Dollar General 2014 Annual Report Download - page 103

10-K
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 Cautionary
Disclosure Regarding Forward-Looking Statements and the Risk Factors disclosures set forth in the
Introduction and in Item 1A of this report, respectively.
Executive Overview
We are the largest discount retailer in the United States by number of stores, with 11,879 stores
located in 43 states as of February 27, 2015, primarily in the southern, southwestern, midwestern and
eastern United States. We offer a broad selection of merchandise, including consumable products such
as food, paper and cleaning products, health and beauty products and pet supplies, and
non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel.
We completed our first full year of tobacco product sales in 2014, with favorable impacts on our net
sales and same store sales. Our merchandise includes high quality national brands from leading
manufacturers, as well as comparable quality private brand selections with prices at substantial
discounts to national brands. We offer our customers these national brand and private brand products
at everyday low prices (typically $10 or less) in our convenient small-box (small store) locations.
The customers we serve are value-conscious, many with low or fixed incomes, and Dollar General
has always been intensely focused on helping them make the most of their spending dollars. We believe
our convenient store format and broad selection of high quality products at compelling values have
driven our substantial growth and financial success over the years. Like other retailers, we have been
operating for several years in an environment with ongoing macroeconomic challenges and
uncertainties. In addition, our core customer faces multiple macroeconomic headwinds, from fluctuating
food and energy costs to rising and uncertain medical costs, and the timetable and strength of
economic recovery remains uncertain. During the latter part of 2014, our customer has experienced
some general economic tailwinds, such as lower gasoline prices and improving employment rates;
however, the duration of these effects is still unknown.
We are keenly focused on executing our four primary operating priorities, which are: 1) drive
productive sales growth, 2) enhance our gross profit margins, 3) leverage process improvements and
information technology to reduce costs, and 4) strengthen and expand Dollar General’s culture of
serving others.
Our first priority is driving productive sales growth, which includes increasing shopper frequency,
item unit sales and transaction amount. In 2014, sales in same-stores increased by 2.8% over 2013
levels due to increases in both traffic and average transaction. Successful sales growth initiatives in 2014
included completion of the first full year of sales relating to the chain-wide rollout of tobacco products
and the expansion of our limited scope store remodeling efforts, which optimized shelf space in many
of our older, smaller stores and in many cases, increased the number of coolers for refrigerated and
frozen foods and beverages. We remodeled and relocated a total of 915 stores during the year. We
continued to meet the affordability needs of our core customer by renewing our focus on $1 to $5
items, as more than 75% of our SKUs at year-end were items priced at $5 or less. We also experienced
the successful launch of our DG Digital Coupons program. Similar to the preceding two years, inflation
had a very modest impact on our sales in 2014. In addition to same-store sales growth, we opened 700
new stores.
Our second priority is to enhance our gross profit rate. The full year of sales of tobacco products
in 2014 has driven increased customer traffic as planned, although the addition of tobacco products and
an increased proportion of sales of perishables have lowered the gross profit rate. An increase in
markdowns, an increase in the LIFO provision and supply chain disruption due to the longshoreman
29