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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended January 28, 201131, 2014


Commission file number: 001-11421


DOLLAR GENERAL CORPORATION
(Exact name of registrant as specified in its charter)charter)


TENNESSEE
(State or other jurisdiction of
incorporation or organization)

61-0502302
(I.R.S. Employer
Identification No.)

100 MISSION RIDGE
GOODLETTSVILLE, TN 37072
(Address of principal executive offices, zip code)

(615) 855-4000
Registrant's telephone number, including area code:

         Securities registered pursuant to Section 12(b) of the Act:

100 MISSION RIDGE
GOODLETTSVILLE, TN  37072
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code:  (615) 855-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of the exchange on which registered

Common Stock, par value $0.875 per share

New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:  None


         Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X ]ý    No [  ]o


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [   ]o    No [X]ý


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]ý    No [    ]o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [   ]ý    No [   ]o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ýAccelerated filer oNon-accelerated filer o
(Do not check if a
smaller reporting company)
Smaller reporting company o

Large accelerated filer [X]

Accelerated filer [   ]


Non-accelerated filer [   ]

Smaller reporting company [  ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]o    No [X]ý


The aggregate fair market value of the registrant’sregistrant's common stock outstanding and held by non-affiliates as of July 30, 2010August 2, 2013 was $2,057,296,011$18.01 billion calculated using the closing market price of our common stock as reported on the NYSE on such date ($29.18)55.79). For this purpose, directors, executive officers and greater than 10% record shareholders are considered the affiliates of the registrant.


The registrant had 341,521,858313,596,983 shares of common stock outstanding as of March 16, 2011.13, 2014.



DOCUMENTS INCORPORATED BY REFERENCE


Certain of the information required in Part III of this Form 10-K is incorporated by reference to the Registrant’sRegistrant's definitive proxy statement to be filed for the Annual Meeting of Shareholders to be held on May 25, 2011.29, 2014.




INTRODUCTION


General
INTRODUCTION


General

This report contains references to years 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007 and 2006,2009, which represent fiscal years ending or ended January 30, 2015, January 31, 2014, February 1, 2013, February 3, 2012, January 28, 2011, and January 29, 2010, respectively. Our fiscal year ends on the Friday closest to January 30, 2009, February 1, 200831, and February 2, 2007, respectively.each of the years listed will be or were 52-week years, with the exception of 2011 which consisted of 53 weeks. All of the discussion and analysis in this report should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and related notes.


Solely for convenience, our trademarks and tradenames referred tomay appear in this document may appearreport without the ® or TM symbol but such references arewhich is not intended to indicate in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right to these trademarks and tradenames.


Cautionary Disclosure Regarding Forward-Looking Statements


We include “forward-looking statements”"forward-looking statements" within the meaning of the federal securities laws throughout this report, particularly under the headings “Business,” “Management’s"Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and “Note 9 "Note 8—Commitments and Contingencies," among others. You can identify these statements because they are not limited to historical fact or they use words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “potential,” “opportunity,” “intend,” “will"may," "will," "should," "could," "believe," "anticipate," "project," "plan," "expect," "estimate," "forecast," "goal," "potential," "opportunity," "intend," "will likely result," or “will continue”"will continue" and similar expressions that concern our strategy, plans, intentions or beliefs about future occurrences or results. For example, all statements relating to our estimated and projected expenditures, cash flows, results of operations, financial condition and liquidity; our plans, objectives and expectations for future operations, growth or initiatives; or the expected outcome or effect of of legislative or regulatory changes or initiatives, pending or threatened litigation or audits are forward-looking statements.


All forward-looking statements are subject to risks and uncertainties that may change at any time, so our actual results may differ materially from those that we expected. We derive many of these statements from our operating budgets and forecasts, which are based on many detailed assumptions that we believe are reasonable. However, it is very difficult to predict the effect of known factors, and we cannot anticipate all factors that could affect our actual results.


Important factors that could cause actual results to differ materially from the expectations expressed in our forward-looking statements are disclosed under “Risk Factors”"Risk Factors" in Part I, Item 1A and elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves and under the heading “Critical"Critical Accounting Policies and Estimates”Estimates"). All written and oral forward-looking statements are expressly qualified in their entirety by these and other cautionary statements that we make from time to time in our other SEC filings and public communications. You should evaluate forward-lookingsuch statements in the context of these risks and uncertainties. These factors may not contain all of the factors that are important to you. We cannot assure you that we will realize the results or developments we



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anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect.


The forward-looking Forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.




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PART I


ITEM 1.    BUSINESS

BUSINESSGeneral


General


We are the largest discount retailer in the United States by number of stores, with 9,41411,215 stores located in 3540 states as of February 25, 2011,28, 2014, primarily in the southern, southwestern, midwestern and eastern United States. We offer a broad selection of merchandise, including consumables, seasonal, home products and apparel. 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 merchandise at everyday low prices (typically $10 or less) through our convenient small-box (approximately 7,200locations, with selling space averaging approximately 7,400 square feet) locations.feet.

Our History

J.L. Turner founded our Company in 1939 as J.L. Turner and Son, Wholesale. We were incorporated as a Kentucky corporation under the name J.L. Turner & Son, Inc. in 1955, when we opened our first Dollar General store. We changed our name to Dollar General Corporation in 1968 and reincorporated in 1998 as a Tennessee corporation. Our common stock was publicly traded from 1968 until July 2007, when we merged with an entity controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., or KKR. OnIn November 13, 2009 our common stock again became publicly traded, upon our completion of an initial public offering of 39,215,000and in December 2013 the entity controlled by investment funds affiliated with KKR sold its remaining shares of our common stock, including 22,700,000 newly issued shares. We are majority owned by Buck Holdings, L.P., a Delaware limited partnership controlled by KKR, which beneficially owns approximately 71% of our outstanding common stock.

Our Business Model

Our long history of profitable growth is founded on a commitment to a relatively simple business model: providing a broad base of customers with their basic everyday and household needs, supplemented with a variety of general merchandise items, at everyday low prices in conveniently located, small-box stores. We continually evaluate the needs and demands of our customers and modify our merchandise selections and pricing accordingly, while remaining focused on increasing profitability and returns for our shareholders.

Fiscal year 20102013 represented our 21st24th consecutive year of same-store sales growth. This growth, regardless of economic conditions, suggests that we have a less cyclical business model than most retailers and, we believe, is a result of our compelling value and convenience proposition. Both customer traffic and average transaction amount increased during 2009 and 2010 despite a very difficult economic environment. We believe that our customers recognize our efforts to provide them with a pleasant, efficient shopping experience along with our ongoing commitment to meet their everyday needs, which encourages them to continue to shop with us in the future.

Our attractive store economics, including a relatively low initial investment and simple, low cost operating model, have allowed us to grow our store base to over 9,400 stores in 35 states, and provide us significant opportunities to continue our strategy of profitable store growth.



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Compelling Value and Convenience PropositionProposition..    Our ability to deliver highly competitive prices on national brand and quality private brand products in convenient locations and our easy in"in and outout" shopping format create a compelling shopping experience that distinguishes us from other discount, convenience and drugstore retailers. Our slogan “Saveof "Save time. Save money. Every day!" summarizes our appeal to customers. We believe our ability to effectively deliver both value and convenience allows us to succeed in small markets with limited shopping alternatives, as well as to profitably coexist alongside larger retailers in more competitive markets. Our compelling value and convenience proposition is evidenced by the following attributes of our business model:

·


Attractive Store Economics. The traditional Dollar General store size, design and location requires minimal initial investment and low maintenance capital expenditures. Our typical locations involve a modest, no-frills building, which helps keep our rental and other fixed overhead costs relatively low. When coupled with our new stores’ ability to generally deliver positive cash flow in the first year, this low capital expenditure requirement typically results in pay back of capital in less than two years. Our stringent market analysis, real estate site selection



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and new store approval processes as well as our new store marketing programs help us optimize financial returns and minimize the risks of opening unprofitable stores.

Our lean store staffing model and centralized management of utilities, maintenance and supplies procurement contribute to our relatively low operating costs and efficient store operations.

Substantial Growth Opportunities.    We believe that we have substantial long-term growth opportunities through both improved profitability of existing stores and new store openings.potential in the U.S. We are pursuing a number of initiatives which we expect to continue to improve the profitability of our existing store base. In addition, we have identified significant opportunities to add new stores in both existing and new markets. We believeIn addition, we have the long-term potential in the U.S. to more than doubleopportunities within our existing store base while maintaining strong returns on capital. See ‘‘to relocate or remodel to better serve our customers.

Our Growth Strategy’’ for additional details.Operating Priorities

Our Growth Strategy

We believe we have the right strategy and execution capabilities to capitalize on the considerable growth opportunities afforded by our business model.        We believe we continue to have significant opportunities to drive profitable growth through increasing same-store sales, expandingby continuing to expand upon our operating profit ratesimple business model, which is largely focused on serving the needs of the low, low-middle and growing our store base.

Increasing Same-Store Sales.fixed income consumer, a segment of the U.S. population that has continued to grow over the past several years. We believe our four key operating priorities, initially established in 2008, remain critical to the combinationlong-term growth and profitability of our necessity-driven productcompany. These priorities are 1) drive productive sales growth; 2) increase, or enhance, our gross profit rate; 3) leverage process improvements and information technology to reduce costs; and 4) strengthen and expand Dollar General's culture of serving others.

        Drive Productive Sales Growth.    We believe our customer-driven merchandise mix and our attractive value proposition, including a well-balanced merchandising approach, providescombined with the impact of our remodeled and relocated stores provide a strong basis for increased same-store sales. On a comparable 52-week basis, our same-store sales increased 3.3% in 2013, 4.7% in 2012 and 6.0% in 2011. Our average net sales per square foot, based on total stores, increased to $201$220 in 20102013 from $195$216 in 20092012 and $180$213 in 2008.2011 (which included a contribution of approximately $4 from the 53rd week.)

        In 2013, among other initiatives, we further expanded our perishables offerings and added tobacco products to our stores, both of which contributed significantly to our same-store sales growth. We believe that selling tobacco products and perishables drives more frequent shopping trips by our existing customers and attracts new customers by making our stores more relevant to a broader customer base. We believe we will continue to have additional opportunities to increase our store productivity in 2014 through improved in-stock positions, price optimization, continued improvements in store space utilization, pricing and markdown optimization and additional operating and merchandising initiatives. Among numerous additional projects in 2011, weWe also plan to further expand our frozen and refrigerated food and health and beauty aids offerings. We will also continue to focus on increasing sales in our home, apparel and seasonal categories.

In addition, we plan to relocate or remodel approximately 550 stores in 2011, which we expect to further drive same-store sales growth. In 2010, we remodeled or relocated 504 stores. Remodels and relocations generally consist of updating the stores to our new customer centric format, which we believe appeals to a broader customer base. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We continue to have opportunities for additional remodels and relocations beyond 2011.

Expanding Operating Profit Rate. Another key component of our growth strategy is improving our operating profit rate through enhanced gross profit and expense reduction initiatives. Our financial results during 2010 and 2009 reflect the favorable impact of our strong category management processes on gross margin improvement and our continued efforts to reduce selling, general and administrative expenses as a percent of sales.

In recent months, we have begun to see many of our product categories impacted by increased costs of commodities, including cotton, wheat, corn, sugar, coffee and resin, as well as increased transportation fuel costs, which have increased significantly in early 2011. These



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increases pose a challenge to our continued priority of improving our gross profit rate. However, we believe we have options available to mitigate the impact of these increases, including our price optimization, changes to our product selection, such as alternate national brands and the expansion of our private brands, and modifications to our packaging and product size, including items in our planned expansion of merchandise selections priced at $1.00. In addition, we continue to focus on reducing inventory shrinkage and improving distribution efficiencies.

We intend to continue to driveremodel stores to update our private brand penetration going forward.appearance and relocate stores to increase square footage, where needed, improve visibility and accessibility or to obtain more attractive lease terms.


        Our private brand program complements our model of offering customers nationally branded consumables merchandise at everyday low prices. Generally, private brand items have higher gross profit margins than similar national brand items, and in 2010 represented approximately 22%new store expansion strategy also is a critical element of our consumables sales. In 2010, we made significant progress in expanding our private brand effortspriority to our non-consumable offerings, dramatically improving the visual impact of our many non-consumables, including housewares, domestics, lawn and garden tools and summer toys.

We believe we have the potential to directly source a larger portion of our products at significant savings to current costs. In 2010, we imported approximately $750 million of goods, or 8% of total purchases, at cost.

We continually look for ways to improve our cost structure and enhance efficiencies throughout the organization. In 2010, we centralized our procurement system which we expect to aid us in reducing the cost of purchases throughout the company in 2011 and beyond. In addition, we have begun to implement a store labor management and work simplification program, and we are continuing our store rent reduction initiative.

Growing Our Store Base. Based on a detailed, market-by-market analysis, we believe we have the potential to at least double our current number of stores through expansion in both existing and new markets. In 2011, we plan to enter three new states, Connecticut, New Hampshire and Nevada.drive productive sales growth. We have confidence in our real estate disciplines and in our ability to identify, open and operate successful new stores. AsIn 2013, we opened 650 new stores and increased our selling square footage by 6.6%. We recently completed a result, we believe that at leaststudy of our present level ofremaining new store growth is sustainableopportunities utilizing new site selection technology. The results of our initial review affirm our confidence in our ability to continue to expand our store base at the current pace for the foreseeable future. In addition,2014, we plan to open 700 new stores and increase our square footage by over 6% as we continue to expand in our core markets and newer states.

        Increase, or Enhance, Our Gross Profit Rate.    Another key component of our growth strategy is increasing, or enhancing, our gross profit rate.

        We remain committed to an everyday low price ("EDLP") strategy that our customers can depend on. To strengthen our adherence to this strategy and still protect gross profit, we utilize various pricing and merchandising options, including zone pricing, markdown optimization strategies and changes to our product selection, such as alternate national brands and private brands, which generally have higher gross profit rates. In addition, we maintain an ongoing focus on reducing transportation and distribution costs as well as minimizing inventory shrinkage and damages. The addition of tobacco products and our continued expansion of perishable food items in 2013 contributed significantly to increases in sales and gross profit dollars, although, as expected, at a lower gross profit rate. Importantly, we believe thatthese categories are instrumental to attaining our goals of driving more frequent shopping trips and attracting new customers. Furthermore, we believe our inventory shrinkage rate increased, in part, due to our addition of various items with relatively higher retail prices, many of which were in our health and beauty departments.

        Over the current real estate market environment there may be opportunitieslong term, we will continue our efforts to negotiate lower rent than would have previously been available, allowing usreduce product costs through further expansion of our private brands, shrink reduction, foreign sourcing, the use of online procurement auctions and incremental distribution and transportation efficiencies. We also plan to continue to improve the overall qualityintroduce new products that meet our customers' needs into our home, apparel and seasonal categories, which generally have higher gross profit rates than consumables.

        Leverage Process Improvements and Information Technology to Reduce Costs.    As part of our sitesongoing effort to improve our cost structure and enhance efficiencies throughout the organization, in 2013 we made further progress in our efforts to simplify our store processes. This progress contributed to a reduction in store labor as a percentage of sales. In addition, we realized cost savings from our centralized procurement initiative and other expense reduction efforts. In 2014, we expect to achieve further savings from our procurement initiatives and will remain focused on controlling those expenses that are within our control. Note that certain factors primarily related to our cash incentive compensation plan caused certain expenses in 2013 to be less than those expected in 2014 and beyond, as explained in further detail in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of this report.

        Strengthen and Expand Our Culture of Serving Others.    The mission of "Serving Others" has been key to the culture of Dollar General for many years and we recognize the importance of this mission to our long-term success. For customers this means helping them "Save time. Save money. Every day!" by providing clean, well-stocked stores with quality products at attractive rental rates.low prices. For employees, this means creating an environment that attracts and retains key employees throughout the organization. For the public, this means giving back to our store communities through our charitable and other efforts. For shareholders, this means meeting their expectations of an efficiently and profitably run organization that operates with compassion and integrity.


Our Merchandise

We offer a focused assortment of everyday necessities, which drive frequent customer visits, and key items in a broad range of general merchandise categories. Our product assortment provides the opportunity for our customers to address most of their basic shopping needs with one trip. We sell high qualityhigh-quality national brands from leading manufacturers such as Procter & Gamble, PepsiCo, Coca-Cola, Nestle, General Mills, Unilever, Kimberly Clark, Unilever, Kellogg’s, General Mills,Kellogg's and Nabisco, Coca-Cola and PepsiCo, which are typically found at higher retail prices elsewhere. Additionally, our private brand selectionsconsumables offer consumers even greater value with options to purchase value items and national brand equivalent products at substantial discounts to the national brand.



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Our stores generally offer approximately 10,000 total SKUs per store. Thestore; however, the number of SKUs in a given store can vary based upon the store’sstore's size, geographic location, merchandising initiatives, seasonality, and other factors. Most of our products are priced at $10 or less, with approximately 24%25% at $1 or less. We separate our merchandise into four categories: 1) consumables; 2) seasonal; 3) home products; and 4) apparel.

Consumables is our largest category and includes paper and cleaning products (such as paper towels, bath tissue, paper dinnerware, trash and storage bags, laundry and other home cleaning supplies); food, including packaged food and perishables (such as cereals, canned soups and vegetables, condiments, spices, sugar flour,and flour); perishables (such as milk, eggs, bread, frozen meals, beer and bread)wine); beverages and snacks (including candy, cookies, crackers, salty snacks and carbonated beverages); health and beauty (including over-the-counter medicines and personal care products, such as soap, body wash, shampoo, dental hygiene and foot care products); and pet (including pet supplies and pet food).; and tobacco products.

Seasonal products include decorations, toys, batteries, small electronics, greeting cards, stationery, prepaid cell phones and accessories, gardening supplies, hardware, automotive and home office supplies.

Home products includes kitchen supplies, cookware, small appliances, light bulbs, storage containers, frames, candles, craft supplies and kitchen, bed and bath soft goods.

Apparel includes casual everyday apparel for infants, toddlers, girls, boys, women and men, as well as socks, underwear, disposable diapers, shoes and accessories.

The percentage of net sales of each of our four categories of merchandise for the fiscal years indicated below was as follows:


 

2010

 

2009

 

2008

Consumables

71.6

%

 

70.8

%

 

69.3

%

Seasonal

14.5

%

 

14.5

%

 

14.6

%

Home products

7.0

%

 

7.4

%

 

8.2

%

Apparel

6.9

%

 

7.3

%

 

7.9

%

 
 2013 2012 2011 

Consumables

  75.2% 73.9% 73.2%

Seasonal

  12.9% 13.6% 13.8%

Home products

  6.4% 6.6% 6.8%

Apparel

  5.5% 5.9% 6.2%


Our seasonal and home products and seasonal categories typically account for the highest gross profit margins, and the consumables category typically accounts for the lowest gross profit margin.

The Dollar General Store


The averagetypical Dollar General store has, on average, approximately 7,2007,400 square feet of selling space and is typically operated by a store manager, an assistant store manager and three or more sales clerks.associates. Approximately 58%66% of our stores are in freestanding buildings 41%and 34% are in strip shopping centers and 1% are in downtown buildings.centers. Most of our customers live within three to five miles, or a 10 minute drive, of our stores.

        Our typical store strategy features a low initial capital expenditures,cost, no frills building with limited maintenance capital, low occupancy and operating costs, and a focused merchandise offering within a broad range of categories, allowing us to


deliver low retail prices while generating strong cash flows and investment returns. In 2010, the average cost of equipment and fixtures in our leased stores was approximately $165,000. Initial inventory, net of payables, increases theOur initial capital investment in a new stores and relocations varies depending on the lease structure or ownership as well as the size and location of the store by approximately $75,000.and the number of coolers appropriate for the location.



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We generally have not encountered difficultyhad good success in locating suitable store sites in the past. Given the size of the communities that we target,past, and we believe that there is ample opportunity for new store growth in existing and new markets. In addition, the current real estate market is providing an opportunity for us to access higher quality sites at lower rates than in recent years. Also, we believe we have significant opportunities available for our relocation and remodel programs. We spend approximately $75,000 for equipment and fixtures to remodel a store and approximately $140,000 to relocate one. We remodeled or relocated 504 stores in 2010, 450 in 2009 and 404 in 2008.

Our recent store growth is summarized in the following table:


Year

Stores at
Beginning
of Year

Stores
Opened

Stores
Closed

Net
Store
Increase/(Decrease)

Stores at
End of Year

2008

8,194

207

39

168 

8,362

2009

8,362

500

34

466 

8,828

2010

8,828

600

56

544 

9,372

Year
 Stores at
Beginning
of Year
 Stores
Opened
 Stores
Closed
 Net
Store
Increase
 Stores at
End of Year
 

2011

  9,372  625  60  565  9,937 

2012

  9,937  625  56  569  10,506 

2013

  10,506  650  24  626  11,132 

Our Customers

Our customers seek value and convenience. Depending on their financial situation and geographic proximity, customers’customers' reliance on Dollar General varies from using Dollar General for fill-in shopping, to making periodic routine trips in order to stock up on household items, to making weekly or more frequent trips to meet most essential needs. We believe thatgenerally locate our valuestores and convenience proposition attractsplan our merchandise selections to best serve the needs of our core customers, the low to lower-middle or fixed income households often underserved by other retailers. At the same time, however, customers from a wide range of income brackets and life stages.stages appreciate our quality merchandise and attractive value and convenience proposition and are loyal Dollar General shoppers. In the last year, we have seencontinued to see increases in the annual number of shopping trips that our customers make to Dollar Generalour stores as well as the amount spent during each trip.

We continue to focus on the quality, selection and pricing of our merchandise, targeted advertising, improved store standards and site selection processes, among other initiatives, to        To attract new and retain existing customers.customers, we continue to focus on product selection, in-stock levels, pricing, targeted advertising, store standards, convenient site locations, and a pleasant overall customer experience.

Our Suppliers

We purchase merchandise from a wide variety of suppliers and maintain direct buying relationships with many producers of national brand merchandise, such as Procter & Gamble, PepsiCo, Coca-Cola, Nestle, General Mills, Unilever, Kimberly Clark, Unilever, Kellogg’s, General Mills, Nabisco, Coca-ColaKellogg's, and PepsiCo.Nabisco. Despite our broad offering, we maintain only a limited number of SKUs per category, giving us a pricing advantage in dealing with our suppliers. Approximately 9%8% and 7% of our purchases in 20102013 were from our largest and second largest suppliers, respectively. Our private brands come from a diversified supplier base. We directly imported approximately 8%$725 million or 6% of our purchases at cost (13%(10% of our purchases at retail)based on their retail value) in 2010.2013. Our vendor arrangements generally provide for payment for such merchandise in U.S. dollars.

We have not experienced any difficulty in obtainingconsistently managed to obtain sufficient quantities of core merchandise and believe that, if one or more of our current sources of supply became unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our



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merchandise costs or reduce the quality of our merchandise, and an inability to obtain alternative sources could adversely affect our sales.


Distribution Transportation and Inventory ManagementTransportation

Our stores are currently supported by ninetwelve distribution centers located strategically throughout our geographic footprint. Of these nine, we own six and lease the other three.footprint, including our newest distribution center in Bethel, Pennsylvania which began shipping in January 2014. We lease additional temporary warehouse space as necessary to support our distribution needs. To support our growth, we are in the process of constructing our tenth distribution center near Birmingham, Alabama. We expect this new distribution center to be operational in 2012. Over the past few years we have made significant investments in facilities, technological improvements and upgrades, and we continue to improve work processes, all of which increase our efficiency and ability to support our merchandising and operations initiatives as well as our new store growth. We continually analyze and rebalance the network to ensure that it remains efficient and provides the service our stores require. See ‘‘—Properties’’"—Properties" for additional information pertaining to our distribution centers.

Most of our merchandise flows through our distributionsdistribution centers and is delivered to our stores by third-party trucking firms, utilizing our trailers. Our agreements with these trucking firms are based on estimated costs of diesel fuel, with the difference in estimated and current market fuel costs passed through to us. The costs of diesel fuel are significantly influenced by international, political and economic circumstances, and have risen in recent months, including considerable increases in early 2011.circumstances. If such increased prices remain in effect, or if furtherfuel price increases were to arise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our transportation costs.


Seasonality

In addition, we believe that there remains opportunity to improve our inventory turns. Initiatives in process include operational efforts to optimize presentation levels and decrease excess quantities shipped to our stores. We continue to focus on SKU optimization in an attempt to ensure that we can meet our customers’ demands for our most popular products as well as for product assortment. We are also in the early stages of implementing an improved supply chain solution to assist in ordering, monitoring and tracking inventory from purchase order to receipt to maintain efficient levels of inventory. We turned our inventory approximately 5.2 times over the most recent four quarters.

Seasonality

Our business is seasonal to a certain extent. Generally, our highest sales volume occurs in the fourth quarter, which includes the Christmas selling season, and the lowest occurs in the first quarter. In addition, our quarterly results can be affected by the timing of certain holidays, the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, as well as the timing of certain holidays.financial transactions such as debt refinancing and stock repurchases. We purchase substantial amounts of inventory in the third quarter and incur higher shipping costs and higher payroll costs in anticipation of the increased sales activity during the fourth quarter. In addition, we carry merchandise during our fourth quarter that we do not carry during the rest of the year, such as gift sets, holiday decorations, certain baking items, and a broader assortment of toys and candy.




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The following table reflects the seasonality of net sales, gross profit, and net income (loss) by quarter for each of the quarters of our three most recent fiscal years. AllThe fourth quarter of the year ended February 3, 2012 was comprised of 14 weeks, and each of the other quarters reflected below arewere comprised of 13 weeks.

(in millions)

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

 

 

 

 

 

 

 

 

 

Year Ended January 28, 2011

 

 

 

 

 

 

 

 

Net sales

$

3,111.3 

$

3,214.2 

$

3,223.4 

$

3,486.1 

Gross profit

 

999.8 

 

1,036.0 

 

1,010.7 

 

1,130.2 

Net income

 

136.0 

 

141.2 

 

128.1 

 

222.5 

 

 

 

 

 

 

 

 

 

Year Ended January 29, 2010

 

 

 

 

 

 

 

 

Net sales

$

2,779.9 

$

2,901.9 

$

2,928.8 

$

3,185.8 

Gross profit

 

855.4 

 

906.0 

 

903.1 

 

1,025.4 

Net income (a)

 

83.0 

 

93.6 

 

75.6 

 

87.2 

 

 

 

 

 

 

 

 

 

Year Ended January 30, 2009

 

 

 

 

 

 

 

 

Net sales

$

2,403.5 

$

2,609.4 

$

2,598.9 

$

2,845.8 

Gross profit

 

693.1 

 

758.0 

 

772.3 

 

837.7 

Net income (loss) (b)

 

5.9 

 

27.7 

 

(7.3)

 

81.9 


(in millions)
 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 

Year Ended January 31, 2014

             

Net sales

 $4,233.7 $4,394.7 $4,381.8 $4,493.9 

Gross profit

  1,295.1  1,377.3  1,328.5  1,434.8 

Net income(a)

  220.1  245.5  237.4  322.2 

Year Ended February 1, 2013

  
 
  
 
  
 
  
 
 

Net sales

 $3,901.2 $3,948.7 $3,964.6 $4,207.6 

Gross profit

  1,228.3  1,263.2  1,226.1  1,367.8 

Net income(b)

  213.4  214.1  207.7  317.4 

Year Ended February 3, 2012

  
 
  
 
  
 
  
 
 

Net sales

 $3,451.7 $3,575.2 $3,595.2 $4,185.1 

Gross profit

  1,087.4  1,148.3  1,115.8  1,346.4 

Net income(c)

  157.0  146.0  171.2  292.5 

(a)

Includes expenses, net of income taxes, of $82.9$11.5 million related to our initial public offering during the fourthtermination of credit facilities in the first quarter of 2009.

2013.

(b)

Includes expenses, net of income taxes, of $37.4$17.7 million related to the settlementredemption of a shareholder lawsuit duringlong-term obligations in the thirdsecond quarter of 2008.

2012.

(c)
Includes expenses, net of income taxes, of $35.4 million related to the redemption of long-term obligations in the second quarter of 2011.


Our Competition

We operate in the basic discount consumer goods market, which is highly competitive with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, and customer service. We compete with discount stores and with many other retailers, including mass merchandise, grocery, drug, convenience, variety and other specialty stores. These other retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. Our direct competitors include Family Dollar, Dollar Tree, Fred’s,Fred's, 99 Cents Only and various local, independent operators, as well as Walmart, Target, Kroger, Aldi, Walgreens, CVS, and Rite Aid, Target and Costco, among others. Certain of our competitors have greater financial, distribution, marketing and other resources than we do.

We differentiate ourselves from other forms of retailing by offering consistently low prices in a convenient, small-store format. We believe that our prices are competitive due in part to our low cost operating structure and the relatively limited assortment of products offered. Historically, we have minimized labor by offering fewer price points and a reliance on simple merchandise presentation. Purchasing large volumes of merchandise within our focused assortment in each merchandise category allows us to keep our average costs low, contributing to our ability to offer competitive everyday low prices to our customers. See “—"—Our Business Model”Model" above for further discussion of our competitive situation.



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Our Employees

As of February 25, 2011,28, 2014, we employed approximately 85,900100,600 full-time and part-time employees, including divisional and regional managers, district managers, store managers, other store personnel and distribution center and administrative personnel. We have increasingly focused on recruiting,


training, motivating and retaining employees, and we believe that the quality, performance and morale of our employees have increased as a result. We currently are not a party to any collective bargaining agreements.

Our Trademarks

We own marks that are registered with the United States Patent and Trademark Office and are protected under applicable intellectual property laws, including without limitation the trademarks Dollar General®, Dollar General Market®, Clover Valley®, DG®, DG Guarantee®, Smart & Simple®, trueliving®, Sweet Smiles®, Open Trails®, Bobbie Brooks®, Comfort Bay®, Holiday Style®, and the Dollar General price point designs,Ever PetTM along with variations and formatives of these trademarks as well as certain other trademarks. We attempt to obtain registration of our trademarks whenever practicable and to pursue vigorously any infringement of those marks. Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly renewed, they have a perpetual duration.

We also hold licenses to use various trademarks owned by third parties, including an exclusive license to the Bobbie Brooks brand for clothing through March 31, 2011, with the option to renew such license on a year-to-year basis, a license to the Fisher Price brand for certain items of children’schildren's clothing through December 31, 2013,2014, and an exclusive license to the Rexall brand through March 5, 2020.

Available Information


Our Web siteInternet website address is www.dollargeneral.com. We file with or furnish to the Securities and Exchange Commission (the “SEC”"SEC") annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, proxy statements and annual reports to shareholders, and, from time to time, registration statements and other documents. These documents are available free of charge to investors on or through the Investor Information portion of our Web sitewebsite as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. In addition, the public may read and copy any of the materials we file with the SEC at the SEC’sSEC's Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, such as Dollar General, that file electronically with the SEC. The address of that Web sitewebsite is http://www.sec.gov.




ITEM 1A.

RISK FACTORS

You should carefully consider the risks described below and the other information contained in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. In addition, theThese risks described below are not the only risks we face. Our business, financial condition, results of operations or liquidity could also be adversely affected by additional factors that apply to all companies generally as well as otheror by risks that are not currently known to us or that we currently view to be immaterial. While we attempt to mitigate known risks to the extent we believe to be practicable and reasonable, weWe can provide no assurance and we make no representation that our mitigation efforts, although we believe they are reasonable, will be successful.


Current economic conditions and other economic factors may adversely affect our financial performance and other aspects of our business.business by negatively impacting our customers' disposable income or discretionary spending, increasing our costs of goods sold and selling, general and administrative expenses, and adversely affecting our sales or profitability.


We believe that many of our customers are onhave fixed or low incomes and generally have limited discretionary spending dollars. AAny factor that could adversely affect that disposable income would decrease our customers' spending and could cause our customers to shift their spending to products other than those sold by us or to our less profitable product choices, all of which could result in lower net sales, decreases in inventory turnover, greater markdowns on inventory, a change in the mix of products we sell, and a reduction in profitability due to lower margins. Factors that could reduce our customers' disposable income and over which we exercise no influence include but are not limited to a further slowdown in the economy, or a delayed economic recovery, or other economic conditions affecting disposable consumer income, such as increased or sustained high unemployment or underemployment levels, inflation, increases in fuel or other energy costs and interest rates, lack of available credit, consumer debt levels, higher tax rates and other changes in tax laws, and further erosionconcerns over government mandated participation in consumer confidence, may adversely affect our business by reducing our customers’ spending or by causing them to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales,health insurance programs, and decreases in inventory turnover, greater markdowns on inventory,government subsidies such as unemployment and a reduction in profitability due to lower margins.food assistance programs.

        Many of thosethe factors identified above that affect disposable income, as well as commodity rates, transportation costs (including the costs of diesel fuel), costs of labor, insurance and healthcare, foreign exchange rate fluctuations, lease costs, measures that create barriers to or increase the costs associated with international trade, changes in other laws and regulations and other economic factors, also affect our cost of goods sold and our selling, general and administrative expenses, and may have other adverse consequences which we are unable to fully anticipate or control, all of which may adversely affect our sales or profitability. We have limited or no ability to control many of these factors. We saw product costs begin to escalate in our 2010 fourth quarter as a result of increases in the costs of certain commodities (including cotton, wheat, corn, sugar, coffee, resin), and increasing diesel fuel costs. We will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our customers.


In addition, many of the factors discussed above, along with current global economic conditions and uncertainties, the potential for additional failures or realignments of financial institutions, and the related impact on available credit may affect us and our suppliers and other business partners, landlords and service providers in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk of bankruptcy of our suppliers, landlords or counterparties to or other financial institutions involved in our credit facilities and our derivative and other contracts, increasing the cost of goods to us, and other adverse consequences which we are unable to fully anticipate or control.




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Our plans depend significantly on strategies and initiatives designed to increase sales and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely.


We have strategies and initiatives (such as those relating to marketing, merchandising, promotions, sourcing, shrink, private brand, distribution and transportation, store operations, expense reduction, and real estate) in various stages of testing, evaluation, and implementation, upon which we expect to rely to continue to improve our results of operations and financial condition and to achieve our financial plans. These initiatives are inherently risky and uncertain, even when tested successfully, in their application to our business in general. It is possible that successful testing can result partially from resources and attention that cannot be duplicated in broader implementation, particularly in light of the diverse geographic locations of our stores and the fact that our field management is so decentralized. General implementation also may be negatively affected by other risk factors described herein. Successful systemwide implementation relies on consistency of training, stability of workforce, ease of execution, and the absence of offsetting factors that can influence results adversely. Failure to achieve successful implementation of our


initiatives or the cost of these initiatives exceeding management’smanagement's estimates could adversely affect our business, results of operations and financial condition.


In addition, the        The success of our merchandising initiatives, particularly those with respect to non-consumable merchandise and store-specific products and allocations, depends in part upon our ability to predict consistently and successfully the products that our customers will demand and to identify and timely respond to evolving trends in demographics and consumer preferences, expectations and needs. If we are unable to select products that are attractive to customers, to obtain such products at costs that allow us to sell them at a profit, or to effectively market such products, our sales, market share and profitability could be adversely affected. If our merchandising efforts in the non-consumables area or the higher margin areas within consumables are unsuccessful, we could be further adversely affected by our inability to offset the lower margins associated with our consumables business.


         If we cannot open, relocate or remodel stores profitably and on schedule, our planned future growth will be impeded, which would adversely affect sales.

        Our ability to open, relocate and remodel profitable stores is a key component of our planned future growth. Our ability to timely open stores and to expand into additional market areas depends in part on the following factors: the availability of attractive store locations; the absence of entitlement process or occupancy delays; the ability to negotiate acceptable lease and development terms; the ability to hire and train new personnel, especially store managers, in a cost effective manner; the ability to identify customer demand in different geographic areas; general economic conditions; and the availability of capital funding for expansion. Many of these factors also affect our ability to successfully relocate stores, and many of them are beyond our control.

        Delays or failures in opening new stores or completing relocations or remodels, or achieving lower than expected sales in new stores, could materially adversely affect our growth and/or profitability. We also may not anticipate all of the challenges imposed by the expansion of our operations and, as a result, may not meet our targets for opening new stores, remodeling or relocating stores or expanding profitably.

        Some new stores may be located in areas where we have little or no meaningful experience or brand recognition. Those areas may have different competitive and market conditions, consumer tastes and discretionary spending patterns than our existing markets, as well as higher cost of entry, which may cause our new stores to be initially less successful than stores in our existing markets. In addition, our alternative format stores, such as our Dollar General Market and, to a lesser degree our Dollar General Plus stores, have significantly higher capital costs than our traditional Dollar General stores, and, as a result, may increase our financial risk if they do not perform as expected.

        Many new stores will be located in areas where we have existing stores. Although we have experience in these areas, increasing the number of locations in these markets may result in inadvertent oversaturation and temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.

         Our profitability may be negatively affected by inventory shrinkage.

        We are subject to the risk of inventory loss and theft. We experience significant inventory shrinkage and cannot be sure that incidences of inventory loss and theft will decrease in the future or that the measures we are taking will effectively reduce the problem of inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our results of operations and financial condition could be affected adversely.


