2nd
quarter includes the results of operations for Buck Acquisition
Corp. for the period prior to the Merger from March 6, 2007 (its
formation) through July 7, 2007 (reflecting the change in fair value of
interest rate swaps), and the 2nd
quarter reflects the combination of pre-Merger and post-Merger
results of Dollar General Corporation for the period from May 5, 2007
through August 3, 2007. We believe this presentation provides a more
meaningful understanding of the underlying business.
|
(b)
|
Results
for the 3rd
and 4th
quarters of 2006 and all quarters of 2007 reflect the impact of Recent
Strategic Initiatives as discussed in further detail in “Management’s
Discussion
and
Analysis of Financial Condition and Results of
Operations.”
|
Merchandise
We
separate our merchandise into the following four categories for reporting
purposes: highly consumable, seasonal, home products, and basic clothing. Highly
consumable consists of packaged food, candy, snacks and refrigerated products,
health and beauty aids, home cleaning supplies and pet supplies; seasonal
consists of seasonal and other holiday-related items, toys, stationery and
hardware; and home products consists of housewares and domestics.
The percentage of net sales of each of our four categories of merchandise
for the period indicated below was as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Highly
consumable
|
|
|
66.5
|
% |
|
|
65.7
|
% |
|
|
65.3
|
% |
Seasonal
|
|
|
15.9
|
% |
|
|
16.4
|
% |
|
|
15.7
|
% |
Home
products
|
|
|
9.2
|
% |
|
|
10.0
|
% |
|
|
10.6
|
% |
Basic
clothing
|
|
|
8.4
|
% |
|
|
7.9
|
% |
|
|
8.4
|
% |
Our home
products and seasonal categories typically account for the highest gross profit
margin, and the highly consumable category typically accounts for the lowest
gross profit margin.
We
currently maintain approximately 5,400 core stock-keeping units, or SKUs, per
store and an additional 3,000 non-core SKUs that get rotated in and out of the
store over the course of a year. In 2007, we reduced the number of
non-core SKUs.
We
purchase our merchandise from a wide variety of suppliers. Approximately 12% of
our purchases in 2007 were from The Procter & Gamble Company. Our
next largest supplier accounted for approximately 6% of our purchases in
2007. We directly imported approximately 9% of our purchases at cost
(15% at retail) in 2007.
The
Dollar General Store
The
average Dollar General store has approximately 6,900 square feet of selling
space and is typically operated by a manager, an assistant manager and two or
more sales clerks. Approximately 47% of our stores are located in
strip shopping centers, 51% are in freestanding buildings and 2% are in downtown
buildings. We attempt to locate primarily in small towns or in neighborhoods of
more densely populated areas where occupancy expenses are relatively
low.
We
generally have not encountered difficulty locating suitable store sites in the
past, and management does not currently anticipate experiencing material
difficulty in finding future suitable locations.
Our recent store growth is summarized
in the following table:
Year
|
Stores
at
Beginning
of
Year
|
Stores
Opened
|
Stores
Closed
|
Net
Store
Increase/(Decrease)
|
Stores
at
End
of Year
|
2005
|
7,320
|
734
|
125(a)
|
609
|
7,929
|
2006
|
7,929
|
537
|
237(b)
|
300
|
8,229
|
2007
|
8,229
|
365
|
400(b)
|
(35)
|
8,194
|
(a) |
Includes 41 stores
closed as a result of hurricane damage. |
(b) |
Includes 128 stores
in 2006 and 275 stores in 2007 closed as a result of certain recent
strategic initiatives. |
Employees
As of
February 29, 2008, we employed approximately 71,500 full-time and part-time
employees, including divisional and regional managers, district managers, store
managers, and DC and administrative personnel. Management believes
our relationship with our employees is generally good, and we currently are not
a party to any collective bargaining agreements.
Competition
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. We compete
with discount stores and with many other retailers, including mass merchandise,
grocery, drug, convenience, variety and other specialty stores. These other
retail companies operate stores in many of the areas where we operate and many
of them engage in extensive advertising and marketing efforts. Our direct
competitors in the dollar store retail category include Family Dollar, Dollar
Tree, Fred’s, 99 Cents Only and various local, independent operators.
Competitors from other retail categories include Wal-Mart Walgreens, CVS, Rite
Aid, Target and Costco, among others. Certain of our competitors have greater
financial, distribution, marketing and other resources than we do.
The
dollar store category differentiates itself from other forms of retailing by
offering consistently low prices in a convenient, small-store format. We believe
that our prices are competitive due in part to our low cost operating structure
and the relatively limited assortment of products offered. Historically, we have
minimized labor by offering fewer price points and a reliance on simple
merchandise presentation. We maintain strong purchasing power due to our
leadership position in the dollar store retail category and our focused
assortment of merchandise.
Trademarks
Through
our subsidiary, Dollar General Merchandising, Inc., we own marks that are
registered with the United States Patent and Trademark Office, including the
trademarks Dollar General®, Dollar General Market®, Clover Valley®, American
Value®, DG Guarantee® and the Dollar General price point designs, along with
certain other trademarks. We attempt to obtain registration of our trademarks
whenever practicable and to pursue vigorously any infringement of those
marks. Our trademark registrations have various expiration dates;
however, assuming that the trademark registrations are properly renewed, they
have a perpetual duration.
Available
Information
Our Web
site address is www.dollargeneral.com. We make available through this address,
without charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after they are electronically filed or furnished to the
SEC.
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.
Any of the following risks could materially and adversely affect our business,
financial condition or results of operations. In addition, the risks described
below are not the only risks facing us. Additional risks and uncertainties not
currently known to us or those we currently view to be immaterial also may
materially and adversely affect our business, financial condition or results of
operations. In any such case, the trading price of our securities could decline
or we may not be able to make payments of principal and interest on our
outstanding notes, and you may lose all or part of your original
investment.
The
fact that we have substantial debt could adversely affect our ability to raise
additional capital to fund our operations, limit our ability to react to changes
in the economy or our industry, expose us to interest rate risk to the extent of
our variable rate debt and prevent us from meeting our obligations under our
outstanding debt securities.
We have
substantial debt which could have important consequences,
including:
·
|
making
it more difficult for us to make payments on our outstanding
debt;
|
·
|
increasing
our vulnerability to general economic and industry
conditions;
|
·
|
requiring
a substantial portion of our cash flow from operations to be dedicated to
the payment of principal and interest on our indebtedness, therefore
reducing our ability
to
use our cash flow to fund our operations, capital expenditures and future
business opportunities;
|
·
|
exposing
us to the risk of interest rate fluctuations as certain of our borrowings
bear interest based on market interest
rates;
|
·
|
limiting
our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions and general
corporate or other purposes; and
|
·
|
limiting
our ability to adjust to changing market conditions and placing us at a
competitive disadvantage compared to our competitors who are less highly
leveraged.
|
In
addition, the borrowings under our New Credit Facilities bear interest at
variable rates and other debt we incur also could be variable-rate
debt. If market interest rates increase, variable-rate debt will
create higher debt service requirements, which could adversely affect our cash
flow. While we have and may in the future enter into agreements
limiting our exposure to higher interest rates, any such agreements may not
offer complete protection from this risk. We and our subsidiaries may
be able to incur substantial additional indebtedness in the future, subject to
the restrictions contained in our New Credit Facilities and the indentures
governing our debt securities. If new indebtedness is added to our
current debt levels, the related risks that we now face could
intensify.
Our
debt agreements contain restrictions that limit our flexibility in operating our
business.
Our New
Credit Facilities and the indentures governing our debt securities contain
various covenants that limit our ability to engage in specified types of
transactions. These covenants limit our and our restricted
subsidiaries’ ability to, among other things:
·
|
incur
additional indebtedness, issue disqualified stock or issue certain
preferred stock;
|
·
|
pay
dividends and make certain distributions, investments and other restricted
payments;
|
·
|
create
certain liens or encumbrances;
|
·
|
enter
into transactions with our
affiliates;
|
·
|
limit
the ability of restricted subsidiaries to make payments to
us;
|
·
|
merge,
consolidate, sell or otherwise dispose of all or substantially all of our
assets; and
|
·
|
designate
our subsidiaries as unrestricted
subsidiaries.
|
A breach
of any of these covenants could result in a default under the agreement
governing such indebtedness. Upon our failure to maintain compliance
with these covenants, the lenders could elect to declare all amounts outstanding
thereunder to be immediately due and payable and terminate all commitments to
extend further credit thereunder. If the lenders under such
indebtedness accelerate the repayment of borrowings, we cannot assure you that
we will have sufficient assets to repay those borrowings, as well as our other
indebtedness, including our outstanding debt securities. We have
pledged a significant portion of our assets as collateral under our New Credit
Facilities. If we were unable to repay those amounts, the lenders
under our New Credit Facilities could proceed against the collateral granted to
them to secure that indebtedness. Additional borrowings under the ABL Facility
will, if excess availability under
that facility is less than
a certain amount, be subject to the satisfaction of a specified financial
ratio. Our ability to meet this financial ratio can be affected by
events beyond our control, and we cannot assure you that we will meet this ratio
and other covenants.
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 than expected fuel and other energy costs, inflation, higher
levels of unemployment, higher consumer debt levels, higher tax rates and other
changes in tax laws, tightening of the credit markets, 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 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, merchandising, promotions, sourcing, shrink, private label, store
operations 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.
Because
our business is seasonal to a certain extent, with the highest volume of net
sales during the fourth quarter, adverse events during the fourth quarter could
materially affect our financial statements as a whole.
We
generally recognize our highest volume of net sales 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 financial
performance 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 adversely
impact our financial performance.
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 adverse impact to our financial performance 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) may have limited ability to
increase prices in response to increased costs (including vendor price
increases). This limitation may adversely affect our margins and financial
performance. 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, grocery, drug, convenience, variety and other specialty
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. See “Business—Our Industry, —Competitive
Strengths, and —Competition” for additional discussion of our competitive
situation.
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
distribution centers, 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 distribution centers 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. Approximately 12% of our purchases in 2007 were from The
Procter & Gamble Company. Our next largest supplier accounted for
approximately 6% of our purchases in 2007. We directly imported approximately 9%
of our purchases at cost in 2007, but many of our domestic vendors directly
import their products or components of their products. 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 or safety issues, currency exchange
rates, transport availability and cost, inflation, and other factors relating to
the suppliers and the countries in which they are located or from which they
import 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 distribution centers, while
controlling our labor costs, is subject to numerous external factors, including
the level of competition for such personnel in a given market, 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. In
addition, to the extent a significant portion of our employee base unionizes, or
attempts to unionize, our labor costs could increase. Our ability to pass along
those costs is constrained.
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. In addition, our substantial debt, particularly combined with the
recent tightening of the credit markets, has made it more difficult for our real
estate developers to obtain loans for our build-to-suit stores and to locate
investors for those properties after they have been developed. If this trend
continues, it could materially adversely impact our ability to open
build-to-suit stores in desirable locations.
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 financial performance.
We are
dependent upon the smooth functioning of our distribution network, the capacity
of our distribution centers, and the timely receipt of
inventory.
We rely
upon the ability to replenish depleted inventory through deliveries to our
distribution centers from vendors and from the distribution centers to our
stores by various means of transportation, including shipments by sea and truck.
Labor shortages in the transportation industry and/or labor inefficiencies
associated with certain “driver hours of service” regulations adopted by the
Federal Motor Carriers Safety Administration 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 our financial performance.
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, in addition to
reputational damage.
Our
current insurance program may expose us to unexpected costs and negatively
affect our financial performance.
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 financial
performance 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. See Part I, Item 3
“Legal Proceedings” 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.
The
Investors control us and may have conflicts of interest with us now or in the
future.
The
Investors indirectly own, through their investment in Parent, a substantial
portion of our common stock. As a result, the Investors have control
over our decisions to enter into any corporate transaction and have the ability
to prevent any transaction that requires the approval of shareholders regardless
of whether others believe that any such transactions are in our own best
interests. For example, the Investors could cause us to make
acquisitions that increase the amount of indebtedness that is secured or that is
senior to our outstanding debt securities or
to sell assets, which may
impair our ability to make payments under our outstanding debt
securities.
