Discount-Variety Stores Industry Module 10: Incorporating Additional Information Kate Johnson

1. Discount-Variety Stores Industry Module 10: Incorporating Additional Information Kate Johnson

2. Agenda for Presentation • Company Overview and Comparables • Summary of Re-Formulation Objectives • Balance Sheet Re-Formulation • Income Statement Re-Formulation • Comments • Uncertainties • Questions

3. I: Company Information and Comparables

4. “Save Time. Save Money.” • Largest discount retailer in the US by number of stores • Goodlettsville, Tennessee • 11,000 stores • 40 States • Southern, Southwestern, Midwestern, Eastern US • Merchandise is typically $10 or less • Founded in 1939 • Stock publicly traded in 2009

5. Product Types • Two brands: 1)High quality nationalbrands from leading manufacturers 2)Comparable quality privatebrand selections 10,000 SKUS/store 10$ or less

6. How are they profitable? • Convenient Locations • Time Saving Shopping Experience • Everyday Low Prices on Quality Merchandise • Key items in a broad range of general merchandise categories • Most basic shopping needs are met in one trip

7. Discount-Variety Stores **Costco is least comparable

8. But DG is a Dollar Store? • Dollar General is more suited to be compared with Walmart, Target, and Costco, as not everything is $1 (DLTR) and they have produce (unlike FDO) • Characteristics such as industry and size are often chosen for comparable

9. Store Growth • 2011-2012 Growth: 5.72% • 2012-2013 Growth: 5.96% DG is a February 2 year end 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . 10,506 650 24 626 11,132

10. II: Summary of Module 10 • Analyzing and including additional sources of information in the footnotes and MD&A • Focus of Module 10: gathering additional information from the financial statements to enrich understanding of DG • Can incorporate any information, although footnotes comprise the majority of this information for DG • Work in Module 10 will help revise and improve identification of NEA and EPAT

11. III: Balance Sheet Re-Formulation

12. Consolidated Balance Sheet

13. Cash, Investments

14. Merchandise Inventories

15. Property and Equipment • As the result of a merger transaction in 2007, the Company’s property and equipment was recorded at estimated fair values • PPE acquired subsequent to the merger has been recorded at cost • Records depreciation and amortization on a straight line basis

16. PPE Continued Footnote Original BS Reformulation

17. Goodwill and Impairment • If indicators of impairment are present: DG evaluates the carrying value of long-lived assets other than Goodwil, in relation to the operating performance and future cash flows or the appraised values of the underlying assets • DG policy: review for impairment stores open more than 3 years for which the current CF from operations are negative • Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows expected to be generated by the assets

18. Goodwill and Other Intangibles

19. Accrued Expenses and Other Liabilities Footnote Original BS Re-formulated BS

20. Other Liabilities

21. Current andLong-term obligations

22. Current and Long-Term Obligations cont.

23. Deferred Tax Assets andLiabilities

25. DTA and DTLs continued Deleted the Deferred Income taxes line item under original balance sheet entitled “long term obligations” (Amount $614,026) Thus DIT $809, 682- DTA $173,861- DIT deleted item $21,795= Deleted$614, 026

26. Common Shareholder’sEquity

28. Re-Formulated Balance Sheet

30. III: Income Statement Reformulation

31. Consolidated IncomeStatement

32. Net Sales

33. Other (income) expense Reformulation

34. Income Taxes

35. Income Taxes cont. Reformulation

36. Consolidated Income Statement

37. Re-Formulated Income Statement

38. Consolidated Balance Sheet

41. General Comments • Because Dollar General has such a simple business model and only US locations, there aren’t many items that need to be included in the re-formulation • Re-Formulation had much fewer line items added than P&G example used in class • No “filling” used in re-formulation for DG; everything reported was exact numbers that matched the numbers in the footnotes • Only the balance sheet, when re-formulated, generated a number different than what is on the face of the financial statements from the 10-K

42. Uncertainties • Tax Rate • SG&A Expenses • Benefit Plans • Lease information • Shareholder’s Equity and Reconciliation

43. Taxes The module stated that our ideal outcome is to estimate the amount of tax that would have been avoided had the firm not had any financial expense Issue: No different tax rate disclosed in the footnotes

44. SG&A Expense

45. SG&A Expenses • Despite searching the footnotes, there is no line-by-line list of what is included in SG&A expense. I have included different portions that reference SG&A expense, but even after doing that and summing their numbers, they still do not add up to the reported SG&A expense on the income statement. • Searching online for the line items didn’t turn up anything either • -I even tried looking at the statement of cash flows investing activities, which talks about leases (rent expense is often considered an SG&A expense), however it states that the current portion of rent expense is in accrued expenses and the long term is in other liabilities on the balance sheet • Important to know for: • forecasting (ex transportation costs versus legal costs will be forecasted forward differently) • ability to split between enterprise operating and financing activities

46. SG&A Expense Continued Even press releases only reveal the amount, not what exactly is included in SG&A expense

47. Benefit Plans Because the notes make it seem like each portion of the benefit is already completely accounted for in various line items on the balance sheet, I am unsure of what exactly to do with this. It is a defined contribution plan, so from my understanding, no grossing up is necessary.

48. Leases: DG usesBoth Capital and Operating • Operating leases record no liability or related asset on the balance sheet. • Off Balance Sheet Financing • Some managers believe that keeping such assets and liabilities off the balance sheet improves the market’s perception of their enterprise’s performance and the company’s financial condition • Module 11 talks about Operating Leases in Adjustment B. Module 11 will take this into account.

49. Impacts of Operating Leases • 1) Lease asset is not reported on the B/S • EATO higher because reported NEA is lower and revenues are unaffected 2) Lease liability not reported on B/S -Balance sheet measures of financial leverage (like the total liabilities-to-equity ratio) are improved -Reduced financial leverage results in better credit rating and lower interest rates on borrowed funds 3) Without adjustment (capitalization of operating leases), the return on NEA (RNEA) appears higher, which improves the perceived quality of the company’s return on equity

50. Capital Leases