We face intense competition that could limit our growth opportunities and adversely impact our financial performance.


The retail business is highly competitive. We operate in the basic discount consumer goods market, which is competitive with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, customer service, aggressive promotional activity, customers, and customer service.employees. We compete with retailers operating discount, mass merchandise, outlet, warehouse club, grocery, drug, convenience, variety and other specialty stores. This competitive environment subjects us to the risk of adverse impact to our financial performance because of the lower prices, and thus the lower margins, required to maintain our competitive position. Also, companies like ours, operating in the basic discount consumer goods market (duedue to customer demographics and other factors)factors, may have limited ability to increase prices in response to increased costs without losing competitive position. This limitation may adversely affect our margins and financial performance. We compete for customers, employees, store sites, products and services and in other important aspects of our business with many other local, regional and national retailers. We compete with retailers operating discount, mass merchandise, outlet, warehouse club, grocery, drug, convenience, variety and other specialty stores. Certain of our competitors have greater financial, distribution, marketing and other resources than we do and may be able to secure better arrangements with suppliers than we can. These other competitors



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compete in a variety of other ways, including aggressive promotional activities, merchandise selection and availability, services offered to customers, location, store hours, in-store amenities and price. If we fail to respond effectively to competitive pressures and changes in the retail markets, it could adversely affect our financial performance.


Competition for customers has intensified in recent years as larger competitors have moved into, or increased their presence in, our geographic markets.markets, and we expect this competition to continue to increase. In addition, some of our large box competitors are or may be developing small box formats, and increasing the pace at which maythey will open the small box formats, which will produce more competition. We remain vulnerable to the marketing power and high level of consumer recognition of these larger competitors and to the risk that these competitors or others could venture into our industry in a significant way. Generally, we expect an increase in competition.


Our private brands may not achieve or maintain broad market acceptance and increase the risks we face.


We have substantially increased the number        The sale of our private brand items and the program is a sizable partan important component of our future sales growth and gross profit rate enhancement plans. We have invested in our development and procurement resources and marketing efforts relating to these private brand offerings. We believe that our success in gaining and maintaining broad market acceptance of our private brands depends on many factors, including pricing, our costs, quality and customer perception. We may not achieve or maintain our expected sales for our private brands. AsThe expansion of our private brand offerings also subjects us to certain risks, such as: potential product liability risks and mandatory or voluntary product recalls; our ability to successfully protect our proprietary rights and successfully navigate and avoid claims related to the proprietary rights of third parties; our ability to successfully administer and comply with applicable contractual obligations and regulatory requirements; and other risks generally encountered by entities that source, sell and market exclusive branded offerings for retail. An increase in sales of our private brands may also adversely affect sales of our vendors' products, which, in turn, could adversely affect our relationship with certain of our vendors. Any failure to appropriately address some or all of these risks could have a result,significant adverse effect on our business, financial condition and results of operations could be materially and adversely affected.financial condition.


A significant disruption to our distribution network, to the capacity of our distribution centers or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.


We rely on our distribution and transportation network to provide goods to our stores in a timely and cost-effective mannermanner. This distribution occurs through deliveries to our distribution centers from vendors and then from the distribution centers or direct shipdirect-ship vendors to our stores by various means of transportation, including shipments by sea and truck. Any disruption, unanticipated expense or operational failure related to this process could affect store operations negatively. For example, unexpected delivery delays or increases in transportation costs (including through increased fuel costs, or a decrease in transportation capacity for overseas shipments)shipments, or work stoppages or slowdowns) could significantly decrease our ability to make sales and earn profits. In addition, laborLabor shortages or work stoppages in


the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries or which would necessitate our securing alternative labor or shipping suppliers could also increase our costs or otherwise negatively affect our business.


We maintain a network of distribution facilities and have plans to build new facilities to support our growth objectives. Delays in opening distribution centers could adversely affect our future operationsfinancial performance by slowing store growth, which may in turn reduce revenue growth.growth, or by increasing transportation costs. In addition, the planned construction of a new distribution center in 2011, and any future distribution-related construction or expansion projects entail risks whichthat could cause delays and cost overruns, such as: shortages of materials; shortages ofmaterials or skilled labor orlabor; work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The



14



completion date and ultimate cost of this or futurethese projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that any project will be completed on time or within established budgets.


Rising fuel costs could materially adversely affect our business.


Fuel prices have risen considerably in recent months and are significantly influenced by international, political and economic circumstances. These increases pose a challenge to our continued priority of improving our gross profit rate. If such increased prices remain in effect, or if further price increases were to arise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our transportation costs, adversely affecting our gross profit and results of operations. In addition, competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products. We will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our customers.


Risks associated with or faced by the domestic and foreignour suppliers from whom our products are sourced could adversely affect our financial performance.


The products we sell are sourced from a wide variety of domestic and international suppliers.suppliers, and we are dependent on our vendors to supply merchandise in a timely and efficient manner. In fact,2013, our largest supplier accounted for 9%8% of our purchases, in 2010, and our next largest supplier accounted for approximately 7% of such purchases. We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our current sources of supply became unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the quality of our merchandise, and an inability to obtain alternative sources could adversely affect our sales. Additionally, if a supplier fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience merchandise out-of-stocks that could lead to lost sales and damage to our reputation.


We directly imported approximately 8%6% of our purchases (measured at cost) in 2010,2013, but many of our domestic vendors directly import their products or components of their products. Changes to the prices and flow of these goods for any reason, such as political and economic instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers’suppliers' failure to meet our standards, issues with labor practices of our suppliers or labor problems they may experience (such as strikes)strikes, stoppages or slowdowns, which could also increase labor costs during and following the disruption), the availability and cost of raw materials to suppliers, increased import duties, merchandise quality or safety issues, currency exchange rates, transport availability and cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located or from which they import, are beyond our control and could adversely affect our operations and profitability. Because a substantial amount of our imported merchandise comes from China, a change in the Chinese currency or other policies could negatively impact our merchandise costs. In addition, the United States’States' foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. Disruptions due to labor stoppages, strikes or slowdowns, or other disruptions involving our vendors or the transportation and handling industries also may negatively affect our ability to receive



15



merchandise and thus may negatively affect sales. These and other factors affecting our suppliers and our access to products could adversely affect our business and financial performance. As we increase our imports of merchandise from foreign vendors, the risks associated with foreign imports will increase.



Product liability and food safety claims could adversely affect our business, reputation and financial performance.


Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or actions required or penalties fromassessed by government agencies relating to products, including but not limited to food products that are recalled, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products must comply with applicable product and food safety laws.laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. We generally seek contractual indemnification and insurance coverage from our suppliers. However, if we do not have adequate contractual indemnification and/or insurance available, such claims could have a material adverse effect on our business, financial condition and results of operations. Our ability to obtain indemnification from foreign suppliers may be hindered by the manufacturers’manufacturers' lack of understanding of U.S. product liability or other laws, which may make it more likely that we be requiredresult in our having to respond to claims or complaints from customers as if we were the manufacturer of the products.manufacturer. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.


We are subject to governmental regulations, procedures and requirements. A significant change in, or noncompliance with, these regulations could have a material adverse effect on our financial performance.


Our business is subject to numerous and increasing federal, state and local laws and regulations. We routinely incur significant costs in complying with these regulations. The complexity of the regulatory environment in which we operate and the related cost of compliance are increasing due to expanding and additional legal and regulatory requirements and increased enforcement efforts. New laws or regulations, particularly those dealing with healthcare reform, product safety, and labor and employment, among others, or changes in existing laws and regulations, particularly those governing the sale of products, may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our cost of doing business. In addition, such changes or new laws may require the write off and disposal of existing product inventory, resulting in significant adverse financial impact to us. Untimely compliance or noncompliance with applicable regulations or untimely or incomplete execution of a required product recall can result in the imposition of penalties, including loss of licenses or significant fines or monetary penalties, class action litigation or other litigation, in addition to reputational damage. Additionally, changes in tax laws, the interpretation of existing laws, or our failure to sustain our reporting positions on examination could adversely affect our effective tax rate.




Litigation may adversely affect our business, financial condition and results of operations.operations and financial condition.


Our business is subject to the risk of litigation by employees, consumers, suppliers, competitors, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The number of employment-related class actions filed each year has continued to increase, and recent changes and proposed changes in Federal and state laws, regulations and agency guidance may cause claims to rise even more. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operationoperations are required. The cost to


defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.operations and financial condition. See Note 98 to the consolidated financial statements for further details regarding certain of these pending matters.


If we cannot open new stores profitably and on schedule, our planned future growth will be impeded, which would adversely affect sales.


Our ability to open profitable new stores is a key component of our planned future growth. Our ability to timely open such stores and to expand into additional market areas depends in part on the following factors: the availability of attractive store locations; the absence of occupancy delays; the ability to negotiate acceptable lease and development terms; the ability to hire and train new personnel, especially store managers, in a cost effective manner; the ability to identify customer demand in different geographic areas; general economic conditions; and the availability of sufficient funds for expansion. Many of these factors affect our ability to successfully relocate stores, and many of them are beyond our control. In addition, our credit ratings, combined with tighter lending practices, have made financing more challenging for our real estate developers in today’s market. These unfavorable lending trends could potentially impact the timing of our store openings and build-to-suit program.

Delays or failures in opening new stores, or achieving lower than expected sales in new stores, or drawing a greater than expected proportion of sales in new stores away from existing stores, could materially adversely affect our growth and/or profitability. In addition, we may not anticipate all of the challenges imposed by the expansion of our operations and, as a result, may not meet our targets for opening new stores, remodeling or relocating stores or expanding profitably.


Some of our new stores may be located in areas where we have little or no meaningful experience or brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing



17



markets, which may cause our new stores to be less successful than stores in our existing markets.


Many of our new stores will be located in areas where we have existing units. Although we have experience in these markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.


Natural disasters (whether or not caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts, and global political events could cause permanent or temporary distribution center or store closures, impair our ability to purchase, receive or replenish inventory, or decrease customer traffic, all of which coulddisrupt business and result in lostlower sales and otherwise adversely affect our financial performance.


The occurrence of one or more natural disasters, such as hurricanes, fires, floods, tornadoes and earthquakes, (whether or not caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could adversely affect our operationsbusiness and financial performance. Uncharacteristic or significant weather conditions can affect consumer shopping patterns, which could lead to lost sales or greater than expected markdowns and adversely affect our short-term results of operations. To the extent these events result in the closure of one or more of our distribution centers, a significant number of stores, or our corporate headquarters or impact one or more of our key suppliers, our operations and financial performance could be materially adversely affected through an inability to make deliveries or provide other support functions to our stores and through lost sales. In addition, these events could result in increases in fuel (or other energy) prices or a fuel shortage, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some domestic and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our distribution centers or stores, the inability of customers to reach or have transportation to our stores directly affected by such events, the temporary reduction in the availability of products in our stores and disruption of our utility services or to our information systems. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage.


Material damage to, or interruptions to our information systems as a result of external factors, staffing shortages andor unanticipated challenges or difficulties in maintaining or updating our existing technology or developing or implementing new technology could have a material adverse effect on our business or results of operations.


We depend on a variety of information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, securitycybersecurity breaches, natural disasters and natural disasters.human error. Damage or interruption to these systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruptionsinterim and may experience loss or corruption of critical data, which could have a material adverse effect on our business or results of operations.


We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors to maintain and



18



periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential problems and interruptions associated


with the implementation of new or upgraded systems and technology such as the implementation of our new supply chain solution, or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.

Failure to attract, train and retain qualified employees, particularly field, store and distribution center managers, and to controlwhile controlling labor costs, as well as other labor issues, could adversely affect our financial performance.


Our future growth and performance and positive customer experience depends on our ability to attract, train, retain and motivate qualified employees, many of whom are in positions with historically high rates of turnover such as field managers and distribution center managers. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulationregulations (including changes in entitlement"entitlement" programs such as health insurance and paid leave programs). If we are unable to attract and retain adequate numbers of qualified employees, our operations, customer service levels and support functions could suffer. To the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, we are evaluating the potential future impact of recently enacted comprehensive healthcare reform legislation which will likely cause our healthcare costs to increase. While the significant costs of the healthcare reform legislation will occur after 2013 (as many of the changes affecting us took effect January 1, 2014), if at all, due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could have a significant negative effect on our business. Our ability to pass along labor costs to our customers is constrained by our low price model.


Our profitabilitysuccess depends on our executive officers and other key personnel. If we lose key personnel or are unable to hire additional qualified personnel, our business may be negatively affected by inventory shrinkage.harmed.


        Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and other key personnel. The loss of the services of any of our executive officers, particularly Richard W. Dreiling, our Chief Executive Officer, could have a material adverse effect on our operations. Competition for skilled and experienced management personnel is intense, and our future success will also depend on our ability to attract and retain qualified personnel, and a failure to attract and retain new qualified personnel could have an adverse effect on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.

We are subject to the risk of inventory loss and theft. We experience significant inventory shrinkage, and we cannot assure you that incidences of inventory loss and theft will decrease in the future or that the measures we are taking will effectively address the problem of inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our financial condition could be affected adversely.


Our cash flows from operations may be negatively affected if we are not successful in managing our inventory balances.


Our inventory balance represented approximately 45%48% of our total assets exclusive of goodwill and other intangible assets as of January 28, 2011.31, 2014. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels and an appropriate product mix to meet our customers’customers' demands without allowing those levels to



19



increase to such an extent that the costs to store and hold the goods unduly impacts our financial results.results or that subjects us to the risk of increased inventory shrinkage. If our buying decisions do not accurately predict customer trends, we inappropriately price products or purchasing actions,our expectations about customer spending levels are inaccurate, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. We continue to focus on ways to reduce these risks, but we cannot assure youmake assurances that we will be successful in our inventory management. If we are not successful in managing our inventory balances, our cash flows from operations may be negatively affected.



Because our business is seasonal to a certain extent, with the highest volume of net sales during the fourth quarter, adverse events during the fourth quarter could materially affect our financial statements as a whole.


We generally recognize our highest volume of net sales during the Christmas selling season, which occurs in the fourth quarter of our fiscal year. In anticipation of this holiday, we purchase substantial amounts of seasonal inventory and hire many temporary employees.inventory. Adverse events, such as deteriorating economic conditions, higher unemployment, higher gas prices, public transportation disruptions, or unanticipated adverse weather could result in lower-than-planned sales during the holiday season. An excess of seasonal merchandise inventory could result if our net sales during the Christmas selling season were to fall below either seasonal norms or expectations. If our fourth quarter sales results were substantially below expectations, our financial performance and operating results could be adversely affected by unanticipated markdowns, especially in seasonal merchandise. Lower than anticipated sales in the Christmas selling season would also negatively affect our ability to absorb the increased seasonal labor costs.


Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.


Our insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on the dispersion of our operations. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, wage and hour and other employment-related claims, including class actions, and some natural disasters. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative insurance market trends, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a significant portion of expected losses under our workers’workers' compensation, automobile liability, general liability and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including expected increases in medical and indemnity costs, could result in materially different expenses than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. In addition, we are evaluating the potential future impact of recently enacted comprehensive healthcare reform legislation, which may cause our healthcare costs to increase.operations and financial condition. Although we continue to maintain property insurance for catastrophic events at our store support center and distribution centers, we are effectively self-insured for other property losses. If we experience a greater number of these losses than we anticipate, our financial performance could be adversely affected.




If we fail to protect our brand name, competitors may adopt tradenames that dilute the value of our brand name.


We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors, or against challenges by others. Our         Any failure to successfully protectmaintain the security of information we hold relating to our trademarkscustomers, employees and vendors, whether as a result of cybersecurity attacks or otherwise, could diminish the valueexpose us to litigation, government enforcement actions and efficacy of our brand recognition,costly response measures, and could cause customer confusion, which could, in turn, adversely affectseriously disrupt our salesoperations and profitability.harm our reputation.


Our success depends on our executive officers and other key personnel. If we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.


Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and other key personnel. The loss of the services of any of our executive officers, particularly Richard W. Dreiling, our Chief Executive Officer, could have a material adverse effect on our operations. Our future success will also depend on our ability to attract and retain qualified personnel and a failure to attract and retain new qualified personnel could have an adverse effect on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.


We face risks related to protection of customers’ credit and debt card data and private data relating to us or our customers or employees.

In connection with credit card sales, we transmit confidential credit and debit card information. We also have access to, collect or maintain private or confidential information regarding our customers, employees and employees,vendors, as well as our business. We have procedures and technology in place to safeguard our customers’ debit and credit card information, our employees’ privatesuch data and information. To our confidentialknowledge, computer hackers have been unable to gain access to the information stored in our information systems. However, cyberattacks are rapidly evolving and becoming increasingly sophisticated. Additionally, under certain circumstances, we may share information with vendors that assist us in conducting our business, information. However, third parties mayas required by law, or with the permission of the individual. While we have the technology or know-howimplemented procedures to breach the security of thisprotect our information and require appropriate controls of our vendors, it is possible that computer hackers and others might compromise our security measures andor those of our technology and other vendors may not effectively prohibit others from obtaining improper access to thisin the future and


obtain the personal information of our customers, employees and vendors that we hold or our business information. A security breach of any kind could expose us to risks of data loss, litigation, government enforcement actions and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation which could cause us to lose market share and have an adverse effect on our business and financial performance.

         Deterioration in market conditions or changes in our financial results.


While we have reduced our debt levels since 2007, we continue to have substantial debt that will need to be repaid or refinanced at or prior to applicable maturity dates whichcredit profile could adversely affect our ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or other opportunities or to react to changes in the economy or our industry.


        We obtain and manage liquidity from the positive cash flow we generate from our operating activities and our access to capital markets, including our credit facility. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to this source of future liquidity. There is no assurance that our ability to obtain additional financing through the capital markets will not be adversely impacted by economic conditions. Our debt securities currently have an investment grade rating, and a downgrade of this rating likely would make it more difficult or expensive for us to obtain additional financing and would increase the cost of borrowing under our credit facility, which could adversely affect our cash flow and limit our growth strategy or other opportunities or our ability to react to changes in the economy or our industry.

At January 28, 2011,31, 2014, we had total outstanding debt (including the current portion of long-term obligations) of $3.29 billion, including a $1.964 billion senior secured term loan facility which matures on July 6, 2014, $864.3 million aggregate principal amount of 10.625% senior notes due 2015 and $450.7 million aggregate principal amount of 11.875% / 12.625% senior



21



subordinated toggle notes due 2017.approximately $2.8 billion. We also had an additional $959.3$822.8 million available for borrowing under our senior secured asset-basedunsecured revolving credit facility of up to $1.031 billion, which matures July 6, 2013.facility. This level of debt and our ability to repay or refinance this debt prior to maturity could have important negative consequences to our business, including:


·

increasing our vulnerability to general economic and industry conditions because our debt payment obligations may limit our ability to use our cash to respond to or defend against changes in the industry or the economy;

·

·

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

·

increasing the difficulty of our ability to make payments on our outstanding debt.


Our variable rate debt exposes us to interest rate risk which could adversely affect our cash flow.


The borrowings under the term loan facility and the senior secured asset-based revolving credit facility comprise our credit facilities and bear interest at variable rates. Other debt we incur also could be variable rate debt. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow. While we have entered and may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

Our debt agreements contain restrictions that could limit our flexibility in operating our business.


Our credit facilities and the indenturesindenture governing our notes contain various covenants that could limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’subsidiaries' ability to, among other things:

·


        We are also subject to specified financial ratio covenants under our credit facilities. Our ability to meet these financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet these ratios and other covenants. A breach of any of these covenants could result in a


default under the agreement governing such indebtedness.indebtedness and inability to borrow additional amounts under our revolving credit facility. Upon our failure to maintain compliance with these covenants, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit thereunder. If the lenders under such indebtedness accelerate the repayment of borrowings, we cannot assure youmake assurances that we will have sufficient assets to repay those borrowings, as well as our other indebtedness, including our outstanding notes. We have pledged a significant portion of our assets as collateral under our credit facilities. If we were unable to repay those amounts, the lenders under our credit facilities could proceed against the collateral granted to them to secure that indebtedness. Additional borrowings under the senior secured asset-based revolving credit facility will, if excess availability under that facility is less than a certain amount, be subject to the satisfaction of a specified financial ratio. Accordingly, our ability to access the full availability under our senior secured asset-based revolving credit facility may be constrained. Our ability to meet this financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio, if applicable, and other covenants.


New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect our financial performance.


The implementation of proposed new accounting standards may require extensive systems, internal process and other changes that could increase our operating costs, and may also result in changes to our financial statements. In particular, the implementation of expected future accounting standards related to leases, as currently being contemplated by the convergence project between the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB"), as well as the possible adoption of international financial reporting standards by U.S. registrants, could require us to make significant changes to our lease management, fixed asset, and other accounting systems, and, in all likelihood wouldif implemented, are likely to result in significant changes to our financial statements.


U.S. generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. The outcome of such changes could include litigation or regulatory actions which could have an adverse effect on our financial condition and results of operations.

Kohlberg Kravis Roberts & Co. L.P. (“KKR”), certain affiliates of Goldman, Sachs & Co. (the “GS Investors”), and other equity co-investors (collectively, the "Investors") have significant influence over us, including control over decisions that require the approval of shareholders, which could limit your ability to influence the outcome of key transactions, including a change of control.


We are controlled by the Investors. The Investors have an indirect interest in approximately 71% of our outstanding common stock through their investment in Buck



23



Holdings, L.P. In addition, the Investors have the ability to elect our entire Board of Directors. As a result, the Investors have control over our decisions to enter into any corporate transaction and the ability to prevent any transaction that requires shareholder approval regardless of whether others believe that the transaction is in our best interests. As long as the Investors continue to have an indirect interest in a majority of our outstanding common stock, they will have the ability to control the vote in any election of directors. In addition, pursuant to a shareholders’ agreement that we entered into with Buck Holdings, L.P., KKR and the GS Investors, KKR has a consent right over certain significant corporate actions and KKR and the GS Investors have certain rights to appoint directors to our Board and its committees.


The Investors are also in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The Investors may also pursue acquisition opportunities that are complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the Investors, or other funds controlled by or associated with the Investors, continue to indirectly own a significant amount of our outstanding common stock, even if such amount is less than 50%, the Investors will continue to be able to strongly influence or effectively control our decisions. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.


If we, the Investors or other significant shareholders sell shares of our common stock, the market price of our common stock could decline.


The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to issue equity securities in the future at a time and at a price that we deem appropriate. As of January 28, 2011, we had approximately 341.5 million shares of common stock outstanding, of which less than 29% were freely tradable on the New York Stock Exchange.


Pursuant to shareholders agreements, we have granted the Investors the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act of 1933, as amended, covering resales of our common stock held by them or to piggyback on a registration statement in certain circumstances. Certain members of management hold similar piggyback registration rights. Collectively, these shares represent approximately 71% of our outstanding common stock. To the extent that such registration rights are exercised, the resulting sale of a substantial number of shares of our common stock into the market could cause the market price of our common stock to decline. These shares also may be sold pursuant to Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates.


ITEM 1B.

UNRESOLVED STAFF COMMENTS


None.




ITEM 2.    PROPERTIES

PROPERTIES


As of February 25, 2011,28, 2014, we operated 9,41411,215 retail stores located in 3540 states as follows:


State

Number of Stores

 

State

Number of Stores

Alabama

512

 

 

Nebraska

79

 

Arizona

61

 

 

New Jersey

44

 

Arkansas

268

 

 

New Mexico

46

 

Colorado

27

 

 

New York

245

 

Delaware

29

 

 

North Carolina

536

 

Florida

505

 

 

Ohio

510

 

Georgia

541

 

 

Oklahoma

295

 

Illinois

352

 

 

Pennsylvania

421

 

Indiana

358

 

 

South Carolina

375

 

Iowa

169

 

 

South Dakota

12

 

Kansas

173

 

 

Tennessee

489

 

Kentucky

363

 

 

Texas

1,081

 

Louisiana

369

 

 

Utah

8

 

Maryland

72

 

 

Vermont

11

 

Michigan

270

 

 

Virginia

265

 

Minnesota

16

 

 

West Virginia

161

 

Mississippi

310

 

 

Wisconsin

93

 

Missouri

348

 

 

 

 

 

State
 Number of
Stores
 
State
 Number of
Stores
 

Alabama

  597 Missouri  398 

Arizona

  85 Nebraska  80 

Arkansas

  325 Nevada  22 

California

  102 New Hampshire  9 

Colorado

  33 New Jersey  71 

Connecticut

  15 New Mexico  72 

Delaware

  36 New York  285 

Florida

  656 North Carolina  611 

Georgia

  632 Ohio  608 

Illinois

  405 Oklahoma  355 

Indiana

  399 Pennsylvania  489 

Iowa

  178 South Carolina  425 

Kansas

  194 South Dakota  11 

Kentucky

  421 Tennessee  578 

Louisiana

  461 Texas  1,198 

Maryland

  92 Utah  8 

Massachusetts

  10 Vermont  20 

Michigan

  330 Virginia  307 

Minnesota

  33 West Virginia  179 

Mississippi

  369 Wisconsin  116 

Most of our stores are located in leased premises. Individual store leases vary as to their terms, rental provisions and expiration dates. Many stores are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of 10-15up to 15 years with multiple renewal options. We also have stores subject to shorter-term leases (usually with initial or current terms of three to five years), and many of these leases have multiple renewal options as well.options. In recent years, an increasing percentage of our new stores have been subject to build-to-suit arrangements, including approximately 72% of our new stores in 2010.arrangements.


As of February 25, 2011,28, 2014, we operated ninetwelve distribution centers, as described in the following table:

Location
 Year
Opened
 Approximate Square
Footage
 Approximate Number
of Stores Served
 

Scottsville, KY

  1959  720,000  774 

Ardmore, OK

  1994  1,310,000  1,380 

South Boston, VA

  1997  1,250,000  926 

Indianola, MS

  1998  820,000  803 

Fulton, MO

  1999  1,150,000  1,256 

Alachua, FL

  2000  980,000  947 

Zanesville, OH

  2001  1,170,000  1,173 

Jonesville, SC

  2005  1,120,000  1,107 

Marion, IN

  2006  1,110,000  1,174 

Bessemer, AL

  2012  940,000  1,025 

Lebec, CA

  2012  600,000  253 

Bethel, PA

  2014  1,000,000  397 

Location

Year
Opened

Approximate Square
Footage

 

Approximate Number of Stores Served

Scottsville, KY

1959

720,000

 

 

949

 

Ardmore, OK

1994

1,310,000

 

 

1,402

 

South Boston, VA

1997

1,250,000

 

 

895

 

Indianola, MS

1998

820,000

 

 

809

 

Fulton, MO

1999

1,150,000

 

 

1,273

 

Alachua, FL

2000

980,000

 

 

876

 

Zanesville, OH

2001

1,170,000

 

 

1,229

 

Jonesville, SC

2005

1,120,000

 

 

981

 

Marion, IN

2006

1,110,000

 

 

1,000

 


We lease the distribution centers located in California, Oklahoma, Mississippi and Missouri and own the other sixeight distribution centers.centers in the table above. Approximately 7.25 acres of the land on which our Kentucky distribution center is located is subject to a ground lease. As of January 28, 2011,31, 2014, we leased



25



approximately 600,000621,000 square feet of additional temporary warehouse space to support our distribution needs.

Our executive offices are located in approximately 302,000 square feet of owned buildings and approximately 56,000 square feet of leased office space in Goodlettsville, Tennessee which are owned by us.Tennessee.


ITEM 3.

LEGAL PROCEEDINGS


The information contained in Note 98 to the consolidated financial statements under the heading “Legal proceedings”"Legal proceedings" contained in Part II, Item 8 of this report is incorporated herein by this reference.

ITEM 4.    MINE SAFETY DISCLOSURES

26        None.




EXECUTIVE OFFICERS OF THE REGISTRANT


Information regarding our current executive officers as of March 22, 201120, 2014 is set forth below. Each of our executive officers serves at the discretion of our Board of Directors and is elected annually by the Board to serve until a successor is duly elected. There are no familial relationships between any of our directors or executive officers.

Name

Name
Age

Position

Richard W. Dreiling

57

60

Chairman and Chief Executive Officer

Todd J. Vasos

52Chief Operating Officer

David M. Tehle

54

57

Executive Vice President and Chief Financial Officer

Kathleen R. GuionDavid D'Arezzo

59

55

Executive Vice President, Division President, Store Operations and Store Development

Todd Vasos

49

Executive Vice President, Division President and Chief Merchandising Officer

John W. Flanigan

59

62

Executive Vice President, Global Supply Chain

Susan S. Lanigan

48

Executive Vice President and General Counsel

Robert D. Ravener

52

55

Executive Vice President and Chief People Officer

Gregory A. Sparks

53Executive Vice President, Store Operations

Anita C. Elliott

46

49

Senior Vice President and Controller

Rhonda M. Taylor

46Senior Vice President and General Counsel


Mr. Dreiling joined Dollar General in January 2008 as Chief Executive Officer and a member of our Board. He was appointed Chairman of the Board on December 2, 2008. Prior to joining Dollar General, Mr. Dreiling served as Chief Executive Officer, President and a director of Duane Reade Holdings, Inc. and Duane Reade Inc., the largest drugstore chain in New York City, from November 2005 until January 2008 and as Chairman of the Board of Duane Reade from March 2007 until January 2008. Prior to that, Mr. Dreiling, beginning in March 2005, served as Executive Vice President—Chief Operating Officer of Longs Drug Stores Corporation, an operator of a chain of retail drug stores on the West Coast and Hawaii, after having joined Longs in July 2003 as Executive Vice President and Chief Operations Officer. From 2000 to 2003, Mr. Dreiling served as Executive Vice President—Marketing, Manufacturing and Distribution at Safeway Inc., a food and drug retailer. Prior to that, Mr. Dreiling served from 1998 to 2000 as President of Vons, a Southern California food and drug division of Safeway. He currently serves as the Chairman of the Retail Industry Leaders Association (RILA). Mr. Dreiling is a director of Lowe's Companies, Inc.


Mr. Vasos joined Dollar General in December 2008 as Executive Vice President, Division President and Chief Merchandising Officer. He was promoted to Chief Operating Officer in November 2013. Prior to joining Dollar General, Mr. Vasos served in executive positions with Longs Drug Stores Corporation for 7 years, including Executive Vice President and Chief Operating Officer (February 2008 through November 2008) and Senior Vice President and Chief Merchandising Officer (2001 - 2008), where he was responsible for all pharmacy and front-end marketing, merchandising, procurement, supply chain, advertising, store development, store layout and space allocation, and the operation of three distribution centers. He also previously served in leadership positions at Phar-Mor Food and Drug Inc. and Eckerd Corporation.

Mr. Tehle joined Dollar General in June 2004 as Executive Vice President and Chief Financial Officer. He served from 1997 to June 2004 as Executive Vice President and Chief Financial Officer of Haggar Corporation, a manufacturing, marketing and retail corporation. From 1996 to 1997, he was Vice President of Finance for a division of The Stanley Works, one of the world's largest manufacturers of tools, and from 1993 to 1996, he was Vice President and Chief Financial Officer of Hat Brands, Inc., a hat manufacturer. Earlier in his career, Mr. Tehle served in a variety of financial-related roles at Ryder System, Inc. and Texas Instruments.Instruments Incorporated. Mr. Tehle currently serves asis a director of Jack in the Box Inc.


Ms. GuionMr. D'Arezzo joined Dollar General in October 2003November 2013 as Executive Vice President, Store Operations. She was named Executive Vice President, Store Operations and Store Development in February 2005, and was promoted to Executive Vice President, Division President, Store


27



Operations and Store Development in November 2005. From 2000 until joining Dollar General, Ms. Guion served as President and Chief Executive Officer of Duke and Long Distributing Company. Prior to that time, she served as an operating partner for Devon Partners (1999-2000), where she developed operating plans and assisted in the identification of acquisition targets in the convenience store industry, and as President and Chief Operating Officer of E-Z Serve Corporation (1997-1998), an owner/operator of convenience stores, mini-marts and gas marts. From 1987 to 1997, Ms. Guion served as the Vice President and General Manager of the largest division (Chesapeake Division) of company-owned stores at 7-Eleven, Inc., a convenience store chain. Other positions held by Ms. Guion during her tenure at 7-Eleven include District Manager, Zone Manager, Operations Manager, and Division Manager (Midwest Division).


Mr. Vasos joined Dollar General in December 2008 as Executive Vice President, Division President and Chief Merchandising Officer. Prior to joining Dollar General, from May 2008 until August 2013, Mr. VasosD'Arezzo served in executive positions with Longs Drug Stores Corporation for 7 years, includingas Executive Vice President and Chief Operating Officer (Februaryof Grocers Supply Co., Inc., the largest


independent wholesaler in the southern United States, serving over 800 supermarkets with a full-line of products for resale. In this role, he was responsible for all functions and the running of the wholesale business. From 2006 to 2008, through November 2008) andhe served as Senior Vice President and Chief Marketing Officer of Duane Reade, Inc., the largest drugstore chain in New York City, and as its Interim Chief Executive Officer for four months in 2008. Prior to Duane Reade, he served as Chief Operating Officer of Raley's Family of Stores, Northern California's premier supermarket operating 120 stores in three western states, from 2003 to 2005. From 2002 to 2003, he served as Executive Vice President of Merchandising Officer (2001-2008)and Replenishment at Office Depot, Inc., where he was responsible for all pharmacya global supplier of office products and front-end marketing, merchandising, procurement, supply chain, advertising, store development, store layoutservices. From 1994 to 2002, Mr. D'Arezzo held various positions at Wegmans Food Market, a supermarket operator, including Senior Vice President of Merchandising (1998 - 2002), Division Manager (1997) and space allocation, and the operationGroup Manager (1994 - 1996). He worked as Vice President of three distribution centers.Sales at DNA Plant Technology, a biotechnology start-up company, in 1994. He also previously served in leadershipheld various positions at Phar-Mor FoodPepsiCo, Inc. from 1989 to 1993, including Business Development Manager, Area Marketing Manager, Brand Manager—Diet Pepsi and Drug Inc. and Eckerd Drug Corp.New Products Assistant Marketing Manager.


Mr. Flanigan joined Dollar General as Senior Vice President, Global Supply Chain in May 2008. He was promoted to Executive Vice President in March 2010. He has over 25 years of management experience in retail logistics. Prior to joining Dollar General, he was group vice presidentGroup Vice President of logisticsLogistics and distributionDistribution for Longs Drug Stores Corporation, an operator of a chain of retail drug stores on the West Coast and Hawaii, from October 2005 to April 2008. In this role, he was responsible for overseeing warehousing, inbound and outbound transportation and facility maintenance to service over 500 retail outlets. From September 2001 to October 2005, he served as the Vice President of Logistics for Safeway Inc., a food and drug retailer, where he oversaw distribution of food products from Safeway distribution centers to all retail outlets, inbound traffic and transportation. He also has held distribution and logistics leadership positions at Vons—a Safeway company, Specialized Distribution Management Inc., and Crum & Crum Logistics.


Ms. Lanigan joined Dollar General in July 2002 as Vice President, General Counsel and Corporate Secretary. She was promoted to Senior Vice President in October 2003 and to Executive Vice President in March 2005. Prior to joining Dollar General, Ms. Lanigan served as Senior Vice President, General Counsel and Secretary at Zale Corporation, a specialty retailer of fine jewelry. During her six years with Zale, Ms. Lanigan held various positions, including Associate General Counsel. Prior to that, she held legal positions with both Turner Broadcasting System, Inc. and the law firm of Troutman Sanders LLP.


Mr. Ravener joined Dollar General as Senior Vice President and Chief People Officer in August 2008. He was promoted to Executive Vice President in March 2010. Prior to joining Dollar General, he served in human resources executive roles with Starbucks Coffee CompanyCorporation, a roaster, marketer and retailer of specialty coffee, from September 2005 until August 2008 as boththe Senior Vice President of U.S. Partner Resources and, prior to that, as the Vice President, Partner Resources—Eastern Division. As the Senior Vice President of U.S. Partner Resources at Starbucks, Mr. Ravener oversaw all aspects of human resources


28



activity for more than 10,000 stores. Prior to serving at Starbucks, Mr. Ravener held Vice President of Human Resources roles for The Home Depot'sDepot Inc., a home improvement retailer, at its Store Support Center and a domestic field division from April 2003 to September 2005. Mr. Ravener also served in executive roles in both human resources and operations at Footstar, Inc. and roles of increasing leadership at PepsiCo.PepsiCo, Inc.


Mr. Sparks joined Dollar General in March 2012 as Executive Vice President of Store Operations. Prior to joining Dollar General, Mr. Sparks served as Division President, Seattle Division, for Safeway Inc., a food and drug retailer, a role he had held since 2001. As Division President of the Seattle Division, Mr. Sparks was responsible for the supervision of approximately 200 stores and approximately 23,000 employees in the northwest region and oversaw real estate, finance and operations of the Seattle Division. Mr. Sparks has 37 years of retail experience including a 34-year career with Safeway where he held roles of increasing responsibility including merchandising manager (1987), category manager (1987 - 1990), divisional director of merchandising, grocery and general merchandise (1990 - 1997) and divisional vice president of marketing (1997 - 2001).