Additionally, the
Investors are in the business of making investments in companies and may from
time to time acquire and hold interests in businesses that compete directly or
indirectly with us. The Investors may also pursue acquisition
opportunities that may be complementary to our business and, as a result, those
acquisition opportunities may not be available to us. So long as the
Investors, or other funds controlled by or associated with the Investors,
continue to indirectly own a significant amount of the outstanding shares of our
common stock, even if such amount is less than 50%, the Investors will continue
to be able to strongly influence or effectively control our
decisions.
As of
February 29, 2008, we operated 8,222 retail stores located in 35 states as
follows:
State
|
Number
of Stores
|
|
State
|
Number
of Stores
|
Alabama
|
446
|
|
|
Nebraska
|
80
|
|
Arizona
|
51
|
|
|
New
Jersey
|
22
|
|
Arkansas
|
224
|
|
|
New
Mexico
|
42
|
|
Colorado
|
19
|
|
|
New
York
|
223
|
|
Delaware
|
24
|
|
|
North
Carolina
|
467
|
|
Florida
|
415
|
|
|
Ohio
|
465
|
|
Georgia
|
464
|
|
|
Oklahoma
|
271
|
|
Illinois
|
306
|
|
|
Pennsylvania
|
393
|
|
Indiana
|
302
|
|
|
South
Carolina
|
316
|
|
Iowa
|
170
|
|
|
South
Dakota
|
12
|
|
Kansas
|
144
|
|
|
Tennessee
|
403
|
|
Kentucky
|
300
|
|
|
Texas
|
969
|
|
Louisiana
|
326
|
|
|
Utah
|
9
|
|
Maryland
|
57
|
|
|
Vermont
|
3
|
|
Michigan
|
238
|
|
|
Virginia
|
243
|
|
Minnesota
|
16
|
|
|
West
Virginia
|
149
|
|
Mississippi
|
256
|
|
|
Wisconsin
|
88
|
|
Missouri
|
309
|
|
|
|
|
|
Most of
our stores are located in leased premises. Individual store leases
vary as to their terms, rental provisions and expiration dates. The
majority of our leases are relatively low-cost, short-term leases (usually with
initial or primary terms of three to five years) often with multiple renewal
options. 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. In recent years, an increasing percentage of our
new stores have been subject to build-to-suit arrangements. In 2007,
approximately 70% of our new stores were build-to-suit
arrangements.
As of February 29, 2008, we operated nine
distribution centers, as described in the following table:
Location
|
Year
Opened
|
Approximate
Square
Footage
|
|
Approximate
Number
of
Stores Served
|
Scottsville,
KY
|
1959
|
720,000
|
|
|
948
|
|
Ardmore,
OK
|
1994
|
1,310,000
|
|
|
1,147
|
|
South
Boston, VA
|
1997
|
1,250,000
|
|
|
779
|
|
Indianola,
MS
|
1998
|
820,000
|
|
|
885
|
|
Fulton,
MO
|
1999
|
1,150,000
|
|
|
1,093
|
|
Alachua,
FL
|
2000
|
980,000
|
|
|
735
|
|
Zanesville,
OH
|
2001
|
1,170,000
|
|
|
1,113
|
|
Jonesville,
SC
|
2005
|
1,120,000
|
|
|
728
|
|
Marion,
IN
|
2006
|
1,110,000
|
|
|
794
|
|
We lease
the distribution centers located in Oklahoma, Mississippi and Missouri
and own the other six distribution centers. Approximately 7.25 acres of the land
on which our Kentucky distribution center is located is subject to a ground
lease. We lease additional temporary warehouse space as necessary to support our
distribution needs.
Our
executive offices are located in approximately 302,000 square feet of leased
space in Goodlettsville, Tennessee.
ITEM 3. |
LEGAL
PROCEEDINGS |
The
information contained in Note 7 to the consolidated financial statements under
the heading “Legal proceedings” contained in Part II, Item 8 of this report is
incorporated herein by this reference.
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS |
No
matters were submitted to a vote of shareholders during the fourth quarter of
2007.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
and Dividend Information. Our outstanding common stock is
privately held, and there is no established public trading market for our common
stock. There were approximately 145 shareholders of record of our common stock
as of March 17, 2008.
Our Board
of Directors declared a quarterly dividend in the amount of $0.05 per
share:
·
|
payable
on or before April 20, 2006 to common shareholders of record on April 6,
2006;
|
·
|
payable
on or before July 20, 2006 to common shareholders of record on July 6,
2006;
|
·
|
payable
on or before October 19, 2006 to common shareholders of record on October
5, 2006;
|
·
|
payable
on or before January 18, 2007 to common shareholders of record on January
4, 2007; and
|
·
|
payable
on or before April 19, 2007 to common shareholders of record on April 5,
2007.
|
Our Board
of Directors did not declare a dividend thereafter. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” for a description of the
restrictions on our ability to pay dividends.
Unregistered
Sales of Equity Securities. In connection with the Merger, our
officer-level employees were offered the opportunity to roll over portions of
their equity and/or stock options and to purchase additional equity of Dollar
General. In connection with such opportunity, on July 6, 2007 these
individuals purchased a total of 635,207 shares of common stock having an
aggregate value of approximately $3,176,035 and exchanged a total of 2,225,175
stock options outstanding prior to the Merger for 1,920,543 vested options to
purchase shares of common stock (the “Rollover Options”) in the surviving
company (the “Rollover”). The Rollover Options remain outstanding in accordance
with the terms of the governing stock incentive plan and grant agreements
pursuant to which the holder originally received the stock option grants.
However, immediately after the Merger, the exercise price and number of shares
underlying the Rollover Options were adjusted as a result of the Merger and the
exercise price for all of the options was adjusted to $1.25 per
option.
We
subsequently offered certain other employees a similar investment opportunity to
participate in our common equity. As a result, on September 20, 2007
and October 5, 2007, we sold 15,000 shares and 558,000 shares, respectively, of
our common stock to those employees for a purchase price of $5 per
share.
In
connection with the investment discussed above and the Merger, our Board of
Directors adopted a new stock incentive plan pursuant to which certain of our
officer-level and other employees also were granted, on July 6, 2007, September
20, 2007 and October 5, 2007, respectively, new non-qualified stock options to
purchase 13,110,000 shares, 130,000 shares and 4,150,000 shares of our common
stock at a per share exercise price of $5, which represented the fair market
value of one share of our common stock on the grant date. Effective
January 21, 2008, our Board also granted to our CEO, Mr. Dreiling, non-qualified
stock options to purchase 2.5 million shares of our common stock pursuant to the
terms of the new stock incentive plan. All of these new options expire no later
than 10 years following the grant date. In addition, half of the
options will vest ratably on each of the five anniversaries of July 6, 2007
solely based upon continued employment over that time period, while the other
half of the options will vest based both upon continued employment and upon the
achievement of predetermined performance annual or cumulative financial-based
targets over time which coincide with our fiscal year. The options also have
certain accelerated vesting provisions upon a change in control or initial
public offering, as defined in the new incentive plan.
Effective
January 21, 2008, our Board also granted to Mr. Dreiling 890,000 shares of
restricted common stock pursuant to the terms of the new stock incentive plan.
The restricted stock will vest on the last day of our 2011 fiscal year if
Mr. Dreiling remains employed by us through that date. The restricted stock
also has certain accelerated vesting provisions upon a change in control,
initial public offering, termination without cause or due to death or
disability, or resignation for good reason, all as defined in
Mr. Dreiling’s employment agreement.
The share
issuances, the Rollover Options and the new option and restricted stock grants
described above were effected without registration in reliance on (1) the
exemptions afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”), because the sales did not involve any public
offering, (2) Rule 701 promulgated under the Securities Act for shares that were
sold under a written compensatory benefit plan or contract for the participation
of our employees, directors, officers, consultants and advisors, and (3)
Regulation S promulgated under the Securities Act relating to offerings of
securities outside of the United States.
ITEM 6. |
SELECTED FINANCIAL
DATA |
The
following table sets forth selected consolidated financial information of Dollar
General Corporation as of the dates and for the periods
indicated. The selected historical statement of operations data and
statement of cash flows data for the fiscal years ended February 1, 2008,
February 2, 2007 and February 3, 2006, and balance sheet data as of February 1,
2008 and February 2, 2007 have been derived from our historical audited
consolidated financial statements included elsewhere in this report. The
selected historical statement of operations data and statement of cash flows
data for the fiscal years ended January 28, 2005 and January 30, 2004 and
balance sheet data as of February 3, 2006, January 28, 2005, and January 30,
2004 presented in this table have been derived from audited consolidated
financial statements not included in this report.
As a
result of the Merger, purchase accounting, and a new basis of accounting
beginning on July 7, 2007, the 2007 financial reporting periods presented below
include the 22-week Predecessor period of the Company from February 3, 2007 to
July 6, 2007 and the 30-week Successor period, reflecting the merger of the
Company and Buck Acquisition Corp. (“Buck”) from July 7, 2007 to February 1,
2008. Buck’s results of operations for the period from March 6, 2007
to July 6, 2007 (prior to the Merger on July 6, 2007) are also included in the
consolidated financial statements for the periods described above, where
applicable, as a result of certain derivative financial instruments entered into
by Buck prior to the Merger as further described below. Other than
these financial instruments, Buck had no assets, liabilities, or operations
prior to the Merger. The fiscal years presented from 2003 to 2006 reflect the
Predecessor.
Due to
the significance of the Merger and related transactions that occurred in 2007,
the 2007 Successor financial information may not be comparable to that of
previous periods presented in the accompanying table.
The
information set forth below should be read in conjunction with, and is
qualified by reference to, the Consolidated Financial Statements and related
notes included in Part II, Item 8 of this report and the Management’s Discussion
and Analysis of Financial Condition and Results of Operations included in Part
II, Item 7 of this report.
