Dollar General Reports Third Quarter 2005 EPS of $0.20; Comments on 2005 Outlook and 2006 Store Opening Plans

Business Wire, Nov 22, 2005

GOODLETTSVILLE, Tenn. -- Dollar General Corporation (NYSE: DG) today reported net income for the third quarter of fiscal 2005 of $64.4 million, or $0.20 per share, compared to net income of $71.1 million, or $0.22 per share, in the third quarter of fiscal 2004. In 2005, the Company increased the number of departments utilized for its retail inventory method gross profit calculation from 10 to 23 (the "RIM expansion"). The impact in the third quarter of the RIM expansion was a decrease in income before income taxes of approximately $10.8 million and a decrease in earnings per share ("EPS") of $0.02.

Net sales for the third quarter ended October 28, 2005, were $2.1 billion, a 9.5 percent increase over net sales of $1.9 billion for the same period of fiscal 2004. The increase was a result of opening new stores and a same-store sales increase of 1.4 percent.

As a percentage of sales, gross profit for the fiscal 2005 third quarter declined to 28.1 percent from 29.5 percent for the comparable period in fiscal 2004. The decrease in the gross profit rate is primarily attributable to: 1) lower sales, as a percentage of total sales, in the Company's seasonal, home products and basic clothing categories, which have higher than average mark-ups; 2) increased markdowns as a result of the Company's initiative to reduce per-store inventory; 3) higher distribution and transportation expenses primarily attributable to increased fuel costs; and 4) the impact of the RIM expansion discussed above. These factors were partially offset by higher average mark-ups in the 2005 period as compared with the 2004 period.

Selling, general and administrative expenses ("SG&A") improved to 23.2 percent of sales for the third quarter of fiscal 2005 versus 23.4 percent of sales during the comparable prior year quarter. The decrease is attributable to: 1) lower employee incentive compensation expense based upon the Company's year-to-date fiscal 2005 financial performance; and 2) a reduction in professional fees primarily due to the reduction of consulting fees in the 2005 period associated with the EZstore project and with the Company's Sarbanes-Oxley compliance efforts. The Company also continued to leverage store labor as a percentage of sales in the quarter. These items were partially offset by increased store occupancy and utilities costs. In addition, during the prior year period the Company incurred certain expenses that did not recur in the current year period including increased sales and use tax accruals and a charge related to the expiration of a lease for, and subsequent purchase of, the Company's airplane.

During the fiscal 2005 third quarter, Hurricanes Katrina, Rita and Wilma impacted the Company in the form of store closings prior to and during the hurricanes' landfalls, as well as after the storms due to power outages and damages sustained. The most significant storm-related Company losses were related to merchandise inventories, furniture and fixtures, which were primarily offset by insurance proceeds. The Company anticipates recording additional insurance proceeds upon receipt, including amounts to offset losses related to business interruption. The Company cannot currently predict the amount or timing of the additional insurance proceeds or whether any additional proceeds will be received in the fourth quarter of 2005. The net impact of the hurricanes was not material to the Company's financial position, liquidity, or results of operations in the third quarter.

The effective income tax rate for the third quarter of 2005 was 34.2 percent compared to 33.9 percent in the comparable prior year period. The rate for the 2005 period is lower than the Company's estimated annual effective rate of approximately 36.0 percent primarily due to favorable reductions in certain contingent income tax-related liabilities. The tax rate in the 2004 period was favorably impacted by the October 2004 retroactive reinstatement of certain federal jobs credits and a favorable adjustment to the Company's 2003 income tax liability upon the filing of its 2003 tax return in October 2004.

For the 39-week year-to-date period, net income was $204.9 million in fiscal 2005, or $0.63 per share, compared to $210.3 million, or $0.63 per share, in the comparable prior year period. The impact of the RIM expansion for the 2005 year-to-date period was to decrease income before income taxes by approximately $17.5 million and to decrease EPS by $0.03.

Year-to-date net sales increased 11.7 percent, resulting primarily from opening 564 net new stores since October 29, 2004, and a same-store sales increase of 3.4 percent.

As a percentage to sales, gross margin for the year-to-date period was 28.4 percent in 2005 compared to 29.3 percent in 2004. The decline in gross margin was due to a number of factors, including lower sales, as a percentage of total sales, in the Company's seasonal, home products and basic clothing categories, increased markdowns and higher transportation expenses, as well as the impact from the RIM expansion discussed above. These factors were partially offset by higher average mark-ups in the 2005 period.