Ms. Elliott joined Dollar General as Senior Vice President and Controller in August 2005. Prior to joining Dollar General, she served as Vice President and Controller of Big Lots, Inc., a closeout retailer, from May 2001 to August 2005. Overseeing a staff of 140 employees at Big Lots, she was responsible for accounting operations, financial reporting and internal audit. Prior to serving at Big


Lots, she served as Vice President and Controller for Jitney-Jungle Stores of America, Inc., a grocery retailer, from April 1998 to March 2001. At Jitney-Jungle, Ms. Elliott was responsible for the accounting operations and the internal and external financial reporting functions. Prior to serving at Jitney-Jungle, she practiced public accounting for 12 years, 6 of which were with Ernst & Young LLP.

Ms. Taylor joined Dollar General as an Employment Attorney in March 2000 and was promoted to Senior Employment Attorney in 2001. She was promoted to Deputy General Counsel in 2004 and then moved into the role of Vice President and Assistant General Counsel in March 2010. She has served as Senior Vice President and General Counsel since June 2013. Prior to joining Dollar General, she practiced law with Ogletree, Deakins, Nash, Smoak & Stewart, P.C., where she specialized in labor law and employment litigation. She has also held attorney positions with Ford & Harrison LLP and Stokes & Bartholomew.



PART II


ITEM 5.

MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information


Our common stock is traded on the New York Stock Exchange under the symbol “DG.” There was no established public trading market for our common stock after our merger that occurred on July 6, 2007 until our initial public offering of our common stock (“IPO”) on November 13, 2009. The range of the high and low sales prices of our common stock during our fourth quarter of fiscal 2009, as reported in the consolidated transaction reporting system, were $24.90 (high) and $21.75 (low)."DG." The high and low sales prices during each quarter in fiscal 20102013 and 2012 were as follows:

2013
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

High

 $53.00 $55.82 $59.87 $62.93 

Low

 $43.35 $48.61 $52.40 $55.08 


2010

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

High

 

$

29.91

 

 

$

31.41

 

 

$

30.20

 

 

$

33.73

 

Low

 

$

21.30

 

 

$

26.61

 

 

$

26.64

 

 

$

27.29

 


2012
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

High

 $48.76 $56.04 $53.36 $50.80 

Low

 $41.20 $45.37 $45.58 $39.73 

Our        On March 13, 2014, our stock price at the close of the market on March 16, 2011, was $29.78. There$57.66 and there were approximately 1,0441,760 shareholders of record of our common stock as of March 16, 2011.stock.


Dividends

Dividends


We have not declared or paid recurring dividends since priorsubsequent to our 2007 merger. However, prior to our IPO, on September 8, 2009, our Board of Directors declared a special dividend on our outstanding common stock of approximately $239.3 millionmerger transaction in the aggregate. The special dividend was paid on September 11, 2009 to shareholders of record on September 8,



29



2009 with cash generated from operations. We have no current plans to pay any cash dividends on our common stock and instead may retain earnings, if any, for future operation and expansion and debt repayment.2007. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our Credit Facilities and in the indentures governing our outstanding 10.625% senior notes due 2015 (the “Senior Notes”) and 11.875%/12.625% senior subordinated toggle notes due 2017 (the “Senior Subordinated Notes” and, collectively with the Senior Notes, the “Notes”). See "Liquidity and Capital Resources" in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report for a description of restrictions on our ability to pay dividends.


Issuer Purchases of Equity Securities

The following table contains information regarding purchases of our common stock made during the quarter ended January 28, 201131, 2014 by or on behalf of Dollar General or any “affiliated"affiliated purchaser," as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:


Period

 

Total Number
of Shares
Purchased (a)

 

Average
Price Paid
per Share

 

Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or
Programs

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

10/30/10-11/30/10

 

-

 

 

$

-

 

-

 

-

12/01/10-12/31/10

 

11,270

 

 

$

29.34

 

-

 

-

1/1/11-1/28/11

 

-

 

 

$

-

 

-

 

-

Total

 

11,270

 

 

$

29.34

 

-

 

-

 

 

 

 

 

 

 

 

 

 

(a)  Represents shares repurchased from employees pursuant to the terms of management stockholder’s agreements.




Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or
Programs(a)
 Approximate
Dollar Value
of Shares that May
Yet Be Purchased
Under the Plans
or Programs(a)
 

11/02/13 - 11/30/13

   $   $223,591,000 

12/01/13 - 12/31/13

  3,280,900 $60.98  3,280,900 $1,023,513,000 

01/01/14 - 01/31/14

   $   $1,023,513,000 

Total

  3,280,900 $60.98  3,280,900 $1,023,513,000 

(a)
A $500 million share repurchase program was publicly announced on September 5, 2012, and increases in the authorization under such program were announced on March 25, 2013 ($500 million increase) and December 5, 2013 ($1.0 billion increase). Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions. This repurchase authorization has no expiration date.

ITEM 6.

SELECTED FINANCIAL DATA


The following table sets forth selected consolidated financial information of Dollar General Corporation as of the dates and for the periods indicated. The selected historical statement of operations data and statement of cash flows data for the fiscal years ended January 28, 2011, January 29, 201031, 2014, February 1, 2013, and January 30, 2009,February 3, 2012 and balance sheet data as of January 28, 201131, 2014 and January 29, 2010,February 1, 2013, have been derived from our historical audited consolidated financial statements included elsewhere in this report. The selected historical statement of operations data and statement of cash flows data for the fiscal years or periods, as applicable, ended February 1, 2008, July 6, 2007January 28, 2011 and February 2, 2007January 29, 2010 and balance sheet data as of February 3, 2012, January 30, 2009, February 1, 200828, 2011, and February 2, 2007January 29, 2010 presented in this table have been derived from audited consolidated financial statements not included in this report.


We completed a merger with Buck Acquisition Corp. (“BAC”) on July 6, 2007, and, as a result, we are majority owned by a Delaware limited partnership controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. As a result of the merger, the related purchase accounting adjustments, and a new basis of accounting beginning on July 7, 2007, the 2007 financial reporting periods presented below include the Predecessor period of the Company reflecting 22 weeks of operating results from February 3, 2007 to July 6, 2007 and 30 weeks of operating results for the Successor period, reflecting the merger from July 7, 2007 to February 1, 2008. BAC’s results of operations for the period from March 6, 2007 to July 6, 2007 (prior to the merger on July 6, 2007) are also included in the consolidated financial statements for the 2007 Successor period described above, as a result of certain derivative financial instruments entered into by BAC prior to the merger. Other than these financial instruments, BAC had no assets, liabilities, or operations prior to the merger. The 2006 fiscal year presented reflects the Predecessor.


Due to the significance of the merger and related transactions that occurred in 2007, the 2010, 2009, 2008 and 2007 Successor financial information is not comparable to that of the Predecessor periods presented in the accompanying table.


The information set forth below should be read in conjunction with, and is qualified by reference to, the Consolidated Financial Statements and related notes included in Part II, Item 8 of this report


and the Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.




 
 Year Ended 
(Amounts in millions, excluding per share data,
number of stores, selling square feet, and net sales
per square foot)

 January 31,
2014
 February 1,
2013
 February 3,
2012(1)
 January 28,
2011
 January 29,
2010
 

Statement of Operations Data:

                

Net sales

 $17,504.2 $16,022.1 $14,807.2 $13,035.0 $11,796.4 

Cost of goods sold

  12,068.4  10,936.7  10,109.3  8,858.4  8,106.5 
            

Gross profit

  5,435.7  5,085.4  4,697.9  4,176.6  3,689.9 

Selling, general and administrative expenses

  3,699.6  3,430.1  3,207.1  2,902.5  2,736.6 
            

Operating profit

  1,736.2  1,655.3  1,490.8  1,274.1  953.3 

Interest expense

  89.0  127.9  204.9  274.0  345.6 

Other (income) expense

  18.9  30.0  60.6  15.1  55.5 
            

Income before income taxes

  1,628.3  1,497.4  1,225.3  985.0  552.1 

Income tax expense

  603.2  544.7  458.6  357.1  212.7 
            

Net income

 $1,025.1 $952.7 $766.7 $627.9 $339.4 
            
            

Earnings per share—basic

 $3.17 $2.87 $2.25 $1.84 $1.05 

Earnings per share—diluted

  3.17  2.85  2.22  1.82  1.04 

Dividends per share

          0.7525 

Statement of Cash Flows Data:

  
 
  
 
  
 
  
 
  
 
 

Net cash provided by (used in):

                

Operating activities

 $1,213.1 $1,131.4 $1,050.5 $824.7 $672.8 

Investing activities

  (250.0) (569.8) (513.8) (418.9) (248.0)

Financing activities

  (598.3) (546.8) (908.0) (130.4) (580.7)

Total capital expenditures

  (538.4) (571.6) (514.9) (420.4) (250.7)

Other Financial and Operating Data:

  
 
  
 
  
 
  
 
  
 
 

Same store sales growth(2)

  3.3% 4.7% 6.0% 4.9% 9.5%

Same store sales(2)

 $16,365.5 $14,992.7 $13,626.7 $12,227.1 $11,356.5 

Number of stores included in same store sales calculation

  10,387  9,783  9,254  8,712  8,324 

Number of stores (at period end)

  11,132  10,506  9,937  9,372  8,828 

Selling square feet (in thousands at period end)

  82,012  76,909  71,774  67,094  62,494 

Net sales per square foot(3)

 $220 $216 $213 $201 $195 

Consumables sales

  75.2% 73.9% 73.2% 71.6% 70.8%

Seasonal sales

  12.9% 13.6% 13.8% 14.5% 14.5%

Home products sales

  6.4% 6.6% 6.8% 7.0% 7.4%

Apparel sales

  5.5% 5.9% 6.2% 6.9% 7.3%

Rent expense

 $686.9 $614.3 $542.3 $489.3 $428.6 

Balance Sheet Data (at period end):

  
 
  
 
  
 
  
 
  
 
 

Cash and cash equivalents and short-term investments

 $505.6 $140.8 $126.1 $497.4 $222.1 

Total assets

  10,867.5  10,367.7  9,688.5  9,546.2  8,863.5 

Long-term debt

  2,818.8  2,772.2  2,618.5  3,288.2  3,403.4 

Total shareholders' equity

  5,402.2  4,985.3  4,674.6  4,063.6  3,408.8 

(1)
The fiscal year ended February 3, 2012 was comprised of 53 weeks.

 

Successor

Predecessor

 

Year Ended

 

 

 

Year Ended

(Amounts in millions, excluding per share data, number of stores, selling square feet, and net sales per square foot)

 

January 28,
2011

 

January 29,
2010

 

January 30,
2009

 

March 6,
2007
through
February 1,
2008(1)(2)

 

February 3,
2007
through
July 6,
2007(2)

 

February 2,
2007(2)

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

13,035.0 

$

11,796.4 

$

10,457.7 

$

5,571.5 

$

3,923.8 

$

9,169.8 

Cost of goods sold

 

8,858.4 

 

8,106.5 

 

7,396.6 

 

3,999.6 

 

2,852.2 

 

6,801.6 

Gross profit

 

4,176.6 

 

3,689.9 

 

3,061.1 

 

1,571.9 

 

1,071.6 

 

2,368.2 

Selling, general and
administrative expenses

 

2,902.5 

 

2,736.6 

 

2,448.6 

 

1,324.5 

 

960.9 

 

2,119.9 

Litigation settlement and related costs, net

 

 

 

32.0 

 

 

 

Transaction and related costs

 

 

 

 

1.2 

 

101.4 

 

Operating profit

 

1,274.1 

 

953.3 

 

580.5 

 

246.1 

 

9.2 

 

248.3 

Interest income

 

(0.2)

 

(0.1)

 

(3.1)

 

(3.8)

 

(5.0)

 

(7.0)

Interest expense

 

274.2 

 

345.7 

 

391.9 

 

252.9 

 

10.3 

 

34.9 

Other (income) expense

 

15.1 

 

55.5 

 

(2.8)

 

3.6 

 

 

Income (loss) before income taxes

 

985.0 

 

552.1 

 

194.4 

 

(6.6)

 

4.0 

 

220.4 

Income tax expense (benefit)

 

357.1 

 

212.7 

 

86.2 

 

(1.8)

 

12.0 

 

82.4 

Net income (loss)

$

627.9 

$

339.4 

$

108.2 

$

(4.8)

$

(8.0)

$

137.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic

$

1.84 

$

1.05 

$

0.34 

$

(0.02)

 

 

 

 

Earnings (loss) per share - diluted

 

1.82 

 

1.04 

 

0.34 

 

(0.02)

 

 

 

 

Dividends per share

 

 

0.7525 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

$

824.7 

$

672.8 

$

575.2 

$

239.6 

$

201.9 

$

405.4 

Investing activities

 

(418.9)

 

(248.0)

 

(152.6)

 

(6,848.4)

 

(66.9)

 

(282.0)

Financing activities

 

(130.4)

 

(580.7)

 

(144.8)

 

6,709.0 

 

25.3 

 

(134.7)

Total capital expenditures

 

(420.4)

 

(250.7)

 

(205.5)

 

(83.6)

 

(56.2)

 

(261.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial and Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

Same store sales growth (3)

 

4.9%

 

9.5%

 

9.0%

 

1.9%

 

2.6%

 

3.3%

Same store sales (3)

$

12,227.1 

$

11,356.5 

$

10,118.5 

$

5,264.2 

$

3,656.6 

$

8,327.2 

Number of stores included in same store sales calculation

 

8,712 

 

8,324 

 

8,153 

 

7,735 

 

7,655 

 

7,627 

Number of stores (at period end)

 

9,372 

 

8,828 

 

8,362 

 

8,194 

 

8,205 

 

8,229 

Selling square feet (in thousands at period end)

 

67,094 

 

62,494 

 

58,803 

 

57,376 

 

57,379 

 

57,299 

Net sales per square foot (4)

$

201 

$

195 

$

180 

$

165 

$

164 

$

163 

Consumables sales

 

71.6%

 

70.8%

 

69.3%

 

66.4%

 

66.7%

 

65.7%

Seasonal sales

 

14.5%

 

14.5%

 

14.6%

 

16.3%

 

15.4%

 

16.4%

Home products sales

 

7.0%

 

7.4%

 

8.2%

 

9.1%

 

9.2%

 

10.0%

Apparel sales

 

6.9%

 

7.3%

 

7.9%

 

8.2%

 

8.7%

 

7.9%

Rent expense

$

489.3 

$

428.6 

$

389.6 

$

214.5 

$

150.2 

$

343.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and short-term investments

$

497.4 

$

222.1 

$

378.0 

$

119.8 

 

 

$

219.2 

Total assets

 

9,546.2 

 

8,863.5 

 

8,889.2 

 

8,656.4 

 

 

 

3,040.5 

Total debt

 

3,288.2 

 

3,403.4 

 

4,137.1 

 

4,282.0 

 

 

 

270.0 

Total shareholders’ equity

 

4,054.5 

 

3,390.3 

 

2,831.7 

 

2,703.9 

 

 

 

1,745.7 


(1)

Includes the results of BAC for the period prior to its merger with and into Dollar General Corporation from March 6, 2007 (the date of BAC’s formation) through July 6, 2007 and the post-merger results of Dollar General Corporation for the period from July 7, 2007 through February 1, 2008.

(2)

Includes the effects of certain strategic merchandising and real estate initiatives that resulted in the closing of approximately 460 stores and changes in our inventory management model which resulted in greater inventory markdowns than in previous years.

(3)

Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. We include stores that have been remodeled, expanded or relocated in our same-store sales calculation. When applicable, we exclude the sales in the 53rdnon-comparable week of a 53-week year from the same-store sales calculation.

(4)



(3)
Net sales per square foot was calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. For the period from February 3, 2007 through July 6, 2007, average selling square footage was calculated using the average square footage as of July 6, 2007 and as of the end of each of the four preceding quarters.





Successor

Predecessor


Year Ended

Year Ended


January 31,
2014
February 1,
2013
February 3,
2012
January 28,
2011

January 29,
2010

January 30,
2009

March 6,
2007
through
February 1,
2008

February 3,
2007
through
July 6,
2007

February 2,
2007

Ratio of earnings to fixed charges (1)charges(1):

3.1x 

4.7x

2.1x 

1.4x 

4.7x

(2) 

3.8x

1.1x 

2.5x 

3.1x
2.1x


(1)

For purposes of computing the ratio of earnings to fixed charges, (a) earnings consist of income (loss) before income taxes, plus fixed charges less capitalized expenses related to indebtedness (amortization expense for capitalized interest is not significant) and (b) fixed charges consist of interest expense (whether expensed or capitalized), the amortization of debt issuance costs and discounts related to indebtedness, and the interest portion of rent expense.

(2)

For the Successor period from March 6, 2007 through February 1, 2008, fixed charges exceeded earnings by $6.6 million.



ITEM 7.

MANAGEMENT’S    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 9,41411,215 stores located in 3540 states as of February 25, 2011,28, 2014, 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. In 2013, we began selling tobacco products in our stores, with very favorable response from our customers. 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.

On July 6, 2007, we completed a merger and, as a result, we are majority owned by Buck Holdings, L.P. (“Buck”), a Delaware limited partnership controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (collectively, “KKR”). The membership interests of Buck and Buck Holdings, LLC (“Buck LLC”), the general partner of Buck, are held by a private investor group, including affiliates of each of KKR and Goldman, Sachs & Co. and other equity investors (collectively, the “Investors”). The merger consideration was funded through the use of our available cash, cash equity contributions from the Investors, equity contributions of certain members of our management and certain debt financings discussed below under “Liquidity and Capital Resources.” In November 2009, we completed an initial public offering of approximately 39.2 million shares, including 22.7 million newly issued shares and approximately 16.5 million outstanding shares sold by Buck. In April and December of 2010, we completed secondary offerings of approximately 29.9 million and 28.8 million shares,



33



respectively, all of which were sold by selling shareholders. We did not receive any proceeds from either of the secondary offerings in 2010.

The customers we serve are value-conscious, many with low or fixed incomes, and Dollar General has always been intensely focused on helping our customersthem 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 companies, we have been operating for several years in an environment with heightened economicongoing macroeconomic challenges and uncertainties. ConsumersOur customers are facing verysustained high rates of unemployment or underemployment, fluctuating food, gasoline and energy costs, rising and uncertain medical costs, and aincluding concerns over government mandated participation in health insurance programs, reductions in government benefits programs, continued weakness inchallenges with affordable housing and consumer credit, markets, and the timetable forand strength of economic recovery for our core customers remains uncertain. The longer our customers have to manage under such difficult conditions, the more difficult it is uncertain. Nonetheless, as a result of our long-term mission of serving the value-conscious customer, coupled with a vigorous focus on improving our operating and financial performance, our 2010 and 2009 financial results were strong, and we remain optimistic with regardfor them to executing our operating priorities in 2011.stretch their spending dollars, particularly for discretionary purchases.

At the beginning of 2008, we defined four operating priorities, which we remain keenly focused on executing. These priorities are: 1) drive productive sales growth, 2) increase, or 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, including by increasing shopper frequency, item unit sales and transaction amountamount. In 2013, sales in same-stores increased by 3.3% over 2012 levels due to increases in both traffic and maximizingaverage transaction. Successful sales per square foot. Our category management processes allow us to identify opportunities to add more productive itemsgrowth initiatives in 2013 included the addition of tobacco products; the expansion of the number of coolers for refrigerated and remove unproductive itemsfrozen foods and beverages in over 1,600 existing stores; the optimization of shelf space, including the reduction of hanging apparel in many of our smaller stores; and the impact of 582 remodeled and relocated stores during the year. Inflation had a timely mannervery modest impact on our sales in 2013 and have allowed us to continue expanding our consumables offerings while also improving profitability. We raised the shelf height in our stores in three phases from 2008 through 2010 in order to utilize the space in our stores more productively. We are adding a fourth phase in 2011.2012. In addition to same-store sales growth, we believe we have significant potential to grow sales throughopened 650 new store growth in both existing and new markets. We opened 600 new stores in 2010 and plan to open approximately 625 new stores in 2011.stores.

Our second priority is to increase, or enhance, our gross profit throughrate. However, in early 2013, we made a strategic decision to add tobacco products in our stores with the primary goal of increasing customer traffic. The addition of tobacco products and the increased proportion of sales of perishables, largely resulting from our continued expansion of coolers in the stores, both led to a decrease in our overall gross profit rate in 2013. We believe that both of these merchandise classes are significant drivers of customer traffic that should lead to increases to average purchase amount. We expect the


improvement in our net sales from these initiatives will outweigh the corresponding reduction in our gross profit rate. In addition, we have ongoing efforts to reduce product costs including effective category management, the expansionutilization of private brand offerings and increased foreign sourcing,brands, shrink reduction, distribution and transportation efficiencies and additional improvements to our pricing and markdown business model, among others, while remaining committed to our everyday low price strategy. We constantly review our pricing strategy and work diligently to minimize vendor cost increases as we focus on providing our customers quality merchandise at great values. In our consumables category, we strive to offer the optimal balance of the most popular nationally advertised brands and our own private brands, which generally have higher gross profit rates than national brands. In 2011,We believe that our core customer is continuing to seek out and purchase goods at entry level price points and are doing so with greater frequency. Commodities cost inflation was minimal in 2013 and, in some instances, we experienced a decrease in such costs. Accordingly, overall price increases passed through to our customers were minimal. We remain committed to our seasonal, home, and apparel categories, and although consumables sales trends are weaker than we would like, we expect increased product costs. We saw the costsgrowth of certain commodities (including cotton, wheat, corn, sugar, coffee, resin) andconsumables to continue to outpace the costs of diesel fuel beginnon-consumables categories again in 2014 due to escalate in our 2010 fourth quarter. The market prices of these commodities, including the cost of diesel fuel, are outside of our control. However, we will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our customers.anticipated continued economic pressures discussed above.

Our third priority is leveraging process improvements and information technology to reduce costs. We are committed as an organization to extractreduce costs, particularly selling, general and administrative expenses ("SG&A") that do not affect the customer experience. ExamplesIn 2013, the most significant decrease in SG&A as a percentage of ongoing cost reduction initiatives includesales as compared to 2012 resulted from our failure to reach our 2013 threshold financial performance level required under our annual cash incentive compensation program, which would have reduced cash incentive compensation for eligible employees to zero. However, the installationCompany will pay a nominal discretionary amount to members of



34



energy management systems, continued preventive maintenance with this group who are not Company officers. In addition, we again successfully lowered our store labor costs as a percentage of sales, in part, by simplifying various tasks performed in the goal of reducing overall repairsstores. Going forward, we will continue to simplify or eliminate unnecessary work in our stores and maintenance costs,elsewhere in the company and recycling of cardboardbelieve we have additional opportunities to reduce waste management costs. Our real estate team continuescosts through our focused procurement efforts. Certain costs, such as new legislation and regulations related to seek out opportunitieshealth care insurance requirements, present a unique challenge to negotiate favorable lease renewals. We are focusing our information technology resources on improving systemsability to create greater efficienciesleverage expenses. Because of the significance of the reduction in merchandisingincentive compensation in 2013, compliance with certain provisions of the Affordable Care Act in 2014, and retailan increase in 2014 store operations, evidenced by our intention to implementoccupancy costs resulting from the recent completion of a new store staffing module in 2011 to better align store labor hours with our customer’s shopping needs. In 2010, we centralized our procurement system whichsale-leaseback transaction, we expect overall SG&A to aid usbe a higher percentage of sales in reducing the cost of purchases throughout the company2014 than in 2011 and beyond. We plan to continue our diligent efforts with regard to our cost reduction initiatives in 2011.2013.

Our fourth priority is to strengthen and expand Dollar General’sGeneral's culture of serving others. For customers this means helping them “Save"Save time. Save money. Every day!" by providing clean, well-stocked stores with quality products at low prices. For employees, this means creating an environment that attracts and retains key employees throughout the organization. For the public, this means giving back to our store communities.communities through our charitable and other efforts. For shareholders, this means meeting their expectations of an efficiently and profitably run organization that operates with compassion and integrity.

For the year ended January 28, 2011,        Although we did not meet all of our financial goals in 2013, our continued focus on ourthese four priorities, coupled with strong cash flow management and share repurchases, resulted in improvedsolid overall operating and financial performance over the year ended January 29, 2010 in each of our key financial metrics,2013 as compared to 2012 as follows. Basis points, as referred to below, are equal to 0.01 percent of total sales.

·


        Also in 2013, we repurchased approximately 11.0 million shares of our outstanding common stock for $620.1 million, and we sold and leased back 233 of our stores, generating cash proceeds of $281.6 million and resulting in a store countdeferred gain of 9,372 on January 28, 2011.


As discussed in more detail below, in recent years, we have generated significant cash flows from operating activities. We have used$67.2 million that will be recognized over a portionperiod of these cash flows to pay down debt and to invest in new store growth through our traditional leased stores. During 2010 we made a strategic decision to purchase certain of our leased stores. We believe that the current environment in the real estate markets provides an opportunity to make these investments at levels which are expected to result in favorable returns and positively impact our operating results. We initiated the store purchase program in the second half of 2010 and have plans to purchase additional stores during 2011.

Like other companies, we face uncertainties with regard to the future impact of healthcare reform legislation, including the Patient Protection and Affordable Care Act and the HealthCare and Education Reconciliation Act of 2010, signed into law in March 2010, which will likely affect the cost associated with employer-sponsored medical plans. Specifically, this legislation requires that employers provide a minimum level of coverage for full-time employees or pay penalties. Some of the plan coverage requirements may have an impact on our costs such as bans on exclusions for pre-existing conditions, extension of dependent coverage to age 26, and caps on employee premium sharing costs. Certain coverage provisions do not go into effect until 2014, but there are a number of dependent coverage and insurance market reforms that took



36



effect immediately. Although this legislation did not have a material effect on our consolidated financial statements in 2010, we continue to evaluate the impact it will have on our costs in future years, and those costs could be material. Due to the breadth and complexity of the healthcare reform legislation, the current lack of implementing regulations and interpretive guidance, the phased-in nature of the implementation, and uncertainty with respect to the outcome of pending litigation with respect to the legislation, it is difficult to predict its overall impact on our business in the coming15 years.

In 2011,2014, we plan to continue to focus on our four key operating priorities. We will continueexpect our sales growth in 2014 to refineagain be driven by consumables as our customer continues to face both continuing and improvenew economic challenges. We plan to focus our store standardsefforts on effectively serving our core customers' needs by providing them with the selections they want at the right price points in order2014.

        We made progress in 2013 on implementing an improved supply chain solution to increase sales, focusing on achieving a consistent lookassist in promotional and feel across the chain. We have beguncore inventory forecasting and will continue to measure customer satisfaction which will allow us to identify areas needing improvement.ordering. We expect to continue the process of raising the height of certain merchandise fixtures, allowing us to better utilize our store square footage. As part of our overall category management processes, we plan tomake further expand our private brand consumables offeringsprogress in 2014, and to continue to upgrade the selection, quality and presentation of our private brand offerings in our apparel, seasonal and home categories, and we expect a greater impact on gross margin from our foreign sourcing efforts in 2011. As noted above, we expect cost increases in certain commodities, including diesel fuel, to present a challenge as we focus on improving our gross profit rate, while managing our everyday low prices.


We now have improved processes and tools in place to assist us in our ongoing inventory shrink reduction efforts. Our work on shrink remains a high priority, and we plan to use the information supplied by these analytical and monitoring tools to help improve on our recent successes.


With regard to leveraging information technology and process improvements to reduce costs, we will continue to focus on making improvements that benefit our merchandising and operations efforts, including item profitability analysis, merchandise selection and allocation and labor scheduling. In 2010, we completed the installation of back office computers ineventually all of our stores, which weSKUs will utilize tobe managed through this solution. The supply chain solution is helping us improve reporting and communications withour ordering processes in the stores and consequently,has contributed to our work simplification efforts and improvements in maintaining efficient inventory levels. We believe we believe will assisthave additional opportunities for work simplification and elimination in improving store productivity. Also in 2010, we completed the rollout of a new voice pick system in our distribution centers, allowing our distribution associates to communicate with warehouse software systems using speech recognition.2014.


Finally, we        We are very pleased with the performance of our 20102013 new stores, remodels and relocations, and in 20112014 we plan to increase ouropen 700 new store openings to 625 stores within the 35 states in which we currently operate as well as three new states, Connecticut, Nevada and New Hampshire, and to increasecontinue our numberongoing remodel and relocation efforts.

        Finally, we plan to continue to repurchase shares of remodels or relocations to an additional 550 stores. With regard to planned new store openings, our criteria are based on numerous factors including, among other things, availability of appropriate sites, expected sales, lease terms, population demographics, competition, and the employment environment. We use various real estate site selection tools to determine target markets and optimum site locations within those markets. With respect to store relocations, we begin to evaluate a store for relocation opportunities approximately 18 months prior to the store’s lease expiration using the same basic tools and criteria as those used for new stores. Remodels, which require a much smaller investment, arecommon stock in 2014.



37



determined based on the need, the opportunity for sales improvement at the location and an expectation of a desirable return on investment.


Key Financial MetricsMetrics..    We have identified the following as our most critical financial metrics for 2011:metrics:


·


        

Readers should refer to the detailed discussion of our operating results below for additional comments on financial performance in the current year periods as compared with the prior year periods.


Results of Operations

Accounting Periods.The following text contains references to years 2010, 20092013, 2012, and 2008,2011, which represent fiscal years ended January 28, 2011, January 29, 201031, 2014, February 1, 2013, and January 30, 2009,February 3, 2012, respectively. Our fiscal year ends on the Friday closest to January 31. Fiscal years 2010, 20092013 and 20082012 were 52-week accounting periods.periods and fiscal year 2011 was a 53-week accounting period.

Seasonality        Seasonality..    The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, sales in our fourth quarter (November, December and January) have historically been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.




38



The following table contains results of operations data for fiscal years 2010, 20092013, 2012 and 2008,2011, and the dollar and percentage variances among those years.


 

 

 

 

 

2010 vs. 2009

2009 vs. 2008

(amounts in millions, except per share amounts)

2010

2009

2008


Amount

Change

% Change

Amount Change

%
Change

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

$

9,332.1 

$

8,356.4 

$

7,248.4 

 

$

975.7 

11.7 

%

$

1,108.0 

15.3 

%

% of net sales

 

71.59% 

 

70.84% 

 

69.31% 

 

 

 

 

 

 

 

 

 

Seasonal

 

1,887.9 

 

1,711.5 

 

1,521.5 

 

 

176.4 

10.3 

 

 

190.0 

12.5 

 

% of net sales

 

14.48% 

 

14.51% 

 

14.55% 

 

 

 

 

 

 

 

 

 

Home products

 

917.6 

 

869.8 

 

862.2 

 

 

47.9 

5.5 

 

 

7.5 

0.9 

 

% of net sales

 

7.04% 

 

7.37% 

 

8.24% 

 

 

 

 

 

 

 

 

 

Apparel

 

897.3 

 

858.8 

 

825.6 

 

 

38.6 

4.5 

 

 

33.2 

4.0 

 

% of net sales

 

6.88% 

 

7.28% 

 

7.89% 

 

 

 

 

 

 

 

 

 

Net sales

$

13,035.0 

$

11,796.4 

$

10,457.7 

 

$

1,238.6 

10.5 

%

$

1,338.7 

12.8 

%

Cost of goods sold

 

8,858.4 

 

8,106.5 

 

7,396.6 

 

 

751.9 

9.3 

 

 

709.9 

9.6 

 

% of net sales

 

67.96% 

 

68.72% 

 

70.73% 

 

 

 

 

 

 

 

 

 

Gross profit

 

4,176.6 

 

3,689.9 

 

3,061.1 

 

 

486.7 

13.2 

 

 

628.8 

20.5 

 

% of net sales

 

32.04% 

 

31.28% 

 

29.27% 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,902.5 

 

2,736.6 

 

2,448.6 

 

 

165.9 

6.1 

 

 

288.0 

11.8 

 

% of net sales

 

22.27% 

 

23.20% 

 

23.41% 

 

 

 

 

 

 

 

 

 

Litigation settlement and related costs, net

 

 

 

32.0 

 

 

 

 

(32.0)

 

% of net sales

 

 

 

0.31% 

 

 

 

 

 

 

 

 

 

Operating profit

 

1,274.1 

 

953.3 

 

580.5 

 

 

320.8 

33.7 

 

 

372.8 

64.2 

 

% of net sales

 

9.77% 

 

8.08% 

 

5.55% 

 

 

 

 

 

 

 

 

 

Interest income

 

(0.2)

 

(0.1)

 

(3.1)

 

 

(0.1)

52.8 

 

 

2.9 

(95.3)

 

% of net sales

 

(0.00)% 

 

(0.00)% 

 

(0.03)% 

 

 

 

 

 

 

 

 

 

Interest expense

 

274.2 

 

345.7 

 

391.9 

 

 

(71.5)

(20.7)

 

 

(46.2)

(11.8)

 

% of net sales

 

2.10% 

 

2.93% 

 

3.75% 

 

 

 

 

 

 

 

 

 

Other (income) expense

 

15.1 

 

55.5 

 

(2.8)

 

 

(40.4)

(72.8)

 

 

58.3

 

% of net sales

 

0.12% 

 

0.47% 

 

(0.03)% 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

985.0 

 

552.1 

 

194.4 

 

 

432.9 

78.4 

 

 

357.7 

184.0 

 

% of net sales

 

7.56% 

 

4.68% 

 

1.86% 

 

 

 

 

 

 

 

 

 

Income taxes

 

357.1 

 

212.7 

 

86.2 

 

 

144.4 

67.9 

 

 

126.5 

146.7 

 

% of net sales

 

2.74% 

 

1.80% 

 

0.82% 

 

 

 

 

 

 

 

 

 

Net income

$

627.9 

$

339.4 

$

108.2 

 

$

288.4 

85.0 

%

$

231.3 

213.8 

%

% of net sales

 

4.82% 

 

2.88% 

 

1.03% 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

1.82 

$

1.04 

$

0.34 

 

$

0.78 

75.0 

%

$

0.70 

205.9 

%


 
  
  
  
 2013 vs. 2012 2012 vs. 2011 
(amounts in millions, except per share amounts)
 2013 2012 2011 Amount
Change
 % Change Amount
Change
 % Change 

Net sales by category:

                      

Consumables

 $13,161.8 $11,844.8 $10,833.7 $1,317.0  11.1%$1,011.1  9.3%

% of net sales

  75.19% 73.93% 73.17%            

Seasonal

  2,259.5  2,172.4  2,051.1  87.1  4.0  121.3  5.9 

% of net sales

  12.91% 13.56% 13.85%            

Home products

  1,115.6  1,061.6  1,005.2  54.1  5.1  56.4  5.6 

% of net sales

  6.37% 6.63% 6.79%            

Apparel

  967.2  943.3  917.1  23.9  2.5  26.2  2.9 

% of net sales

  5.53% 5.89% 6.19%            
                

Net sales

 $17,504.2 $16,022.1 $14,807.2 $1,482.0  9.2%$1,214.9  8.2%

Cost of goods sold

  12,068.4  10,936.7  10,109.3  1,131.7  10.3  827.4  8.2 

% of net sales

  68.95% 68.26% 68.27%            
                

Gross profit

  5,435.7  5,085.4  4,697.9  350.3  6.9  387.5  8.2 

% of net sales

  31.05% 31.74% 31.73%            

Selling, general and administrative expenses

  3,699.6  3,430.1  3,207.1  269.4  7.9  223.0  7.0 

% of net sales

  21.14% 21.41% 21.66%            
                

Operating profit

  1,736.2  1,655.3  1,490.8  80.9  4.9  164.5  11.0 

% of net sales

  9.92% 10.33% 10.07%            

Interest expense

  89.0  127.9  204.9  (38.9) (30.4) (77.0) (37.6)

% of net sales

  0.51% 0.80% 1.38%            

Other (income) expense

  18.9  30.0  60.6  (11.1) (37.0) (30.7) (50.6)

% of net sales

  0.11% 0.19% 0.41%            
                

Income before income taxes

  1,628.3  1,497.4  1,225.3  130.9  8.7  272.1  22.2 

% of net sales

  9.30% 9.35% 8.27%            

Income taxes

  603.2  544.7  458.6  58.5  10.7  86.1  18.8 

% of net sales

  3.45% 3.40% 3.10%            
                

Net income

 $1,025.1 $952.7 $766.7 $72.5  7.6%$186.0  24.3%

% of net sales

  5.86% 5.95% 5.18%            
                
                

Diluted earnings per share

 $3.17 $2.85 $2.22 $0.32  11.2%$0.63  28.4%
                
                

Net SalesSales..    The net sales increase in 20102013 reflects a same-store sales increase of 4.9%3.3% compared to 2009.2012. For 2013, there were 10,387 same-stores which accounted for sales of $16.37 billion. Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period. For 2010, there were 8,712 same-stores which accounted forChanges in same-store sales of $12.23 billion.are calculated based on the comparable calendar weeks in the prior year, and include stores that have been remodeled, expanded or relocated.. The remainder of the increase in sales in 20102013 was attributable to new stores, partially offset by sales from closed stores. The increase in sales reflects increased customer traffic and average transaction amounts. Increases in sales of consumables outpaced our non-consumables, with sales of tobacco products, perishables, and candy


and snacks contributing the continued refinementmajority of the increase. Tobacco was added in the stores primarily during the first and second quarters. The expansion of coolers for perishables in over 1,600 existing stores was completed in the first half of the year while other initiatives, including space optimization in many of our merchandise offerings,smaller stores, were implemented throughout the optimization of our category management processes, further improvement in store standards, and increased utilization of square footage in our stores.year.