(Amounts
in millions, excluding number of stores and net sales per square
foot)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
7, 2007 through
February
1,
2008
(1)
|
|
|
February
3, 2007
through
July
6, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
5,571.5 |
|
|
$ |
3,923.8 |
|
|
$ |
9,169.8 |
|
|
$ |
8,582.2 |
|
|
$ |
7,660.9 |
|
|
$ |
6,872.0 |
|
Cost
of goods sold
|
|
|
3,999.6 |
|
|
|
2,852.2 |
|
|
|
6,801.6 |
|
|
|
6,117.4 |
|
|
|
5,397.7 |
|
|
|
4,853.9 |
|
Gross
profit
|
|
|
1,571.9 |
|
|
|
1,071.6 |
|
|
|
2,368.2 |
|
|
|
2,464.8 |
|
|
|
2,263.2 |
|
|
|
2,018.1 |
|
Selling,
general and administrative
(4)
|
|
|
1,324.5 |
|
|
|
960.9 |
|
|
|
2,119.9 |
|
|
|
1,903.0 |
|
|
|
1,706.2 |
|
|
|
1,510.1 |
|
Transaction
and related costs
|
|
|
1.2 |
|
|
|
101.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating
profit
|
|
|
246.1 |
|
|
|
9.2 |
|
|
|
248.3 |
|
|
|
561.9 |
|
|
|
557.0 |
|
|
|
508.0 |
|
Interest
income
|
|
|
(3.8 |
) |
|
|
(5.0 |
) |
|
|
(7.0 |
) |
|
|
(9.0 |
) |
|
|
(6.6 |
) |
|
|
(4.1 |
) |
Interest
expense
|
|
|
252.9 |
|
|
|
10.3 |
|
|
|
34.9 |
|
|
|
26.2 |
|
|
|
28.8 |
|
|
|
35.6 |
|
Loss
on interest rate swaps
|
|
|
2.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
on debt retirement, net
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before taxes
|
|
|
(6.6 |
) |
|
|
4.0 |
|
|
|
220.4 |
|
|
|
544.6 |
|
|
|
534.8 |
|
|
|
476.5 |
|
Income
tax expense (benefit)
|
|
|
(1.8 |
) |
|
|
12.0 |
|
|
|
82.4 |
|
|
|
194.5 |
|
|
|
190.6 |
|
|
|
177.5 |
|
Net
income (loss)
|
|
$ |
(4.8 |
) |
|
$ |
(8.0 |
) |
|
$ |
137.9 |
|
|
$ |
350.2 |
|
|
$ |
344.2 |
|
|
$ |
299.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
239.6 |
|
|
$ |
201.9 |
|
|
$ |
405.4 |
|
|
$ |
555.5 |
|
|
$ |
391.5 |
|
|
$ |
514.1 |
|
Investing
activities
|
|
|
(6,848.4 |
) |
|
|
(66.9 |
) |
|
|
(282.0 |
) |
|
|
(264.4 |
) |
|
|
(259.2 |
) |
|
|
(256.7 |
) |
Financing
activities
|
|
|
6,709.0 |
|
|
|
25.3 |
|
|
|
(134.7 |
) |
|
|
(323.3 |
) |
|
|
(245.4 |
) |
|
|
(43.3 |
) |
Total
capital expenditures
|
|
|
(83.6 |
) |
|
|
(56.2 |
) |
|
|
(261.5 |
) |
|
|
(284.1 |
) |
|
|
(288.3 |
) |
|
|
(140.1 |
) |
Other
Financial and Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
store sales growth
|
|
|
1.9 |
% |
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
2.2 |
% |
|
|
3.2 |
% |
|
|
4.0 |
% |
Number
of stores (at period end)
|
|
|
8,194 |
|
|
|
8,205 |
|
|
|
8,229 |
|
|
|
7,929 |
|
|
|
7,320 |
|
|
|
6,700 |
|
Selling
square feet (in thousands at period
end)
|
|
|
57,376 |
|
|
|
57,379 |
|
|
|
57,299 |
|
|
|
54,753 |
|
|
|
50,015 |
|
|
|
45,354 |
|
Net
sales per square foot (5)
|
|
$ |
165.4 |
|
|
$ |
163.9 |
|
|
$ |
162.6 |
|
|
$ |
159.8 |
|
|
$ |
159.6 |
|
|
$ |
157.5 |
|
Highly
consumable sales
|
|
|
66.4 |
% |
|
|
66.7 |
% |
|
|
65.7 |
% |
|
|
65.3 |
% |
|
|
63.0 |
% |
|
|
61.2 |
% |
Seasonal
sales
|
|
|
16.3 |
% |
|
|
15.4 |
% |
|
|
16.4 |
% |
|
|
15.7 |
% |
|
|
16.5 |
% |
|
|
16.8 |
% |
Home
product sales
|
|
|
9.1 |
% |
|
|
9.2 |
% |
|
|
10.0 |
% |
|
|
10.6 |
% |
|
|
11.5 |
% |
|
|
12.5 |
% |
Basic
clothing sales
|
|
|
8.2 |
% |
|
|
8.7 |
% |
|
|
7.9 |
% |
|
|
8.4 |
% |
|
|
9.0 |
% |
|
|
9.5 |
% |
Rent
expense
|
|
$ |
214.5 |
|
|
$ |
150.2 |
|
|
$ |
343.9 |
|
|
$ |
312.3 |
|
|
$ |
268.8 |
|
|
$ |
232.0 |
|
Balance
Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and short-term investments
|
|
$ |
119.8 |
|
|
|
|
|
|
$ |
219.2 |
|
|
$ |
209.5 |
|
|
$ |
275.8 |
|
|
$ |
414.6 |
|
Total
assets
|
|
|
8,656.4 |
|
|
|
|
|
|
|
3,040.5 |
|
|
|
2,980.3 |
|
|
|
2,841.0 |
|
|
|
2,621.1 |
|
Total
debt
|
|
|
4,282.0 |
|
|
|
|
|
|
|
270.0 |
|
|
|
278.7 |
|
|
|
271.3 |
|
|
|
282.0 |
|
Total
shareholders’ equity
|
|
|
2,703.9 |
|
|
|
|
|
|
|
1,745.7 |
|
|
|
1,720.8 |
|
|
|
1,684.5 |
|
|
|
1,554.3 |
|
(1)
|
Includes
the results of Buck for the period prior to the Merger with and into
Dollar General Corporation from March 6, 2007 (its formation) through July
6, 2007 and the post-Merger results of Dollar General Corporation for the
period from July 7, 2007 through February 1,
2008.
|
(2)
|
Includes
the effects of certain strategic merchandising and real estate initiatives
as further described in “Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.”
|
(3)
|
The
fiscal year ended February 3, 2006 was comprised of 53
weeks.
|
(4)
|
Penalty
expenses of $10 million in fiscal 2003 are included in
SG&A.
|
(5)
|
For
the fiscal year ended February 3, 2006, net sales per square foot was
calculated based on 52 weeks’
sales.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
General
Accounting
Periods. The following text contains references to years 2008,
2007, 2006 and 2005, which represent fiscal years ending or ended January 30,
2009, February 1, 2008, February 2, 2007 and February 3, 2006, respectively. Our
fiscal year ends on the Friday closest to January 31. Each of fiscal years 2007
and 2006 were and fiscal year 2008 will be 52-week accounting periods, while
fiscal 2005 was a 53-week accounting period, which affects the comparability of
certain amounts in the Consolidated Financial Statements and financial ratios
between 2005 and the other fiscal years reflected herein. As
discussed below, we completed a merger transaction on July 6,
2007. The 2007 52-week period presented includes the 22-week
Predecessor period of Dollar General Corporation through July 6, 2007 reflecting
the historical basis of accounting, and a 30-week Successor period, reflecting
the impact of the business combination and associated purchase price allocation
of the merger of Dollar General Corporation and Buck Acquisition Corp. (“Buck”),
from July 7, 2007 to February 1, 2008. For comparison purposes, the
discussion of results of operations below is generally based on the mathematical
combination of the Successor and Predecessor periods for the 52-week fiscal year
ended February 1, 2008 compared to the Predecessor 2006 fiscal year ended
February 2, 2007, which we believe provides a meaningful understanding of the
underlying business. Transactions relating to or resulting from the
Merger are discussed separately. The combined results do not reflect
the actual results we would have achieved absent the Merger and should not be
considered indicative of future results of operations. This
discussion and analysis should be read with, and is qualified in its entirety
by, the Consolidated Financial Statements and the notes thereto. It also should
be read in conjunction with the Forward-Looking Statements/Risk Factors
disclosures set forth in the Introduction and in 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 year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements.
Merger
with KKR
On July
6, 2007, we completed a merger (the “Merger”) in which our former shareholders
received $22.00 in cash, or approximately $6.9 billion in total, for each share
of our common stock held. As a result of the Merger, we are a subsidiary of Buck
Holdings, L.P. (“Parent”), a Delaware limited partnership controlled by
investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR”
or “Sponsor”). KKR, GS Capital Partners VI Fund, L.P. and affiliated funds
(affiliates of Goldman, Sachs & Co.), Citi Private Equity, Wellington
Management Company, LLP, CPP Investment Board (USRE II) Inc., and other equity
co-investors (collectively, the “Investors”) indirectly own a substantial
portion of our capital stock through their investment in Parent.
The
Merger consideration was funded through the use of our available cash, cash
equity contributions from the Investors, equity contributions of certain members
of our management and the debt financings discussed below. Our outstanding
common stock is now owned by Parent and certain members of management. Our
common stock is no longer registered with the Securities and Exchange Commission
(“SEC”) and is no longer traded on a national securities exchange.
We
entered into the following debt financings in conjunction with the
Merger:
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a $2.3 billion senior secured term loan facility, which
matures on July 6, 2014 (the “Term Loan
Facility”).
|
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a senior secured asset-based revolving credit facility of up
to $1.125 billion (of which $432.3 million was drawn at closing
and $132.3 million was paid down on the same day), subject to
borrowing base availability, which matures July 6, 2013 (the “ABL
Facility” and, with the Term Loan Facility, the “New Credit
Facilities”).
|
·
|
We
issued $1.175 billion aggregate principal amount of 10.625% senior
notes due 2015, which mature on July 15, 2015, and $725 million
aggregate principal amount of 11.875%/12.625% senior subordinated toggle
notes due 2017, which mature on July 15, 2017. During the
fourth quarter of fiscal 2007, we repurchased $25 million of the
11.875%/12.625% senior subordinated toggle notes due
2017.
|
Executive
Overview
We are
the largest discount retailer in the United States by number of stores, with
approximately 8,200 stores located in 35 states, primarily in the southern,
southwestern, midwestern and eastern United States. We serve a broad customer
base and offer a focused assortment of everyday items, including basic
consumable merchandise and other home, apparel and seasonal products. A majority
of our products are priced at $10 or less and approximately 30% of our products
are priced at $1 or less. We seek to offer a compelling value proposition for
our customers based on convenient store locations, easy in and out shopping and
quality merchandise at highly competitive prices. We believe our combination of
value and convenience distinguishes us from other discount, convenience and
drugstore retailers, who typically focus on either value or
convenience.
The
nature of our business is seasonal to a certain extent. 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.
In
November 2006, we completed a strategic review of our inventory and real estate
strategies and announced significant changes to existing company practices,
which we refer to as “Project Alpha.” At that time, we announced our decision to
close 403 stores which did not meet our recently developed store criteria, in
addition to stores closed in the ordinary course of business, and to slow our
new store growth rate. We made this decision to allow ourselves to focus on our
merchandising efforts and improvements to our execution in the stores. At that
time, we also announced the decision to eliminate, with limited exceptions, our
“packaway” inventory strategy, which was our historical practice of storing
unsold merchandise at the end of a season and carrying it over to the following
year. All of the 403 stores identified for closing were closed by the end of
July 2007, and all of our packaway inventory was eliminated by the end of the
2007 fiscal year. We believe that the elimination of packaway inventory, coupled
with the completion in 2006 of the implementation of our EZstoreTM
process (simplifying the way we stock new merchandise in our stores),
contributed to our ability to show significant improvements in the shopability
and manageability of our stores in 2007. We believe these initiatives
also led to our successful reduction of store employee turnover in 2007,
including significant improvement at the critical store manager and district
manager levels.
In
addition to the initiatives noted above, during 2007 we worked closely with KKR
to refine our strategic initiatives and set goals to improve our operational and
financial performance. During this transition, we slowed our store growth, as
planned, and we defined very specific operational and financial benchmarks to
monitor and measure our progress against our goals. Specifically, in 2007, we
focused on and made good progress on improving our merchandising and category
management processes, refining our real estate processes and improving our
distribution and transportation logistics. In addition, we accelerated our
efforts to refine our pricing strategy, increase direct foreign sourcing and
expand our private label offering. All of these initiatives are ongoing and we
continue to expect them to positively impact our gross profit, sales
productivity and capital efficiency in 2008 and beyond.
It is
important for you to read our more detailed discussion of financial and
operating results below under “Results of Operations.” Basis points or "bps"
amounts referred to below are equal to 0.01 percent as a percentage of
sales. Some of the more significant highlights of the 2007 fiscal year are
as follows:
·
|
Total
sales increased 3.5%, including a 2.1% increase in same-store sales
compared with the prior year. The remaining sales increase resulted from
new stores, partially offset by the impact of closed
stores.
|
·
|
Gross
profit, as a percentage of sales, increased to 27.8% compared to 25.8% in
2006. This increase was the result of improved purchase markups, decreased
markdowns, and leverage on distribution costs impacted by improved
logistics. The 2006 gross profit rate was significantly
impacted by merchandise markdowns as a result of our inventory liquidation
and store closing activities.
|
·
|
SG&A,
as a percentage of sales, increased to 24.1% compared to 23.1%. Several
items of significance affected this comparison, including: the addition of
leasehold intangibles amortization (non-cash) of 25 bps; an excess of
Project Alpha-related
|
|
SG&A
expenses in 2007 over 2006 of 21 bps; an excess of 2007 incentive
compensation resulting from meeting certain financial targets over 2006
discretionary bonuses of 18 bps; the impact of
hurricane-related insurance proceeds received in 2006 of 14 bps; an
accrued loss relating to the restructuring of certain distribution center
leases as a result of the Merger of 13 bps; and other SG&A relating to
or resulting from the Merger. |
|
|
·
|
Other
items affecting our 2007 results of operations, relating to or resulting
from the Merger, as more fully described below, include transaction and
related costs of $102.6 million and a significant increase in interest
expense.
|
·
|
As
a result, we incurred a net loss for the 2007 combined periods of $12.8
million compared to net income for 2006 of $137.9 million. Cash flow from
operating activities increased to $441.6 million in 2007 from $405.4
million in 2006.
|
·
|
We
opened 365 new stores, closed 400 stores (including 275 remaining from
Project Alpha) and relocated or remodeled 300 stores. As of February 1,
2008, we operated 8,194 stores.
|
·
|
We
also reduced total inventories by $143.7 million, or
10.0%.
|
We made
significant progress on our merchandising and operating initiatives in 2007,
including clearing our stores of packaway inventories and closing our
low-performing stores, giving us a strong foundation for further enhancements in
2008. These changes also contributed to a decrease in employee turnover and a
dramatic improvement in the overall appearance of our stores. We moved forward
with our pricing and private label initiatives and enhanced our merchandising
analysis tools giving us a better platform for decision-making. We accomplished
these goals while making a significant transition in the financial structure of
the Company.
