Dollar General posts 4Q earnings decline

Forges ahead with expansion plan

Staff -- Home Textiles Today, 3/5/2001

GOODLETTSVILLE, TN -Building stores at a faster pace than it could realistically handle, Dollar General Stores recorded rare declines in earnings for the fourth quarter and all of last year, as interest costs shot up sharply higher, and operating costs moved up while gross margins eroded.

The neighborhood retailer drove sales sharply higher during the Christmas quarter, by 22.5 percent, to $1.4 billion from $1.2 billion last year, after opening 758 new stores over the past 12 months and remodeling or relocating 237 others.

But picking up the tab for all that costly growth, Dollar General saw its interest costs shoot up almost 20-fold during the closing quarter, to $1.0 million from just $55,000 the prior year, taking a big bite out of the bottom line.

On top of rising interest expense, average gross margin crumbled in a weakening retail environment, while operating costs move inexorably higher. Average gross margin eroded by 270 basis points, to 26.5 percent from 29.2 percent the previous year. But given the stronger level of sales, gross margin dollars improved at a double-digit pace, rising by 11.0 percent, to $382.3 million from $344.4 million last year. Unable to leverage the new store openings or the improved top line into lower overhead costs, Dollar General reported that operating costs climbed higher by 150 basis points, to 18.7 percent from 17.2 percent the prior year. Measured in absolute dollars, costs shot up by 33.2 percent, to $269.4 million from $202.8 million a year ago, a whopping $67.1 million increase.

In a public mea culpa, Cal Turner Jr., chairman and ceo, said, "Year-over-year declines in earnings are rare for Dollar General. 2000 was an unusual year of poorer implementation of our growth as we undertook more change than could be fully digested in one year."

Clearly chagrined, but still finding a silver lining, Turner added, "Earnings downturns have always brought valuable lessons and significant change, positioning future progress. Our reaction to last year has been the positioning of a new management team-a combination of a few select placements from the outside and even more promotions of great talent developed with the company."

Even with the recent missteps, Dollar General is still on a sharp growth trajectory, and plans to open another 600 to 700 new stores this year. Looking ahead, the retailer said it expects sales and earnings both to increase between 15 percent and 18 percent during the year.