The net sales increase in 20092012 reflects a same-store sales increase of 9.5%4.7% compared to 2008.2011. For 2009,2012, there were 8,3249,783 same-stores which accounted for sales of $11.36$14.99 billion. The



39



remainder of the increase in sales in 20092012 was attributable to new stores, partially offset by sales from closed stores. The strong increase in sales reflects increased customer traffic and average transaction amounts, as a result of the results of our various initiatives implemented throughout 2008 and 2009, including the impact of improved store standards, the expansionrefinement of our merchandise offerings, including significant enhancements toimprovements in our convenience foodcategory management processes and beveragesstore standards, and health and beauty products, in addition to improvedincreased utilization of square footage extended store hoursin our stores. Increases in sales of consumables outpaced our non-consumables, with sales of snacks, candy, beverages and improved marketing efforts.perishables contributing the majority of the increase throughout the year.

Of our four major merchandise categories, the consumables category, has grown most significantly over the past several years. Although this categorywhich generally has a lower gross profit rate than the other three categories, as discussed below, we were able to increase our overall gross profit rate in both 2010 and 2009 as compared tohas grown most significantly over the previous year.past several years. Because of the impact of sales mix on gross profit, we continually review our merchandise mix and strive to adjust it when appropriate. Maintaining an appropriate sales mix is an integral part of achieving our gross profit and sales goals. Both the number of customer transactions and average transaction amount increased in 2010 and 2009, and we believe that our stores have benefited to some degree from attracting new customers who are seeking value as a result of the recent economic environment.

Gross ProfitProfit..    The gross profit rate as a percentage of sales was 32.0%31.1% in 20102013 compared to 31.3%31.7% in 2009. Factors contributing to2012. Gross profit increased by 6.9% in 2013, and as a percentage of sales, decreased by 69 basis points. The majority of the increase in the 2010 gross profit rate includedecrease in 2013 as compared to 2012 was due to consumables comprising a larger portion of our net sales, primarily as the result of increased markups resulting primarily fromsales of lower margin consumables including tobacco products and expanded perishables offerings, all of which contributed to lower initial inventory markups. In addition, we experienced a higher purchase markups,inventory shrinkage rate, partially attributable to the addition of certain consumable products with relatively higher retail prices. These factors were partially offset by increased markdowns, as well as our category management efforts and increased sales volumes which have contributed to our ability to reducea reduction in net purchase costs from our vendors. Our merchandising team continueson certain products. The Company recorded a LIFO benefit of $11.0 million in 2013 compared to work closely with our vendors to provide quality merchandise at value prices to meet our customers’ demands. In 2010 we recorded a LIFO provision of $5.3 million, reflecting an increase in certain merchandise costs, the most significant of which occurred in the 2010 fourth quarter, compared to a LIFO benefit of $2.5$1.4 million in 2009.2012.

The gross profit rate as a percentage of sales was 31.3%31.7% in 2009 compared to 29.3% in 2008.both 2012 and 2011. Factors contributing to the increase in the 2009favorably impacting our gross profit rate include increaseda significantly lower LIFO provision, higher inventory markups, resulting primarily from higher purchase markups, partiallyand improved transportation efficiencies due in part to a decrease in average miles per delivery enabled by our new distribution centers and other logistics initiatives. These positive factors were offset by increased markdowns.higher markdowns, a reduction in price increases and a modest increase in our inventory shrinkage rate compared to 2011. In addition, our increased sales volumesconsumables, which generally have contributed to our ability to reduce purchase costs from our vendors. Transportation and distribution costs decreased for the year driven by lower fuel costs as well as the impact of cost reduction initiatives. Higher sales volumes and productivity initiatives also contributed to improved leverage of our distribution costs. In addition, inventory shrinkage asmarkups than non-consumables, represented a greater percentage of sales declined in 2009 from 2008, contributing to our gross profit rate improvement. In 2009 we2012 than in 2011. We recorded a LIFO benefit of $2.5 million, reflecting a flattening of merchandise costs in 2009, compared to a LIFO provision of $43.9$1.4 million in 2008, when we faced increased commodity cost pressures mainly related2012 compared to food and pet products which were driven by rising fruit and vegetable prices and freight costs. Increasesa $47.7 million provision in petroleum, resin, metals, pulp and other raw material commodity driven costs also resulted in multiple product cost increases in 2008. Also in 2008, we marked down merchandise2011, primarily as thea result of our interpretation of the phthalates provision of the Consumer Product Safety Improvement Act of 2008, resulting in a charge of $8.6 million.lower inflation on commodities.

Selling, General and Administrative (“SG&A”)&A Expense.SG&A expense was 22.3%21.1% as a percentage of sales in 20102013 compared to 23.2%21.4% in 2009, a decrease2012, an improvement of 9327 basis points. SG&A in



40



2010 included expenses totaling $19.7 million, or 15 basis points, relating to two secondary offerings of our common stock, consisting of $1.1 million of legal and other transaction expenses and $18.6 million relating to the acceleration of certain equity appreciation rights. SG&A in 2009 included expenses totaling $68.3 million, or 58 basis points, including $58.8 million relating to the termination of an advisory agreement among us, KKR and Goldman, Sachs & Co. and $9.4 million resulting from the acceleration of certain equity based compensation related to the completion of our initial public offering. DecreasesWe had a significant decrease in incentive compensation the cost of health benefits, consulting feesexpense, as 2013 financial performance did not satisfy certain performance requirements under our cash incentive compensation program. Retail labor expense increased at a rate lower than our increase in sales. Declines in workers' compensation and severance costsgeneral liability expenses also contributed to the overall decrease in SG&A expense as a percentage of sales. The above items were partially offset by certain costs that increased from 2012 to 2013 at a rate higher than our increase in sales, including depreciation and amortization and fees associated with the increased volume of customer purchases transacted with debit cards.

        SG&A expense was 21.4% as a percentage of sales as did other cost reductionin 2012 compared to 21.7% in 2011, an improvement of 25 basis points. Retail labor expense increased at a lower rate than our increase in sales, partially due to ongoing benefits of our workforce management system coupled with savings due to various store work simplification initiatives. Also positively impacting SG&A expense was lower legal


settlement costs in 2012 due to two legal matters settled in 2011 for a combined expense of $13.1 million and productivity initiatives. Other costs increasingthe impact of decreased expenses ($2.9 million in 2012 compared to $11.1 million in 2011) relating to secondary offerings of our common stock. Costs that increased at a rate lowerhigher than our 10.5%sales increase in sales include utilities, which reflect lower waste management costs resulting from our recycling efforts, as well as repairs and maintenance. Our increased sales levels in 2010 also favorably impacted SG&A, as a percentage of sales. Debit cardrent expense, fees increased at a higher rate than the increase in sales, primarily as a result of increased usage.

SG&A, as a percentage of sales, was 23.2% in 2009 compared to 23.4% in 2008, representing an improvement of 21 basis points before taking into account the impact of our initial public offering as discussed above. Our increased sales levels in 2009 favorably impacted SG&A, as a percentage of sales,associated with the most significant impact on store occupancy costs, including rentincreased use of debit cards and utilities. Our cost of utilities, as a percentage of sales, was further reduced by energy savings resulting from our store energy management initiatives, including forward purchase contracts, increased preventive maintenance and the installation of energy management systems in substantially all of our new and relocated stores. In addition, we continued to significantly reduce our workers’ compensationdepreciation expense, through safety initiatives implemented over the last several years, and legal expenses were lower in 2009 than 2008, which included expenses incurred in connection with a shareholder litigation settlement in 2008 relating to our 2007 merger. Also during 2008, we recorded a $5.0 million gain relating to potential losses on distribution center leases indirectlyprimarily related to our 2007 merger.additions of certain store equipment and fixtures.

Litigation Settlement and Related Costs, Net. Expenses in 2008 included $32.0 million which represents the settlement of a class action lawsuit filed in response to our 2007 merger, and includes a $40.0 million settlement plus related expenses of $2.0 million, net of $10.0 million of insurance proceeds received in the fourth quarter of 2008.


Interest ExpenseExpense..    The decrease in interest expense in 20102013 compared to 2009 was2012 is due to lower all-in interest rates primarily resulting from the resultcompletion of lower average outstandingour refinancing in April 2013. See the detailed discussion under "Liquidity and Capital Resources" regarding refinancing of various long-term obligations.obligations and the related effect on interest expense in the periods presented.

        The decrease in interest expense in 20092012 compared to 2008 was primarily the result of2011 is due to lower average outstanding long-term obligations, resulting from the redemption, repurchase and refinancing of indebtedness in 2012 and 2011 and lower all-in interest rates on our term loan.long-term obligations.


We had outstanding variable-rate debt of $931 million$0.14 billion and $560 million$1.39 billion as of January 28, 201131, 2014 and January 29, 2010,February 1, 2013, respectively, after taking into consideration the impact of interest rate swaps. The remainder of our outstanding indebtedness at January 28, 201131, 2014 and January 29, 2010February 1, 2013 was fixed rate debt.


See the detailed discussion under “Liquidity"Liquidity and Capital Resources”Resources" regarding indebtedness incurred to finance our 2007 merger along with subsequent repurchasesrefinancing of various long-term obligations and the related effect on interest expense in the periods presented.



41



Other (Income) Expense.    In2010, 2013, we recorded pretax losses of $14.7$18.9 million resulting from the repurchase intermination of our senior secured credit facilities. In 2012, we recorded pretax losses of $29.0 million resulting from the open marketredemption of $115.0$450.7 million aggregate principal amount of our Senior Notessenior subordinated notes due 2017 plus accrued and unpaid interest.


In2009, 2011, we recorded charges totaling $55.5 million, which primarily representspretax losses on debt retirement totaling $55.3 million, and also includes expense of $0.6 million related to hedge ineffectiveness on certain of our interest rate swaps.


In 2008, we recorded a gain of $3.8$60.3 million resulting from repurchases and the repurchaseredemption of $44.1$864.3 million aggregate principal amount of our senior subordinated notes offset by expense of $1.0 million related to hedge ineffectiveness on certain of our interest rate swaps.due 2015 plus accrued and unpaid interest.


Income TaxesTaxes..    The effective income tax rates for 2010, 20092013, 2012, and 20082011 were expenses of 36.3%37.0%, 38.5%36.4%, and 44.4%37.4%, respectively.

The 2010effective income tax rate for 2013 was 37.0% compared to a rate of 36.4% for 2012 which represents a net increase of 0.6 percentage points. The 2012 amounts were favorably impacted by the resolution of income tax examinations that did not reoccur, to the same extent, in 2013. This effective tax rate increase was partially offset by the recording of an income tax benefit in 2013 associated with the expiration of the assessment period during which the taxing authorities could have assessed additional income tax associated with our 2009 tax year. In addition, 2013 reflects larger income tax benefits associated with federal jobs credits. We receive a significant income tax benefit related to wages paid to certain newly hired employees that qualify for federal jobs credits (principally the Work Opportunity Tax Credit or "WOTC"). The federal law authorizing the WOTC credit has expired for employees hired after December 31, 2013. In the past, when these credit provisions have expired, Congress has reenacted the law on a retroactive basis. It is uncertain as to whether (or when) WOTC credits will be retroactively renewed in this instance. The Company will receive credits in future periods for employees hired on or before December 31, 2013; however, in future periods the credit received will be significantly lower than what has been recognized in 2013 and prior years without WOTC reenactment.

        The 2012 effective tax rate of 36.4% was greater than the expectedstatutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 20102012 effective tax rate is lessof 36.4% was lower than the 20092011 rate of 37.4% due principallyprimarily to reductions in state income tax expense, income tax related interest expense and other expense items. The 2010 effectivethe favorable resolution of various examinations by the taxing authorities, when combined with unfavorable examination results in 2009, resulted in a decrease in the year-to-year state income tax expense rate. This decrease in state income tax expense was partially offset by an increase in state income tax expense due to a shift in income to companies within the group that have a higher effective state income tax rate. In addition, decreases also occurred due to favorable outcomes in 2010 associated with reductions in income tax related interest accruals and income tax related penalty accruals due to favorable income tax examination results, the completion of a federal income tax examination and reductions in expense associated with uncertain tax benefit accruals.during 2012.


The 20092011 effective tax rate isof 37.4% was greater than the expectedstatutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2009 effective tax rate is less than the 2008 rate due principally to the unfavorable impact that the non-deductible, merger-related lawsuit settlement had on the 2008 rate. This reduction in the effective tax rate was partially offset by a decrease in the tax rate benefit related to federal jobs credits. While the total amount of jobs credits earned in 2009 was similar to the amount earned in 2008, the impact of this benefit on the effective tax rate was reduced due to the 2009 increase in income before tax. The 2009 rate was also increased by accruals associated with uncertain tax benefits.

The 2008 effective income tax rate was greater than the expected tax rate of 35% principally due to the non-deductibility of the settlement and related expenses associated with the shareholder lawsuit related to our 2007 merger.

Off Balance Sheet Arrangements

We lease three of our distribution centers.        The entities involved in the ownership structure underlying thesethe leases for three of our distribution centers meet the accounting definition of a Variable Interest Entity (‘‘VIE’’("VIE"). One of these distribution centers has been recorded as a financing obligation whereby its property and equipment are reflected in our consolidated balance sheets. The land and



42



buildings of the other two distribution centers have been recorded as operating leases. We are not the primary beneficiary of these VIEs and, accordingly, have not included these entities in our consolidated financial statements. Other than the foregoing, we are not party to any material off balance sheet arrangements.

Effects of Inflation


        We experienced little or no overall product cost inflation in 2013 and 2012. In 2008,2011, we experienced increased commodity cost pressures mainly related to food, housewares and petapparel products which were driven by fruit and vegetable prices and rising freight costs, increased the costs of certain products. Increasesincreases in petroleum,cotton, sugar, coffee, groundnut, resin, metals, pulppetroleum and other raw material commodity driven costs also resulted in multiple product cost increases. We believe that our ability to increase selling prices in response to cost increases largely mitigated the effect of these cost increases on our overall results of operations. These 2008 trends generally reversed or stabilized in 2009 and 2010.costs.


Liquidity and Capital Resources


Current Financial Condition and Recent Developments

During the past three years, we have generated an aggregate of approximately $2.07$3.39 billion in cash flows from operating activities.activities and incurred approximately $1.62 billion in capital expenditures. During that period, we expanded the number of stores we operate by 1,178, or over 14%1,760, representing growth of approximately 19%, and we remodeled or relocated 1,3581,749 stores, or approximately 14%16% of the stores we operated as of February 25, 2011, and incurred approximately $877 million in capital expenditures.January 31, 2014. We made certain strategic decisions which slowedintend to continue our current strategy of pursuing store growth, remodels and relocations in 20072014.

        In April 2013, we consummated a refinancing pursuant to which we terminated our existing senior secured credit agreements, entered into a five-year $1.85 billion unsecured credit agreement (the "Facilities"), and 2008, but we reaccelerated store growth beginning in 2009 and currently plan to continue that strategy in 2011 and beyond.

issued senior notes with a face value of $1.3 billion, net of discount totaling $2.8 million. At January 28, 2011,31, 2014, we had total outstanding debt (including the current portion of long-term obligations) of $3.29 billion.$2.82 billion, which includes balances under the Facilities, and senior notes, all of which are described in greater detail below. We also had an additional $959.3$822.8 million available for borrowing under our senior secured asset-based revolving credit facility (“ABL Facility” and, together with the Term Loan Facility, the “Credit Facilities”)Facilities at that date. Our liquidity needs are significant, primarily due to our debt service and other obligations. Our substantial debt could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry or to pursue our growth strategy, expose us to interest rate risk to the extent of our variable rate debt, and increase the difficulty of our ability to make payments on our outstanding debt securities.January 31, 2014.


Nevertheless, management believes        We believe our cash flow from operations and existing cash balances, combined with availability under the Credit Facilities, (described below),and access to the debt markets will provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next twelve months andas well as the next several years. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.


Facilities

Credit        The Facilities


Overview. consist of a $1.0 billion senior unsecured term loan facility (the "Term Facility") and an $850.0 million senior unsecured revolving credit facility (the "Revolving Facility") which provides for the issuance of letters of credit up to $250.0 million. We have two senior secured creditmay request, subject to agreement by one or more lenders, increased revolving commitments and/or incremental term loan facilities which provide financingin an aggregate amount of up to $2.995 billion as of January 28, 2011.$150.0 million. The Credit Facilities consist of the $1.964 billion Term Loan Facility and the $1.031 billion ABL Facility (of which up to $350.0 million is available formature on April 11, 2018.




43



letters of credit), subject to borrowing base availability. The ABL Facility includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swingline loans.


The amount available under the ABL Facility (including letters of credit) shall not exceed the sum of the tranche A borrowing base and the tranche A-1 borrowing base. The tranche A borrowing base equals the sum of (i) 85% of the net orderly liquidation value of all our eligible inventory and that of each guarantor thereunder and (ii) 90% of all our accounts receivable and credit/debit card receivables and that of each guarantor thereunder, in each case, subject to customary reserves and eligibility criteria. An additional 10% of the net orderly liquidation value of all of our eligible inventory and that of each guarantor thereunder is made available to us in the form of a “last out” tranche under which we may borrow up to a maximum amount of $101.0 million.        Borrowings under the ABL Facility will be incurred first under the last out tranche, and no borrowings will be permitted under any other tranche until the last out tranche is fully utilized. Repayments of the ABL Facility will be applied to the last out tranche only after all other tranches have been fully paid down.

Interest Rates and Fees. Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable margin for borrowings is (i) under the Term Loan Facility, 2.75%as of January 31, 2014 was 1.275% for LIBOR borrowings and 1.75%0.275% for base-rate borrowings (ii) underborrowings. We must also pay a facility fee, payable on any used and unused amounts of the ABL Facility (except in the last out tranche described above) asFacilities, and letter of January 28, 2011 and January 29, 2010, 1.25% for LIBOR borrowings; 0.25% for base-rate borrowings and for any last out borrowings, 2.25% for LIBOR borrowings and 1.25% for base-rate borrowings.credit fees. The applicable margins for borrowings, the facility fees and the letter of credit fees under the ABL Facility (except in the case of last out borrowings)Facilities are subject to adjustment each quarter based on average daily excess availability under the ABL Facility.our long-term senior unsecured debt ratings.

        The interest rate for borrowings under the Term Loan Facility was 3.0% (without giving effect to the market rate swaps discussed below) as of both January 28, 2011 and January 29, 2010, respectively. We are also required to pay a commitment fee to the lenders under the ABL Facility for any unutilized commitments at a rate of 0.375% per annum. We also must pay customary letter of credit fees. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” below for a discussion of our use of interest rate swaps to manage our interest rate risk.


Prepayments.The senior secured credit agreement for the Term Loan Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:


·

50% of our annual excess cash flow (as definedwill amortize in the credit agreement) which will be reduced to 25% and 0% if we achieve and maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively;

·

100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property in excessquarterly installments of $25.0 million, inwith the aggregatefirst such payment due on August 1, 2014, and subject to our right to reinvest the proceeds; and

·

100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the senior secured credit agreement.



44



balance due at maturity. The mandatory prepayments discussed above will be applied to the Term Loan Facility as directed by the senior secured credit agreement. Through January 28, 2011, no prepayments have been required under the prepayment provisions listed above. The Term Loan FacilityFacilities can be prepaid in whole or in part at any time.

In addition, The Facilities contain certain covenants that place limitations on the senior secured credit agreement for the ABL Facility requires us to prepay the ABL Facility, subject to certain exceptions, as follows:


·

With 100%incurrence of the net cash proceedsliens; change of business; mergers or sales of all non-ordinary course asset sales or other dispositions of Revolving Facility Collateral (as defined below) in excess of $1.0 million in the aggregate and subject to our right to reinvest the proceeds; and

·

To the extent such extensions of credit exceed the then current borrowing base (as defined in the senior secured credit agreement for the ABL Facility).


The mandatory prepayments discussed above will be applied to the ABL Facility as directed by the senior secured credit agreement for the ABL Facility. Through January 28, 2011, no prepayments have been required under the prepayment provisions listed above.


An event of default under the senior secured credit agreements will occur upon a change of control as defined in the senior secured credit agreements governing our Credit Facilities. Upon an event of default, indebtedness under the Credit Facilities may be accelerated, in which case we will be required to repay all outstanding loans plus accrued and unpaid interest and all other amounts outstanding under the Credit Facilities.


Amortization.The original terms of the Term Loan Facility required quarterly payments of principal beginning September 30, 2009. As a result of voluntary prepayments under the Term Loan Facility, no further quarterly principal installments will be required prior to maturity of the Term Loan on July 6, 2014. There is no amortization under the ABL Facility. The entire principal amounts (if any) outstanding under the ABL Facility are due and payable in full at maturity, on July 6, 2013, on which day the commitments thereunder will terminate.

Guarantee and Security.All obligations under the Credit Facilities are unconditionally guaranteed by substantially all of our existingassets; and future domestic subsidiaries (excluding certain immaterial subsidiaries and certain subsidiaries designated by us under our senior secured credit agreements as “unrestricted subsidiaries”), referred to, collectively, as U.S. Guarantors.


All obligations and related guarantees under the Term Loan Facility are secured by:

·

a second-priority security interest in all existing and after-acquired inventory, accounts receivable, andsubsidiary indebtedness, among other assets arising from such inventory and accounts receivable, of our company and each U.S. Guarantor (the “Revolving Facility Collateral”), subject to certain exceptions;

·

a first-priority security interest in, and mortgages on, substantially all of our and each U.S. Guarantor’s tangible and intangible assets (other than the Revolving Facility Collateral); and




·

a first-priority pledge of 100% of the capital stock held by us, or any of our domestic subsidiaries that are directly owned by us or one of the U.S. Guarantors and 65% of the voting capital stock of each of our existing and future foreign subsidiaries that are directly owned by us or one of the U.S. Guarantors.

All obligations and related guarantees under the ABL Facility are secured by the Revolving Facility Collateral, subject to certain exceptions.


Certain Covenants and Events of Default. limitations. The senior secured credit agreementsFacilities also contain a number offinancial covenants that among other things, restrict, subject to certain exceptions, our ability to:

·

incur additional indebtedness;

·

sell assets;

·

pay dividendsrequire the maintenance of a minimum fixed charge coverage ratio and distributions or repurchase our capital stock;

·

make investments or acquisitions;

·

repay or repurchase subordinated indebtedness (including the Senior Subordinated Notes discussed below) and the Senior Notes discussed below;

·

amend material agreements governing our subordinated indebtedness (including the Senior Subordinated Notes discussed below) or our Senior Notes discussed below;

·

change our linesa maximum leverage ratio. As of business.

January 31, 2014, we were in compliance with all such covenants. The senior secured credit agreementsFacilities also contain certain customary affirmative covenants and events of default.

At        As of January 28, 2011,31, 2014, we had no borrowings, $52.7 million of standbytotal outstanding letters of credit and $19.1of $49.9 million, $27.2 million of commercial letterswhich were under the Revolving Facility.

        For the remainder of credit,fiscal 2014, we anticipate potential borrowings under the Revolving Facility up to a maximum of approximately $300 million outstanding under our ABL Facility.at any one time, including any anticipated borrowings to fund repurchases of common stock.


Senior Notes due 2015 and Senior Subordinated Toggle Notes due 2017


Overview. As of January 28, 2011,        On July 12, 2012, we have $864.3issued $500.0 million aggregate principal amount of 10.625%4.125% senior notes due 20152017 (the “Senior Notes”"2017 Senior Notes") outstanding (reflected in our consolidated balance sheet net of a $11.2 million discount), which mature on July 15, 2015, pursuant2017. Interest on the 2017 Senior Notes is payable in cash on January 15 and July 15 of each year, and commenced on January 15, 2013. On July 15, 2012, we used these net proceeds to an indenture dated as of July 6, 2007 (the “senior indenture”), andredeem the remaining $450.7 million outstanding aggregate principal amount of 11.875%/12.625% senior subordinated toggle notes due 20172017.

        On April 11, 2013, as part of our refinancing, we issued $400.0 million aggregate principal amount of 1.875% senior notes due 2018 (the “Senior Subordinated Notes”"2018 Senior Notes") outstanding,, net of discount of $0.5 million, which mature on JulyApril 15, 2018; and issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the "2023 Senior Notes"), net of discount of $2.4 million, which mature on April 15, 2023. Collectively, the 2017 Senior Notes, the 2018 Senior Notes and the 2023 Senior Notes comprise the "Senior Notes", each of which were issued pursuant to an indenture dated as modified by supplemental indentures relating to each series of July 6, 2007 (the “senior subordinated indenture”Senior Notes (as so supplemented, the "Senior Indenture"). TheInterest on the 2018 Senior Notes and the Senior Subordinated Notes are collectively referred to herein as the “Notes.” The senior indenture and the senior subordinated indenture are collectively referred to herein as the “indentures.”


Interest on the Notes is payable on January 15 and July 15 of each year. Interest on the2023 Senior Notes is payable in cash. Cash interestcash on the Senior Subordinated Notes accrues at a rateApril 15 and October 15 of 11.875% per annum. For the Senior Subordinated Notes, we previously had the ability to elect to pay interest by increasing the principal amount of the Senior Subordinated Notes or issuing new Senior Subordinated Notes (“PIK interest”) instead of paying cash interest. Due to theeach year, and commenced on October 15, 2013.



46



expiration of the notification period for such option, all interest on the Notes has been and will be paid in cash.


The Notes are fully and unconditionally guaranteed by each of the existing and future direct or indirect wholly owned domestic subsidiaries that guarantee the obligations under our Credit Facilities.


We intend tomay redeem some or all of the Senior Notes at the first scheduled call date in July 2011 or later. We may redeem some or all of the Notes at any time at redemption prices described or set forth in the indentures. We also may seek, from time to time, to retire some or all of the Notes through cash purchases on the open market, in privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. We repurchased $115.0 million aggregate principal amount of outstanding Senior Notes during 2010. In connection with our initial public offering in 2009, we redeemed $195.7 million principal amount of outstanding Senior Notes and $205.2 million principal amount of outstanding Senior Subordinated Notes. We repurchased $44.1 million and $25.0 million of Senior Subordinated Notes in 2008 and 2007, respectively.


Change of Control. Indenture. Upon the occurrence of a change of control triggering event, which is defined in the indentures,Senior Indenture, each holder of theour Senior Notes has the right to require us to repurchase some or all of such holder’sholder's Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

Covenants.The indentures containSenior Indenture contains covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to (subject to certain exceptions):

·

incur additional debt, issue disqualified stock or issue certain preferred stock;

·

pay dividends and or make certain distributions, investments and other restricted payments;

·

create certain liens or encumbrances;

·

sell assets;

·

enter into transactions with our affiliates;

·

allow payments to us by our restricted subsidiaries;

·

consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and

·

designate our ability and the ability of our subsidiaries as unrestrictedto incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.



Events of Default. The indenturesSenior Indenture also provideprovides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on theour Senior Notes to become or to be declared due and payable.


Sale-Leaseback Transaction



        In January 2014 we consummated a transaction pursuant to which we sold and subsequently leased back the land, buildings and related improvements for 233 of our stores. This transaction resulted in cash proceeds of approximately $281.6 million. These proceeds may be utilized for customary business purposes including repurchases of our common stock.

47Rating Agencies



Adjusted EBITDA

Under the agreements governing the Credit Facilities        In March 2013, Moody's upgraded our senior unsecured debt rating to Baa3 from Ba2 with a stable outlook. In April 2013, Standard & Poor's upgraded our senior unsecured debt rating to BBB- from BB+ and the indentures, certain limitationsreaffirmed our corporate debt rating of BBB-, both with a stable outlook. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and restrictions could arise if(iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we are notwill be able to satisfy and remain in compliance with specified financial ratios. Management believes the most significant of such ratios is the senior secured incurrence test under the Credit Facilities. This test measures the ratio of the senior secured debt to Adjusted EBITDA. This ratio would need to be no greater than 4.25 to 1 to avoid such limitations and restrictions. As of January 28, 2011, this ratio was 1.0 to 1. Senior secured debt is defined asmaintain or improve our total debt secured by liens or similar encumbrances less cash and cash equivalents. EBITDA is defined as income (loss) from continuing operations before cumulative effect of change in accounting principle plus interest and other financing costs, net, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA, further adjusted to give effect to adjustments required in calculating this covenant ratio under our Credit Facilities. EBITDA and Adjusted EBITDA are not presentations made in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), are not measures of financial performance or condition, liquidity or profitability, and should not be considered as an alternative to (i) net income, operating income or any other performance measures determined in accordance with U.S. GAAP or (ii) operating cash flows determined in accordance with U.S. GAAP. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements and replacements of fixed assets.current credit ratings.


Our presentation of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because not all companies use identical calculations, these presentations of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that the presentation of EBITDA and Adjusted EBITDA is appropriate to provide additional information about the calculation of this financial ratio in the Credit Facilities. Adjusted EBITDA is a material component of this ratio. Specifically, non-compliance with the senior secured indebtedness ratio contained in our Credit Facilities could prohibit us, subject to specified exceptions, from making investments, incurring liens, making certain restricted payments and incurring additional secured indebtedness (other than the additional funding provided for under the senior secured credit agreement).




48



The calculation of Adjusted EBITDA under the Credit Facilities is as follows:


(in millions)

Year Ended

January 28,
2011

January 29,
2010

Net income

$

627.9 

$

339.4 

Add (subtract):

 

 

 

 

Interest income

 

(0.2)

 

(0.1)

Interest expense

 

274.1 

 

345.6 

Depreciation and amortization

 

242.3 

 

241.7 

Income taxes

 

357.1 

 

212.7 

EBITDA

 

1,501.2 

 

1,139.3 

 

 

 

 

 

Adjustments:

 

 

 

 

Loss on debt retirements

 

14.6 

 

55.3 

Loss on hedging instruments

 

0.4 

 

0.5 

Impact of markdowns related to inventory clearance
activities, net of purchase accounting adjustments

 

 

(7.3)

Advisory and consulting fees to affiliates

 

0.1 

 

63.5 

Non-cash expense for share-based awards

 

16.0 

 

18.7 

Indirect merger-related costs

 

1.3 

 

10.6 

Other non-cash charges (including LIFO)

 

11.5 

 

6.6 

Total Adjustments

 

43.9 

 

147.9 

 

 

 

 

 

Adjusted EBITDA

$

1,545.1 

$

1,287.2 


Interest Rate Swaps

We use interest rate swaps to minimize the risk of adverse changes in interest rates. These swaps are intended to reduce risk by hedging an underlying economic exposure. Because of high correlation between the derivative financial instrument and the underlying exposure being hedged, fluctuations in the value of the financial instruments are generally offset by reciprocal changes in the value of the underlying economic exposure. Our principal interest rate exposure relates to outstanding amounts under our Credit Facilities. At January 28, 2011,31, 2014, we had interest rate swaps with a total notional amount of approximately $1.05 billion.$875.0 million. For more information see Item 7A, “Quantitative"Quantitative and Qualitative Disclosures about Market Risk”Risk" below.

Fair Value Accounting


We have classified our interest rate swaps, as further discussed in Item 7A. below, in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value a derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. We use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For our



49



derivatives, all of which trade in liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment.verified.


We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’scounterparty's nonperformance risk in the fair value measurements of our derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying each counterparty’scounterparty's credit spread to the applicable exposure. For derivatives with two-way exposure, such as interest rate swaps, the counterparty’scounterparty's credit spread is applied to our exposure to the counterparty, and our own credit spread is applied to the counterparty’scounterparty's exposure to us, and the net


credit valuation adjustment is reflected in our derivative valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. The inputs utilized for our own credit spread are based on implied spreads from our publicly-traded debt. For counterparties with publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third party credit data provider. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Additionally, we actively monitor counterparty credit ratings for any significant changes.


As of January 28, 2011,31, 2014, the net credit valuation adjustments reducedhad an insignificant impact on the settlement values of our derivative liabilities by $0.7 million.liabilities. Various factors impact changes in the credit valuation adjustments over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments. When appropriate, valuations are also adjusted for various factors such as liquidity and bid/offer spreads, which factors we deemed to be immaterial as of January 28, 2011.31, 2014.




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Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments as of January 28, 201131, 2014 (in thousands):

 
 Payments Due by Period 
Contractual obligations
 Total 1 year 1 - 3 years 3 - 5 years 5+ years 

Long-term debt obligations

 $2,814,495 $75,000 $200,305 $1,625,770 $913,420 

Capital lease obligations

  6,841  966  2,232  1,412  2,231 

Interest(a)

  437,655  75,536  146,249  92,050  123,820 

Self-insurance liabilities(b)

  232,483  86,056  90,688  32,614  23,125 

Operating leases(c)

  5,738,832  712,563  1,275,836  1,050,678  2,699,755 
            

Subtotal

 $9,230,306 $950,121 $1,715,310 $2,802,524 $3,762,351 
            


 

Payments Due by Period

Contractual obligations

Total

1 year

1-3 years

3-5 years

5+ years

Long-term debt obligations

$

3,293,025

 

$

-

 

$

-

 

$

2,827,923

 

$

465,102

Capital lease obligations

 

6,363

 

 

1,157

 

 

999

 

 

679

 

 

3,528

Interest (a)

 

1,093,039

 

 

243,435

 

 

486,754

 

 

282,408

 

 

80,442

Self-insurance liabilities (b)

 

213,736

 

 

78,540

 

 

85,881

 

 

30,265

 

 

19,050

Operating leases (c)

 

3,003,342

 

 

481,921

 

 

839,585

 

 

614,080

 

 

1,067,756

Subtotal

$

7,609,505

 

$

805,053

 

$

1,413,219

 

$

3,755,355

 

$

1,635,878


 

Commitments Expiring by Period

Commercial commitments (d)

Total

1 year

1-3 years

3-5 years

5+ years

Letters of credit

$

19,059

 

$

19,059

 

$

-

 

$

-

 

$

-

Purchase obligations (e)

 

853,862

 

 

850,871

 

 

2,991

 

 

-

 

 

-

Subtotal

$

872,921

 

$

869,930

 

$

2,991

 

$

-

 

$

-

Total contractual obligations and commercial commitments (f)

$

8,482,426

 

$

1,674,983

 

$

1,416,210

 

$

3,755,355

 

$

1,635,878


 
 Commitments Expiring by Period 
Commercial commitments(d)
 Total 1 year 1 - 3 years 3 - 5 years 5+ years 

Letters of credit

 $22,671 $22,671 $ $ $ 

Purchase obligations(e)

  783,407  725,984  40,749  16,674   
            

Subtotal

 $806,078 $748,655 $40,749 $16,674 $ 
            

Total contractual obligations and commercial commitments(f)

 $10,036,384 $1,698,776 $1,756,059 $2,819,198 $3,762,351 
            
            

(a)

Represents obligations for interest payments on long-term debt and capital lease obligations, and includes projected interest on variable rate long-term debt, using 20102013 year end rates.

Variable rate long-term debt includes the balance of the senior revolving credit facility (which had a balance of zero as of January 31, 2014), the balance of our tax increment financing of $14.5 million, and the unhedged portion of the senior term loan facility of $125 million.

(b)

We retain a significant portion of the risk for our workers’workers' compensation, employee health insurance, general liability, property loss and automobile insurance. As these obligations do not have scheduled maturities, these amounts represent undiscounted estimates based upon actuarial assumptions. Reserves for workers’workers' compensation and general liability which existed as of the date

(c)

Operating lease obligations are inclusive of amounts included in deferred rent and closed store obligations in our consolidated balance sheets.



(d)

Commercial commitments include information technology license and support agreements, supplies, fixtures, letters of credit for import merchandise, and other inventory purchase obligations.



(e)

Purchase obligations include legally binding agreements for software licenses and support, supplies, fixtures, and merchandise purchases (excluding such purchases subject to letters of credit).



(f)

We have potential payment obligations associated with uncertain tax positions that are not reflected in these totals. We anticipate that approximately $0.2$3.6 million of such amounts will be paid in the coming year. We are currently unable to make reasonably reliable estimates of the period of cash settlement with the taxing authorities for our remaining $27.3$18.8 million of reserves for uncertain tax positions.

Share Repurchase Program


        On December 4, 2013, the Company's Board of Directors authorized a $1.0 billion increase to our existing common stock repurchase program. The total remaining authorization is approximately $824 million at March 13, 2014. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions, and the authorization has no expiration date. For more detail about our share repurchase program, see Note 13 to the consolidated financial statements.

Other Considerations


We have no current plansnot declared or paid recurring dividends subsequent to pay any cash dividends on our common stock and instead may retain earnings, if any, for future operation and expansion and debt repayment.a merger transaction in 2007. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors, subject to certain limitations found in covenants in our Credit Facilities and in the indentures governing the Notes as discussed in more detail above, and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.



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Our inventory balance represented approximately 45%48% of our total assets exclusive of goodwill and other intangible assets as of January 28, 2011.31, 2014. Our proficiency in managingability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. As a result, efficientInventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory management has been and continues to be an area of focus for us.