2008
Priorities. In 2008, under the leadership of our new CEO, we plan to
continue to deliver value to our customers through our ability to deliver highly
competitive prices in a convenient shopping format. Our stores provide our
customers with a compelling shopping experience, low everyday prices on name
brand and other quality items in a convenient, easy-to-shop format. We plan to
continue to improve on this value/convenience model by implementing
merchandising and operational improvements.
We are
focused on further improving financial performance through:
·
|
Productive
sales growth, including emphasis on increasing shopper frequency, size of
basket and productivity per square
foot.
|
·
|
Improving
our gross margins through: decreasing inventory shrink, refining our
pricing strategy, optimizing our merchandise offering, expanding and
improving our private label offering and improving and expanding our
foreign sourcing;
|
·
|
Improving
our operational processes, for example, through information technology and
work management and leveraging those improvements to reduce
costs.
|
·
|
Strengthening
and expanding our culture of serving
others.
|
In
addition, we plan to open approximately 200 new stores and to remodel or
relocate approximately 400 stores.
Key
Financial Metrics. We have identified the following as our most critical
financial metrics for 2008:
·
|
Same-store
sales growth / sales per square
foot
|
·
|
Gross
profit, as a percentage of sales
|
·
|
Earnings
before interest, taxes and depreciation and amortization
(“EBITDA”)
|
Readers
should refer to the detailed discussion of our operating results below for
additional comments on financial performance in the current year periods as
compared with the prior year periods.
Results
of Operations
The
following discussion of our financial performance is based on the Consolidated
Financial Statements set forth herein. The following table contains results of
operations data for the 2007, 2006 and 2005 fiscal years, and the dollar and
percentage variances among those years.
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
(amounts
in millions)
|
|
2007
(a)
|
|
|
2006
(b)
|
|
|
2005
(c)
|
|
|
$
change
|
|
|
%
change
|
|
|
$
change
|
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highly
consumable
|
|
$ |
6,316.8 |
|
|
$ |
6,022.0 |
|
|
$ |
5,606.5 |
|
|
$ |
294.8 |
|
|
|
4.9 |
% |
|
$ |
415.5 |
|
|
|
7.4 |
% |
%
of net sales
|
|
|
66.53 |
% |
|
|
65.67 |
% |
|
|
65.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seasonal
|
|
|
1,513.2 |
|
|
|
1,510.0 |
|
|
|
1,348.8 |
|
|
|
3.2 |
|
|
|
0.2 |
|
|
|
161.2 |
|
|
|
12.0 |
|
%
of net sales
|
|
|
15.94 |
% |
|
|
16.47 |
% |
|
|
15.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
products
|
|
|
869.8 |
|
|
|
914.4 |
|
|
|
907.8 |
|
|
|
(44.6 |
) |
|
|
(4.9 |
) |
|
|
6.5 |
|
|
|
0.7 |
|
%
of net sales
|
|
|
9.16 |
% |
|
|
9.97 |
% |
|
|
10.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
clothing
|
|
|
795.4 |
|
|
|
723.5 |
|
|
|
719.2 |
|
|
|
72.0 |
|
|
|
9.9 |
|
|
|
4.3 |
|
|
|
0.6 |
|
%
of net sales
|
|
|
8.38 |
% |
|
|
7.89 |
% |
|
|
8.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
9,495.2 |
|
|
$ |
9,169.8 |
|
|
$ |
8,582.2 |
|
|
$ |
325.4 |
|
|
|
3.5 |
% |
|
$ |
587.6 |
|
|
|
6.8 |
% |
Cost
of goods sold
|
|
|
6,851.8 |
|
|
|
6,801.6 |
|
|
|
6,117.4 |
|
|
|
50.2 |
|
|
|
0.7 |
|
|
|
684.2 |
|
|
|
11.2 |
|
%
of net sales
|
|
|
72.16 |
% |
|
|
74.17 |
% |
|
|
71.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,643.5 |
|
|
|
2,368.2 |
|
|
|
2,464.8 |
|
|
|
275.3 |
|
|
|
11.6 |
|
|
|
(96.6 |
) |
|
|
(3.9 |
) |
%
of net sales
|
|
|
27.84 |
% |
|
|
25.83 |
% |
|
|
28.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,285.4 |
|
|
|
2,119.9 |
|
|
|
1,903.0 |
|
|
|
165.5 |
|
|
|
7.8 |
|
|
|
217.0 |
|
|
|
11.4 |
|
%
of net sales
|
|
|
24.07 |
% |
|
|
23.12 |
% |
|
|
22.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
and related costs
|
|
|
102.6 |
|
|
|
- |
|
|
|
- |
|
|
|
102.6 |
|
|
|
100.0 |
|
|
|
- |
|
|
|
- |
|
%
of net sales
|
|
|
1.08 |
% |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Operating
profit
|
|
|
255.4 |
|
|
|
248.3 |
|
|
|
561.9 |
|
|
|
7.2 |
|
|
|
2.9 |
|
|
|
(313.6 |
) |
|
|
(55.8 |
) |
%
of net sales
|
|
|
2.69 |
% |
|
|
2.71 |
% |
|
|
6.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(8.8 |
) |
|
|
(7.0 |
) |
|
|
(9.0 |
) |
|
|
(1.8 |
) |
|
|
26.3 |
|
|
|
2.0 |
|
|
|
(22.2 |
) |
%
of net sales
|
|
|
(0.09 |
)% |
|
|
(0.08 |
)% |
|
|
(0.10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
263.2 |
|
|
|
34.9 |
|
|
|
26.2 |
|
|
|
228.3 |
|
|
|
653.8 |
|
|
|
8.7 |
|
|
|
33.1 |
|
%
of net sales
|
|
|
2.78 |
% |
|
|
0.38 |
% |
|
|
0.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on interest rate swaps, net
|
|
|
2.4 |
|
|
|
- |
|
|
|
- |
|
|
|
2.4 |
|
|
|
100.0 |
|
|
|
- |
|
|
|
- |
|
%
of net sales
|
|
|
0.03 |
% |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on debt retirements, net
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
|
|
1.2 |
|
|
|
100.0 |
|
|
|
- |
|
|
|
- |
|
%
of net sales
|
|
|
0.01 |
% |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(2.6 |
) |
|
|
220.4 |
|
|
|
544.6 |
|
|
|
(222.9 |
) |
|
|
(101.1 |
) |
|
|
(324.3 |
) |
|
|
(59.5 |
) |
%
of net sales
|
|
|
(0.03 |
)% |
|
|
2.40 |
% |
|
|
6.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
10.2 |
|
|
|
82.4 |
|
|
|
194.5 |
|
|
|
(72.2 |
) |
|
|
(87.6 |
) |
|
|
(112.1 |
) |
|
|
(57.6 |
) |
%
of net sales
|
|
|
0.11 |
% |
|
|
0.90 |
% |
|
|
2.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(12.8 |
) |
|
$ |
137.9 |
|
|
$ |
350.2 |
|
|
$ |
(150.7 |
) |
|
|
(109.3 |
)% |
|
$ |
(212.2 |
) |
|
|
(60.6 |
)% |
(a)
|
The
amounts in the 2007 column represent the mathematical combination of the
Predecessor through July 6, 2007 and Successor from July 7, 2007 through
February 1, 2008 as included in the consolidated financial statements.
These results also include the operations of Buck for the period prior to
the Merger from March 6, 2007 (Buck’s date of formation) through July 6,
2007 (reflecting the change in fair value of interest rate swaps.) This
presentation does not comply with generally accepted accounting
principles, but we believe this combination provides a meaningful method
of comparison.
|
(b)
|
Includes
the impacts of certain strategic initiatives as more fully described in
the “Executive Overview” above.
|
(c)
|
The
fiscal year ended February 3, 2006 was comprised of 53
weeks.
|
Net
Sales. Net sales increased $325.4 million, or 3.5%, in 2007,
primarily representing a same-store sales increase of 2.1% for 2007 compared to
2006. Same-store sales include stores that have been open for 13
months and remain open at the end of the reporting period. The increase in
same-store sales accounted for $185.6 million of the increase in sales. Sales
resulting from new store growth, including 365 new stores in 2007, were
partially offset by the impact of store closings in 2007 and 2006. Increased
sales of highly consumables accounted for $294.8 million of our total sales
increase, resulting from successful changes over the past year to our
consumables merchandising mix. Sales of seasonal merchandise and apparel
increased slightly and were partially offset by a decrease in home products
sales. To some extent, sales in these more discretionary categories were
impacted by our efforts to eliminate our packaway strategy by the end of 2007
and to reduce overall inventory levels. In addition, we believe sales of
seasonal merchandise, apparel and home products were negatively affected by
continued economic pressures on our customers, particularly in the fourth
quarter. The increase in same-store sales represents an increase in average
customer purchase, offset by a slight decrease in customer traffic.
Increases
in 2006 net sales resulted primarily from opening additional stores, including
300 net new stores in 2006, and a same-store sales increase of 3.3% for 2006
compared to 2005. The increase in same-store sales accounted for $265.4 million
of the increase in sales, while new stores were the primary contributors to the
remaining $322.2 million sales increase during 2006. The increase in same-store
sales is primarily attributable to an increase in average customer purchase. We also believe
that the strategic merchandising and real estate initiatives discussed above in
the “Executive Overview” had a positive impact on net sales in the fourth
quarter. By merchandise category, our sales increase in 2006 compared to 2005
was primarily attributable to the highly consumable category, which increased by
$415.5 million, or 7.4%. An increase in sales of seasonal merchandise of $161.2
million, or 12.0%, also contributed to overall sales growth. We believe that our
increased sales in 2006 were supported by additions to our product offerings and
increased promotional activities, including the use of advertising circulars and
clearance activities.
As
discussed above, we monitor our sales internally by the following four major
categories: highly consumable, seasonal, home products and basic clothing. The
highly consumable category has a lower gross profit rate than the other three
categories and has grown significantly over the past several years. We expect
the move away from our packaway inventory strategy to have a positive impact on
sales in our non-consumable merchandise categories. 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 is an
integral part of achieving our gross profit and sales goals.
Gross
Profit. The gross profit rate increased by 201 basis points in
2007 as compared with 2006 due to a number of factors, including: an increase in
purchase markups, resulting primarily from a change in mix of items and higher
vendor rebates; lower markdowns, including markdowns from retail and below cost
markdowns (as discussed below, markdowns in 2006 included significant markdowns
and below cost adjustments relating to the initial launch of Project Alpha); and
improved leverage on distribution and transportation costs driven by
logistics
efficiencies. Offsetting the factors listed above was an increase in our
shrink rate in 2007 as compared to 2006.
The gross
profit rate decline in 2006 as compared with 2005 was due primarily to a
significant increase in markdown activity as a percentage of sales, including
below-cost markdowns, as a result of our inventory liquidation and store closing
initiatives. While we believe these initiatives had a positive impact on sales,
they had a negative impact on our gross profit rate in 2006. In total, our gross
profit rate declined by 289 basis points to 25.8% in 2006 compared to 28.7% in
2005. Significantly impacting our gross profit rate, as a result of the related
effect on cost of goods sold, were total markdowns of $279.1 million at cost
taken during 2006, compared with total markdowns of $106.5 million at cost taken
in 2005. The 2006 markdowns reflect $179.9 million at cost taken during the
fourth quarter of 2006 compared to $39.0 million markdowns at cost taken during
the fourth quarter of 2005. Other factors included, but were not limited to: a
decrease in the markups on purchases, primarily attributable to purchases of
highly consumable products (including nationally branded products, which
generally have lower average markups); and an increase in our shrink
rate.
