Dollar General 2004 Annual Report Download - page 16

14
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company measures itself against seven key financial
metrics that it believes provide a well-balanced perspec-
tive regarding its overall financial health. These metrics,
and their method of computation, are listed below:
■ Earnings per share (“EPS”) growth (current year
EPS minus prior year EPS divided by prior year EPS
equals percentage change), which is an indicator of
the increased returns generated for the Company’s
shareholders;
■ Total net sales growth (current year total net sales
minus prior year total net sales divided by prior year
total net sales equals percentage change), which
indicates, among other things, the success of the
Company’s selection of new store locations and
merchandising strategies;
■ Operating margin rate (operating profit divided by
net sales), which is an indicator of the Company’s
success in leveraging its fixed costs and managing
its variable costs;
■ Return on invested capital (numerator—net income
plus interest expense, net of tax, plus rent expense,
net of tax; denominator—average long-term debt plus
average shareholders’ equity, both measured at the
end of the latest five fiscal quarters, plus average rent
expense multiplied by eight. Average rent expense is
computed using a two-year period.). Although this
measure is a not computed using generally accepted
accounting principles (“GAAP”), the Company believes
it is useful because return on invested capital mea-
sures the efficiency of the Company’s capital deployed
in its operations;
■ Free cash flow (the sum of net cash flows from operat-
ing activities, net cash flows from investing activities
and net cash flows from financing activities, excluding
share repurchases and changes in debt other than
required payments). Although this measure is a non-
GAAP measure, the Company believes it is useful as
an indicator of the cash flow generating capacity of
the Company’s operations. It is also a useful metric
to analyze in conjunction with net income to determine
whether there is any significant non-cash component
to the Company’s net income;
■ Inventory turns (cost of goods sold for the year divided
by average inventory balances, at cost, measured at
the end of the latest five fiscal quarters) which is an
indicator of how well the Company is managing the
largest asset on its balance sheet;
■ Return on average assets (net income for the year
divided by average total assets, measured at the end
of the latest five fiscal quarters), which is an overall
indicator of the Company’s effectiveness in deploying
its resources.
The Company computes the above metrics using both
GAAP and certain non-GAAP information. As discussed
further below under “Results of Operations,” the
Company generally excludes items relating to the
restatement of the Company’s 1998–2000 financial
results (the “2001 Restatement”) to more effectively
evaluate the Company’s performance on a comparable
and ongoing basis.
The Company also pays particular attention to its same-
store sales growth, which is a sub-category of its total
sales growth, and its shrink performance, which is a
sub-category of its operating margin rate. In 2004 and
2003, the Company experienced same-store sales
growth of 3.2% and 4.0%, respectively. In 2004 and
2003, the Company’s shrink, expressed in retail dollars
as a percentage of sales, was 3.05% for each year.
Results of Operations
The following discussion of the Company’s financial
performance is based on the Consolidated Financial
Statements set forth herein. The Company has included
in this document certain financial information not derived
in accordance with GAAP, such as selling, general and
administrative (“SG&A”) expenses, net income and
diluted earnings per share that exclude the impact of items
relating to the 2001 Restatement. The Company believes
that this information is useful to investors as it indicates
more clearly the Company’s comparative year-to-year
operating results. This information should not be consid-
ered a substitute for any measures derived in accordance
with GAAP. Management may use this information to
better understand the Company’s underlying operating
results. Reconciliations of these non-GAAP measures to
the most comparable measure calculated in accordance
with GAAP are contained in the table below.
The Company has restated its consolidated financial
statements, as discussed in Note 2 to the Consolidated
Financial Statements, for all previous years presented
(the “Restatement”). The following discussion of the
Company’s results of operations incorporates the
effects of this Restatement.
For fiscal years 2001 and 2000, the Restatement
reduced previously reported net income by approximately
$3.6 million and $3.7 million, respectively, or approxi-
mately $.01 per diluted share in each year. Retained
earnings at the beginning of 2000 have been reduced
by approximately $10.7 million to reflect the after-tax
impacts of earlier periods.