As described in Note 98 to the Consolidated Financial Statements,consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity. As discussed in Note 6 to the Consolidated Financial Statements, weWe also have certain income tax-related contingencies.contingencies as disclosed in Note 4 to the consolidated financial statements. Future negative developments could have a material adverse effect on our liquidity.


In June 2010, Standard & Poor’s upgraded our long-term debt rating to BB from BB- with a stable outlook and in November 2010, Moody’s upgraded our long-term debt rating to Ba3 from B1 with a positive outlook. These current ratings are considered non-investment grade. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to obtain financings to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs.


Cash flows


Cash flows from operating activities.

A significant component    Significant components of ourthe increase in cash flows from operating activities in 20102013 compared to 2009 was the increase in2012 include increased net income due primarily to greaterincreased sales higher gross margins and lower SG&A expenses, as a percentage of sales, in 2013 as described in more detail above under “Results"Results of Operations.” Partially offsetting this" Significant components of the increase in cash flows from operating activities were related to changes in working capital, including Merchandise inventories, Accounts payable and Accrued expenses and other. The impact of the changes in inventory balances, which increased in both years but by 16%a lesser amount in 20102013 compared to 2012, is explained in more detail below. Items positively affecting Accrued expenses and other include the timing of accruals and payments for legal settlements and non-income taxes (primarily sales taxes), and the adjustment of accruals during 2012 resulting from the favorable resolution of income tax examinations which did not recur in 2013. Partially offsetting the positive impact of the items discussed above were reduced incentive compensation accruals, increased cash payments for income taxes, and changes in Accounts payable, which are affected by the timing and mix of merchandise purchases, the most significant category of which were domestic purchases.

        On an increase of 7% in 2009. Althoughongoing basis, we continue to closely monitor and manage our inventory balances, and they oftenmay fluctuate from period to period and from year to year based on new store openings, the timing of purchases, merchandising initiatives and other factors. Merchandise inventories increased by 7% during 2013, compared to a 19% increase in 2012. The percentage increase in inventories in 2013 was less than the prior year due to our emphasis on more effective inventory management and our related efforts to control shrink. Inventory levels in the consumables category increased by $133.9$168.0 million, or 16%12%, in 20102013 compared to an increase of $111.4$245.7 million, or 15%22%, in 2009.2012. The seasonal category increaseddecreased by $55.2$4.7 million, or 1%, in 2013 compared to an increase of $70.2 million, or 18%, in 20102012. The home products category increased $22.0 million, or 9%, in 2013 compared to an increase of $25.3$56.2 million, or 29%, in 2012. The apparel category decreased by $29.5 million, or 9%, in 2009. The home products category increased $25.22013 compared to an increase of $16.0 million, or 17%5%, in 2010 compared to a decline2012.

        Significant components of $9.1 million, or 6%, in 2009. The apparel category increased by $32.3 million, or 15%, in 2010 compared to a decline of $22.9 million, or 10%, in 2009. In addition, increased net income resulted in an increase in income taxes paid in 2010 compared to 2009. Changes in Accrued expenses and other were affected in part by reductions of income tax reserves and reduced accruals for incentive compensation, partially offset by the timing of payments related to a litigation settlement in prior years (as discussed in more detail below) and by lower accruals for interest on long-term debt.

Our increase in cash flows from operating activities in 20092012 compared to 2008 was also driven by an increase in2011 include increased net income due primarily to greaterincreased sales higher gross margins and lower SG&A expenses, as a percentage of sales. In addition, we experienced increased inventory turnssales, in 20092012 as compared to 2008.described in more detail above under "Results of Operations." A portion of the changes in Prepaid and other current assets as well as Accrued expenses and other reflect the activity associated with a legal settlement accrued in 2011 for which payments were made in 2012. Changes in inventory balances increasedAccrued expenses and other were also affected by 7%higher sales tax accruals at the end of 2011 and the adjustment of accruals during 2012 due to the favorable resolution of income tax examinations. The reclassification of the tax benefit of stock options to cash flows from financing activities was higher in 2009 compared2012 due to an increase in stock options exercised. Changes in Accounts payable were due to increased merchandise purchases as discussed in more detail below, the most significant category of 10%which were domestic purchases.

        In addition, our inventories increased by 19% during 2012, compared to a 14% increase in 2008.2011. The increase in inventories in 2012 was due to several factors including new items introduced in 2012, the receipt during 2012 of certain items related to our 2013 merchandising initiatives, and the emphasis on improved presentation levels of select merchandise categories. Inventory levels in the consumables category increased by $111.4



52



$245.7 million, or 15%22%, in 20092012 compared to an increase of $77.8$132.3 million, or 12%13%, in 2008.2011. The seasonal category increased by $25.3$70.2 million, or 9%18%, in 20092012 compared to an increase of $20.9$27.5 million, or 8%7%, in 2008.2011. The home products category declined $9.1increased $56.2 million, or 6%29%, in 2009 compared to a decline of $2.6 million, or 2%, in 2008. The apparel category declined by $22.9 million, or 10%, in 20092012 compared to an increase of $30.2$24.6 million, or 15%14%, in 2008. In addition,2011. The apparel category increased net incomeby $16.0 million, or 5%, in 20092012 compared to 2008 was a principal factoran increase of $59.4 million, or 24%, in the increase in income taxes paid in 2009 compared to 2008. Changes in Accrued expenses and other were affected in part by the timing of the payments related to the Litigation settlement and related costs discussed above under “Results of Operations,” as the associated insurance proceeds of $10.0 million were received at the end of 2008 while the payment of the $40.0 million settlement occurred at the beginning of 2009.2011.

Cash flows from investing activitiesactivities..    Cash flows used in investing activities totaling $418.9 million in 2010 were primarily relatedexpenditures for purchases of property and equipment decreased by 5.8% from 2012 to capital expenditures.2013. Significant components of our property and equipment purchases in 2010


2013 included the following approximate amounts: $156$187 million for improvements, upgrades, remodels and relocations of existing stores; $100$124 million for new leased stores; $91$112 million for distribution centers, which included a significant portion of the construction cost of a distribution center in Pennsylvania; $76 million for stores purchased or built by us; $45 million for distribution and transportation-related capital expenditures; and $22$28 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During 20102013, we opened 600650 new stores and remodeled or relocated 504582 stores. Our sale-leaseback transaction which we consummated in January 2014 for 233 of our stores resulted in proceeds from the sale of these properties of approximately $281.6 million. See "—Liquidity and Capital Resources"

Cash flows used in investing activities totaling $248.0 million in 2009 were also primarily related to capital expenditures.        Significant components of our property and equipment purchases in 20092012 included the following approximate amounts: $114$155 million for new leased stores; $151 million for improvements, upgrades, remodels and relocations of existing stores; $69$132 million for new leased stores; $28stores purchased or built by us; $83 million for distribution and transportation-related capital expenditures; $24centers; $27 million for various administrativesystems-related capital costs;projects; and $11$17 million for information systems upgrades and technology-relatedtransportation-related projects. During 20092012, we opened 500625 new stores and remodeled or relocated 450592 stores.

Cash flows used in investing activities totaling $152.6 million in 2008 were primarily related to capital expenditures, offset by sales of investments.        Significant components of our property and equipment purchases in 20082011 included the following approximate amounts: $149$153 million for improvements, upgrades, remodels and relocations of existing stores; $22$120 million for distribution centers, including costs associated with the construction of a distribution center in Alabama; $114 million for new leased stores; $17$80 million for distribution and transportation-related capital expenditures; and $13stores purchased or built by us; $28 million for information systems upgradessystems-related capital projects; and technology-related$15 million for transportation-related projects. During 20082011, we opened 207625 new stores and remodeled or relocated 404575 stores.

Purchases and sales of short-term investments equal to net sales of $51.6 million in 2008 primarily reflected investment activities in our captive insurance subsidiary.

Capital expenditures during 20112014 are projected to be in the range of $550-$450-$600500 million. We anticipate funding 20112014 capital requirements with existing cash balances, cash flows from operations, and if necessary, as of January 31, 2014, we also have significant availability under our ABLRevolving Facility. Significant componentsWe plan to continue to invest in store growth and development of the 2011 capital plan include growth initiatives, such as approximately 625700 new stores and approximately 500 stores to be remodeled or relocated. Capital expenditures in 2014 are anticipated to support our store growth as well as our remodel and relocation initiatives, including the purchase of existing storescapital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs related to new leased stores including leasehold improvements, fixturessupport and equipment; continued investment in our existing store base with plans for remodeling and relocating approximately 550 stores; the



53



construction of a new distribution center in Alabama; as well as additional investments inenhance our supply chain and information technology. We plan to undertake these expenditures as part of our efforts to improve our infrastructuretechnology initiatives; and increase our cash generated from operating activities.also routine and ongoing capital requirements.

Cash flows from financing activities.    The 2013 cash flows from financing activities. During 2010, reflect our refinancing in April 2013, including the issuance of long-term obligations which includes the $1.0 billion unsecured Term Facility and the issuance of Senior Notes totaling approximately $1.3 billion. Proceeds from these transactions were used to extinguish our previous secured term loan and revolving credit facilities which had balances of $1.96 billion and $155.6 million at termination. Net repayments under the Revolving Facility were $130.9 million during 2013. We paid debt issuance costs and hedging fees totaling $29.2 million in 2013 related to the refinancing. Also in 2013, we repurchased $115.011.0 million outstanding shares of our common stock at a total cost of $620.1 million.

        In 2012 we repurchased 14.4 million outstanding shares of our common stock at a total cost of $671.4 million. In July 2012, we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2017. Also in July 2012, we redeemed the remaining aggregate principal amount of senior subordinated notes due 2017 at a redemption price of 105.938% of the principal amount thereof, resulting in a cash outflow of $477.5 million. Net borrowings under our senior secured revolving credit facility were $101.8 million during 2012.

        In July 2011, we redeemed $839.3 million aggregate principal amount of our outstanding Senior Notessenior notes due 2015 at total cost of $883.9 million including associated premiums, and in April 2011, we repurchased in the open market $25.0 million aggregate principal amount of senior notes due 2015 at a


total cost of $26.8 million including associated premiums. A portion of the July 2011 redemption of senior notes due 2015 was financed by borrowings under our senior secured revolving credit facility. Net borrowings under such facility were $184.7 million during 2011. In December 2011, we repurchased 4.9 million outstanding shares of our common stock at a total cost of $127.5 million including associated premiums. We had no borrowings or repayments under the ABL Facility in 2010.$185.0 million.

In 2009, we had cash inflows from the issuance of equity of $443.8 million primarily due to our initial public offering of 22.7 million shares of common stock. We used the proceeds from the offering to redeem outstanding Notes with a total principal amount of $400.9 million at a premium, and used cash generated from operations to repay $336.5 million outstanding principal amount on our Term Loan Facility. We had no borrowings or repayments under the ABL Facility in 2009. In addition, we paid a dividend and related amounts totaling $239.7 million using cash generated from operations.

In February 2008, we repaid outstanding borrowings of $102.5 million under our ABL Facility, and have had no borrowings outstanding under the ABL facility since that time. Also during 2008, we repurchased $44.1 million principal amount of our outstanding Senior Subordinated Notes.


Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In addition to the estimates presented below, there are other items within our financial statements that require estimation, but are not deemed critical as defined below. We believe these estimates are reasonable and appropriate. However, if actual experience differs from the assumptions and other considerations used, the resulting changes could have a material effect on the financial statements taken as a whole.


Management believes the following policies and estimates are critical because they involve significant judgments, assumptions, and estimates. Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates. See Note 1 to the consolidated financial statements for a detailed discussion of our principal accounting policies.


Merchandise InventoriesInventories..    Merchandise inventories are stated at the lower of cost or market ("LCM") with cost determined using the retail last-in, first-out (“LIFO”last in, first out ("LIFO") method. Under ourWe use the retail inventory method (“RIM”("RIM"), the calculation of to calculate gross profit and the resulting valuation of inventories at cost, which are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales at a department level. The RIM is an averaging method that has been widely used in the retail industry due to its practicality. Also, it is recognized that the use of the RIM will result in valuing inventories at the lower of cost or market (“LCM”)LCM if markdowns are currently taken as a reduction of the retail value of inventories.




54



Inherent in the RIMretail inventory method calculation are certain significant management judgments and estimates including, among others, initial markups, markdowns, and shrinkage, which significantly impact the gross profit calculation as well as the ending inventory valuation at cost. These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted cost figures. Factors that can lead to distortion in the calculation of the inventory balance include:

·

Factors that reduce potential distortion include the use of historical experience in estimating the shrink provision (see discussion below) and an annual LIFO analysis whereby all SKUs are considered for inclusion in the index formulation. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’smanagement's estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation/deflation for the year and are thus subject to adjustment in the final year-end LIFO inventory valuation. We also perform interim inventory analysis for determining obsolete inventory. Our policy is to write down inventory to an LCM value based on various management assumptions including estimated markdowns and sales required to liquidate such


inventory in future periods. Inventory is reviewed on a quarterly basis and adjusted as appropriate to reflect write-downs determined to be necessary.as appropriate.


Factors such as slower inventory turnover due to changes in competitors’competitors' practices, consumer preferences, consumer spending and unseasonable weather patterns, among other factors, could cause excess inventory requiring greater than estimated markdowns to entice consumer purchases, resulting in an unfavorable impact on our consolidated financial statements. Sales shortfalls due to the above factors could cause reduced purchases from vendors and associated vendor allowances that would also result in an unfavorable impact on our consolidated financial statements.


We calculate our shrink provision based on actual physical inventory results during the fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory through the end of the fiscal reporting period. This accrual is calculated as a percentage of sales at each retail store, at a department level, and is determined by dividing the book-to-physical inventory adjustments recorded during the previous twelve months by the related sales for the same period for each store. To the extent that subsequent physical inventories yield different results than this estimated accrual, our effective shrink rate for a given reporting period will



55



include the impact of adjusting the estimated results to the actual results. Although we perform physical inventories in virtually all of our stores on an annual basis, the same stores do not necessarily get counted in the same reporting periods from year to year, which could impact comparability in a given reporting period.

We believe our estimates and assumptions related to merchandise inventories have generally been accurate in recent years and we do not currently anticipate material changes in these estimates and assumptions.


Goodwill and Other Intangible Assets.We amortize intangible assets over their estimated useful lives unless such lives are deemed indefinite. If    The qualitative and quantitative assessments related to the valuation and any potential impairment indicators are noted, amortizableof goodwill and other intangible assets are tested for impairment based on projected undiscounted cash flows, and, if impaired, written downeach subject to fair value based on either discounted projected cash flows judgments and/or appraised values. Future cash flow projections are based on management’s projections.assumptions. Significant judgments required in thisthe analysis of qualitative factors may include determining the appropriate factors to consider and the relative importance of those factors along with other assumptions. Significant judgments required in the quantitative testing process may include projecting future cash flows, determining appropriate discount rates, correctly applying valuation techniques, correctly computing the implied fair value of goodwill if necessary, and other assumptions. ProjectionsFuture cash flow projections are based on management’smanagement's projections and represent best estimates giventaking into account recent financial performance, market trends, strategic plans and other available information, which in recent years have been materially accurate. Although not currently anticipated, changes in these estimates and assumptions could materially affect the determination of fair value or impairment. Future indicators of impairment could result in an asset impairment charge. If these judgments or assumptions are incorrect or flawed, the analysis could be negatively impacted.


Under accounting standards for        Our most recent testing of our goodwill and otherindefinite lived trade name intangible assets we are required to test such assets with indefinite lives for impairment annually, or more frequently if impairment indicators occur. The goodwill impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of our reporting unit based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the implied fair value of goodwill would require us to allocate the estimated fair value of our reporting unit to its assets and liabilities. Any unallocated fair value represents the implied fair value of goodwill, which would be compared to its corresponding carrying value.

The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

We performed our annual impairment tests of goodwill and indefinite-lived intangible assetswas completed during the third quarter of 2010 based on conditions as2013. No indicators of the endimpairment were evident and no assessment of the second quarter of 2010. The tests indicated that no impairment chargeor adjustment to these assets was necessary.required. We are not currently projecting a decline in cash flows that could be expected to have an adverse effect such as a violation of debt covenants or future impairment charges.




56



Property and EquipmentEquipment..    Property and equipment are recorded at cost. We group our assets into relatively homogeneous classes and generally provide for depreciation on a straight-line basis over the estimated average useful life of each asset class, except for leasehold improvements, which are amortized over the lesser of the applicable lease term or the estimated useful life of the asset. Certain store and warehouse fixtures, when fully depreciated, are removed from the cost and related accumulated depreciation and amortization accounts. The valuation and classification of these assets and the assignment of depreciable lives involves significant judgments and the use of estimates, which we believe have been materially accurate in recent years.



Impairment of Long-lived Assets.We review the carrying value of all long-lived assets for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with accounting standards for impairment or disposal    Impairment of long-lived assets we review for impairment stores open for approximately two years or more for which recent cash flows from operations are negative. Impairment results when the carrying value of the assets exceeds the estimated undiscounted future cash flows overgenerated by the life of the lease.assets. Our estimate of undiscounted future store cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to variability and are difficult to predict. If our estimates of future cash flows are not materially accurate, our impairment analysis could be impacted accordingly. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’sasset's estimated fair value. The fair value is estimated based primarily upon projected future cash flows (discounted at our credit adjusted risk-free rate) or other reasonable estimates of fair market value in accordance with U.S. GAAP. During 2010, 2009 and 2008 we recorded pre-tax impairment chargesAlthough not currently anticipated, changes in these estimates, assumptions or projections could materially affect the determination of $1.7 million, $5.0 million and $4.0 million, respectively, for certain store assets that we deemed to be impaired.fair value or impairment.


Insurance LiabilitiesLiabilities..    We retain a significant portion of the risk for our workers’workers' compensation, employee health, property loss, automobile and general liability. These represent significant costs primarily due to theour large employee base and number of stores. Provisions are made tofor these liabilities on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed using actuarial methodologies based on historical claim trends, which have been and are anticipated to continue to be materially accurate. If future claim trends deviate from recent historical patterns, or other unanticipated events affect the number and significance of future claims, we may be required to record additional expenses or expense reductions, which could be material to our future financial results.


Contingent Liabilities – Liabilities—Income Taxes.    Income tax reserves are determined using the methodology established by accounting standards relating to uncertainty in income taxes. These standards require companies to assess each income tax position taken using a two steptwo-step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be madeestimated based on provisions of the tax law which may be subject to



57



change or varying interpretation. If our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results.


Contingent Liabilities - Liabilities—Legal MattersMatters..We are subject to legal, regulatory and other proceedings and claims. We establish liabilities as appropriate for these claims and proceedings based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in our financial statements and SEC filings, management’smanagement's view of our exposure. We review outstanding claims and proceedings with external counsel to assess probability and estimates of loss.loss, which includes an analysis of whether such loss estimates are probable, reasonably possible, or remote. We re-evaluate these assessments on a quarterly basis or as new and significant information becomes available to determine whether a liability should be established or if any existing liability should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded liability. In addition, because it is not permissible under U.S. GAAP to establish a litigation liability until the loss is both probable and estimable, in some cases there may be insufficient time to establish a liability prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).


Lease Accounting and Excess FacilitiesFacilities..    Many of our stores are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of 10-15up to 15 years with multiple renewal options. We also have stores subject to shorter-term leases (usually with initial or current terms of 3 to 5 years), and many of these leases have multiple renewal options. As of January 28, 2011, approximately 35%Certain of our stores hadhave provisions for contingent rentals based upon a percentage of defined sales volume. We recognize contingent rental expense when the achievement of specified


sales targets is considered probable. We recognize rent expense over the term of the lease. We record minimum rental expense on a straight-line basis over the base, non-cancelable lease term commencing on the date that we take physical possession of the property from the landlord, which normally includes a period prior to store opening to make necessary leasehold improvements and install store fixtures. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. Tenant allowances, to the extent received, are recorded as deferred incentive rent and amortized as a reduction to rent expense over the term of the lease. We reflect as a liability any difference between the calculated expense and the amounts actually paid. Improvements of leased properties are amortized over the shorter of the life of the applicable lease term or the estimated useful life of the asset.

For store closures (excluding those associated with a business combination) where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the date the store is closed in accordance with accounting standards for costs associated with exit or disposal activities. Based on an overall analysis of store performance and expected trends, management periodically evaluates the need to close underperforming stores. Liabilities are established at the point of closure for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. Historically, these estimates have not been materially inaccurate; however, if actual timing and potential termination costs or realization of sublease



58



income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.


Share-Based PaymentsPayments..    Our share-based stock option awards are valued on an individual grant basis using the Black-Scholes-Merton closed form option pricing model. We believe that this model fairly estimates the value of our share-based awards. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the valuation of stock options, which affects compensation expense related to these options. These assumptions include an estimate of the fair value of our common stock, the term that the options are expected to be outstanding, an estimate of the historical volatility of our stock price, (which is based on a peer group of publicly traded companies), applicable interest rates and the dividend yield of our stock. Our volatility estimates are based on a peer group due to the fact that our stock has been publicly traded for a relatively short period of time in relation to the expected term of outstanding options. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of share-based awards. Historically, these estimates have not been materially inaccurate; however, if our estimates differ materially from actual experience, we may be required to record additional expense or reductions of expense, which could be material to our future financial results.


Fair Value Measurements. We measure    Accounting standards for the measurement of fair value of assets and liabilities in accordance with applicable accounting standards, which require that fair values be determined based on the assumptions that market participants would use in pricing the asset or liability. These standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’sentity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Therefore, Level 3 inputs are typically based on an entity’sentity's own assumptions, as there is little, if any, related market activity, and thus require the use of significant judgment and estimates. Currently, we have no assets or liabilities that are valued based solely on Level 3 inputs.


Our fair value measurements are primarily associated with our derivative financial instruments, intangible assets, property and equipment,debt instruments, and to a lesser degree our investments. TheWe use various valuation models in determining the values of our derivative financial instruments are determined using widely accepted valuation techniques, includingthese assets and liabilities. The application of these models involves assumptions such as discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. Thecurves that are judgmental and highly sensitive in the fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.value computations. In recent years, these methodologies have produced materially accurate valuations.


Derivative Financial Instruments.We account for our derivative instruments in accordance with accounting standards for derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities, as amended and interpreted,



59



which establish accounting and reporting requirements for such instruments and activities. These standards require that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. See “Fair Value Measurements” above for a discussion of derivative valuations. Special accounting for qualifying hedges allows a derivative’s gains and losses to either offset related results on the hedged item in the statement of operations or be accumulated in other comprehensive income, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. We use derivative instruments to manage our exposure to changing interest rates, primarily with interest rate swaps.


In addition to making valuation estimates,estimating the fair value of derivatives as discussed above, we also bear the risk that certain derivative instruments that have been designated as hedges and currently meet the strict hedge accounting requirements may not qualify in the future as “highly"highly effective," as defined, as well as the risk that hedged transactions in cash flow hedging relationships may no longer be considered probable to occur. If hedge accounting were disallowed it could cause greater volatility in our results of operations. Further, new regulations, accounting standards, and related interpretations and guidance relatedpertaining to these instruments may be issued in the future, and we cannot predict the possible impact that such guidancerequirements may have on our use of derivative instruments going forward.



instruments.


ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Financial Risk Management


We are exposed to market risk primarily from adverse changes in interest rates, and to a lesser degree commodity prices. To minimize this risk, we may periodically use financial instruments, including derivatives. All derivative financial instrument transactions must be authorized and executed pursuant to approval by the Board of Directors. As a matter of policy, we do not buy or sell financial instruments for speculative or trading purposes, and allany such derivative financial instrument transactions must be authorized and executed pursuant to approval by the Board of Directors. All financial instrument positions taken by usinstruments are intended to be used to reduce risk by hedging an underlying economic exposure. Because of high correlation between the derivative financial instrument and the underlying exposure being hedged, fluctuations in the value of the financial instruments are generally offset by reciprocal changes in the value of the underlying economic exposure.

Interest Rate Risk


We manage our interest rate risk through the strategic use of fixed and variable interest rate debt and, from time to time, derivative financial instruments. Our principal interest rate exposure relates to outstanding amounts under our Creditunsecured debt Facilities. As of January 28, 2011, our Credit Facilities provide for31, 2014, we had variable rate borrowings of up to $2.995 billion including availability of up to $1.031$1.0 billion under our ABLTerm Facility subject to the borrowing base.and no borrowings outstanding under our Revolving Facility. In order to mitigate a portion of the variable rate interest exposure under the Credit Facilities, we have entered into various interest rate swaps in recent years. For a detailed discussion of our Facilities, see Note 5 to the consolidated financial statements.

        Currently, we are counterparty to certain interest rate swaps which became effective on July 31, 2007. Pursuantwith a total notional amount of $875.0 million entered into in May 2012 in order to mitigate a portion of the variable rate interest exposure under the Facilities. These swaps are scheduled to mature in May 2015. Under the terms of these swaps,agreements we swapped threeone month LIBOR rates for fixed interest rates, resulting in the payment of an all-in fixed rate of 7.68%1.86% on an originala notional amount of $2.0 billion originally scheduled$875.0 million. Such all-in rate was reduced in 2013 due to amortizea reduction in the underlying applicable margin on our Term Facility as a quarterly basis until maturity at July 31, 2012.

In October 2008, a counterparty to one of our 2007 swap agreements defaulted. We terminated this agreement and in November 2008 we subsequently cash settled the swap. Representativesresult of the counterparty have challenged our calculationrefinancing of the cash settlement. See “Legal Proceedings” underoutstanding indebtedness as discussed in Note 9 of the footnotes5 to the consolidated financial statements. As of January 28, 2011, the notional amount under the remaining 2007 swaps is $646.7 million.

        

Effective December 31, 2008, we entered into a $475.0 million interest rate swap in order to mitigate an additional portion of the variable rate interest exposure under the Credit Facilities. This swap is scheduled to mature on January 31, 2013. Under the terms of this agreement we swapped one month LIBOR rates for fixed interest rates, resulting in the payment of a fixed rate of 5.06% on a notional amount of $475.0 million through April 2010, $400.0 million from May 2010 through October 2011, and $300.0 million to maturity.

A change in interest rates on variable rate debt impacts our pre-tax earnings and cash flows; whereas a change in interest rates on fixed rate debt impacts the economic fair value of debt but not our pre-tax earnings and cash flows. Our interest rate swaps qualify for hedge accounting as cash flow hedges. Therefore, changes in market fluctuations related to the



61



effective portion of these cash flow hedges do not impact our pre-tax earnings until the accrued interest is recognized on the derivatives and the associated hedged debt. Based on our variable rate borrowing levels and interest rate swaps outstanding during 2010as of January 31, 2014 and 2009,February 1, 2013, respectively, the annualized effect of a one percentage point changeincrease in variable interest rates would have resulted in a pretax reduction of our earnings and cash flows of approximately $9.3$1.4 million in 20102013 and $5.6$13.9 million in 2009.2012.


        To mitigate our interest rate risk on our planned issuance of 10-year senior notes, we entered into six treasury locks that were designated as cash flow hedges during the period from March 20, 2013 to March 27, 2013. Such instruments had a combined notional amount of $700.0 million and a weighted-average 10-year U.S. Treasury rate of 1.94%. The issuance of the 2023 Senior Notes occurred on April 11, 2013, and the related settlement of the treasury locks resulted in a loss of $13.2 million that was deferred to Other comprehensive income. For more information, see Note 5 to the consolidated financial statements.

The        Market conditions and periodic uncertainties in the global credit markets have increasedmay increase the credit risk of other counterparties to our swap agreements. In the event such counterparties fail to perform under our swap agreements and we are unable to enter into new swap agreements on terms favorable to us, our ability to effectively manage our interest rate risk may be materially impaired. We attempt to


manage counterparty credit risk by periodically evaluating the financial position and creditworthiness of such counterparties, monitoring the amount for which we are at risk with each counterparty, and where possible, dispersing the risk among multiple counterparties. There can be no assurance that we will manage or mitigate our counterparty credit risk effectively.




ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of


Dollar General Corporation


We have audited the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries as of January 28, 201131, 2014 and January 29, 2010,February 1, 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended January 28, 2011, January 29, 2010 and January 30, 2009.31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dollar General Corporation and subsidiaries at January 28, 201131, 2014 and January 29, 2010,February 1, 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 28, 2011, January 29, 2010 and January 30, 2009,31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dollar General Corporation'sCorporation and subsidiaries' internal control over financial reporting as of January 28, 2011,31, 2014, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 22, 201120, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Nashville, Tennessee
March 20, 2014




/s/ Ernst & Young LLP


Nashville, Tennessee

March 22, 2011



63



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(In thousands, except per share amounts)

 

January 28,
2011

 

January 29,
2010

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

497,446 

 

$

222,076 

Merchandise inventories

 

1,765,433 

 

 

1,519,578 

Income taxes receivable

 

 

 

7,543 

Prepaid expenses and other current assets

 

104,946 

 

 

96,252 

Total current assets

 

2,367,825 

 

 

1,845,449 

Net property and equipment

 

1,524,575 

 

 

1,328,386 

Goodwill

 

4,338,589 

 

 

4,338,589 

Intangible assets, net

 

1,256,922 

 

 

1,284,283 

Other assets, net

 

58,311 

 

 

66,812 

Total assets

$

9,546,222 

 

$

8,863,519 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

$

1,157 

 

$

3,671 

Accounts payable

 

953,641 

 

 

830,953 

Accrued expenses and other

 

347,741 

 

 

342,290 

Income taxes payable

 

25,980 

 

 

4,525 

Deferred income taxes payable

 

36,854 

 

 

25,061 

Total current liabilities

 

1,365,373 

 

 

1,206,500 

Long-term obligations

 

3,287,070 

 

 

3,399,715 

Deferred income taxes payable

 

598,565 

 

 

546,172 

Other liabilities

 

231,582 

 

 

302,348 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

9,153 

 

 

18,486 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, 1,000 shares authorized

 

 

 

Common stock; $0.875 par value, 1,000,000 shares authorized, 341,507 and 340,586 shares issued and outstanding at

January 28, 2011 and January 29, 2010, respectively

 

298,819 

 

 

298,013 

Additional paid-in capital

 

2,945,024 

 

 

2,923,377 

Retained earnings

 

830,932 

 

 

203,075 

Accumulated other comprehensive loss

 

(20,296)

 

 

(34,167)

Total shareholders’ equity

 

4,054,479 

 

 

3,390,298 

Total liabilities and shareholders’ equity

$

9,546,222 

 

$

8,863,519 


 
 January 31,
2014
 February 1,
2013
 

ASSETS

       

Current assets:

       

Cash and cash equivalents

 $505,566 $140,809 

Merchandise inventories

  2,552,993  2,397,175 

Prepaid expenses and other current assets

  147,048  139,129 
      

Total current assets

  3,205,607  2,677,113 
      

Net property and equipment

  2,080,305  2,088,665 
      

Goodwill

  4,338,589  4,338,589 
      

Other intangible assets, net

  1,207,645  1,219,543 
      

Other assets, net

  35,378  43,772 
      

Total assets

 $10,867,524 $10,367,682 
      
      

LIABILITIES AND SHAREHOLDERS' EQUITY

       

Current liabilities:

       

Current portion of long-term obligations

 $75,966 $892 

Accounts payable

  1,286,484  1,261,607 

Accrued expenses and other

  368,578  357,438 

Income taxes payable

  59,148  95,387 

Deferred income taxes

  21,795  23,223 
      

Total current liabilities

  1,811,971  1,738,547 
      

Long-term obligations

  2,742,788  2,771,336 
      

Deferred income taxes

  614,026  647,070 
      

Other liabilities

  296,546  225,399 
      

Commitments and contingencies

       

Shareholders' equity:

  
 
  
 
 

Preferred stock, 1,000 shares authorized

     

Common stock; $0.875 par value, 1,000,000 shares authorized, 317,058 and 327,069 shares issued and outstanding at January 31, 2014 and February 1, 2013, respectively

  277,424  286,185 

Additional paid-in capital

  3,009,226  2,991,351 

Retained earnings

  2,125,453  1,710,732 

Accumulated other comprehensive loss

  (9,910) (2,938)
      

Total shareholders' equity

  5,402,193  4,985,330 
      

Total liabilities and shareholders' equity

 $10,867,524 $10,367,682 
      
      

The accompanying notes are an integral part of the consolidated financial statements.




64



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME



(In thousands, except per share amounts)

 

For the Year Ended

January 28,
2011

 

January 29,
2010

 

January 30,
2009

 

 

 

 

 

 

 

 

 

Net sales

$

13,035,000 

 

$

11,796,380 

 

$

10,457,668 

Cost of goods sold

 

8,858,444 

 

 

8,106,509 

 

 

7,396,571 

Gross profit

 

4,176,556 

 

 

3,689,871 

 

 

3,061,097 

Selling, general and administrative expenses

 

2,902,491 

 

 

2,736,613 

 

 

2,448,611 

Litigation settlement and related costs, net

 

 

 

 

 

32,000 

Operating profit

 

1,274,065 

 

 

953,258 

 

 

580,486 

Interest income

 

(220)

 

 

(144)

 

 

(3,061)

Interest expense

 

274,212 

 

 

345,744 

 

 

391,932 

Other (income) expense

 

15,101 

 

 

55,542 

 

 

(2,788)

Income before income taxes

 

984,972 

 

 

552,116 

 

 

194,403 

Income tax expense

 

357,115 

 

 

212,674 

 

 

86,221 

Net income

$

627,857 

 

$

339,442 

 

$

108,182 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

$

1.84 

 

$

1.05 

 

$

0.34 

Diluted

$

1.82 

 

$

1.04 

 

$

0.34 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

Basic

 

341,047 

 

 

322,778 

 

 

317,024 

Diluted

 

344,800 

 

 

324,836 

 

 

317,503 


 
 For the Year Ended 
 
 January 31,
2014
 February 1,
2013
 February 3,
2012
 

Net sales

 $17,504,167 $16,022,128 $14,807,188 

Cost of goods sold

  12,068,425  10,936,727  10,109,278 
        

Gross profit

  5,435,742  5,085,401  4,697,910 

Selling, general and administrative expenses

  3,699,557  3,430,125  3,207,106 
        

Operating profit

  1,736,185  1,655,276  1,490,804 

Interest expense

  88,984  127,926  204,900 

Other (income) expense

  18,871  29,956  60,615 
        

Income before income taxes

  1,628,330  1,497,394  1,225,289 

Income tax expense

  603,214  544,732  458,604 
        

Net income

 $1,025,116 $952,662 $766,685 
        
        

Earnings per share:

          

Basic

 $3.17 $2.87 $2.25 

Diluted

 $3.17 $2.85 $2.22 

Weighted average shares:

  
 
  
 
  
 
 

Basic

  322,886  332,254  341,234 

Diluted

  323,854  334,469  345,117 

The accompanying notes are an integral part of the consolidated financial statements.





65



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

COMPREHENSIVE INCOME

(In thousands except per share amounts)
thousands)

 

Common
Stock
Shares

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings
(Accumulated Deficit)

Accumulated
Other
Comprehensive
Loss

Total

Balances, February 1, 2008

317,418 

$

277,741 

$

2,480,062 

$

(4,818)

$

(49,112)

$

2,703,873 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

108,182 

 

 

108,182 

Unrealized net gain on hedged transactions, net of income tax expense of $4,518

 

 

 

 

9,682 

 

9,682 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

117,864 

Issuance of common stock under stock incentive plans

484 

 

423 

 

(423)

 

 

 

Repurchases of common stock

(57)

 

(50)

 

50 

 

 

 

Share-based compensation expense

 

 

9,958 

 

 

 

9,958 

Balances, January 30, 2009

317,845 

$

278,114 

$

2,489,647 

$

103,364 

$

(39,430)

$

2,831,695 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

339,442 

 

 

339,442 

Unrealized net gain on hedged transactions, net of income tax expense of $2,553

 

 

 

 

5,263 

 

5,263 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

344,705 

Issuance of common stock

22,700 

 

19,863 

 

421,299 

 

 

 

441,162 

Cash dividends, $0.7525 per common share, and related amounts

 

 

 

(239,731)

 

 

(239,731)

Share-based compensation expense

 

 

15,009 

 

 

 

15,009 

Tax benefit from stock option exercises

 

 

3,072 

 

 

 

3,072 

Issuance of common stock under stock incentive plans

304 

 

266 

 

2,020 

 

 

 

2,286 

Equity settlements under stock incentive plans

(263)

 

(230)

 

(7,670)

 

 

 

(7,900)

Balances, January 29, 2010

340,586 

$

298,013 

$

2,923,377 

$

203,075 

$

(34,167)

$

3,390,298 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

627,857 

 

 

627,857 

Unrealized net gain on hedged transactions, net of income tax expense of $9,406

 

 

 

 

13,871 

 

13,871 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

641,728 

Share-based compensation expense

 

 

12,805 

 

 

 

12,805 

Tax benefit from stock option exercises

 

 

10,110 

 

 

 

10,110 

Issuance of common stock under stock incentive plans

93 

 

82 

 

1,943 

 

 

 

2,025 

Exercise of stock options

872 

 

763 

 

(8,399)

 

 

 

(7,636)

Other equity settlements under stock incentive plans

(44)

 

(39)

 

5,188 

 

 

 

5,149 

Balances, January 28, 2011

341,507 

$

298,819 

$

2,945,024 

$

830,932 

$

(20,296)

$

4,054,479 

 
 For the Year Ended 
 
 January 31,
2014
 February 1,
2013
 February 3,
2012
 

Net income

 $1,025,116 $952,662 $766,685 

Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $(4,461), $1,448 and $9,692, respectively

  (6,972) 2,253  15,105 
        

Comprehensive income

 $1,018,144 $954,915 $781,790 
        
        

The accompanying notes are an integral part of the consolidated financial statements.