Selling,
General and Administrative (“SG&A”) Expense. SG&A
expense increased $165.5 million, or 7.8%, in 2007 from the prior year, and
increased as a percentage of sales to 24.1% in 2007 from 23.1% in 2006. SG&A
in 2007 includes: $23.4 million related to amortization of leasehold intangibles
capitalized in connection with the revaluation of assets at the date of the Merger;
$27.2 million of accrued administrative employee incentive compensation expense
resulting from meeting certain financial targets (compared to $9.6 million of
discretionary bonuses in 2006); approximately $54 million of expenses relating
to the closing of stores and the elimination of our packaway inventory strategy
(compared to approximately $33 million in 2006) and an accrued loss of
approximately $12.0 million relating to the probable restructuring of certain
distribution center leases. In addition, SG&A in 2007 includes approximately
$4.8 million of KKR-related consulting and monitoring fees. SG&A expense in
2006 was partially offset by insurance proceeds of $13.0 million received during
the year related to losses incurred due to Hurricane
Katrina.
The
increase in SG&A expense as a percentage of sales in 2006 as compared with
2005 was due to a number of factors, including increases in the following
expense categories: impairment charges on leasehold improvements and
store fixtures totaling $9.4 million, including $8.0 million related to the
planned closings of approximately 400 underperforming stores, 128 of which
closed in 2006 and the remainder of which closed in 2007, lease contract
terminations totaling $5.7 million related to these stores; higher store
occupancy costs (increased 12.1%) due to higher average monthly rentals
associated with our leased store locations; higher debit and credit card fees
(increased 40.6%) due to the increased customer usage of debit cards and the
acceptance of VISA credit and check cards at all locations; higher
administrative labor costs (increased 29.9%) primarily related to additions to
our executive team, particularly in merchandising and real estate, and the
expensing of stock options; higher advertising costs (increased 198.3%) related
primarily to the distribution of several advertising circulars in the year and
to promotional activities related to the inventory clearance and store closing
activities discussed above; and higher incentive compensation primarily related
to the $9.6 million discretionary bonus authorized by the Board of Directors for
the 2006 fiscal year. These
increases were partially
offset by insurance proceeds of $13.0 million received during the period related
to losses incurred due to Hurricane Katrina, and depreciation and amortization
expenses that remained relatively constant in fiscal 2006 as compared to fiscal
2005.
Transaction
and Related Costs. The $102.6 million of expenses recorded in 2007
reflect $63.2 million of expenses related to the Merger, such as investment
banking and legal fees as well as $39.4 million of compensation expense related
to stock options, restricted stock and restricted stock units which were fully
vested immediately prior to the Merger.
Interest
Income. Interest income in 2007 consists primarily of interest
on short-term investments. The increase in 2007 from 2006 resulted from higher
levels of cash and short term investments on hand, primarily in the first half
of the year. The decrease in 2006 compared to 2005 was due primarily to the
acquisition of the entity which held legal title to the South Boston
distribution center in June 2006 and the related elimination of the note
receivable which represented debt issued by this entity from which we formerly
leased the South Boston distribution center.
Interest
Expense. Interest expense increased by $228.3 million in 2007 as compared
to 2006 due to interest on long-term obligations incurred to finance the Merger.
See further discussion under “Liquidity and Capital Resources”
below. We had outstanding variable-rate debt of $787.0 million, after
taking into consideration the impact of interest rate swaps, as of
February 1, 2008. The remainder of our outstanding indebtedness at
February 1, 2008 was fixed rate debt.
The
increase in interest expense in 2006 was primarily attributable to increased
interest expense of $6.5 million under a revolving credit agreement primarily
due to increased borrowings, an increase in tax-related interest of $4.1
million, offset by a reduction in interest expense associated with the
elimination of a financing obligation on the South Boston distribution
center.
Loss
on Interest Rate Swaps. During 2007, we recorded an unrealized loss of
$4.1 million related to the change in the fair value of interest swaps prior to
the designation of such swaps as cash flow hedges in October 2007. This loss is
offset by earnings of $1.7 million under the contractual provisions of the swap
agreements.
Loss
on Debt Retirements, Net. During 2007, we recorded $6.2 million of
expenses related to consent fees and other costs associated with a tender offer
for certain notes payable maturing in June 2010 (“2010 Notes”). Approximately
99% of the 2010 Notes were retired as a result of the tender offer. The costs
related to the tender of the 2010 Notes were partially offset by a $4.9 million
gain resulting from the repurchase of $25.0 million of our 11.875%/12.625%
Senior Subordinated Notes, due July 15, 2017.
Income
Taxes. The effective income tax rates for the Successor period
ended February 1, 2008, and the Predecessor periods ended July 6, 2007, 2006 and
2005 were a benefit of 26.9% and expense of 300.2%, 37.4% and 35.7%,
respectively.
The
income tax rate for the Successor period ended February 1, 2008 is a benefit of
26.9%. This benefit is less than the expected U.S. statutory rate of
35% due to the incurrence of state income taxes in several of the group’s
subsidiaries that file their state income tax returns on a separate entity basis
and the election to include, effective February 3, 2007, income tax related
interest and penalties in the amount reported as income tax
expense.
The
income tax rate for the Predecessor period ended July 6, 2007 is an expense of
300.2%. This expense is higher than the expected U.S. statutory rate
of 35% due principally to the non-deductibility of certain acquisition related
expenses.
The
2006 income tax rate was higher than the 2005 rate by 1.7%. Factors
contributing to this increase include additional expense related to the adoption
of a new tax system in the State of Texas; a reduction in the contingent income
tax reserve due to the resolution of contingent liabilities that is less than
the decrease that occurred in 2005; an increase in the deferred tax valuation
allowance; and an increase related to a non-recurring benefit recognized in 2005
related to an internal restructuring. Offsetting these rate increases
was a reduction in the income tax rate related to federal income tax
credits. Due to the reduction in our 2006 income before tax, a small
increase in the amount of federal income tax credits earned yielded a much
larger percentage reduction in the income tax rate for 2006 versus
2005.
Effects of
Inflation
We
believe that inflation and/or deflation had a minimal impact on our overall
operations during 2007, 2006 and 2005.
Liquidity
and Capital Resources
Current
Financial Condition / Recent Developments. During the past three years,
we have generated an aggregate of approximately $1.4 billion in cash flows from
operating activities. During that period, we expanded the number of stores we
operate by approximately 12% (874 stores) and incurred approximately $685
million in capital expenditures. As noted above, we made certain strategic
decisions which slowed our growth in 2007.
At
February 1, 2008, we had total outstanding debt (including the current portion
of long-term obligations) of $4.282 billion. We also had an
additional $769.2 million available for borrowing under our new senior secured
asset-based revolving credit facility at that date. Our liquidity
needs are significant, primarily due to our debt service and other
obligations.
Management believes our
cash flow from operations and existing cash balances, combined with availability
under the New Credit Facilities (described below), will provide sufficient
liquidity to fund our current obligations, projected working capital
requirements and capital spending for a period that includes the next twelve
months.
New
Credit Facilities
Overview.
On July 6, 2007, in connection with the Merger, we entered into two senior
secured credit agreements, each with Goldman Sachs Credit Partners L.P.,
Citicorp Global Markets Inc., Lehman Brothers Inc. and Wachovia Capital
Markets, LLC, each as joint lead arranger and joint bookrunner. The
CIT Group/Business Credit, Inc. is administrative agent under the senior secured
credit agreement for the asset-based revolving credit facility and Citicorp
North America, Inc. is administrative agent under the senior secured credit
agreement for the term loan facility.
The New
Credit Facilities provide financing of $3.425 billion, consisting
of:
·
|
$2.3
billion in a senior secured term loan facility;
and
|
·
|
a
senior secured asset-based revolving credit facility of up to $1.125
billion (of which up to $350.0 million is available for letters of
credit), subject to borrowing base
availability.
|
The term
loan credit facility consists of two tranches, one of which is a “first-loss”
tranche, which, in certain circumstances, is subordinated in right of payment to
the other tranche of the term loan credit facility.
We are the borrower under the term loan credit facility,
the primary borrower under the asset-based credit facility and, in addition,
certain subsidiaries of ours are designated as borrowers under this
facility. The asset-based credit facility includes borrowing capacity
available for letters of credit and for short-term borrowings referred to as
swingline loans.
The New
Credit Facilities provide that we have the right at any time to request up to
$325.0 million of incremental commitments under one or more incremental
term loan facilities and/or asset-based revolving credit facilities. The lenders
under these facilities are not under any obligation to provide any such
incremental commitments and any such addition of or increase in commitments will
be subject to our not exceeding certain senior secured leverage ratios and
certain other customary conditions precedent. Our ability to obtain
extensions of credit under these incremental commitments will also be subject to
the same conditions as extensions of credit under the New Credit
Facilities.
The
amount from time to time available under the senior secured asset-based credit
facility (including in respect of letters of credit) shall not exceed the sum of
the tranche A borrowing base and the tranche A-1 borrowing base. The tranche A
borrowing base equals the sum of (i) 85% of the net orderly liquidation
value of all our eligible inventory and that of each guarantor thereunder and
(ii) 90% of all our accounts receivable and credit/debit card receivables
and that of each guarantor thereunder, in each case, subject to a reserve equal
to the principal amount of the 2010 Notes that remain outstanding at any time
and other customary reserves and eligibility criteria. An additional 10% to 12%
of the net orderly liquidation value of all our eligible inventory and that of
each guarantor thereunder is made available to us in the form of a “last out”
tranche in respect of which we may borrow up to a maximum amount of $125.0
million. Borrowings under
the asset-based credit facility will be incurred first under the last out
tranche, and no borrowings will be permitted under any other tranche until the
last out tranche is fully utilized. Repayments of the senior secured asset-based
revolving credit facility will be applied to the last out tranche only after all
other tranches have been fully paid down.
Interest
Rate and Fees.
Borrowings under the New Credit Facilities bear interest at a rate equal to an
applicable margin plus, at our option, either (a) LIBOR or (b) a base
rate (which is usually equal to the prime rate). The applicable
margin for borrowings is (i) under the term loan facility, 2.75% with respect to
LIBOR borrowings and 1.75% with respect to base-rate borrowings and (ii) as of
February 1, 2008 under the asset-based revolving credit facility (except in the
last out tranche described above), 1.50% with respect to LIBOR borrowings and
0.50% with respect to base-rate borrowings and for any last out borrowings,
2.25% with respect to LIBOR borrowings and 1.25% with respect to base-rate
borrowings. The applicable margins for borrowings under the
asset-based revolving credit facility (except in the case of last out
borrowings) are subject to adjustment each quarter based on average daily excess
availability under the asset-based revolving credit facility.
In
addition to paying interest on outstanding principal under the New Credit
Facilities, we are required to pay a commitment fee to the lenders under the
asset-based revolving credit facility in respect of the unutilized commitments
thereunder. At February 1, 2008 the commitment fee rate was 0.375% per annum.
The commitment fee rate will be reduced (except with regard to the last out
tranche) to 0.25% per annum at any time that the unutilized commitments
under the asset-based credit facility are equal to or less than 50% of the
aggregate commitments under the asset-based revolving credit facility. We must
also pay customary letter of credit fees.
Prepayments. The
senior secured credit agreement for the term loan facility requires us to prepay
outstanding term loans, subject to certain exceptions, with:
·
|
50%
of our annual excess cash flow (as defined in the credit agreement)
commencing with the fiscal year ending on or about January 31, 2008 (which
percentage will be reduced to 25% and 0% if we achieve and maintain a
total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0,
respectively);
|
·
|
100%
of the net cash proceeds of all non-ordinary course asset sales or other
dispositions of property in excess of $25.0 million in the aggregate and
subject to our right to reinvest the proceeds;
and
|
·
|
100%
of the net cash proceeds of any incurrence of debt, other than proceeds
from debt permitted under the senior secured credit
agreement.
|
The
mandatory prepayments discussed above will be applied to the term loan facility
as directed by the senior secured credit agreement.
In
addition, the senior secured credit agreement for the asset-based revolving
credit facility requires us to prepay the asset-based revolving credit facility,
subject to certain exceptions, with:
·
|
100%
of the net cash proceeds of all non-ordinary course asset sales or other
dispositions of revolving facility collateral (as defined below) in excess
of $1.0 million in the aggregate and subject to our right to reinvest the
proceeds; and
|
·
|
to
the extent such extensions of credit exceed the then current borrowing
base (as defined in the senior secured credit agreement for the
asset-based revolving credit
facility).
|
We may
be obligated to pay a prepayment premium on the amount repaid under the term
loan facility if the term loans are voluntarily repaid in whole or in part
before July 6, 2009. We may voluntarily repay outstanding loans under the
asset-based revolving credit facility at any time without premium or penalty,
other than customary “breakage” costs with respect to LIBOR loans.
An
event of default under the senior secured credit agreements will occur upon a
change of control as defined in the senior secured credit agreements governing
our New Credit Facilities. Upon an event of default, indebtedness
under the New Credit Facilities may be accelerated, in which case we will be
required to repay all outstanding loans plus accrued and unpaid interest and all
other amounts outstanding under the New Credit Facilities.
Letters of
Credit. $350.0
million of our asset-based revolving credit facility is available for letters of
credit.
Amortization. Beginning
September 30, 2009, we are required to repay installments on the loans under the
term loan credit facility in equal quarterly principal amounts in an aggregate
amount per annum equal to 1% of the total funded principal amount at July 6,
2007, with the balance payable on July 6, 2014. There is no amortization under
the asset-based revolving credit facility. The entire principal amounts (if any)
outstanding under the asset-based revolving credit facility are due and payable
in full at maturity, on July 6, 2013, on which day the commitments thereunder
will terminate.
Guarantee
and Security. All
obligations under the New Credit Facilities are unconditionally guaranteed by
substantially all of our existing and future domestic subsidiaries (excluding
certain immaterial subsidiaries and certain subsidiaries designated by us under
our senior secured credit agreements as “unrestricted subsidiaries”), referred
to, collectively, as U.S. Guarantors.
All
obligations and related guarantees under the term loan credit facility are
secured by:
·
|
a
second-priority security interest in all existing and after-acquired
inventory, accounts receivable, and other assets arising from such
inventory and accounts receivable, of the Company and each U.S. Guarantor
(the “Revolving Facility Collateral”), subject to certain
exceptions;
|
·
|
a
first priority security interest in, and mortgages on, substantially all
of our and each U.S. Guarantor’s tangible and intangible assets (other
than the Revolving Facility Collateral);
and
|
·
|
a
first-priority pledge of 100% of the capital stock held by the Company, or
any of our domestic subsidiaries that are directly owned by us or one of
the U.S. Guarantors and 65% of the voting capital stock of each of our
existing and future foreign subsidiaries that are directly owned by us or
one of the U.S. Guarantors.
|
All
obligations and related guarantees under the asset-based credit facility are
secured by the Revolving Facility Collateral, subject to certain
exceptions.
Certain
Covenants and Events of Default. The senior secured credit agreements
contain a number of covenants that, among other things, restrict, subject to
certain exceptions, our ability to:
·
|
incur
additional indebtedness;
|
·
|
pay
dividends and distributions or repurchase our capital
stock;
|
·
|
make
investments or acquisitions;
|
·
|
repay
or repurchase subordinated indebtedness (including the senior subordinated
notes discussed below) and the senior notes discussed
below;
|
·
|
amend
material agreements governing our subordinated indebtedness (including the
senior subordinated notes discussed below) or our senior notes discussed
below; and
|
·
|
change
our lines of business.
|
The
senior secured credit agreements also contain certain customary affirmative
covenants and events of default.
At
February 1, 2008, we had $102.5 million of borrowings, $28.8 million of
commercial letters of credit, and $69.2 million of standby letters of credit
outstanding under our asset-based revolving credit facility.
Senior
Notes due 2015 and Senior Subordinated Toggle Notes due 2017
On July
6, 2007, we issued $1,175.0 million aggregate principal amount of 10.625% senior
notes due 2015 (the “senior notes”) which mature on July 15, 2015 pursuant to an
indenture, dated as of July 6, 2007 (the “senior
indenture”), and $725 million aggregate principal amount of 11.875%/12.625%
senior subordinated toggle notes due 2017 (the “senior subordinated notes”),
which mature on July 15, 2017, pursuant to an indenture, dated as of July 6,
2007 (the “senior subordinated indenture”). The senior notes and the senior
subordinated notes are collectively referred to herein as the “notes.” The
senior indenture and the senior subordinated indenture are collectively referred
to herein as the “indentures.”
Interest
on the notes is payable on January 15 and July 15 of each year, commencing
January 15, 2008. Interest on the senior notes will be payable in cash. Cash
interest on the senior subordinated notes will accrue at a rate of 11.875% per
annum, and PIK interest (as that term is defined below) will accrue at a rate of
12.625% per annum. The initial interest payment on the senior subordinated notes
will be payable in cash. For any interest period thereafter through July 15,
2011, we may elect to pay interest on the senior subordinated notes (i) in cash,
(ii) by increasing the principal amount of the senior subordinated notes or
issuing new senior subordinated notes (“PIK interest”) or (iii) by paying
interest on half of the principal amount of the senior subordinated notes in
cash interest and half in PIK interest. After July 15, 2011, all interest on the
senior subordinated notes will be payable in cash.
The
notes are fully and unconditionally guaranteed by each of the existing and
future direct or indirect wholly owned domestic subsidiaries that guarantee the
obligations under our New Credit Facilities.
We may
redeem some or all of the notes at any time at redemption prices described or
set forth in the indentures. We repurchased $25.0 million of the 11.875%/12.625%
senior subordinated toggle notes in the fourth quarter of 2007.
Change
of Control. Upon the occurrence of a change of control, which is defined
in the indentures, each holder of the notes has the right to require us to
repurchase some or all of such holder’s notes at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date.
Covenants. The
indentures contain covenants limiting, among other things, our ability and the
ability of our restricted subsidiaries to (subject to certain
exceptions):
·
|
incur
additional debt, issue disqualified stock or issue certain preferred
stock;
|
·
|
pay
dividends on or make certain distributions and other restricted
payments;
|
·
|
create
certain liens or encumbrances;
|
·
|
enter
into transactions with affiliates;
|
·
|
consolidate,
merge, sell or otherwise dispose of all or substantially all of our
assets; and
|
·
|
designate
our subsidiaries as unrestricted
subsidiaries.
|
Events
of Default. The indentures also provide for events of default which, if
any of them occurs, would permit or require the principal of and accrued
interest on the notes to become or to be declared due and payable.
Registration
Rights Agreement. On July 6, 2007, we entered into a registration rights
agreement with respect to the notes. In the registration rights
agreement, we agreed to use commercially reasonable efforts to register with the
SEC new senior notes having substantially identical terms as the senior notes
and new senior subordinated notes having substantially identical terms as the
senior subordinated notes. We filed this registration statement with
the SEC, and it was declared effective, in the fourth quarter of fiscal
2007. We subsequently commenced the offer to exchange the new senior
notes and the new senior subordinated notes for each of the outstanding senior
notes and the outstanding senior subordinated notes, respectively. The exchange
offer expired on March 17, 2008. All of the outstanding senior notes
and senior subordinated notes were tendered in the exchange offer.
Adjusted
EBITDA
Under the
New Credit Facilities and the indentures, certain limitations and restrictions
could occur if we are not able to satisfy and remain in compliance with
specified financial ratios. Management believes the most significant of such
ratios is the senior secured incurrence test under the New Credit
Facilities. This test measures the ratio of the senior secured debt
to Adjusted EBITDA. This ratio would need to be no greater than 4.25 to 1 to
avoid such limitations and restrictions. As of February 1, 2008, this ratio was
3.4 to 1. Senior secured debt is defined as our total debt secured by liens or
similar encumbrances less cash and cash equivalents. EBITDA is
defined as income (loss) from continuing operations before cumulative effect of
change in accounting principle plus interest and other financing costs, net,
provision for income taxes, and depreciation and amortization. Adjusted EBITDA
is defined as EBITDA, further adjusted to give effect to adjustments required in
calculating this covenant ratio under our New Credit Facilities. EBITDA and
Adjusted EBITDA are not presentations made in accordance with GAAP, are not
measures of financial performance or condition, liquidity or profitability, and
should not be considered as an alternative to (1) net income, operating
income or any other performance measures determined in accordance with GAAP or
(2) operating cash flows determined in accordance with GAAP. Additionally,
EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for
management’s discretionary use, as they do not consider certain cash
requirements such as interest payments, tax payments and debt service
requirements and replacements of fixed assets.
Our
presentation of EBITDA and Adjusted EBITDA has limitations as an analytical
tool, and should not be considered in isolation or as a substitute for analysis
of our results as reported under GAAP. Because not all companies use identical
calculations, these presentations of EBITDA and Adjusted EBITDA may not be
comparable to other similarly titled measures of
other
companies. We believe that the presentation of EBITDA and Adjusted EBITDA is
appropriate to provide additional information about the calculation of this
financial ratio in the New Credit Facilities. Adjusted EBITDA is a material
component of this ratio. Specifically, non-compliance with the senior secured
indebtedness ratio contained in our New Credit Facilities could prohibit us from
being able to incur additional secured indebtedness, other than the additional
funding provided for under the senior secured credit agreement and pursuant to
specified exceptions, to make investments, to incur liens and to make certain
restricted payments.
The calculation of
Adjusted EBITDA under the New Credit Facilities is as
follows:
(In
millions)
|
|
Year
Ended February 1,
2008
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(12.8 |
) |
Add
(subtract):
|
|
|
|
|
Interest
income
|
|
|
(8.8 |
) |
Interest
expense
|
|
|
263.2 |
|
Depreciation
and amortization
|
|
|
226.4 |
|
Income
taxes
|
|
|
10.2 |
|
EBITDA
|
|
|
478.2 |
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
Transaction
and related costs
|
|
|
102.6 |
|
Loss
on debt retirements, net
|
|
|
1.2 |
|
Loss
on interest rate swaps
|
|
|
2.4 |
|
Contingent
loss on distribution center leases
|
|
|
12.0 |
|
Impact
of markdowns related to inventory clearance activities, including LCM
adjustments, net of purchase accounting adjustments
|
|
|
5.7 |
|
SG&A
related to store closing and inventory clearance
activities
|
|
|
54.0 |
|
Operating
losses (cash) of stores to be closed
|
|
|
10.5 |
|
Monitoring
and consulting fees to affiliates
|
|
|
4.8 |
|
Stock
option and restricted stock unit expense
|
|
|
6.5 |
|
Indirect
merger-related costs
|
|
|
4.6 |
|
Other
|
|
|
1.0 |
|
Total
Adjustments
|
|
|
205.3 |
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$ |
683.5 |
|
Other
Considerations
Our
inventory balance represented approximately 44% of our total assets exclusive of
goodwill and other intangible assets as of February 1, 2008. Our proficiency in
managing our inventory balances can have a significant impact on our cash flows
from operations during a given fiscal year. We have made more efficient
inventory management a strategic priority, as more fully discussed in the
“Executive Overview” above.
During
2006 and 2005, the Predecessor’s Board of Directors authorized the repurchase of
up to $500 million and 10 million shares, respectively, of the Predecessor’s
outstanding common stock. These authorizations allowed purchases in the open
market or in privately negotiated transactions from time to time, subject to
market conditions. During 2006, we purchased approximately 4.5 million shares
pursuant to the 2005 authorization at a total cost of $79.9 million. During
2005, we purchased approximately 15.0 million shares pursuant to the 2005 and a
prior authorization at a total cost of $297.6 million.