66



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

SHAREHOLDERS' EQUITY

(In thousands)
thousands except per share amounts)

 

For the Year Ended

January 28,

2011

 

January 29, 2010

 

January 30,

2009

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

627,857 

 

$

339,442 

 

$

108,182 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

254,927 

 

 

256,771 

 

 

247,899 

Deferred income taxes

 

50,985 

 

 

14,860 

 

 

73,434 

Tax benefit of stock options

 

(13,905)

 

 

(5,390)

 

 

(950)

Loss (gain) on debt retirement

 

14,576 

 

 

55,265 

 

 

(3,818)

Noncash share-based compensation

 

15,956 

 

 

17,295 

 

 

9,958 

Noncash inventory adjustments and asset impairments

 

7,607 

 

 

647 

 

 

50,671 

Other noncash gains and losses

 

5,942 

 

 

7,920 

 

 

6,252 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventories

 

(251,809)

 

 

(100,248)

 

 

(173,014)

Prepaid expenses and other current assets

 

(10,157)

 

 

(7,298)

 

 

(598)

Accounts payable

 

123,424 

 

 

106,049 

 

 

140,356 

Accrued expenses and other liabilities

 

(42,428)

 

 

(12,643)

 

 

68,736 

Income taxes

 

42,903 

 

 

1,153 

 

 

33,986 

Other

 

(1,194)

 

 

(1,000)

 

 

14,084 

Net cash provided by operating activities

 

824,684 

 

 

672,823 

 

 

575,178 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(420,395)

 

 

(250,747)

 

 

(205,546)

Purchases of short-term investments

 

 

 

 

 

(9,903)

Sales of short-term investments

 

 

 

 

 

61,547 

Sales of property and equipment

 

1,448 

 

 

2,701 

 

 

1,266 

Net cash used in investing activities

 

(418,947)

 

 

(248,046)

 

 

(152,636)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock

 

631 

 

 

443,753 

 

 

4,228 

Repayments under revolving credit facility

 

 

 

 

 

(102,500)

Issuance of long-term obligations

 

 

 

1,080 

 

 

Repayments of long-term obligations

 

(131,180)

 

 

(785,260)

 

 

(44,425)

Payment of cash dividends and related amounts

 

 

 

(239,731)

 

 

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(13,723)

 

 

(5,928)

 

 

(3,009)

Tax benefit of stock options

 

13,905 

 

 

5,390 

 

 

950 

Net cash used in financing activities

 

(130,367)

 

 

(580,696)

 

 

(144,756)

 

Net increase (decrease) in cash and cash equivalents

 

275,370 

 

 

(155,919)

 

 

277,786 

Cash and cash equivalents, beginning of year

 

222,076 

 

 

377,995 

 

 

100,209 

Cash and cash equivalents, end of year

$

497,446 

 

$

222,076 

 

$

377,995 


 
 Common
Stock
Shares
 Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Loss
 Total 

Balances, January 28, 2011

  341,507 $298,819 $2,954,177 $830,932 $(20,296)$4,063,632 

Net income

        766,685    766,685 

Unrealized net gain (loss) on hedged transactions

          15,105  15,105 

Share-based compensation expense

      15,250      15,250 

Repurchases of common stock

  (4,960) (4,340) (1,558) (180,699)   (186,597)

Tax benefit from stock option exercises

      27,727      27,727 

Exercise of share-based awards

  1,534  1,342  (28,734)     (27,392)

Other equity transactions

  8  7  165      172 
              

Balances, February 3, 2012

  338,089 $295,828 $2,967,027 $1,416,918 $(5,191)$4,674,582 

Net income

        952,662    952,662 

Unrealized net gain (loss) on hedged transactions

          2,253  2,253 

Share-based compensation expense

      21,664      21,664 

Repurchases of common stock

  (14,394) (12,595) (16) (658,848)   (671,459)

Tax benefit from stock option exercises

      77,020      77,020 

Exercise of share-based awards

  3,048  2,667  (75,787)     (73,120)

Other equity transactions

  326  285  1,443      1,728 
              

Balances, February 1, 2013

  327,069 $286,185 $2,991,351 $1,710,732 $(2,938)$4,985,330 

Net income

        1,025,116    1,025,116 

Unrealized net gain (loss) on hedged transactions

          (6,972) (6,972)

Share-based compensation expense

      20,961      20,961 

Repurchases of common stock

  (11,037) (9,657)   (610,395)   (620,052)

Tax benefit from stock option exercises

      24,151      24,151 

Exercise of share-based awards

  1,026  896  (27,237)     (26,341)
              

Balances, January 31, 2014

  317,058 $277,424 $3,009,226 $2,125,453 $(9,910)$5,402,193 
              
              




Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

$

244,752 

 

$

328,433 

 

$

377,022 

Income taxes

 

314,123 

 

 

187,983 

 

 

7,091 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

$

29,658 

 

$

30,393 

 

$

7,474 

Purchases of property and equipment under capital lease obligations

 

 

 

50 

 

 

3,806 

Expiration of equity repurchase rights

 

 

 

 

 

2,548 


The accompanying notes are an integral part of the consolidated financial statements.




68



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
 For the Year Ended 
 
 January 31,
2014
 February 1,
2013
 February 3,
2012
 

Cash flows from operating activities:

          

Net income

 $1,025,116 $952,662 $766,685 

Adjustments to reconcile net income to net cash from operating activities:

          

Depreciation and amortization

  332,837  302,911  275,408 

Deferred income taxes

  (36,851) (2,605) 10,232 

Tax benefit of share-based awards

  (30,990) (87,752) (33,102)

Loss on debt retirement, net

  18,871  30,620  60,303 

Noncash share-based compensation

  20,961  21,664  15,250 

Other noncash (gains) and losses

  (12,747) 6,774  54,190 

Change in operating assets and liabilities:

          

Merchandise inventories

  (144,943) (391,409) (291,492)

Prepaid expenses and other current assets

  (4,947) 5,553  (34,554)

Accounts payable

  36,942  194,035  104,442 

Accrued expenses and other liabilities

  16,265  (36,741) 71,763 

Income taxes

  (5,249) 138,711  51,550 

Other

  (2,200) (3,071) (195)
        

Net cash provided by (used in) operating activities

  1,213,065  1,131,352  1,050,480 
        

Cash flows from investing activities:

          

Purchases of property and equipment

  (538,444) (571,596) (514,861)

Proceeds from sales of property and equipment

  288,466  1,760  1,026 
        

Net cash provided by (used in) investing activities

  (249,978) (569,836) (513,835)
        

Cash flows from financing activities:

          

Issuance of long-term obligations

  2,297,177  500,000   

Repayments of long-term obligations

  (2,119,991) (478,255) (911,951)

Borrowings under revolving credit facilities

  1,172,900  2,286,700  1,157,800 

Repayments of borrowings under revolving credit facilities

  (1,303,800) (2,184,900) (973,100)

Debt issuance costs

  (15,996) (15,278)  

Payments for cash flow hedge related to debt issuance

  (13,217)    

Repurchases of common stock

  (620,052) (671,459) (186,597)

Other equity transactions, net of employee taxes paid

  (26,341) (71,393) (27,219)

Tax benefit of share-based awards

  30,990  87,752  33,102 
        

Net cash provided by (used in) financing activities

  (598,330) (546,833) (907,965)
        

Net increase (decrease) in cash and cash equivalents

  364,757  14,683  (371,320)

Cash and cash equivalents, beginning of year

  140,809  126,126  497,446 
        

Cash and cash equivalents, end of year

 $505,566 $140,809 $126,126 
        
        

Supplemental cash flow information:

          

Cash paid for:

          

Interest

 $73,464 $121,712 $209,351 

Income taxes

 $646,811 $422,333 $382,294 

Supplemental schedule of noncash investing and financing activities:

  
 
  
 
  
 
 

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

 $27,082 $39,147 $35,662 

Purchases of property and equipment under capital lease obligations

 $ $3,440 $ 

The accompanying notes are an integral part of the consolidated financial statements.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.

Basis of presentation and accounting policies


Basis of presentation


These notes contain references to the years 2010, 20092013, 2012, and 2008,2011, which represent fiscal years ended January 28, 2011, January 29, 201031, 2014, February 1, 2013, and January 30, 2009, respectively, each of which were 52-week accounting periods.February 3, 2012, respectively. The Company’sCompany's fiscal year ends on the Friday closest to January 31. The 2013 and 2012 years were 52-week accounting periods, while 2011 was a 53-week accounting period. The consolidated financial statements include all subsidiaries of the Company, except for its not-for-profit subsidiary which the Company does not control. Intercompany transactions have been eliminated.


Business description


The Company sells general merchandise on a retail basis through 9,37211,132 stores (as of January 28, 2011)31, 2014) in 3540 states covering most of the southern, southwestern, midwestern and eastern United States. The Company hasowns distribution centers (“DCs”("DCs") in Scottsville, Kentucky; Ardmore, Oklahoma; South Boston, Virginia; Indianola, Mississippi; Fulton, Missouri; Alachua, Florida; Zanesville, Ohio; Jonesville, South CarolinaCarolina; Marion, Indiana; Bessemer, Alabama; and Marion, Indiana.Bethel, Pennsylvania, and leases DCs in Ardmore, Oklahoma; Fulton, Missouri; Indianola, Mississippi; and Lebec, California.


The Company purchases its merchandise from a wide variety of suppliers. Approximately 9% and 7% of the Company’s purchases in 2010 were made from the Company’s largest and second largest suppliers, respectively.


Cash and cash equivalents


Cash and cash equivalents include highly liquid investments with insignificant interest rate risk and original maturities of three months or less when purchased. Such investments primarily consist of money market funds, bank deposits, certificates of deposit (which may include foreign time deposits), and commercial paper. The carrying amounts of these items are a reasonable estimate of their fair value due to the short maturity of these investments.


Payments due from processors for electronic tender transactions classified as cash and cash equivalents totaled approximately $26.1$44.0 million and $23.2$45.2 million at January 28, 201131, 2014 and January 29, 2010,February 1, 2013, respectively.


The Company’s cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment. Outstanding but unpresented checks totaling approximately $153.6 million and $159.6 million at January 28, 2011 and January 29, 2010, respectively, have been included in Accounts payable in the consolidated balance sheets. Upon presentation for payment, these checks are funded through available cash balances or the Company’s credit facilities.




69



At January 28, 2011,31, 2014, the Company maintained cash balances to meet a $20 million minimum threshold set by insurance regulators, as further described below under “Insurance"Insurance liabilities."


Investments in debt and equity securities


The Company accounts for its investments in debt and marketable equity securities as held-to-maturity, available-for-sale, or trading, depending on their classification. Debt securities categorized as held-to-maturity are stated at amortized cost. Debt and equity securities categorized as available-for-sale are stated at fair value, with any unrealized gains and losses, net of deferred income taxes, reported as a component of Accumulated other comprehensive loss. Trading securities (primarily mutual funds held pursuant to deferred compensation and supplemental retirement plans, as further discussed below in Note 10)Notes 6 and 9) are stated at fair value, with changes in fair value recorded as a component of Selling, general and administrative (“("SG&A”&A") expense.


As of January 28, 2011 and January 29, 2010, the Company had investments in trading securities of $8.3 million and $8.8 million, respectively, $2.2 million and $1.6 million of which were classified as Prepaid expenses and other current assets, respectively, and $6.1 million and $7.2 million of which were classified as Other assets, net, respectively, in the consolidated balance sheets. Historical cost information pertaining to these investments in mutual funds by participants in the Company’s supplemental retirement and compensation deferral plans is not readily available to the Company.

During 2008, the Company’s South Carolina-based wholly owned captive insurance subsidiary, Ashley River Insurance Company (“ARIC”), had investments in various debt securities. These investments were held pursuant to South Carolina regulatory requirements to maintain certain asset balances related to ARIC’s liability and equity balances, which could have limited the Company’s ability to use these assets for general corporate purposes. In May 2008, the state of South Carolina made certain changes to these regulations, which in turn changed the Company’s investment requirements. As a result, the Company reclassified certain investments held by ARIC from held-to-maturity to available-for-sale, and ARIC subsequently liquidated certain investments totaling $48.6 million during 2008.

For the years ended January 28, 2011, January 29, 201031, 2014, February 1, 2013, and January 30, 2009,February 3, 2012, gross realized gains and losses on the sales of available-for-sale securities were not material. The cost of securities sold is based upon the specific identification method.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

Merchandise inventories


Inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”("LIFO") method as this method results in a better matching of costs and revenues. Under the Company’sCompany's retail inventory method (“RIM”("RIM"), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales at a department level. The use of the RIM will result in valuing inventories at the lower of cost or market ("LCM") if markdowns are currently taken as a reduction of the retail value of inventories. Costs directly associated with warehousing and distribution are capitalized into inventory.

        The excess of current cost over LIFO cost was approximately $52.8$90.9 million and $47.5$101.9 million at January 28, 201131, 2014 and January



70



29, 2010,February 1, 2013, respectively. Current cost is determined using the RIM on a first-in, first-out basis. Under the LIFO inventory method, the impacts of rising or falling market price changes increase or decrease cost of sales (the LIFO provision or benefit). The Company recorded a LIFO provision (benefit) of $5.3$(11.0) million in 2010, a LIFO benefit of $2.52013, $1.4 million in 2009,2012, and a LIFO provision of $43.9$47.7 million in 2008.2011, which is included in cost of goods sold in the consolidated statements of income.

The 2008 LIFO provision was impacted by increased commodity costs related to foodCompany purchases its merchandise from a wide variety of suppliers. Approximately 8% and pet products which7% of the Company's purchases in 2013 were driven by fruitmade from the Company's largest and vegetable prices and rising freight costs. In addition, increases in petroleum, resin, metals, pulp and other raw material commodity costs also resulted in multiple product cost increases. These trends generally stabilized or reversed in 2009 and 2010.second largest suppliers, respectively.

Vendor rebates

The Company accounts for all cash consideration received from vendors in accordance with applicable accounting standards pertaining to such arrangements. Cash consideration received from a vendor is generally presumed to be a rebate or an allowance and is accounted for as a reduction of merchandise purchase costs as earned. However, certain specific, incremental and otherwise qualifying SG&A expenses related to the promotion or sale of vendor products may be offset by cash consideration received from vendors, in accordance with arrangements such as cooperative advertising, when earned for dollar amounts up to but not exceeding actual incremental costs. The Company recognizes amounts received for cooperative advertising on performance, “first showing” or distribution, consistent with its policy for advertising expense in accordance with applicable accounting standards for reporting on advertising costs.

Prepaid expenses and other current assets


Prepaid expenses and other current assets include prepaid amounts for rent, maintenance, business licenses, advertising, and insurance, as well asand amounts receivable for certain vendor rebates (primarily those expected to be collected in cash), coupons, and other items.coupons.


Property and equipment


        As the result of a merger transaction in 2007, the Company's property and equipment was recorded at estimated fair values. Property and equipment areacquired subsequent to the merger has been recorded at cost. The Company provides forrecords depreciation and amortization on a straight-line basis over the following



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

assets' estimated useful lives:


Land improvements

20

Buildings

39-40

Furniture, fixtures and equipment

3-10


Improvements of leased propertieslives. The Company's property and equipment balances and depreciable lives are summarized as follows:

(In thousands)
 Depreciable
Life
 January 31,
2014
 February 1,
2013
 

Land

 Indefinite $163,448 $176,861 

Land improvements

 20  48,566  80,834 

Buildings

 39 - 40  765,555  773,835 

Leasehold improvements

 (a)  326,122  279,351 

Furniture, fixtures and equipment

 3 - 10  2,078,893  1,828,573 

Construction in progress

    70,332  87,444 
        

    3,452,916  3,226,898 

Less accumulated depreciation and amortization

    1,372,611  1,138,233 
        

Net property and equipment

   $2,080,305 $2,088,665 
        
        

(a)
amortized over the shorterlesser of the life of the applicable lease term or the estimated useful life of the asset.asset

        Depreciation expense related to property and equipment was approximately $315.3 million, $277.2 million and $243.7 million for 2013, 2012 and 2011. Amortization of capital lease assets is included in depreciation expense. Interest on borrowed funds during the construction of property and equipment is capitalized where applicable. Interest costs of $1.2 million, $0.6 million and $1.5 million were capitalized in 2013, 2012 and 2011.


Impairment of long-lived assets


When indicators of impairment are present, the Company evaluates the carrying value of long-lived assets, other than goodwill, in relation to the operating performance and future cash



71



flows or the appraised values of the underlying assets. In accordance with accounting standards for long-lived assets,Generally, the Company reviewsCompany's policy is to review for impairment stores open more than twothree years for which current cash flows from operations are negative. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows overexpected to be generated by the life of the lease.assets. The Company’sCompany's estimate of undiscounted future cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’sasset's estimated fair value. The fair value is estimated based primarily upon estimated future cash flows over the asset's remaining useful life (discounted at the Company’sCompany's credit adjusted risk-free rate) or other reasonable estimates of fair market value. Assets to be disposed of are adjusted to the fair value less the cost to sell if less than the book value.


The Company recorded impairment charges included in SG&A expense of approximately $1.7$0.5 million in 2010, $5.02013, $2.7 million in 20092012 and $4.0$1.0 million in 2008,2011, to reduce the carrying value of certain of its stores’stores' assets. Such action was deemed necessary based on the Company’sCompany's evaluation that such amounts would not be recoverable primarily due to insufficient sales or excessive costs resulting in negative current and projected future cash flows at these locations.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Capitalized interestNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


1. Basis of presentation and accounting policies (Continued)

To assure that interest costs properly reflect only that portion relating to current operations, interest on borrowed funds during the construction of property and equipment is capitalized where applicable. No interest costs were capitalized in 2010, 2009 or 2008.


Goodwill and other intangible assets


The Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment when indicators of impairment are present, based on undiscounted cash flows, and if impaired, written down to fair value based on either discounted cash flows or appraised values.

Goodwill and intangible assets with indefinite lives are tested for impairment annually or more frequently if indicators of impairment are present andpresent. Other intangible assets are tested for impairment if indicators of impairment are present. Impaired assets are written down to fair value as required. No impairment of intangible assets has been identified during any of the periods presented.


        In accordance with accounting standards for goodwill and indefinite-lived intangible assets, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value as described in further detail below.

The quantitative goodwill impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’sCompany's reporting unit based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied"implied fair value”value" of goodwill. The determination of the implied fair value of goodwill would require the Company to allocate the estimated fair value of its reporting unit to its assets and liabilities. Any unallocated fair value would represent the implied fair value of goodwill, which would be compared to its corresponding carrying value.



        The quantitative impairment test for intangible assets compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

72



Other assets


Non-current        Noncurrent Other assets consist primarily of qualifying prepaid expenses, debt issuance costs which are amortized over the life of the related obligations, and utility, security and securityother deposits.


Accrued expenses and other liabilities


Accrued expenses and other consist of the following:

(In thousands)
 January 31,
2014
 February 1,
2013
 

Compensation and benefits

 $47,909 $76,981 

Insurance

  84,697  86,189 

Taxes (other than taxes on income)

  104,990  89,329 

Other

  130,982  104,939 
      

 $368,578 $357,438 
      
      

(In thousands)

January 28, 2011

 

January 29,

2010

Compensation and benefits

$

81,786

 

$

100,843

Insurance

 

76,372

 

 

65,408

Taxes (other than taxes on income)

 

74,900

 

 

72,902

Other

 

114,683

 

 

103,137

 

$

347,741

 

$

342,290


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

Other accrued expenses primarily include the current portion of liabilities for interest expense, legal settlements, freight expense, contingent rent expense, interest, utilities, and common area and other maintenance charges, and income tax related reserves.charges.


Insurance liabilities


The Company retains a significant portion of risk for its workers’workers' compensation, employee health, general liability, property and automobile claim exposures. Accordingly, provisions are made for the Company’sCompany's estimates of such risks. The undiscounted future claim costs for the workers’workers' compensation, general liability, and health claim risks are derived using actuarial methods.methods and are recorded as self-insurance reserves pursuant to Company policy. To the extent that subsequent claim costs vary from those estimates, future results of operations will be affected.affected as the reserves are adjusted.

        Ashley River Insurance Company (or ARIC, as defined above)("ARIC"), a South Carolina-based wholly owned captive insurance subsidiary of the Company, charges the operating subsidiary companies premiums to insure the retained workers’workers' compensation and non-property general liability exposures. Pursuant to South Carolina insurance regulations, ARIC is required to maintain certain levels of cash and cash equivalents related to its self insuredself-insured exposures. ARIC currently insures no unrelated third-party risk.


As a result of the Merger discussed in Note 3, the Company recorded its assumed self-insurance reserves as of the Merger date at their present value in accordance with applicable accounting standards for business combinations, using a discount rate of 5.4%. The balance of the resulting discount was $4.8 million and $7.4 million at January 28, 2011 and January 29, 2010, respectively. Other than for reserves assumed in a business combination, the Company’s policy is to record self-insurance reserves on an undiscounted basis.

Operating leases and related liabilities

Rent expense is recognized over the term of the lease. The Company records minimum rental expense on a straight-line basis over the base, non-cancelable lease term commencing on the date that the Company takes physical possession of the property from the landlord, which



73



normally includes a period prior to the store opening to make necessary leasehold improvements and install store fixtures. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. Tenant allowances, to the extent received, are recorded as deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease. Any difference between the calculated expense and the amounts actually paid are reflected as a liability, with the current portion in Accrued expenses and other and the long-term portion in Other liabilities in the consolidated balance sheets, and totaled approximately $23.2$49.5 million and $14.5$43.6 million at January 28, 201131, 2014 and January 29, 2010,February 1, 2013, respectively.


The Company recognizes contingent rental expense when the achievement of specified sales targets are considered probable, in accordance with applicable accounting standards for contingent rent.probable. The amount expensed but not paid as of January 28, 201131, 2014 and January 29, 2010February 1, 2013 was approximately $9.2$6.0 million and $10.8$7.7 million, respectively, and is included in Accrued expenses and other in the consolidated balance sheets (See Note 9).sheets.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

In the normal courseNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of business, based on an overall analysis of store performancepresentation and expected trends, management periodically evaluates the need to close underperforming stores. Generally, for store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the date the store is closed in accordance with applicable accounting standards for costs associated with exit or disposal activities. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. Liabilities are reviewed periodically and adjusted when necessary. The current portion of the closed store rent liability is reflected in Accrued expenses and other and the long-term portion in policies (Continued)

Other liabilities in the consolidated balance sheets, and totaled approximately $7.0 million and $7.6 million at January 28, 2011 and January 29, 2010, respectively.


Other liabilities


Non-current        Noncurrent Other liabilities consist of the following:


(In thousands)

January 28,

2011

 

January 29,

2010

Compensation and benefits

$

14,531

 

$

12,441

Insurance

 

131,912

 

 

140,633

Income tax related reserves

 

27,255

 

 

68,021

Derivatives

 

34,923

 

 

57,058

Other

 

22,961

 

 

24,195

 

$

231,582

 

$

302,348

(In thousands)
 January 31,
2014
 February 1,
2013
 

Compensation and benefits

 $17,604 $18,404 

Insurance

  145,162  137,451 

Income tax related reserves

  18,802  23,383 

Deferred gain on sale leaseback

  62,693   

Other

  52,285  46,161 
      

 $296,546 $225,399 
      
      


Amounts reflectedcategorized as “other”"Other" in the table above consist primarily of deferred rent lease contract termination liabilities for closed stores, and rebate obligations.derivative liabilities.



74



Fair value accounting

The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’sentity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).


Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’sentity's own assumptions, as there is little, if any, relatedobservable market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’sCompany's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.


The valuation of the Company’sCompany's derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.


The Company incorporates credit valuation adjustments (CVAs) to appropriately reflect both its own nonperformance risk and the respective counterparty’scounterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.


        In connection with accounting standards for fair value measurement, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with its derivatives



75



utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of January 28, 2011,31, 2014, the Company has assessed the significance of the impact of the CVAs on the overall valuation of its derivative positions and has determined that the CVAs are not significant to the overall valuation of its derivatives. Based on the Company's review of the CVAs by counterparty portfolio, the Company has determined that the CVAs are not significant to the overall portfolio valuations, as the CVAs are deemed to be immaterial in terms of basis points and are a very small percentage of the aggregate notional value.value of the derivative instruments. Although some of the CVAs as a percentage of termination value appear to be more significant, primary emphasis was placed on a review of the CVA in basis points and the percentage of the notional value. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of January 28, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.


(In thousands)

Quoted Prices
in Active
Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
January 28,
2011

Assets:

 

 

 

 

 

 

 

 

 

 

 

Trading securities (a)

$

8,289

 

$

-

 

$

-

 

$

8,289

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations (b)

 

3,450,812

 

 

20,858

 

 

-

 

 

3,471,670

Derivative financial instruments (c)

 

-

 

 

34,923

 

 

-

 

 

34,923

Deferred compensation (d)

 

16,710

 

 

-

 

 

-

 

 

16,710

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Reflected at fair value in the consolidated balance sheet as Prepaid expenses and other current assets of $2,179 and Other assets, net of $6,110.

(b)

Reflected at book value in the consolidated balance sheet as Current portion of long-term obligations of $1,157 and Long-term obligations of $3,287,070.

(c)

Reflected at fair value in the consolidated balance sheet as noncurrent Other liabilities.

(d)

Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $2,179 and non-current Other liabilities of $14,531.


The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, short-term investments, receivables and payables approximate their respective fair values. The Company does not have any fair value measurements using significant unobservable inputs (Level 3) as of January 28, 2011.


Derivative financial instruments


The Company accounts for derivative financial instruments in accordance with applicable accounting standards for derivativesuch instruments and hedging activities. All financial instrument positions taken by the Companyactivities, which require that all derivatives are intended to be used to reduce risk by hedging an underlying economic exposure.



76



The Company records all derivativesrecorded on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

        Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards.

The Company’sCompany's derivative financial instruments, in the form of interest rate swaps at January 28, 2011,31, 2014, are related to variable interest rate risk exposures associated with the Company’sCompany's long-term debt and were entered into in an effort to manage that risk. The counterparties to the Company’sCompany's derivative agreements are all major international financial institutions. The Company continually monitors its position and the credit ratings of its counterparties and does not anticipate nonperformance by the counterparties; however, there can be no assurance that such nonperformance will not occur.counterparties.


Revenue and gain recognition


The Company recognizes retail sales in its stores at the time the customer takes possession of merchandise. All sales are net of discounts and estimated returns and are presented net of taxes assessed by governmental authorities that are imposed concurrent with those sales. The liability for retail merchandise returns is based on the Company’sCompany's prior experience. The Company records gain contingencies when realized.


The Company recognizes gift card sales revenue at the time of redemption. The liability for the gift cards is established for the cash value at the time of purchase. The liability for outstanding gift cards was approximately $2.4$4.3 million and $1.9$3.6 million at January 28, 201131, 2014 and January 29, 2010,February 1, 2013, respectively, and is recorded in Accrued expenses and other liabilities. Through January 28, 2011,31, 2014, the Company has not recorded any breakage income related to its gift card program.


Advertising costs


Advertising costs are expensed upon performance, “first showing”"first showing" or distribution, and are reflected in SG&A expenses net of qualifyingearned cooperative advertising fundsamounts provided by vendors in SG&A expenses.which are specific, incremental and otherwise qualifying expenses related to the promotion or sale of vendor products for dollar amounts up to but not exceeding actual incremental costs. Advertising costs were $46.9$70.5 million, $41.5$61.7 million and $27.8$50.4 million in 2010, 20092013, 2012 and 2008,2011, respectively. These costs primarily include promotional circulars, targeted circulars supporting new stores, television and radio advertising, in-store signage, and costs associated



77



with the sponsorships of certain automobile racing activities. Vendor funding for cooperative advertising offset reported expenses by $14.2$31.9 million, $9.0$23.6 million and $7.8$20.8 million in 2010, 20092013, 2012 and 2008,2011, respectively.


Share-based payments

The Company recognizes compensation expense for share-based compensation based on the fair value of the awards on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate ismay be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the prior estimate. The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. The Company bases this estimate on historical experience or estimates of future trends, as applicable. An increase in the forfeiture rate will decrease compensation expense.


The fair value of each option grant is separately estimated and amortized into compensation expense on a straight-line basis between the applicable grant date and each vesting date. The Company



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

has estimated the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.


The Company calculates compensation expense for nonvested restricted stock, share units and similar awards as the difference between the market price of the underlying stock on the grant date and the purchase price, if any, and recognizes such amountany. Such expense is recognized on a straight-line basis for graded awards or an accelerated basis for performance awards over the period in which the recipient earns the nonvested restricted stock and similar awards.

Store pre-opening costs


Pre-opening costs related to new store openings and the related construction periods are expensed as incurred.


Income taxes


Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’sCompany's consolidated financial statements or income tax returns. Deferred income tax expense or benefit is the net change during the year in the Company’sCompany's deferred income tax assets and liabilities.


The Company includes income tax related interest and penalties as a component of the provision for income tax expense.


Income tax reserves are determined using a methodology which requires companies to assess each income tax position taken using a two steptwo-step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the



78



more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’sCompany's determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’sCompany's future financial results.


Management estimates


The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Accounting standards


In June 2009February 2013, the FASBFinancial Accounting Standards Board issued a newan accounting standard relatingstandards update which requires additional disclosures with regard to variable interest entities. This standard amends previous standardsan entity's balances of and requires an enterprise to perform an analysis to determine whetheramounts reclassified out of accumulated other comprehensive income in its financial statements. The Company adopted this guidance in the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity, specifies updated criteria for determining the primary beneficiary, requires ongoing reassessmentsfirst quarter of whether an enterprise is the primary beneficiary of a variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, amends certain guidance for determining whether an entity is a variable interest entity, requires enhanced disclosures about an enterprise’s involvement in a variable interest entity, among other provisions. This standard was effective as2013. All of the beginningCompany's related balances are cash flow



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Basis of presentation and accounting policies (Continued)

hedges, and the Company’s 2010 reporting periods.required disclosures are reflected in Note 7 below. The adoption of this standardguidance did not have a material effect on the Company’sCompany's consolidated financial statements.

Reclassifications


Certain reclassifications of the 20082012 and 20092011 amounts have been made to conform to the 20102013 presentation.


2.

Initial public offering and special dividend


On November 18, 2009, the Company completed the initial public offering of its common stock. The Company issued 22,700,000 shares in the offering, and an existing shareholder sold an additional 16,515,000 outstanding shares. Net proceeds to the Company from the offering of $446.0 million were used to redeem outstanding debt, as discussed in more detail in Note 7 below. The Company paid a $4.8 million transaction fee to Kohlberg Kravis Roberts & Co., L.P. (“KKR”) and Goldman, Sachs & Co. in connection with the offering. Although this transaction fee was not paid from the net proceeds of the offering, it was directly related to the offering and accounted for as a cost of raising equity.



79



Upon the completion of the offering, the Company incurred additional charges of $58.8 million for fees paid to terminate its advisory agreement with KKR and Goldman, Sachs & Co. The transaction and termination fees paid to such parties are discussed in more detail in Note 12 below. The Company also incurred charges of $9.4 million for the accelerated vesting of certain share-based awards as discussed in more detail in Note 11 below.

On September 8, 2009, the Company’s Board of Directors declared a special dividend on the Company’s outstanding common stock (including shares of restricted stock) of $0.7525 per share, or approximately $239.3 million in the aggregate, which was paid on September 11, 2009 to shareholders of record on September 8, 2009. The special dividend was paid with cash generated from operations. Pursuant to the terms of the Company’s stock option plans, holders of stock options received either a pro-rata adjustment to the terms of their share-based awards or a cash payment (totaling approximately $0.5 million for all such grantees) in substitution for such adjustment as a result of the dividend.

3.

Merger


On July 6, 2007, the Company consummated a merger transaction (the “Merger”), and as a result, the Company is a subsidiary of an entity controlled by investment funds affiliated with KKR. The aggregate purchase price was approximately $7.1 billion, including direct costs of the Merger, and was funded primarily through debt financings as described more fully below in Note 7 and cash equity contributions from KKR, GS Capital Partners VI Fund, L.P. and affiliated funds (affiliates of Goldman, Sachs & Co.), Goodwill and other equity co-investors (collectively, the “Investors”).intangible assets


The Merger was accounted for as a reverse acquisition in accordance with applicable purchase accounting provisions. Because of this accounting treatment, the Company’s assets and liabilities were properly accounted for at their estimated fair values as of the Merger date. The purchase price allocation included approximately $4.34 billion of goodwill, none of which is expected to be deductible for tax purposes.

The purchase price allocation as of the Merger date also included approximately $1.4 billion of other intangible assets.        As of January 28, 201131, 2014 and January 29, 2010, theseFebruary 1, 2013, the balances of the Company's intangible assets were as follows:

 
  
 As of January 31, 2014 
(In thousands)
 Remaining
Life
 Amount Accumulated
Amortization
 Net 

Goodwill

 Indefinite $4,338,589 $ $4,338,589 
          
          

Other intangible assets:

            

Leasehold interests

 1 to 9 years $64,644 $56,699 $7,945 

Trade names and trademarks

 Indefinite  1,199,700    1,199,700 
          

   $1,264,344 $56,699 $1,207,645 
          
          

 

 

 

As of January 28, 2011

(In thousands)

Estimated
Useful Life

 

 

Amount

 

 

Accumulated

Amortization

 

 

Net

Leasehold interests

2 to 17.5 years

 

$

141,180

 

$

83,458

 

$

57,722

Trade names and trademarks

Indefinite

 

 

1,199,200

 

 

-

 

 

1,199,200

 

 

 

$

1,340,380

 

$

83,458

 

$

1,256,922


 

 

As of January 29, 2010

(In thousands)

Estimated
Useful Life

 

 

Amount

 

 

Accumulated

Amortization

 

 

Net

Leasehold interests

2 to 17.5 years

 

$

184,168

 

$

100,793

 

$

83,375

Internally developed software

3 years

 

 

12,300

 

 

10,592

 

 

1,708

 

 

 

 

196,468

 

 

111,385

 

 

85,083

Trade names and trademarks

Indefinite

 

 

1,199,200

 

 

-

 

 

1,199,200

 

 

 

$

1,395,668

 

$

111,385

 

$

1,284,283




 
  
 As of February 1, 2013 
(In thousands)
 Remaining
Life
 Amount Accumulated
Amortization
 Net 

Goodwill

 Indefinite $4,338,589 $ $4,338,589 
          
          

Other intangible assets:

            

Leasehold interests

 1 to 10 years $106,917 $87,074 $19,843 

Trade names and trademarks

 Indefinite  1,199,700    1,199,700 
          

   $1,306,617 $87,074 $1,219,543 
          
          

The Company recorded amortization expense related to amortizable intangible assets for 2010, 20092013, 2012 and 20082011 of $27.4$11.9 million, $41.3$16.9 million and $45.0$21.0 million, respectively, ($25.7 million, $37.2 million and $40.9 million, respectively,all of which is included in rent expense).expense. Expected future cash flows associated with the Company’sCompany's intangible assets are not expected to be materially affected by the Company’sCompany's intent or ability to renew or extend the arrangements. The Company's goodwill balance is not expected to be deductible for tax purposes.


For intangible assets subject to amortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: 2011 – $20.92014—$5.8 million, 2012 – $17.02015—$0.9 million, 2013 – $12.02016—$0.3 million, 2014 – $5.82017—$0.2 million and 2015 – $0.92018—$0.2 million.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

4.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Earnings per share

Earnings per share is computed as follows (in thousands except per share data):

 

2010

 

Net

Income

 

Weighted Average

Shares

Per Share

Amount

Basic earnings per share

$

627,857 

 

 

341,047

 

$

1.84 

 

Effect of dilutive share-based awards

 

 

 

 

3,753

 

 

 

 

Diluted earnings per share

$

627,857 

 

 

344,800

 

$

1.82 

 

 
 2013 
 
 Net Income Weighted
Average
Shares
 Per Share
Amount
 

Basic earnings per share

 $1,025,116  322,886 $3.17 

Effect of dilutive share-based awards

     968    
        

Diluted earnings per share

 $1,025,116  323,854 $3.17 
        
        


 

2009

 

Net

Income

 

Weighted Average

Shares

Per Share

Amount

Basic earnings per share

$

339,442 

 

 

322,778

 

$

1.05 

 

Effect of dilutive share-based awards

 

 

 

 

2,058

 

 

 

 

Diluted earnings per share

$

339,442 

 

 

324,836

 

$

1.04 

 

 
 2012 
 
 Net Income Weighted
Average
Shares
 Per Share
Amount
 

Basic earnings per share

 $952,662  332,254 $2.87 

Effect of dilutive share-based awards

     2,215    
        

Diluted earnings per share

 $952,662  334,469 $2.85 
        
        


 

2008

 

Net

Income

 

Weighted Average

Shares

Per Share

Amount

Basic earnings per share

$

108,182 

 

 

317,024

 

$

0.34 

 

Effect of dilutive share-based awards

 

 

 

 

479

 

 

 

 

Diluted earnings per share

$

108,182 

 

 

317,503

 

$

0.34 

 


 
 2011 
 
 Net Income Weighted
Average
Shares
 Per Share
Amount
 

Basic earnings per share

 $766,685  341,234 $2.25 

Effect of dilutive share-based awards

     3,883    
        

Diluted earnings per share

 $766,685  345,117 $2.22 
        
        

Basic earnings per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share was determined based on the dilutive effect of share-based awards using the treasury stock method.

Options to purchase shares of common stock that were outstanding at the end of the respective periods, but were not included in the computation of diluted earnings per share because the effect of exercising such options would be antidilutive, were 0.41.1 million, 0.20.8 million, and 12.1 millionzero in 2010, 20092013, 2012 and 2008,2011, respectively.




5.

Property and equipment
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and equipment is recorded at cost and summarized as follows:


(In thousands)

January 28, 2011

 

January 29, 2010

Land and land improvements

$

174,439

 

$

137,903

Buildings

 

575,305

 

 

520,867

Leasehold improvements

 

173,836

 

 

130,774

Furniture, fixtures and equipment

 

1,235,756

 

 

992,423

Construction in progress

 

17,933

 

 

10,406

 

 

2,177,269

 

 

1,792,373

Less accumulated depreciation and amortization

 

652,694

 

 

463,987

Net property and equipment

$

1,524,575

 

$

1,328,386


Depreciation expense related to property and equipment was approximately $215.7 million, $201.1 million and $190.5 million for 2010, 2009 and 2008. Amortization of capital lease assets is included in depreciation expense.


6.

4. Income taxes


The provision (benefit) for income taxes consists of the following:


(In thousands)

2010

 

2009

 

2008

Current:

 

 

 

 

 

 

 

 

Federal

$

273,005 

 

$

173,027 

 

$

10,489 

Foreign

 

1,269 

 

 

1,465 

 

 

1,084 

State

 

28,062 

 

 

21,002 

 

 

1,214 

 

 

302,336 

 

 

195,494 

 

 

12,787 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

42,024 

 

 

12,412 

 

 

64,403 

Foreign

 

 

 

(49)

 

 

(3)

State

 

12,755 

 

 

4,817 

 

 

9,034 

 

 

54,779 

 

 

17,180 

 

 

73,434 

 

$

357,115 

 

$

212,674 

 

$

86,221 

(In thousands)
 2013 2012 2011 

Current:

          

Federal

 $530,728 $457,370 $385,277 

Foreign

  1,324  1,209  1,449 

State

  101,174  78,025  56,272 
        

  633,226  536,604  442,998 
        

Deferred:

          

Federal

  (16,132) 9,734  8,313 

State

  (13,880) (1,606) 7,293 
        

  (30,012) 8,128  15,606 
        

 $603,214 $544,732 $458,604 
        
        

A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to income before income taxes is summarized as follows:


(Dollars in thousands)

                      2010

                      2009

 

                   2008

 

U.S. federal statutory rate on earnings before income taxes

$

 344,740

35.0 

%

$

 

193,241 

35.0 

%

$

68,041 

35.0 

%

State income taxes, net of federal income tax benefit

 

     26,877 

2.7 

 

  18,375 

3.3 

 

 

5,361 

2.8 

 

Jobs credits, net of federal income taxes

    

   (8,845)

(0.9)

 

    

  (8,590)

(1.6)

 

 

(9,149)

(4.7)

 

Increase (decrease) in valuation allowances

     

   (1,003)

(0.1)

 

    

  (1,722)

(0.3)

 

 

3,038 

1.6 

 

Income tax related interest expense (benefit), net of federal income taxes

   (5,004)

(0.5)

 

         

    1,289

0.2 

 

 

(2,015)

(1.0)

 

Nondeductible Merger-related lawsuit settlement

 

         -

 

         

     (366)

(0.1)

 

 

18,130 

9.3 

 

Other, net

       350

0.1 

 

  10,447 

2.0 

 

 

2,815 

1.4 

 

 

$

357,115 

36.3 

%

$

212,674 

38.5 

%

$

86,221 

44.4 

%




(Dollars in thousands)
 2013 2012 2011 

U.S. federal statutory rate on earnings before income taxes

 $569,916  35.0%$524,088  35.0%$428,851  35.0%

State income taxes, net of federal income tax benefit

  56,822  3.5  52,713  3.5  42,774  3.5 

Jobs credits, net of federal income taxes

  (19,348) (1.2) (16,062) (1.1) (15,153) (1.2)

Reduction in valuation allowances

  (437)   (3,050) (0.2) (2,202) (0.2)

Reduction in income tax reserves

  (6,391) (0.4) (13,676) (0.9)    

Other, net

  2,652  0.1  719  0.1  4,334  0.3 
              

 $603,214  37.0%$544,732  36.4%$458,604  37.4%
              
              

The 20102013 effective tax rate iswas an expense of 36.3%37.0%. The 2013 effective income tax rate increased from 2012 due to the favorable resolution of income tax examinations during 2012 that did not reoccur, to the same extent, in 2013. This rate increase was partially offset by the recording of an income tax benefit in 2013 associated with the expiration of the assessment period during which the taxing authorities could have assessed additional income tax associated with the Company's 2009 tax year. In addition, the 2013 amounts reflect larger income tax benefits associated with federal jobs credits. The Company receives a significant income tax benefit related to salaries paid to certain newly hired employees that qualify for federal jobs credits (principally the Work Opportunity Tax Credit or "WOTC"). The federal law authorizing the WOTC credit expired for employees hired after December 31, 2013. Whether these credits will be available for employees hired after December 31, 2013 depends upon a change in the tax law that extends the expiration date of these credit provisions, the certainty and timing of which are currently unclear.

        The 2012 effective tax rate was an expense of 36.4%. This expense iswas greater than the expectedfederal statutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Income taxes (Continued)

rate. The 2012 effective tax rate of 36.4% was lower than the 2011 rate of 37.4% due to the favorable resolution of a federal income tax examination during 2012.

        The 2011 effective tax rate was an expense of 37.4%. This expense was greater than the federal statutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2010 effective rate is less than the 2009 rate of 38.5% due principally to reductions in state income tax expense, income tax related interest expense and other expense items. The 2010 effective resolution of various examinations by the taxing authorities, when combined with unfavorable examination results in 2009, resulted in a decrease in the year-to-year state income tax expense rate (net of federal income tax expense) of approximately 1.8%. This decrease in state income tax expense was partially offset by an increase in state income tax expense due to a shift in income to companies within the group that have a higher effective state income tax rate. In addition, income tax related interest accruals and income tax related penalty accruals (with the penalty accruals being included in Other, net) were also reduced due to favorable income tax examination results, thereby resulting in a decrease in income tax related interest expense and a decrease in Other income tax expense. Additional decreases in Other, net items occurred due to favorable outcomes in 2010 associated with the completion of a federal income tax examination and reductions in expense associated with uncertain tax benefit accruals.

The 2009 effective tax rate is an expense of 38.5%. This expense is greater than the expected tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2009 effective tax rate is less than the 2008 rate of 44.4% due principally to the unfavorable impact that the non-deductible, Merger-related lawsuit settlement had on the 2008 rate. This reduction in the effective tax rate was partially offset by a decrease in the tax rate benefit related to federal jobs credits. While the total amount of jobs credits earned in 2009 was similar to the amount earned in 2008, the impact of this benefit on the effective tax rate was reduced due to the 2009 increase in income before tax. The 2009 rate was also increased by accruals associated with uncertain tax benefits, which are included in Other, net.

The 2008 effective income tax rate is an expense of 44.4%. This expense is greater than the expected U.S. statutory tax rate of 35% principally due to the non-deductibility of the settlement and related expenses associated with the Merger-related shareholder lawsuit.



83



Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’sCompany's deferred tax assets and liabilities are as follows:

(In thousands)
 January 31,
2014
 February 1,
2013
 

Deferred tax assets:

       

Deferred compensation expense

 $8,666 $9,276 

Accrued expenses and other

  9,067  5,727 

Accrued rent

  17,375  15,450 

Accrued insurance

  78,557  72,442 

Accrued incentive compensation

  3,385  15,399 

Interest rate hedges

  4,921  1,883 

Tax benefit of income tax and interest reserves related to uncertain tax positions

  3,439  2,696 

Deferred gain on sale-leaseback

  26,186   

Other

  15,094  13,914 

State tax net operating loss carry forwards, net of federal tax

  282  645 

State tax credit carry forwards, net of federal tax

  8,282  8,925 
      

  175,254  146,357 

Less valuation allowances

  (1,393) (1,830)
      

Total deferred tax assets

  173,861  144,527 
      

Deferred tax liabilities:

       

Property and equipment

  (307,644) (294,204)

Inventories

  (64,481) (67,246)

Trademarks

  (433,130) (435,529)

Amortizable assets

  (2,343) (6,809)

Bonus related tax method change

    (6,534)

Other

  (2,084) (4,498)
      

Total deferred tax liabilities

  (809,682) (814,820)
      

Net deferred tax liabilities

 $(635,821)$(670,293)
      
      


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Income taxes (Continued)

        

(In thousands)

January 28,
2011

 

 

January 29,
2010

 

Deferred tax assets:

 

 

 

 

 

 

Deferred compensation expense

$

6,653

 

$

7,214

 

Accrued expenses and other

 

4,798

 

 

4,223

 

Accrued rent

 

8,581

 

 

5,329

 

Accrued insurance

 

67,634

 

 

67,124

 

Accrued bonuses

 

20,116

 

 

26,112

 

Interest rate hedges

 

13,650

 

 

22,249

 

Tax benefit of income tax and interest reserves related to
uncertain tax positions

 

2,520

 

 

9,498

 

Other

 

16,321

 

 

15,399

 

State tax net operating loss carryforwards, net of federal tax

 

4,697

 

 

7,000

 

State tax credit carryforwards, net of federal tax

 

12,511

 

 

15,696

 

 

 

157,481

 

 

179,844

 

Less valuation allowances

 

(7,083

)

 

(8,086

)

Total deferred tax assets

 

150,398

 

 

171,758

 

Deferred tax liabilities:

 

 

 

 

 

 

Property and equipment

 

(222,757

)

 

(177,171

)

Inventories

 

(68,314

)

 

(66,002

)

Trademarks

 

(435,543

)

 

(435,336

)

Amortizable assets

 

(21,288

)

 

(31,724

)

Insurance related tax method change

 

(14,844

)

 

(30,059

)

Bonus related tax method change

 

(19,520

)

 

 

Other

 

(3,551

)

 

(2,699

)

Total deferred tax liabilities

 

(785,817

)

 

(742,991

)

Net deferred tax liabilities

$

(635,419

)

$

(571,233

)


Net deferred tax liabilities are reflected separately on the consolidated balance sheets as current and noncurrent deferred income taxes. The following table summarizes net deferred tax liabilities as recorded in the consolidated balance sheets:


(In thousands)

January 28,
2011

 

January 29, 2010

Current deferred income tax liabilities, net

$

(36,854)

 

$

(25,061)

Noncurrent deferred income tax liabilities, net

 

(598,565)

 

 

(546,172)

Net deferred tax liabilities

$

(635,419)

 

$

(571,233)

(In thousands)
 January 31,
2014
 February 1,
2013
 

Current deferred income tax liabilities, net

 $(21,795)$(23,223)

Noncurrent deferred income tax liabilities, net

  (614,026) (647,070)
      

Net deferred tax liabilities

 $(635,821)$(670,293)
      
      


The Company has state net operating loss carryforwardscarry forwards as of January 28, 201131, 2014 that total approximately $136.7$4.3 million which will expire in 2022 through 2029.2028. The Company also has state tax credit carryforwardscarry forwards of approximately $19.2$12.7 million that will expire beginning in 20112021 through 2025.2024.


The        A valuation allowance has been provided for state tax credit carryforwardscarry forwards and federal capital losses. The 20102013, 2012, and 20092011 decreases of $1.0$0.4 million, $3.1 million and $1.7$2.2 million, respectively, were recorded as a reduction in income tax expense. The 2008 increase of $8.2 million was recorded

84



as income tax expense of $3.0 million and an adjustment to goodwill of $5.2 million. Based upon expected future income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance.


The Internal Revenue Service (“IRS”("IRS") is examininghas previously examined the Company’sCompany's 2008 and earlier federal income tax returns for fiscal years 2006, 2007returns. As a result, the 2008 and 2008. The 2005 and earlier tax years are not open for examination.further examination by the IRS. The Company has filed an amended federal income tax return requesting a refund of approximately $5.1 million for its 2009 and 2010 fiscal years, while not currently under examination, are subjecttax year. This amended return is expected to examination at the discretion ofbe examined by the IRS. As the statute of limitations has otherwise closed for the 2009 tax year, the IRS' ability to assess additional income tax for 2009 is limited to the refund requested on the amended income tax return. The IRS, at its discretion, may also choose to examine the Company's 2010 through 2013 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. The estimated liability related to these state income tax examinations is included in the Company’s reserve for uncertain tax positions. Generally, the Company’sCompany's 2010 and later tax years ended in 2007 and forward remain open for examination by the various state taxing authorities.

As of January 28, 2011,31, 2014, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $26.4$19.6 million, $1.9$2.4 million and $0.5$0.4 million, respectively, for a total of $28.8$22.4 million. Of this total amount, $0.2$3.6 million and $27.3$18.8 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the consolidated balance sheet with the remaining $1.3 million reducing deferred tax assets related to net operating loss carry forwards.sheet.

As of January 29, 2010,February 1, 2013, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $67.6$22.2 million, $8.8$2.3 million and $1.7$0.4 million, respectively, for a total of $78.1$24.9 million. Of this total amount, $8.5$1.5 million and $68.0$23.4 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the consolidated balance sheet with the remaining $1.6 million reducing deferred tax assets related to net operating loss carry forwards.sheet.

The Company believes that it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $1.4$11.2 million in the coming twelve months principally as a result of the effective settlement of currently ongoing income tax examinations. The reasonably possible change of $1.4 million is included in current liabilities in Accrued expenses and other ($0.2 million) and in noncurrent Other liabilities ($1.2 million) in the consolidated balance sheet as of January 28, 2011.several outstanding issues. Also, as of January 28, 2011,31, 2014, approximately $26.4



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Income taxes (Continued)

$19.6 million of the uncertain tax positions would impact the Company’sCompany's effective income tax rate if the Company were to recognize the tax benefit for these positions.

The consolidated statementsamounts associated with uncertain tax positions included in income tax expense consists of income for the respective years reflected below include the following amounts:following:

(In thousands)

2010

2009

2008

 

Income tax expense (benefit)

$

(12,000

)

$

11,900

 

$

800

 

Income tax related interest expense (benefit)

 

(5,800

)

 

2,300

 

 

(1,000

)

Income tax related penalty expense (benefit)

 

(700

)

 

400

 

 

300

 


(In thousands)
 2013 2012 2011 

Income tax expense (benefit)

 $(3,915)$(16,119)$97 

Income tax related interest expense (benefit)

  590  344  968 

Income tax related penalty expense (benefit)

  30  (200) 63 



85



A reconciliation of the uncertain income tax positions from February 1, 2008 through January 28, 2011 through January 31, 2014 is as follows:


(In thousands)

2010

2009

2008

 

Beginning balance

$

67,636

 

$

59,057

 

$

96,600

 

Increases – tax positions taken in the current year

 

125

 

 

13,701

 

 

25,977

 

Decreases – tax positions taken in the current year

 

-

 

 

-

 

 

(2,250

)

Increases – tax positions taken in prior years

 

-

 

 

4,039

 

 

3,271

 

Decreases – tax positions taken in prior years

 

(36,973

)

 

(1,111

)

 

(58,607

)

Statute expirations

 

(1,570

)

 

-

 

 

(1,955

)

Settlements

 

(2,789

)

 

(8,050

)

 

(3,979

)

 

 

 

 

 

 

 

 

 

 

Ending balance

$

26,429

 

$

67,636

 

$

59,057

 


(In thousands)
 2013 2012 2011 

Beginning balance

 $22,237 $42,018 $26,429 

Increases—tax positions taken in the current year

  3,484  2,114  125 

Increases—tax positions taken in prior years

  3,000  1,144  15,840 

Decreases—tax positions taken in prior years

  (608) (22,669)  

Statute expirations

  (7,622) (166) (376)

Settlements

  (908) (204)  
        

Ending balance

 $19,583 $22,237 $42,018 
        
        

7.

5. Current and long-term obligations


Current and long-term obligations consist of the following:

(In thousands)
 January 31,
2014
 February 1,
2013
 

Senior unsecured credit facilities, maturity April 11, 2018:

       

Term Facility

 $1,000,000 $ 

Revolving Facility

     

Senior secured term loan facility:

       

Maturity July 6, 2014

    1,083,800 

Maturity July 6, 2017

    879,700 

ABL Facility, maturity July 6, 2014

    286,500 

41/8% Senior Notes due July 15, 2017

  500,000  500,000 

17/8% Senior Notes due April 15, 2018 (net of discount of $383)

  399,617   

31/4% Senior Notes due April 15, 2023 (net of discount of $2,199)

  897,801   

Capital lease obligations

  6,841  7,733 

Tax increment financing due February 1, 2035

  14,495  14,495 
      

  2,818,754  2,772,228 

Less: current portion

  (75,966) (892)
      

Long-term portion

 $2,742,788 $2,771,336 
      
      

(In thousands)

January 28, 2011

 

January 29, 2010

Senior secured term loan facility

$

1,963,500 

 

$

1,963,500 

 

ABL Facility

 

 

 

 

10 5/8% Senior Notes due July 15, 2015, net of discount of
$11,161 and $14,788, respectively

 

853,172 

 

 

964,545 

 

11 7/8/12 5/8% Senior Subordinated Notes due July 15, 2017

 

450,697 

 

 

450,697 

 

8 5/8% Notes due June 15, 2010

 

 

 

1,822 

 

Capital lease obligations

 

6,363 

 

 

8,327 

 

Tax increment financing due February 1, 2035

 

14,495 

 

 

14,495 

 

 

 

3,288,227 

 

 

3,403,386 

 

Less: current portion

 

(1,157)

 

 

(3,671)

 

Long-term portion

$

3,287,070 

 

$

3,399,715 

 


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

TheNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Current and long-term obligations (Continued)

        On April 11, 2013, the Company entered into twoconsummated a refinancing pursuant to which it terminated its existing senior secured credit agreements, entered into a new five-year unsecured credit agreement, and issued senior notes due in 2018 and 2023 as described in more detail below. The Company's new senior unsecured credit facilities (the “Credit Facilities”"Facilities") at the timeconsist of the Merger. As of January 28, 2011, the Credit Facilities provide total financing of $2.995a $1.0 billion consisting of $1.964 billion in a senior securedunsecured term loan facility (“Term Loan Facility”(the "Term Facility") which matures on July 6, 2014, and aan $850.0 million senior secured asset-basedunsecured revolving credit facility (“ABL Facility”(the "Revolving Facility"), which provides for the issuance of letters of credit up to $250.0 million. The Company may request, subject to agreement by one or more lenders, increased revolving commitments and/or incremental term loan facilities in an aggregate amount of up to $1.031 billion, subject to borrowing base availability, which matures on July 6, 2013.

$150.0 million. The amount available under the ABL Facility (including up to $350.0 million for letters of credit) may not exceed the borrowing base (consisting of specified percentages of eligible inventory and credit card receivables less any applicable availability reserves). The ABL Facility includes a $930.0 million tranche and a $101.0 million (“last out”) tranche. Repayments of the ABLTerm Facility will be applied toamortize in quarterly installments of $25.0 million, with the $101.0first such payment due on August 1, 2014, and final payment at maturity on April 11, 2018. The Company capitalized $5.9 million tranche only after all other tranches have been fully paid down.of debt issuance costs associated with the Facilities which is included in long-term Other assets, net in the consolidated balance sheet.


Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at the Company’sCompany's option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable margin for borrowings is (i) under the Term Loan, 2.75%as of January 31, 2014 was 1.275% for LIBOR borrowings and 1.75%0.275% for base-rate borrowings (ii) underborrowings. The Company must also pay a facility fee on any used and unused amounts of the ABL Facility (except in the last out tranche described above)Facilities, as well as letter of January 28, 2011 and January 29, 2010, 1.25% for



86



LIBOR borrowings and 0.25% for base-rate borrowings and for any last out borrowings, 2.25% for LIBOR borrowings and 1.25% for base-rate borrowings.credit fees. The applicable margins for borrowings, the facility fees and the letter of credit fees under the ABL Facility (except in the case of last out borrowings)Facilities are subject to adjustment each quarter based on average daily excess availability under the ABL Facility.Company's long-term senior unsecured debt ratings. The weighted average interest rate for borrowings under the Term Loan FacilityFacilities was 3.0%1.46% (without giving effect to the interest rate swaps discussed in Note 8)7) as of both January 28, 2011 and January 29, 2010, respectively.31, 2014.


In addition to paying interest on outstanding principal under the Credit        The Facilities the Company is required to pay a commitment fee to the lenders under the ABL Facility for any unutilized commitments. The commitment fee rate is 0.375% per annum. The commitment fee rate will be reduced (except with regard to the last out tranche) to 0.25% per annum at any time that the unutilized commitments under the ABL Facility are equal to or less than 50% of the aggregate commitments under the ABL Facility. The Company also must pay customary letter of credit fees.


The senior secured credit agreement for the Term Loan Facility requires the Company to prepay outstanding term loans, subject to certain exceptions, with percentages of excess cash flow, proceeds of non-ordinary course asset sales or dispositions of property, and proceeds of incurrences of certain debt. In addition, the senior secured credit agreement for the ABL Facility requires the Company to prepay the ABL Facility, subject to certain exceptions, with proceeds of non-ordinary course asset sales or dispositions of property and any borrowings in excess of the then current borrowing base. The Term Loan Facility can be prepaid in whole or in part at any time.

Beginning September 30, 2009, The Facilities contain certain covenants which place limitations on the incurrence of liens; change of business; mergers or sales of all or substantially all assets; and subsidiary indebtedness, among other limitations. The Facilities also contain financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of January 31, 2014, the Company was required to repay installments onin compliance with all such covenants. The Facilities also contain customary affirmative covenants and events of default.

        As of January 31, 2014, the loansCompany had total outstanding letters of credit of $49.9 million, $27.2 million of which were under the Term LoanRevolving Facility, in equal quarterly principal amounts in an aggregate amount per annum equal to 1% ofand borrowing availability under the total funded principal amount at July 6, 2007. During 2009,Revolving Facility was $822.8 million.

        In connection with the refinancing discussed above, the Company paid two such quarterly installments totaling $11.5 million. In addition, in January 2010 the Company voluntarily prepaid $325 million of the principal balance of the Term Loan Facility,terminated its senior secured term loan facility and as a result, no further quarterly principal installments will be required prior to maturity of the Term Loan Facility on July 6, 2014.senior secured revolving credit facility ("ABL Facility"). The Company incurredrecorded a pretax loss of $4.7$18.9 million in 2009 for the write off of debt issuance costs associated with this prepayment.

All obligations underthose facilities, which is reflected in Other (income) expense in the Credit Facilities are unconditionally guaranteed by substantially allconsolidated statement of the Company’s existing and future domestic subsidiaries (excluding certain immaterial subsidiaries and certain subsidiaries designated by the Company under the Credit Facilities as “unrestricted subsidiaries”).


All obligations and guarantees of those obligations under the Term Loan Facility are secured by, subject to certain exceptions, a second-priority security interest in all existing and after-acquired inventory and accounts receivable; a first priority security interest in substantially all of the Company’s and the guarantors’ tangible and intangible assets (other than the inventory and accounts receivable collateral); and a first-priority pledge of the capital stock held by the Company. All obligations under the ABL Facility are secured by all existing and after-acquired inventory and accounts receivable, subject to certain exceptions.




87



The Credit Facilities contain certain covenants, including, among other things, covenants that limit the Company’s ability to incur additional indebtedness, sell assets, incur additional liens, pay dividends, make investments or acquisitions, or repay certain indebtedness.


Under the ABL facility, for the years ended January 28, 2011 and January 29, 2010, the Company had no borrowings or repayments;income for the year ended January 30, 2009, the Company had no borrowings and repayments of $102.5 million. As of January 28, 2011 and January 29, 2010, respectively, amounts outstanding under the ABL Facility included $52.7 million and $85.1 million of standby letters of credit, and $19.1 million and $15.4 million of commercial letters of credit, while excess availability under the ABL Facility was $959.3 million and $930.6 million, respectively.31, 2014.


On July 6, 2007, in conjunction with the Merger,12, 2012, the Company issued $1.175 billion$500.0 million aggregate principal amount of 10.625%4.125% senior notes due 20152017 (the “Senior Notes”"2017 Senior Notes") which were issued net of a discount of $23.2 million and which mature on July 15, 2015 pursuant to an indenture, dated as of July 6, 2007 (the “senior indenture”), and $725 million aggregate principal amount of 11.875%/12.625% senior subordinated toggle notes due 2017 (the “Senior Subordinated Notes”), which mature on July 15, 2017, pursuant to an indenture, dated as of July 6, 2007 (the “senior subordinated indenture”). The Senior Notes and the Senior Subordinated Notes are collectively referred to herein as the “Notes”. The senior indenture and the senior subordinated indenture are collectively referred to herein as the “indentures.”


2017. Interest on the 2017 Senior Notes is payable in cash on January 15 and July 15 of each year.year, and commenced on January 15, 2013.

        On April 11, 2013, the Company issued $400.0 million aggregate principal amount of 1.875% senior notes due 2018 (the "2018 Senior Notes"), net of discount of $0.5 million, which mature on April 15, 2018; and issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the "2023 Senior Notes"), net of discount of $2.4 million, which mature on April 15, 2023.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Current and long-term obligations (Continued)

Collectively, the 2017 Senior Notes, the 2018 Senior Notes and the 2023 Senior Notes comprise the "Senior Notes", each of which were issued pursuant to an indenture as modified by supplemental indentures relating to each series of Senior Notes (as so supplemented, the "Senior Indenture"). The Company capitalized $10.1 million of debt issuance costs associated with the 2018 Senior Notes and the 2023 Senior Notes. Interest on the 2018 Senior Notes and 2023 Senior Subordinated Notes is payable in cash. Cash interestcash on the Senior Subordinated Notes accrues at a rateApril 15 and October 15 of 11.875% per annum. For certain interest periods, the Company previously had the ability to elect to pay interesteach year and commenced on the Senior Subordinated Notes by increasing the principal amount of the Senior Subordinated Notes or issuing new senior subordinated notes (“PIK interest”), instead of paying interest in cash. This election was never utilized by the Company and due to the expiration of the notification period for such option, all interest on the Notes has been paid in cash.October 15, 2013.

The Notes are fully and unconditionally guaranteed by each of the existing and future direct or indirect wholly owned domestic subsidiaries that guarantee the obligations under the Company’s Credit Facilities.

The Company may redeem some or all of theits Senior Notes at any time at redemption prices described or set forth in the indentures. In addition,Senior Indenture. Upon the holdersoccurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of the Senior Notes canhas the right to require the Company to redeem therepurchase some or all of such holder's Senior Notes at a purchase price in cash equal to 101% of the aggregate principal amount outstanding inthereof, plus accrued and unpaid interest, if any, to the eventrepurchase date.

        The Senior Indenture contains covenants limiting, among other things, the ability of certain change in control events.

In May 2010, the Company repurchased in(subject to certain exceptions) to consolidate, merge, sell or otherwise dispose of all or substantially all of the open market $50.0Company's assets; and the ability of the Company and its subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

        The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Notes to become or to be declared due and payable.

        On July 15, 2012, the Company redeemed $450.7 million aggregate principal amount of 10.625%outstanding senior subordinated notes due 2017 at a premium, resulting in a pretax loss of $29.0 million which is reflected in Other (income) expense in the consolidated statement of income for the year ended February 1, 2013. The Company funded the redemption price for the senior subordinated notes due 2017 with proceeds from the issuance of the 2017 Senior Notes.

        In 2011, the Company repurchased or redeemed $864.3 million aggregate principal amount of outstanding senior notes due 2015 at a price of 111.0% plus accrued and unpaid interest. In September 2010, the Company repurchased in the open market $65.0 million aggregate principal amount of 10.625% senior notes due 2015 at a price of 110.75% plus accrued and unpaid interest. The 2010 repurchases resulted in pretax losses totaling $14.7 million. In connection with the Company’s November 2009 initial public offering, as further discussed in Note 2, the Company repurchased $195.7 million of the Senior Notes and $205.2 million of the



88



Senior Subordinated Notes at redemption prices of 110.625% and 111.875%, respectively, plus accrued and unpaid interest,premium, resulting in pretax losses totaling $50.6 million. In January 2009, the Company repurchased $44.1$60.3 million of the Senior Subordinated Notes, resulting in a pretax gain of $3.8 million. Pretax gains and losses associated with the redemption of the Noteswhich are reflected in Other (income) expense in the consolidated statementsstatement of operations.income for the year ended February 3, 2012. The Company funded the redemption price for the senior notes due 2015 with cash on hand and borrowings under the ABL Facility.


The indentures contain certain covenants, including, among other things, covenants that limit the Company’s ability to incur additional indebtedness, create liens, sell assets, enter into transactions with affiliates, or consolidate or dispose of all of its assets.


Scheduled debt maturities, including capital lease obligations, for the Company’sCompany's fiscal years listed below are as follows (in thousands): 2011 - $1,157; 2012 - $707; 2013 - $292;2014—$75,966; 2015—$101,158; 2016—$101,379; 2017—$601,290; 2018—$1,025,892; thereafter—$915,651.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Assets and liabilities measured at fair value

        The following table presents the Company's assets and liabilities measured at fair value on a recurring basis as of January 31, 2014, - $1,963,815; 2015 - $864,787; thereafter - $468,630.aggregated by the level in the fair value hierarchy within which those measurements are classified.

(In thousands)
 Quoted Prices
in Active
Markets
for Identical
Assets and
Liabilities
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 Balance at
January 31,
2014
 

Assets:

             

Trading securities(a)

 $621 $ $ $621 

Liabilities:

             

Long-term obligations(b)

  2,772,739  21,336    2,794,075 

Derivative financial instruments(c)

    4,109    4,109 

Deferred compensation(d)

  21,696      21,696 

(a)
Reflected at fair value in the consolidated balance sheet as Prepaid expenses and other current assets.

(b)
Reflected at book value in the consolidated balance sheet as Current portion of long-term obligations of $75,966 and Long-term obligations of $2,742,788.

(c)
Reflected at fair value in the consolidated balance sheet as noncurrent Other liabilities.

(d)
Reflected at fair value in the consolidated balance sheet as Accrued expenses and other current liabilities of $4,092 and noncurrent Other liabilities of $17,604.

        The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, short-term investments, receivables and payables approximate their respective fair values. The Company does not have any recurring fair value measurements using significant unobservable inputs (Level 3) as of January 31, 2014.


8.

7. Derivative financial instruments


        The Company enters into certain financial instrument positions, all of which are intended to be used to reduce risk by hedging an underlying economic exposure.

Risk management objective of using derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined primarily by interest rates. The Company’sCompany's derivative financial instruments are used to



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Derivative financial instruments (Continued)

manage differences in the amount, timing, and duration of the Company’sCompany's known or expected cash receipts and its known or expected cash payments principally related to the Company’sCompany's borrowings.

In addition, the Company is exposed to certain risks arising from uncertainties of future market values caused by the fluctuation in the prices of commodities. From time to time the Company has enteredmay enter into derivative financial instruments to protect against future price changes related to transportation costs associated with forecasted distribution of inventory.these commodity prices.

Cash flow hedges of interest rate risk

The Company’sCompany's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate changes. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (also referred to as “OCI”"OCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Subsequent to the Merger, theseThese transactions represent the only amounts reflected in Accumulated other comprehensive income (loss) in the



89



consolidated statements of shareholders’shareholders' equity. During the yearyears ended January 28, 2011,31, 2014, February 1, 2013, and February 3, 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

As of January 28, 2011,31, 2014, the Company had three interest rate swaps with a combined notional value of $1.05 billion$875 million that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’sCompany's variable-rate debt. The

        During the year ended January 31, 2014, the Company terminated anentered into treasury locks with a combined notional amount of $700 million that were designated as cash flow hedges of interest rate swap in October 2008 due torisk on the bankruptcy declarationCompany's forecasted issuance of long-term debt. The issuance of the counterparty bank.hedged long-term debt occurred on April 11, 2013 in the form of senior notes due April 15, 2023, as further discussed in Note 5, and the related settlement of the treasury locks on that date resulted in a loss of $13.2 million which was deferred to OCI. The Company continues to report the net gain or loss related to the discontinued cash flow hedge in OCI and such net gain or loss is being reclassified into earnings duringamortized as an increase to interest expense over the original contractual terms ofperiod corresponding to the swap agreementdebt's maturity as the Company accrues or pays interest on the hedged interest payments are expected to occur as forecasted.long-term debt. There was no ineffectiveness recognized on these designated treasury locks.

        During the next 52-week period, the Company estimates that an additional $27.2approximately $4.7 million will be reclassified as an increase to interest expense for all of its interest rate swaps.swaps and treasury locks.

Non-designated hedges of commodity risk

Derivatives not designated as hedges are not speculative and are used to manage the Company’sCompany's exposure to commodity price risk but do not meet strict hedge accounting requirements. In February 2009, the Company entered into a commodity hedge related to diesel fuel to limit its exposure to variability in diesel fuel prices and their effect on transportation costs. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of January 28, 2011,31, 2014, the Company had no outstanding commoditysuch non-designated hedges. During 2009, the Company entered into one diesel fuel commodity swap hedging monthly usage of diesel fuel that was not designated as a hedge in a qualifying hedging relationship, which expired prior to January 29, 2010.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Derivative financial instruments (Continued)

The table below presents the fair value of the Company’sCompany's derivative financial instruments as well as their classification on the consolidated balance sheets as of January 28, 201131, 2014 and January 29, 2010 (in thousands):February 1, 2013:


Tabular Disclosure of Fair Values of Derivative Instruments

 

 

 

 

Asset Derivatives

Liability Derivatives

 

Balance Sheet
Classification

 

Fair Value

Balance Sheet
Classification

 

Fair Value

Derivatives designated as hedging
instruments

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

As of January 28, 2011

 

 

 

 

Other liabilities

 

$

34,923

As of January 29, 2010

 

 

 

 

Other liabilities

 

$

57,058




(in thousands)
 January 31,
2014
 February 1,
2013
 

Derivatives Designated as Hedging Instruments

       

Interest rate swaps classified as noncurrent Other liabilities

 $4,109 $4,822 

The tables below present the pre-tax effect of the Company’sCompany's derivative financial instruments onas reflected in the consolidated statementstatements of operations (including OCI) for the years ended January 28, 2011comprehensive income and January 29, 2010:shareholders' equity, as applicable:


Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations
For the year ended January 28, 2011

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest rate swaps

 

$

19,717

Interest expense

 

$

42,994

Other (income)
expense

 

$

526


Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations
For the year ended January 29, 2010

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of
(Gain) or Loss
Recognized in
OCI on
Derivative
(Effective
Portion)

Location of Gain or
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
(Gain) or Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Location of Gain or
Loss Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of (Gain)
or Loss Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

Interest rate swaps

 

$

42,324

Interest expense

 

$

50,140

Other (income)
expense

 

$

618

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging
Instruments

Location of Gain or
Loss Recognized in
Income on
Derivative

 

Amount of
(Gain) or Loss
Recognized in
Income on
Derivative

 

 

 

 

Commodity hedges

Other (income)
expense

 

$

(341)

 

 

 

 

(in thousands)
 2013 2012 2011 

Derivatives in Cash Flow Hedging Relationships

          

Loss related to effective portion of derivative recognized in OCI

 $16,036 $9,626 $3,836 

Loss related to effective portion of derivative reclassified from Accumulated OCI to Interest expense

 $4,604 $13,327 $28,633 

(Gain) loss related to ineffective portion of derivative recognized in Other (income) expense

 $ $(2,392)$312 


Credit-risk-related contingent features


The Company has agreements with all of its interest rate swap counterparties that contain a provision providing that the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on such indebtedness.


As of January 28, 2011,31, 2014, the fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $44.0$4.2 million. If the Company had breached any of these provisions at January 28, 2011,31, 2014, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value equal to the fair value of $44.0$4.2 million. As of January 28, 2011,31, 2014, the Company had not breached any of these provisions or posted any collateral related to these agreements.




9.

8. Commitments and contingencies


Leases

Leases


As of January 28, 2011,31, 2014, the Company was committed under operating lease agreements for most of its retail stores. Many of the Company’sCompany's stores are subject to build-to-suit arrangements with landlords which typically carry a primary lease term of 10-15up to 15 years with multiple renewal options. The Company also has stores subject to shorter-term leases (usually with initial or current terms of three to five years), and many of these leases have multiple renewal options. Approximately 35%Certain of the Company's leased stores have provisions for contingent rentals based upon a specified percentage of defined sales volume. The Company leases three of its DCs.