We may
seek, from time to time, to retire the notes (as defined above) through cash
purchases on the open market, in privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on prevailing market conditions, our
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
The
following table summarizes our significant contractual obligations and
commercial commitments as of February 1, 2008 (in thousands):
|
Payments
Due by Period
|
Contractual
obligations
|
Total
|
|
<
1 yr
|
|
1-3
yrs
|
|
3-5
yrs
|
>
5 yrs
|
Long-term
debt obligations
|
$
|
4,293,718
|
|
$
|
-
|
|
|
$
|
36,223
|
|
|
$
|
46,000
|
|
$
|
4,211,495
|
Capital
lease obligations
|
|
10,268
|
|
|
3,246
|
|
|
|
1,957
|
|
|
|
526
|
|
|
4,539
|
Interest
(a)
|
|
2,817,237
|
|
|
382,587
|
|
|
|
762,872
|
|
|
|
756,070
|
|
|
915,708
|
Self-insurance
liabilities (b)
|
|
203,600
|
|
|
68,613
|
|
|
|
89,815
|
|
|
|
26,612
|
|
|
18,560
|
Operating
leases (c)
|
|
1,614,215
|
|
|
335,457
|
|
|
|
524,363
|
|
|
|
357,418
|
|
|
396,977
|
Monitoring
agreement (d)
|
|
24,903
|
|
|
5,250
|
|
|
|
10,763
|
|
|
|
8,890
|
|
|
-
|
Subtotal
|
$
|
8,963,941
|
|
$
|
795,153
|
|
|
$
|
1,425,993
|
|
|
$
|
1,195,516
|
|
$
|
5,547,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
Expiring by Period
|
Commercial
commitments (e)
|
|
Total
|
|
|
<
1 yr
|
|
|
|
1-3
yrs
|
|
|
|
3-5
yrs
|
|
|
>
5 yrs
|
Letters
of credit
|
$
|
28,778
|
|
$
|
28,778
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
Purchase
obligations (f)
|
|
385,366
|
|
|
384,892
|
|
|
|
474
|
|
|
|
-
|
|
|
-
|
Subtotal
|
$
|
414,144
|
|
$
|
413,670
|
|
|
$
|
474
|
|
|
$
|
-
|
|
$
|
-
|
Total
contractual obligations and commercial commitments
|
$
|
9,378,085
|
|
$
|
1,208,823
|
|
|
$
|
1,426,467
|
|
|
$
|
1,195,516
|
|
$
|
5,547,279
|
(a)
|
Represents
obligations for interest payments on long-term debt and capital lease
obligations, and includes projected interest on variable rate long-term
debt, based upon 2007 year end
rates.
|
(b)
|
We
retain a significant portion of the risk for our workers’ compensation,
employee health insurance, general liability, property loss and automobile
insurance. As these obligations do not have scheduled maturities, these
amounts represent undiscounted estimates based upon actuarial assumptions.
Reserves for workers’ compensation and general liability which existed as
of the Merger date were discounted in order to arrive at estimated fair
value. All other amounts are reflected on an undiscounted basis
in our consolidated balance sheets.
|
(c)
|
Operating
lease obligations are inclusive of amounts included in deferred rent and
closed store obligations in our consolidated balance
sheets.
|
(d)
|
We
entered into a monitoring agreement, dated July 6, 2007, with affiliates
of certain of our Investors pursuant to which those entities will provide
management and advisory services. Such agreement has no
contractual term and for purposes of this schedule is presumed to be
outstanding for a period of five
years.
|
(e)
|
Commercial
commitments include information technology license and support agreements,
supplies, fixtures, letters of credit for import merchandise, and other
inventory purchase obligations.
|
(f)
|
Purchase
obligations include legally binding agreements for software licenses and
support, supplies, fixtures, and merchandise purchases excluding such
purchases subject to letters of
credit.
|
In 2007
and 2006, our South Carolina-based wholly owned captive insurance subsidiary,
Ashley River Insurance Company (“ARIC”), had cash and cash equivalents and
investments balances held pursuant to South Carolina regulatory requirements to
maintain a specified percentage of ARIC’s liability and equity balances
(primarily insurance liabilities) in the form of certain specified types of
assets and, as such, these investments are not available for general corporate
purposes. At February 1, 2008, these cash and cash equivalents balances and
investments balances were $11.9 million and $51.5 million,
respectively.
During 2005, we incurred
significant losses caused by Hurricane Katrina, primarily inventory and fixed
assets, in the form of store fixtures and leasehold improvements. We reached
final settlement of our related insurance claim in 2006 and received proceeds
totaling $21.0 million due to these losses, including $13.0 million in 2006 and
$8.0 million in 2005, and have utilized a portion of these proceeds to replace
lost assets. Insurance proceeds related to fixed assets are included in
cash flows from investing activities and proceeds related to inventory losses
and business interruption are included in cash flows from operating
activities.
Legal
actions, claims and tax contingencies. As described in Note 7 to the
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. As discussed in Note 5 we also have
certain income tax-related contingencies as more fully described below under
“Critical Accounting Policies and Estimates.” Future negative developments could
have a material adverse effect on our liquidity.
Considerations
regarding distribution center leases. The Merger and certain of the
related financing transactions may be interpreted as giving rise to certain
trigger events (which may include events of default) under our three
distribution center leases. In that event, our additional cost of acquiring the
underlying land and building assets could approximate $112
million. At this time, we do not believe such issues would result in
the purchase of these distribution centers; however, the payments associated
with such an outcome would have a negative impact on our liquidity. To minimize
the uncertainty associated with such possible interpretations, we are
negotiating the restructuring of these leases and the related underlying debt.
We have concluded that a probable loss exists in connection with the
restructurings and have recorded associated SG&A expenses in the Successor
financial statements for the period ended February 1, 2008 totaling $12.0
million. The ultimate resolution of these negotiations may result in changes in
the amounts of such losses, which changes may be material.
Credit
ratings. On June 12, 2007 Standard & Poor’s revised our
long-term debt rating to B, and left our long-term debt ratings on negative
watch. Moody’s revised our long-term debt rating to B3 with a stable
outlook. These current ratings are considered non-investment
grade. Our current credit ratings, as well as future rating agency
actions, could (1) negatively impact our ability to obtain financings to finance
our operations on satisfactory terms; (2) have the effect of increasing our
financing costs; and (3) have the effect of increasing our insurance premiums
and collateral requirements necessary for our self-insured
programs.
Cash
flows
The
discussion of the cash flows from operating, investing and financing activities
included below for 2007 is generally based on the combination of the Predecessor
and Successor for the 52-week period ended February 1, 2008, which we believe
provides a more meaningful understanding of our liquidity and capital resources
for the time period presented.
Cash
flows from operating activities. Cash flows from operating
activities for 2007 compared to 2006 increased by $36.2 million, notwithstanding
a decline in net income (loss) of $150.8 million, as described in detail under
“Results of Operations” above, and which is partially attributable to $102.6
million of Transaction and related costs in 2007. Other significant components
of the change in cash flows from operating activities in 2007 as compared to
2006 were changes in inventory balances, which decreased by approximately 10%
during 2007 compared to a decrease of approximately 3% during 2006. Inventory
levels in the seasonal category declined by $84.5 million, or 24%, in 2007
compared to a $6.7 million, or 2%, increase in 2006. The highly consumable
category declined by $42.4 million, or 6%, in 2007 compared to a $63.2 million,
or 10%, increase in 2006. The home products category increased by $3.5 million,
or 2%, in 2007 as compared to a $52.5 million, or 25%, decline in 2006. The
basic clothing category decreased by $20.3 million, or 9%, in 2007 as compared
to a $59.5 million, or 21%, decrease in 2006. In addition to inventory changes
the decline in net income was a principal factor in the reduction in income
taxes paid in 2007 as compared to 2006. Also offsetting the decline in net
income were changes in accrued expenses in 2007 as compared to 2006, which
increased primarily due to income tax related reserves, accrued interest,
incentive compensation accrual, the accrued loss in connection with the ongoing
negotiations to restructure our distribution center leases, and accruals
for lease liabilities on closed stores.
Cash
flows from operating activities for 2006 compared to 2005 declined by $150.1
million. The most significant component of the decline in cash flows from
operating activities in 2006 as compared to 2005 was the reduction in net
income, as described in detail under “Results of Operations” above. Partially
offsetting this decline are certain noncash charges included in net income,
including below-cost markdowns on inventory balances and property and equipment
impairment charges totaling $78.1 million, and a $13.8 million increase in
noncash depreciation and amortization charges in 2006 as compared to 2005. In
addition, the reduction in 2006 year end inventory balances reflect the effect
of below-cost markdowns and our efforts to sell through excess inventories, as
compared with increases in 2005 and 2004. Seasonal inventory levels
increased by 2% in 2006 as compared to a 10% increase in 2005, home products
inventory levels declined by 25% in 2006 as compared to a 2% increase in 2005,
while basic clothing inventory levels declined by 21% in 2006 as compared to a
5% decline in 2005. Total merchandise inventories at the end of 2006 were $1.43
billion compared to $1.47 billion at the end of 2005, a 2.9% decrease overall,
and a 6.4% decrease on a per store basis, reflecting both our focus on
liquidating packaway merchandise and the effect of below-cost
markdowns.
Cash
flows from investing activities. The Merger, as discussed in more detail
above, required cash payments of approximately $6.7 billion, net of cash
acquired of $350 million. Significant components of property and equipment
purchases in 2007 included the following approximate amounts: $60 million for
improvements, upgrades, remodels and relocations of existing stores; $45 million
for new stores; and $30 million for distribution and transportation-related
capital expenditures. During 2007, we opened 365 new stores and remodeled or
relocated 300 stores.
During
2007 we purchased a secured promissory note for $37.0 million which represents
debt issued by a third-party entity from which we lease our distribution center
in Ardmore, Oklahoma. Purchases and
sales of short-term investments in 2007, which equaled net sales of $22.1
million, primarily reflect our investment activities in our captive insurance
subsidiary, and all purchases of long-term investments are related to the
captive insurance subsidiary.
Cash
flows used in investing activities totaling $282.0 million in 2006 were
primarily related to capital expenditures and, to a lesser degree, purchases of
long-term investments. Significant components of our property and equipment
purchases in 2006 included the following approximate amounts: $66 million for
distribution and transportation-related capital expenditures (including
approximately $30 million related to our distribution center in Marion, Indiana
which opened in 2006); $66 million for new stores; $50 million for the
EZstoreTM project;
and $38 million for capital projects in existing stores. During 2006 we opened
537 new stores and remodeled or relocated 64 stores.
Purchases
and sales of short-term investments in 2006, which equaled net sales of $1.9
million, reflect our investment activities in tax-exempt auction rate securities
as well as investing activities of our captive insurance subsidiary. Purchases
of long-term investments are related to the captive insurance
subsidiary.
Significant components of
our purchases of property and equipment in 2005 included the following
approximate amounts: $102 million for distribution and transportation-related
capital expenditures; $96 million for new stores; $47 million related to the
EZstoreTM project;
$18 million for certain fixtures in existing stores; and $15 million for various
systems-related capital projects. During 2005, we opened 734 new stores and
relocated or remodeled 82 stores. Distribution and transportation expenditures
in 2005 included costs associated with the construction of our new distribution
centers in South Carolina and Indiana.
Net sales
of short-term investments in 2005 of $34.1 million primarily reflect our
investment activities in tax-exempt auction rate securities. Purchases of
long-term investments are related to our captive insurance
subsidiary.
Capital
expenditures during 2008 are projected to be approximately $200 to $220
million. We anticipate funding 2008 capital requirements with cash
flows from operations and our revolving credit facility, if necessary.
Significant components of the 2008 capital plan include growth initiatives as
well as continued investment in our existing store base, plans for
remodeling and relocating approximately 400 stores, additional
investments in our supply chain, and leasehold improvements and fixtures and
equipment for approximately 200 new stores. We plan to undertake these
expenditures in order to improve our infrastructure and enhance our cash
generated from operating activities.
Cash
flows from financing activities. To finance the Merger,
we issued long-term debt of approximately $4.2 billion and issued common stock
in the amount of approximately $2.8 billion. We incurred costs associated with
the issuance of Merger-related long-term debt of $87.4 million. As discussed
above, we completed a cash tender offer for our 2010 Notes. Approximately 99% of
the 2010 Notes were validly tendered resulting in repayments of long-term debt
and related consent fees in the amount of $215.6 million. Borrowings, net of
repayments, under our new asset-based revolving credit facility in 2007 totaled
$102.5 million.
Cash
flows used in financing activities during 2006 included the repurchase of
approximately 4.5 million shares of our common stock at a total cost of $79.9
million, cash dividends paid of $62.5 million, or $0.20 per share, on our
outstanding common stock, and $14.1 million to reduce our outstanding capital
lease and financing obligations. These uses of cash were partially offset by
proceeds from the exercise of stock options during 2006 of $19.9
million.
During
2005, we repurchased approximately 15.0 million shares of our common stock at a
total cost of $297.6 million, paid cash dividends of $56.2 million, or $0.175
per share, on our outstanding common stock, and expended $14.3 million to reduce
our outstanding capital lease and financing obligations. Also in 2005, we
received proceeds of $14.5 million from the issuance of a tax increment
financing in conjunction with the construction of our new distribution center in
Indiana and proceeds from the exercise of stock options of $29.4
million.
The
borrowings and repayments under the revolving credit agreements in 2007, 2006
and 2005 were primarily a result of activity associated with periodic cash
needs.
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 (see discussion below) and recent improvements
in the LIFO analysis whereby all SKUs are considered in the 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 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.
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.
Goodwill
and Indefinite-Lived Intangible Assets. Under SFAS 142, “Goodwill and
Other Intangible Assets”, we are required to test goodwill and intangible assets
with indefinite lives for impairment annually, or
more frequently if impairment indicators occur. Significant judgments required
in this testing process may include projecting future cash flows, determining
appropriate discount rates and other assumptions. Projections are based on
management’s best estimate given recent financial performance, market trends,
strategic plans and other available information. Changes in these estimates and
assumptions could materially affect the determination of fair value or
impairment. Future indicators of impairment could result in an asset impairment
charge.
Purchase
Accounting. The Merger was accounted for as a reverse acquisition in
accordance with the purchase accounting provisions of SFAS 141, “Business
Combinations,” under which our assets and liabilities have been accounted for at
their estimated fair values as of the date of the Merger. The aggregate purchase
price was allocated to the tangible and intangible assets acquired and
liabilities assumed, based upon an assessment of their relative fair values as
of the date of the Merger. These estimates of fair values, the allocation of the
purchase price and other factors related to the accounting for the Merger are
subject to significant judgments and the use of estimates.
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. Certain store and warehouse fixtures, when fully depreciated, are removed
from the cost and related accumulated depreciation and amortization accounts.
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 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 are 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. At the date of the Merger this liability was
discounted in accordance with purchase accounting standards. Subsequent to the
Merger, 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 using actuarial methodologies based on 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 we
adopted on 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 on a quarterly basis 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 7 to the 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 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 (excluding those associated with a business combination) 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 (which is based on a peer group of publicly traded companies),
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.
Adoption
of 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. After the Merger and the related application of purchase
accounting, no portion of the reserve for uncertain tax positions that
existed as of
the date of adoption would impact our effective tax rate but would, if
subsequently recognized, reduce the amount of goodwill recorded in relation to
the Merger.
Subsequent to the adoption
of FIN 48, we elected to record income tax related interest and penalties as a
component of the provision for income tax expense.
Accounting
Pronouncements
In March
2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.
161, “Disclosures about Derivative Instruments and Hedging Activities”, an
amendment of FASB Statement No. 133. SFAS 161 applies to all derivative
instruments and nonderivative instruments that are designated and qualify as
hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133 and related
hedged items accounted for under SFAS 133. SFAS 161 requires entities to provide
greater transparency through additional disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flows. SFAS 161 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2008. We currently plan to adopt SFAS 161 during our 2009 fiscal
year. No determination has yet been made regarding the potential
impact of this standard on our financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”.
The new standard establishes the requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest (formerly minority
interest) in an acquiree; provides updated requirements for recognition and
measurement of goodwill acquired in the business combination or a gain from a
bargain purchase; and provides updated disclosure requirements to enable users
of financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is not allowed. This standard is not expected to impact our
financial statements unless a qualifying transaction is consummated subsequent
to the effective date.
In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115” (SFAS 159). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. It provides entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. We currently plan to
adopt SFAS 159 during our 2008 fiscal year. We are in the process of
evaluating the potential impact of this standard on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
provides guidance for using fair value to measure assets and liabilities. The
standard also requires expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. For non-financial assets and liabilities, the effective date has been
delayed to fiscal years beginning after November 15, 2008. We currently expect
to adopt SFAS 157 during our 2008 and 2009 fiscal years. We are in the process
of evaluating the potential impact of this standard on our consolidated
financial statements.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Financial
Risk Management
Interest
Rate Risk
We manage
our interest rate risk through the strategic use of fixed and variable interest
rate debt and, from time to time, derivative financial instruments. Our
principal interest rate exposure relates to outstanding amounts under our New
Credit Facilities. Our New Credit Facilities provide for variable rate
borrowings of up to $3,425.0 million including availability of
$1,125.0 million under our senior secured asset-based revolving credit
facility, subject to the borrowing base. In order to mitigate a
portion of the variable rate interest exposure under the New Credit Facilities,
we entered into interest rate swaps with affiliates of Goldman, Sachs & Co.,
Lehman Brothers Inc. and Wachovia Capital Markets, LLC. Pursuant to the swaps,
which became effective on July 31, 2007, we swapped three month LIBOR rates
for fixed interest rates which will result in the payment of a fixed rate of
7.68% on a notional amount of $2,000.0 million which will amortize on a
quarterly basis until maturity at July 31, 2012. At February 1, 2008, the
notional amount was $1,630.0 million.
A change
in interest rates on variable rate debt impacts our pre-tax earnings and cash
flows; whereas a change in interest rates on fixed rate debt impacts the
economic fair value of debt but not our pre-tax earnings and cash
flows. Our derivatives qualify for hedge accounting as cash flow
hedges. Therefore, changes in market fluctuations related to the
effective portion of these cash flow hedges do not impact our pre-tax earnings
until the accrued interest is recognized on the derivatives and the associated
hedged debt. Based on our outstanding debt as of February 1,
2008 and
assuming that our mix of debt instruments, derivative instruments and other
variables remain the same, the annualized effect of a one percentage point
change in variable interest rates would have a pretax impact on our earnings and
cash flows of approximately $7.9 million.
The
interest rate swaps are accounted for in accordance with SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities”, as amended and
interpreted (collectively, “SFAS 133”). SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires that all derivatives be recognized as
either assets or liabilities at fair value. Beginning October 12, 2007, we
are accounting for the swaps described above as cash flow hedges and record the
effective portion of changes in fair value of the swaps within accumulated other
comprehensive income.
Subsequent to the 2007
fiscal year end, we entered into a $350.0 million step-down interest rate swap
which became effective February 28, 2008 in order to mitigate an additional
portion of the variable rate interest exposure under the New Credit
Facilities. We entered into the swap with Wachovia Capital Markets
and we swapped one month LIBOR rates for fixed interest rates, which will result
in the payment of a fixed rate of 5.58% on a notional amount of $350.0 million
for the first year and $150.0 million for the second year.
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA |
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
Dollar
General Corporation
We have
audited the accompanying consolidated balance sheets of Dollar General
Corporation and subsidiaries as of February 1, 2008 (Successor) and February 2,
2007 (Predecessor), and the related consolidated statements of operations,
shareholders' equity, and cash flows for the periods from March 6, 2007 to
February 1, 2008 (Successor), February 3, 2007 to July 6, 2007 (Predecessor) and
for the years ended February 2, 2007 and February 3, 2006
(Predecessor). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Dollar General
Corporation and subsidiaries at February 1, 2008 (Successor) and February 2,
2007 (Predecessor), and the consolidated results of their operations and their
cash flows for the periods from March 6, 2007 to February 1, 2008 (Successor),
February 3, 2007 to July 6, 2007 (Predecessor) and for the years ended February
2, 2007 and February 3, 2006 (Predecessor), in conformity with U.S. generally
accepted accounting principles.
As
discussed in Notes 1 and 9 to the consolidated financial statements, effective
February 4, 2006, the Company changed its method of accounting for stock-based
compensation in connection with the adoption of Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment”.
As
discussed in Notes 1 and 5 to the consolidated financial statements, effective
February 3, 2007, the Company changed its method of accounting for uncertain tax
positions in connection with the adoption of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”.
/s/ Ernst & Young
LLP
Nashville,
Tennessee
March 25,
2008
CONSOLIDATED
BALANCE SHEETS
(In
thousands except per share amounts)
|
|
Successor
|
|
|
Predecessor
|
|
|
|
February
1,
2008
|
|
|
February
2,
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
100,209 |
|
|
$ |
189,288 |
|
Short-term
investments
|
|
|
19,611 |
|
|
|
29,950 |
|
Merchandise
inventories
|
|
|
1,288,661 |
|
|
|
1,432,336 |
|
Income
taxes receivable
|
|
|
32,501 |
|
|
|
9,833 |
|
Deferred
income taxes
|
|
|
17,297 |
|
|
|
24,321 |
|
Prepaid
expenses and other current assets
|
|
|
59,465 |
|
|
|
57,020 |
|
Total
current assets
|
|
|
1,517,744 |
|
|
|
1,742,748 |
|
Net
property and equipment
|
|
|
1,274,245 |
|
|
|
1,236,874 |
|
Goodwill
|
|
|
4,344,930 |
|
|
|
2,337 |
|
Intangible
assets, net
|
|
|
1,370,557 |
|
|
|
86 |
|
Other
assets, net
|
|
|
148,955 |
|
|
|
58,469 |
|
Total
assets
|
|
$ |
8,656,431 |
|
|
$ |
3,040,514 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term obligations
|
|
$ |
3,246 |
|
|
$ |
8,080 |
|
Accounts
payable
|
|
|
551,040 |
|
|
|
555,274 |
|
Accrued
expenses and other
|
|
|
300,956 |
|
|
|
253,558 |
|
Income
taxes payable
|
|
|
2,999 |
|
|
|
15,959 |
|
Total
current liabilities
|
|
|
858,241 |
|
|
|
832,871 |
|
Long-term
obligations
|
|
|
4,278,756 |
|
|
|
261,958 |
|
Deferred
income taxes
|
|
|
486,725 |
|
|
|
41,597 |
|
Other
liabilities
|
|
|
319,714 |
|
|
|
158,341 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Redeemable
common stock
|
|
|
9,122 |
|
|
|
- |
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Shares authorized: 1,000,000
|
|
|
- |
|
|
|
|
|
Series
B junior participating preferred stock, stated
value
$0.50 per share; Shares authorized:
10,000;
Issued: None
|
|
|
|
|
|
|
- |
|
Common
stock; $0.50 par value, 1,000,000 shares authorized,
555,482
shares issued and outstanding at February 1, 2008 and
500,000
shares authorized, 312,436 shares issued and
outstanding
at February 2, 2007, respectively.
|
|
|
277,741 |
|
|
|
156,218 |
|
Additional
paid-in capital
|
|
|
2,480,062 |
|
|
|
486,145 |
|
Retained
earnings (accumulated deficit)
|
|
|
(4,818 |
) |
|
|
1,103,951 |
|
Accumulated
other comprehensive loss
|
|
|
(49,112 |
) |
|
|
(987 |
) |
Other
shareholders’ equity
|
|
|
- |
|
|
|
420 |
|
Total
shareholders’ equity
|
|
|
2,703,873 |
|
|
|
1,745,747 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
8,656,431 |
|
|
$ |
3,040,514 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands)
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the years
ended
|
|
|
|
July
7, 2007
through
February
1, 2008
(a)
|
|
|
February
3, 2007 through
July
6, 2007
|
|
|
|
|
|
February
3,
2006
|
|
|
|
(30
weeks)
|
|
|
(22
weeks)
|
|
|
(52
weeks)
|
|
|
(53
weeks)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
5,571,493 |
|
|
$ |
3,923,753 |
|
|
$ |
9,169,822 |
|
|
$ |
8,582,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
3,999,599 |
|
|
|
2,852,178 |
|
|
|
6,801,617 |
|
|
|
6,117,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,571,894 |
|
|
|
1,071,575 |
|
|
|
2,368,205 |
|
|
|
2,464,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
1,324,508 |
|
|
|
960,930 |
|
|
|
2,119,929 |
|
|
|
1,902,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
and related costs
|
|
|
1,242 |
|
|
|
101,397 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
246,144 |
|
|
|
9,248 |
|
|
|
248,276 |
|
|
|
561,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(3,799 |
) |
|
|
(5,046 |
) |
|
|
(7,002 |
) |
|
|
(9,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
252,897 |
|
|
|
10,299 |
|
|
|
34,915 |
|
|
|
26,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on interest rate swaps
|
|
|
2,390 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on debt retirement, net
|
|
|
1,249 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(6,593 |
) |
|
|
3,995 |
|
|
|
220,363 |
|
|
|
544,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(1,775 |
) |
|
|
11,993 |
|
|
|
82,420 |
|
|
|
194,487 |
|
|
< |