        The land and buildings of two of the Company's DCs in Fulton, Missouri and Indianola, Mississippi are subject to operating lease agreements and the thirdleased Ardmore, Oklahoma DC is subject to a financing arrangement. The entities involved in the ownership structure underlying these leases meet the



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

accounting definition of a Variable Interest Entity (“VIE”("VIE"). The Company is not the primary beneficiary of these VIEs and, accordingly, has not included these entities in its consolidated financial statements. Certain leases contain restrictive covenants.covenants that, individually, are not material to the Company. As of January 28, 2011,31, 2014, the Company is not aware of any material violations of such covenants.

        In January 2014, the Company sold 233 store locations for cash and concurrent with the sale transaction, the Company leased the properties back for a period of 15 years. The transaction resulted in cash proceeds of approximately $281.6 million and a deferred gain of $67.2 million which will be recognized as a reduction of rent expense over the 15-year initial lease term of the properties.

In January 1999, the Company sold its DC located in Ardmore, Oklahoma for 100% cash consideration. Concurrentand concurrent with the sale transaction, the Company leased the property back for a period of 23 years. The transaction was recordedis accounted for as a financing obligation rather than a sale as a result of, among other things, the lessor’slessor's ability to put the property back to the Company under certain circumstances. The property and equipment, along with the related lease obligation associated with this transaction are recorded in the consolidated balance sheets. In August 2007, the Company purchased a secured promissory note (the “Ardmore Note”"Ardmore Note") from an unrelated third party with a face value of $34.3 million at the date of purchase which approximated the remaining financing obligation. The Ardmore Note represents debt issued by the third party entity from which the Company leases the Ardmore DC and therefore the Company holds the debt instrument pertaining to its lease financing obligation. Because a legal right of offset exists, the Company is accounting for the Ardmore Note as a reduction of its outstanding financing obligation in its consolidated balance sheets.



92



Future minimum payments as of January 28, 201131, 2014 for capital and operating leases are as follows:


(In thousands)

Capital

Leases

 

Operating

Leases

2011

1,535 

 

481,921

 

2012

 

1,040 

 

 

444,804

 

2013

 

599 

 

 

394,781

 

2014

 

602 

 

 

338,781

 

2015

 

627 

 

 

275,299

 

Thereafter

 

4,609 

 

 

1,067,756

 

 

 

 

 

 

 

 

Total minimum payments

 

9,012 

 

3,003,342

 

Less: imputed interest

 

(2,649)

 

 

 

 

Present value of net minimum lease payments

 

6,363 

 

 

 

 

Less: current portion, net

 

(1,157)

 

 

 

 

Long-term portion

5,206 

 

 

 

 

(In thousands)
  
 

2014

 $712,563 

2015

  665,193 

2016

  610,643 

2017

  554,413 

2018

  496,265 

Thereafter

  2,699,755 
    

Total minimum payments

 $5,738,832 
    
    

Capital        Total minimum payments for capital leases as of January 31, 2014 were discounted at an effective interest rate$8.7 million, with a present value of approximately 6.3%$6.8 million at January 28, 2011.31, 2014. The gross amount of property and equipment recorded under capital leases and financing obligations at both January 28, 201131, 2014 and at January 29, 2010,February 1, 2013, was $31.0 million and $34.8 million, respectively.$29.8 million. Accumulated depreciation on property and equipment under capital leases and financing obligations at January 28, 201131, 2014 and January 29, 2010,February 1, 2013, was $7.4$8.7 million and $6.9 million, respectively.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

Rent expense under all operating leases is as follows:


(In thousands)

2010

 

2009

 

2008

Minimum rentals (a)

$

471,402

 

$

407,379

 

$

370,827

(In thousands)
 2013 2012 2011 

Minimum rentals(a)

 $674,849 $599,138 $525,486 

Contingent rentals

 

17,882

 

 

21,248

 

 

18,796

 12,058 15,150 16,856 

$

489,284

 

$

428,627

 

$

389,623

       

 

 

 

 

 

 

 

 

 $686,907 $614,288 $542,342 

(a)

Excludes amortization of leasehold interests of $25.7 million, $37.2 million and $40.9 million included in rent expense for the years ended January 28, 2011, January 29, 2010 and January 30, 2009, respectively.

       
       

(a)
Excludes amortization of leasehold interests of $11.9 million, $16.9 million and $21.0 million included in rent expense for the years ended January 31, 2014, February 1, 2013, and February 3, 2012, respectively.


Legal proceedings


On August 7, 2006, a lawsuit entitledCynthia Richter, et al. v. Dolgencorp, Inc., et al. was filed in the United States District Court for the Northern District of Alabama (Case No. 7:06-cv-01537-LSC) (“Richter”("Richter") in which the plaintiff alleges that she and other current and former Dollar General store managers were improperly classified as exempt executive employees under the Fair Labor Standards Act (“FLSA”("FLSA") and seeks to recover overtime pay, liquidated damages, and attorneys’attorneys' fees and costs. On August 15, 2006, theRichter plaintiff filed a motion in which she asked the court to certify a nationwide class of current and former store managers. The Company opposed the plaintiff’splaintiff's motion. On March 23, 2007, the court conditionally certified a nationwide class. On December 2, 2009, notice was mailed to over 28,000 current or former Dollar General store managers, and approximately 3,860managers. Approximately 3,950 individuals



93



opted into the lawsuit. In September 2010,lawsuit, approximately 1,000 of whom have been dismissed for various reasons, including failure to cooperate in discovery.

        On April 2, 2012, the Company moved to decertify the class. The plaintiff's response to that motion was filed on May 9, 2012.

        On October 22, 2012, the court entered a scheduling orderMemorandum Opinion granting the Company's decertification motion. On December 19, 2012, the court entered an Order decertifying the matter and stating that governs, among other things, deadlines for fact discovery (September 30, 2011)a separate Order would be entered regarding the opt-in plaintiffs' rights and Cynthia Richter's individual claims. To date, the court has not entered such an Order.

        The parties agreed to mediate the matter, and the Company’s anticipated decertification motion (August 15, 2011).court informally stayed the action pending the results of the mediation. Mediations were conducted in January, April and August 2013. On August 10, 2013, the parties reached a preliminary agreement, which has been formalized and submitted to the court for approval, to resolve the matter for up to $8.5 million. The court’s scheduling order establishes a trial date of February 12, 2012.


On July 20, 2010, a lawsuit was filedCompany has deemed the settlement probable and recorded such amount as the estimated expense in the judicial district in which the Richter matter is pending in which a former store manager made allegations substantially similar to those raised in Richter and sought to represent a nationwide classsecond quarter of current and former store managers (Lisa Beard v. Dollar General Corporation, et al., Case No. 7:10-cv-01956-SLB). The plaintiff in Beard seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On March 4, 2011, the Beard plaintiff moved to amend her complaint to strike all class allegations and notified the court of her withdrawal of the consent forms previously filed by approximately 95 opt-in plaintiffs. The plaintiff’s motion to amend was granted on March 7, 2011, which had the effect of rendering the Beard action a single-plaintiff case. If the case remains a single-plaintiff case, it is extremely unlikely that the case could have a material impact on the Company’s financial statements as a whole.2013.


The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that theRichter action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending individual or single-plaintiff store manager exemption cases in which it has filed such a motion.


The Company intends to vigorously defend the Richter and Beard matters. However, at        At this time, although probable, it is not certain that the court will approve the settlement. If it does not, and the case proceeds, it is not possible to predict whetherRichter ultimately will be permitted to proceed collectively, and no assurances can be given that the Company will be successful



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

in its defense of the action on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted if this action were to proceed. For these reasons, the Company is unable to estimate any potential loss or range of loss in such a scenario; however, if the Company is not successful in its defense efforts, the resolution ofRichter could have a material adverse effect on the Company's consolidated financial statements as a whole.

        On April 9, 2012, the Company was served with a lawsuit filed in the United States District Court for the Eastern District of Virginia entitledJonathan Marcum v. Dolgencorp. Inc. (Civil Action No. 3:12-cv-00108-JRS) in which the plaintiffs, one of whose conditional offer of employment was rescinded, allege that certain of the Company's background check procedures violate the Fair Credit Reporting Act ("FCRA"). Plaintiff Marcum also alleges defamation. According to the complaint and subsequently filed first and second amended complaints, the plaintiffs seek to represent a putative class of applicants in connection with their FCRA claims. The Company responded to the complaint and each of the amended complaints. The plaintiffs' certification motion was due to be filed on or before April 5, 2013; however, plaintiffs asked the court to stay all deadlines in light of the parties' ongoing settlement discussions (as more fully described below). On November 12, 2013, the court entered an order lifting the stay. The court has not issued a new scheduling order but has set a pre-trial conference for March 27, 2014.

        The parties have engaged in formal settlement discussions on three occasions, once in January 2013 with a private mediator, and again in March 2013 and July 2013 with a federal magistrate. On February 18, 2014, the parties reached a preliminary agreement to resolve the matter for up to $4.08 million, which must be submitted to and approved by the court. Based on this preliminary settlement agreement, the Company believes, but cannot guarantee, that the court will not proceed with the March 27, 2014, pre-trial conference.

        The Company's Employment Practices Liability Insurance ("EPLI") carrier has been placed on notice of this matter and participated in both the formal and informal settlement discussions. The EPLI Policy covering this matter has a $2 million self-insured retention. Because the Company believes that it was likely to expend the balance of its self-insured retention in settlement of this litigation or otherwise, it accrued $1.8 million in the fourth quarter of 2012, an amount that is immaterial to the Company's consolidated financial statements as a whole.

        At this time, although probable, it is not certain that the court will approve the settlement. If the court does not approve the settlement and the case proceeds, it is not possible to predict whetherMarcum ultimately will be permitted to proceed as a class action under the FCRA, and no assurances can be given that the Company will be successful in the defense on the merits or otherwise. At this stage in the proceedings, the Company cannot estimate either the size of any potential class or the value of the claims asserted by the plaintiffs.

        In September 2011, the Chicago Regional Office of the United States Equal Employment Opportunity Commission ("EEOC" or "Commission") notified the Company of a cause finding related to the Company's criminal background check policy. The cause finding alleges that Dollar General's criminal background check policy, which excludes from employment individuals with certain criminal convictions for specified periods, has a disparate impact on African-American candidates and employees in violation of Title VII of the Civil Rights Act of 1964, as amended ("Title VII").



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

        The Company and the EEOC engaged in the statutorily required conciliation process, and despite the Company's good faith efforts to resolve the matter, the Commission notified the Company on July 26, 2012 of its view that conciliation had failed.

        On June 11, 2013, the EEOC filed a lawsuit in the United States District Court for the Northern District of Illinois entitledEqual Opportunity Commission v. Dolgencorp, LLC d/b/a Dollar General (Case No. 1:13-cv-04307) in which the Commission alleges that the Company's criminal background check policy has a disparate impact on "Black Applicants" in violation of Title VII and seeks to recover monetary damages and injunctive relief on behalf of a class of "Black Applicants." The Company filed its Answer to the Complaint on August 9, 2013.

        On January 29, 2014, the court entered an order, which, among other things, bifurcates the issues of liability and damages during discovery and at trial. Under this order, fact discovery relating to liability is to be completed by September 15, 2014. A status conference is scheduled for June 17, 2014.

        The Company believes that its criminal background check process is both lawful and necessary to a safe environment for its employees and customers and the protection of its assets and shareholders' investments. The Company also does not believe that this matter is amenable to class or similar treatment. However, at this time, it is not possible to predict whether the action will ultimately be permitted to proceed as a class or in a similar fashion or the size of any putative class. Likewise, at this time, it is not possible to estimate the value of the claims asserted, and, therefore, the Company cannot estimate the potential exposure or range of potential loss. If the matter were to proceed successfully as a class or similar action or the Company is unsuccessful in its defense efforts as to the merits of the action, it could have a material adverse effect on the Company's consolidated financial statements as a whole.

        On May 23, 2013, a lawsuit entitledJuan Varela v. Dolgen California and Does 1 through 50 (Case No. RIC 1306158) ("Varela") was filed in the Superior Court of the State of California for the County of Riverside in which the plaintiff alleges that he and other "key carriers" were not provided with meal and rest periods in violation of California law and seeks to recover alleged unpaid wages, injunctive relief, consequential damages, pre-judgment interest, statutory penalties and attorneys' fees and costs. TheVarela plaintiff seeks to represent a putative class of California "key carriers" as to these claims. TheVarela plaintiff also asserts a claim for unfair business practices and seeks to proceed under California's Private Attorney General Act ("PAGA").

        The Company removed the action to the United States District Court for the Central District of California (Case No. 5:13-cv-01172VAP-SP) on July 1, 2013, and filed its Answer to the Complaint on July 1, 2013. On July 30, 2013, the plaintiff moved to remand the action to state court. The Company's response to that motion was filed on August 19, 2013.

        On September 13, 2013, the court granted plaintiff's motion and remanded the case. The Company filed a Petition for Permission to Appeal to the United States Court of Appeals for the Ninth Circuit on September 23, 2013. The Petition for Permission to Appeal is pending.

        A status conference has been scheduled by the Superior Court for July 23, 2014. The parties have agreed to informally stay discovery pending a decision by the Ninth Circuit on the Petition for Permission to Appeal.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

        Similarly, on June 6, 2013, a lawsuit entitledVictoria Lee Dinger Main v. Dolgen California, LLC and Does 1 through 100 (Case No. 34-2013-00146129) ("Main") was filed in the Superior Court of the State of California for the County of Sacramento. TheMain plaintiff alleges that she and other "key carriers" were not provided with meal and rest periods, accurate wage statements and appropriate pay upon termination in violation of California wage and hour laws and seeks to recover alleged unpaid wages, declaratory relief, restitution, statutory penalties and attorneys' fees and costs. TheMain plaintiff seeks to represent a putative class of California "key carriers" as to these claims. TheMain plaintiff also asserts a claim for unfair business practices and seeks to proceed under the PAGA.

        The Company removed this action to the United States District Court for the Eastern District of California (Case No. 2:13-cv-01637-MCE-KJN) on August 7, 2013, and filed its Answer to the Complaint on August 6, 2013. On August 29, 2013, the plaintiff moved to remand the action to state court. The Company's response to that motion was filed on September 19, 2013. On October 28, 2013, the court granted plaintiff's motion and remanded the case. The Company filed a Petition for Permission to Appeal to the United States Court of Appeals for the Ninth Circuit on November 7, 2013. The plaintiff filed its opposition brief on November 15, 2013. The Petition remains pending.

        On February 6, 2014, the Superior Court referred the matter to the Trial Setting Process and ordered the parties to confer and agree upon a date for trial and a mandatory settlement conference. The parties are to advise the Court of the date agreed upon for a trial and settlement conference no later than January 30, 2015. If the parties are unable to agree upon a date by such time, the Court will assign the next available dates.

        The Company believes that its policies and practices comply with California law and that theVarela andMain actions are not appropriate for class or similar treatment. The Company intends to vigorously defend these actions; however, at this time, it is not possible to predict whether theVarela orMain action ultimately will be permitted to proceed as a class, and no assurances can be given that the Company will be successful in its defense of either action on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in theRichterVarela. andMain actions. For these reasons, the Company is unable to estimate any potential loss or range of loss in that action;either matter; however, if the Company is not successful in its defense efforts, the resolution of the Richtereither action could have a material adverse effect on the Company’sCompany's consolidated financial statements as a whole.


On May 18, 2006, the Company was served with31, 2013, a lawsuit entitledTammy Brickey, Becky Norman, Rose Rochow, Sandra CogswellJudith Wass v. Dolgen Corp, LLC (Case No. 13PO-CC00039) ("Wass") was filed in the Circuit Court of Polk County, Missouri. TheWass plaintiff seeks to proceed collectively on behalf of a nationwide class of similarly situated non-exempt store employees who allegedly were not properly paid for certain breaks in violation of the FLSA. TheWass plaintiff seeks back wages (including overtime), injunctive and Melinda Sappington v. Dolgencorp, Inc.declaratory relief, liquidated damages, pre- and Dollar General Corporation (post-judgment interest, and attorneys' fees and costs.

        On July 11, 2013, the Company removed this action to the United States District Court for the Western District of New York, CaseMissouri (Case No. 6:06-cv-06084-DGL, originally113-cv-03267-JFM). The Company filed its Answer on July 18, 2013. The plaintiff's motion for conditional certification is due to be filed on February 9, 2006 and amended on May 12, 2006 (“Brickey”)).or before March 28, 2014. The Brickey plaintiffs seek to proceed collectively under the FLSA and as a class under New York, Ohio, Maryland and North Carolina wage and hour statutes on behalf of, among others, assistant store managers who claimCompany's response is due to be owed wages (including overtime wages) under those statutes. On February 22, 2011, the court denied the plaintiffs’ class certification motion in its entiretyfiled on or before April 25, 2014.

        Similarly, on July 2, 2013, a lawsuit entitledRachel Buttry and ordered that the matter proceed only as to the named plaintiffs. To date, the plaintiffs have not appealed that order. If the case proceeds only as to the named plaintiffs, the Company does not expect the outcome to be material to its financial statements as a whole.


On March 7, 2006, a complaintJennifer Peters v. Dollar General Corp. (Case no. 3:13-cv-00652) ("Buttry") was filed in the United States District Court for the Northern Middle



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

District of Alabama (Tennessee. TheJanet Calvert v. Dolgencorp, Inc.Buttry, Case No. 2:06-cv-00465-VEH



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(“Calvert”)), in which the plaintiff, a former store manager, alleged that she was paid less than male store managers because of her sex, in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964, as amended (“Title VII”). The complaint subsequently was amended to include additional plaintiffs who also allege to have been paid less than males because of their sex, and to add allegations that the Company’s compensation practices disparately impact females. Under the amended complaint, Plaintiffs seek to proceed collectivelyon a nationwide collective basis under the Equal Pay ActFLSA and as a statewide class under Title VII, and requestTennessee law on behalf of non-exempt store employees who allegedly were not properly paid for certain breaks. TheButtry plaintiffs seek back wages (including overtime), injunctive and declaratory relief, liquidated damages, punitivecompensatory and economic damages, "consequential" and attorneys’"incidental" damages, pre-judgment and post-judgment interest, and attorneys' fees and costs.


On July 9, 2007, the        The Company filed its Answer on August 7, 2013. The plaintiffs filed atheir motion in which they asked the court to approve the issuancefor conditional certification of notice to a class of current and former female store managers under the Equal Pay Act. The Company opposed plaintiffs’ motion. On November 30, 2007, the court conditionally certified a nationwide class of females under the Equal Pay Act who worked for Dollar General as store managers between November 30, 2004 and November 30, 2007. The notice was issuedtheir FLSA on January 11, 2008, and persons to whom the notice was sent were required to opt into the suit by March 11, 2008. Approximately 2,100 individuals have opted into the lawsuit.


On April 19, 2010, the plaintiffs moved for class certification relating to their Title VII claims.December 5, 2013. The Company filed its response to that motion on February 3, 2014. The court set a hearing on the plaintiffs' motion for conditional certification of their FLSA claims on April 2, 2014.

        The plaintiffs' motion in June 2010. Briefing has closed, and the parties are awaiting a ruling. The Company’s motionfor certification of their statewide claims is due to decertify the Equal Pay Act class was denied as premature. The Company expects to file a similar motion in due course.


The parties have agreed to mediate this action, and the mediation is scheduled to beginbe filed on March 24, 2011.or before September 22, 2014. The court has stayed the action during the period in which the parties attempt to resolve the matter.set this matter for trial on February 17, 2015.


The Company has tenderedbelieves that its wage and hour policies and practices comply with both the matterFLSA and state law, including Tennessee law, and that theWass and Buttry actions are not appropriate for collective or class treatment. The Company intends to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy. At this time, the Company expects that the EPLI carrier will participate in any resolution of some or all of the plaintiffs’ claims.


Atvigorously defend these actions; however, at this time, it is not possible to predict whether the courtWass or Buttry action ultimately will permit the Calvert actionbe permitted to proceed collectively under the Equal Pay Act or as a class, under Title VII. Although the Company intends to vigorously defend the action,and no assurances can be given that itthe Company will be successful in theits defense of these actions on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims raisedasserted in this action. For these reasons, the Company is unable to estimate any potential loss or range of loss; however, if the Company is not successful in defending this action, its resolution could have a material adverse effect on the Company’s financial statements as a whole.


On June 16, 2010, a lawsuit entitled Shaleka Gross, et al v. Dollar General Corporation was filed in the United States District Court for the Southern District of Mississippi (Civil Action No. 3:10CV340WHB-LR) in which three former non-exempt store employees, on behalf of themselvesWass and certain other non-exempt Dollar General store employees, alleged that they were not paid for all hours worked in violation of the FLSA. Specifically, plaintiffs alleged that they were not properly paid for certain breaks and sought back wages (including overtime wages), liquidated damages and attorneys’ fees and costs.



95



Before the Company was served with the GrossButtry complaint, the plaintiffs dismissed the action and re-filed it in the United States District Court for the Northern District of Mississippi, now captioned as Cynthia Walker, et al. v. Dollar General Corporation, et al. (Civil Action No. 4:10-CV119-P-S). The Walker complaint was filed on September 16, 2010, and although it adds approximately eight additional plaintiffs, it adds no substantive allegations beyond those alleged in the Gross complaint. The Company filed a motion to transfer the case back to the Southern District of Mississippi and a motion to dismiss for lack of personal jurisdiction over two corporate defendants and for failure to state a claim as to Dollar General Corporation, all of which are pending. The court stayed the matter pending resolution of the motion to dismiss. To date, no other individuals have opted into the Walker matter, and the plaintiffs have not asked the court to certify any class.


On August 26, 2010, a lawsuit containing allegations substantially similar to those raised in the Walker matter was filed by a single plaintiff in the United States District Court for the Eastern District of Kentucky (Brenda McCown v. Dollar General Corporation, Case No.210-297 (WOB)). On December 22, 2010, the court entered an order establishing certain deadlines, including the deadline for discovery related to certification issues (June 1, 2011) and for plaintiff’s certification motion, if any (June 30, 2011). No trial date has been set. To date, approximately three other individuals have opted into the McCown matter. The plaintiff has not asked the court to certify any class.


At this time, it is not possible to predict whether the courts will permit the Walker or McCown actions to proceed collectively. However, the Company believes that those actions are not appropriate for collective treatment and that its wage and hour policies and practices comply with both federal and state law. Although the Company plans to vigorously defend Walker and McCown, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims raised in these actions. For these reasons, the Company is unable to estimate any potential loss or range of loss;loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of eitherone or bothmore of these actions could have a material adverse effect on the Company’sCompany's consolidated financial statements as a whole.

        On September 16, 2013, a lawsuit entitledLisa Kocmich v. DolgenCorp, LLC (Case No. 2013CA005841AX) ("Kocmich") was filed in the Circuit Court of Manatee County, Florida. TheKocmich plaintiff seeks to proceed on a nationwide collective basis under the FLSA on behalf of all similarly situated non-exempt store employees who allegedly were not paid for all hours worked (including overtime) as required by the FLSA. TheKocmich plaintiff seeks back wages, liquidated damages and attorneys' fees and costs.

        The Company removed this matter to the United States District Court for the Middle District of Florida (Case No. 8:13-cv-02705-RAL-MAP) on October 21, 2013. The Company filed its Answer on November 4, 2013.

        The parties have reached an agreement to resolve theKocmich matter for an amount that is immaterial to the Company's consolidated financial statements as a whole.

        On May 20, 2011, a lawsuit entitledWinn-Dixie Stores, Inc., et al. v. Dolgencorp, LLC was filed in the United States District Court for the Southern District of Florida (Case No. 9:11-cv-80601-DMM) ("Winn-Dixie") in which the plaintiffs allege that the sale of food and other items in approximately 55 of the Company's stores, each of which allegedly is or was at some time co-located in a shopping center with one of plaintiffs' stores, violates restrictive covenants that plaintiffs contend are binding on the occupants of the shopping centers. Plaintiffs sought damages and an injunction limiting the sale of food and other items in those stores. Although plaintiffs did not make a demand for any specific amount of damages, documents prepared and produced by plaintiffs during discovery suggested that plaintiffs



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and contingencies (Continued)

would seek as much as $47 million although the court limited their ability to prove such damages. The case was consolidated with similar cases against Big Lots and Dollar Tree. The court issued an order on August 10, 2012 in which it (i) dismissed all claims for damages, (ii) dismissed claims for injunctive relief for all but four stores, and (iii) directed the Company to report to the court on its compliance with restrictive covenants at the four stores for which it did not dismiss the claims for injunctive relief. The Company believes that compliance with the August 2012 ruling will have no material adverse impact on the Company or its consolidated financial statements.

        On August 28, 2012, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit (Docket No. 12-14527-B). Oral argument was conducted on January 16, 2014, and the appellate court rendered its decision on March 5, 2014, affirming in part and reversing in part the trial court's decision. Specifically, the appellate court affirmed the trial court's dismissal of plaintiffs' claim for monetary damages but reversed the trial court's decision denying injunctive relief as to thirteen additional stores and remanded for further proceedings. At this time, the Company is unable to predict whether the trial court will enter an injunction as to any of the additional stores at issue; however, the Company does not believe that such an injunction, even if entered as to each remaining additional store at issue, would have a material adverse effect on the Company or its consolidated financial statements as a whole.


In October 2008,        The Company also is unable to predict whether the plaintiffs will seek further appellate review of the trial court's dismissal of plaintiff's claim for damages. If plaintiffs were to obtain further appellate review, and the Company terminated an interest rate swap as a result of the counterparty’s declaration of bankruptcy. This declaration of bankruptcy constituted a default under the contract governing the swap, giving the Company the right to terminate. The Company subsequently settled the swap in November 2008 for approximately $7.6 million, including interest accrued to the date of termination. On May 14, 2010, the Company received a demand from the counterparty for an additional payment of approximately $19 million plus interest, claiming that the valuation used to calculate the $7.6 million was commercially unreasonable, and seeking to invoke the alternative dispute resolution procedures established by the bankruptcy court. The Company is participating in the alternative dispute resolution procedures because it believes a reasonable settlement would be in the best interest of the Company to avoid the substantial risk and costs of litigation, but does not believe that additional payment is owed. The Company believes the methodology it used to calculate the settlement amount was commercially reasonable and appropriate; however, no assurances can be given that the Company will be successfulunsuccessful in its defense of such appeal, the outcome could have a material adverse effect on the merits or otherwise. If the Company is successful in its defense,Company's consolidated financial statements as a whole.



96



no loss will occur. If the Company is not successful or it deems it advisable to resolve the matter prior to trial through the continuing mediation, the resolution of this action could result in a loss up to the claimed $19 million plus interest.


From time to time, the Company is a party to various other legal actions involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation, including without limitation under federal and state employment laws and wage and hour laws. The Company believes, based upon information currently available, that such other litigation and claims, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’sCompany's financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’sCompany's results of operations, cash flows, or financial position. In addition, certain of these lawsuits, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’sCompany's financial position or may negatively affect operating results if changes to the Company’sCompany's business operation are required.


10.

9. Benefit plans


The Dollar General Corporation 401(k) Savings and Retirement Plan, which became effective on January 1, 1998, is a safe harbor defined contribution plan and is subject to the Employee Retirement and Income Security Act (“ERISA”("ERISA").


Participants are permitted to contribute between 1% and 25% of their pre-tax annual eligible compensation as defined in the 401(k) plan document, subject to certain limitations under the Internal Revenue Code. Employees who are over age 50 are permitted to contribute additional amounts on a pre-tax basis under the catch-up provision of the 401(k) plan subject to Internal Revenue Code limitations. The Company currently matches employee contributions, including catch-up contributions, at a rate of 100% of employee contributions up to 5% of annual eligible salary, after an employee has been employed for over one year and has completed a minimum of 1,000 hours of service.


A participant’sparticipant's right to claim a distribution of his or her account balance is dependent on the plan, ERISA guidelines and Internal Revenue Service regulations. All active participants are fully vested in all contributions to the 401(k) plan. During 2010, 20092013, 2012 and 2008,2011, the Company expensed approximately $9.5$13.0 million, $8.4$11.9 million and $8.0$10.9 million, respectively, for matching contributions.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Benefit plans (Continued)

The Company also has a nonqualified supplemental retirement plan (“SERP”("SERP") and compensation deferral plan (“CDP”("CDP"), known as the Dollar General Corporation CDP/SERP Plan, for a select group of management and highly compensatedother key employees. The SERP is a noncontributory defined contribution plan with annual Company contributions ranging from 2% to 10% of base pay plus bonus depending upon age, years of service and job grade. Under the CDP, participants may defer up to 65% of base pay and up to 100% of bonus pay. An employee may be designated for participation in one or both of the plans, according to the eligibility



97



requirements of the plans. The Company matches base pay deferrals at a rate of 100% of base pay deferral, up to 5% of annual salary, with annual salary offset by the amount of match-eligible salary in the 401(k) plan. All participants are 100% vested in their CDP accounts. The Company incurred compensation expense for these plans of approximately $1.2 million, $1.4 million and $1.7 million $1.9 millionin 2013, 2012 and $1.2 million in 2010, 2009 and 2008,2011, respectively.


The CDP/SERP Plan assets are invested in accounts selected by the Company’sCompany's Compensation Committee or its delegate. Effective August 2, 2008, the deemed fund options under the CDP/SERP Plan were changed to mirror the same fund options offered under the 401(k) plan which include a combination of registered mutual funds and a collective trust fund.

Vested amounts are payable at the time designated by the plan upon the participant’s termination of employment, disability, death or retirement, except that participants may elect to receive an in-service distribution or an “unforeseeable emergency hardship” distribution of vested amounts credited to the CDP account. Account balances are payable in cash.


Asset balances in the fund options that mirror the registered mutual funds are stated at fair value, which is based on quoted market prices. Asset balances in the collective trust fund are stated at contract value of the underlying fund assets. These investments are classified as trading securities and the associated deferred compensation liability is reflected in the consolidated balance sheets as further discussed in Note 1. The deferred compensation liability related to the fund options is recorded at the fair value of the investment options for the registered mutual funds and at contract value for the collective trust fund. See Note 1 for additional discussion.6.

11.

10. Share-based payments


The Company accounts for share-based payments in accordance with applicable accounting standards. Under these standards, under which the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’sCompany's stock option grants are estimated on the grant date using the Black-Scholes-Merton valuation model. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.


Prior to the Merger, the Company maintained various share-based compensation programs which included options, restricted stock and restricted stock units. In connection with the Merger, the Company’s outstanding stock options, restricted stock and restricted stock units became fully vested immediately prior to the closing of the Merger and were settled in cash, canceled or, in limited circumstances, certain stock options held by Company management were exchanged for new options to purchase common stock in the Company (the “Rollover Options”). The exercise price of the Rollover Options and the number of shares of Company common stock underlying the Rollover Options were adjusted as a result of the Merger. The Rollover Options otherwise continue under the terms of the equity plan under which the original options were issued.


On July 6, 2007, the Company’sCompany's Board of Directors adopted the 2007 Stock Incentive Plan for Key Employees, which plan was subsequently amended (as so amended, the “Plan”"Plan").



98



The Plan provides forallows the granting of stock options, stock appreciation rights, and other stock-based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company common stock authorized for grant under the Plan is 31,142,858. No more than 4.5 million shares may be granted to any one Plan participant in the form of stock options and stock appreciation rights in any given fiscal year of the Company, and no more than 1.5 million shares may be granted to any one Plan participant in the form of other stock-based awards in any given fiscal year of the Company. As of January 28, 2011, 17,837,49731, 2014, 19,871,333 of such shares are available for future grants.


Since        Through May 2011, a significant majority of the Merger, the Company has grantedCompany's share-based awards were stock options under the Plan that vest solely upon the continued employment of the recipient (“("MSA Time Options”Options") as well asand options that vest upon the achievement of predetermined annual or cumulative financial-based targets (“("MSA Performance Options”Options"). Through November 2009, 20% of each of theMSA Time Options and MSA Performance Options generally vest annuallyratably on an annual basis over a five-year period. Beginning in December 2009,period of approximately five years, with limited exceptions.

        Both the Company began granting awards whereby 25% of each of theMSA Time Options and the MSA Performance Options generally vest annually overare subject to various provisions set forth in a four-year period.management stockholder's agreement ("MSA") entered into with each option holder. The MSA contains certain put and call rights and other provisions pertaining to both the option holder and the Company which may, in certain scenarios, affect the holder's ability to sell or realize market value for these instruments and any shares acquired thereunder.

        Assuming thespecified financial targets are met, the MSA Performance Options vest as of the Company’sCompany's fiscal year end, and as a result the initial and final tranche of each MSA Performance Option grant ismay be prorated based upon the date of grant. In the event the performance target is not achieved in any given annual performance period, the MSA Performance Options for that period may still subsequently vest, provided that a cumulative performance target is achieved. Vesting of theThe MSA Time Options and Performance Options is also subject to acceleration in the event of an earlier change in control or certain public offerings of the Company’s common stock. Each of these options, whether Time Options orMSA Performance Options have a contractual term of 10 years and an exercise price equal to the fair value of the underlying common stock on the date of grant.


Both the Time Options and the Performance Options are subject to various provisions set forth in a management stockholder’s agreement entered into with each option holder by which the Company may require the employee, upon termination, to sell to the Company any vested options or shares received upon exercise of the Time Options or Performance Options at amounts that differ based upon the reason for the termination. In particular, in the event that the employee resigns “without good reason” (as defined in the management stockholder’s agreement), then any options whether or not then exercisable are forfeited and any shares received upon prior exercise of such options are callable at the Company’s option at an amount equal to the lesser of fair value or the amount paid for the shares (i.e., the exercise price). In such cases, because the employee would not benefit in any share appreciation over the exercise price, for accounting purposes such options are not considered vested until the expiration of the Company’s call option, which is generally five years subsequent to the date of grant. Accordingly, all references to the vesting provisions or vested status of the options discussed in this note give effect to the vesting pursuant to these accounting provisions and may differ from descriptions of the vesting status of the Time Options and Performance Options located elsewhere in this report or the Company’s other SEC filings.
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Share-based payments (Continued)

        The Company records expense for Time Options on a straight-line basis over the term of the management stockholder’s agreement (generally five years).


Each of the Company’s management-owned shares, Rollover Options, and vested new options include certain provisions by which the holder of such shares, Rollover Options, or



99



vested new options may require the Company to repurchase such instruments in limited circumstances. Specifically, each such instrument is subject to a put right for a period of 365 days after termination due to the death or disability of the holder of the instrumenthas also issued share-based awards that occurs generally within five years from the date of grant. In such circumstances, the holder of such instruments may require the Company to repurchase any shares at the fair market value of such shares and any Rollover Options or vested new options at a price equal to the intrinsic value of such Rollover or vested new options. Because the Company does not have control over the circumstances in which it may be required to repurchase the outstanding shares or Rollover Options, such shares and Rollover Options, valued at $8.8 million and $0.4 million, respectively, at January 28, 2011, and $14.4 million and $4.1 million, respectively, at January 29, 2010, have been classified as Redeemable common stock in the accompanying consolidated balance sheets as of these dates. The values of these equity instruments are based upon the fair value and intrinsic value, respectively, of the underlying stock and Rollover Options at the date of issuance. Because redemption of such shares is uncertain, such shares are not subject to re-measurement until their redemption becomes probable.


Subsequent to the Merger, the Company’s Board of Directors adopted an Equity Appreciation Rights Plan, which plan was later amended and restated (as amended and restated, the “Rights Plan”). The Rights Plan provides for the granting of equity appreciation rights to nonexecutive managerial employees. In 2009, the Rights Plan was modified such that certain equity appreciation rights vested as a result of the Company’s initial public offering discussed in Note 2 that otherwise would notMSA. These awards have vested. At January 29, 2010, 697,762 equity appreciation rights were outstanding. During 2010, 783,322 equity appreciation rights were granted, 1,406,237 of such rights, affecting 1,028 employees, vested in conjunction with the Company stock offerings, 21,557 of such rights vested as a result of other provisions of the Rights Plan, 53,290 of such rights were cancelled and no such rights remain outstanding at January 28, 2011.


For the year ended January 28, 2011, the fair value method of accounting for share-based awards resulted in share-based compensation expense (a component of SG&A expenses) and a corresponding reduction in net income before income taxesgenerally been in the amountform of $30.2 million ($18.4 million net of tax) of which $12.7 million ($7.8 million net of tax) was related to stock options, $17.4 million ($10.6 million net of tax) was related to equity appreciation rights and less than $0.1 million was related to restricted stock units as discussedand performance share units. Stock options granted to employees and board members generally vest ratably on an annual basis over a four-year and three-year period, respectively. Restricted stock units generally vest ratably over a three-year period. Performance share units generally vest ratably over a three-year period, provided that certain minimum performance criteria are met in more detail below.

For the year ended January 29, 2010,of grant. With limited exceptions, the fair value method of accounting for share-based awards resulted in share-based compensation expense (a component of SG&A expenses)performance share unit and a corresponding reduction in net income before income taxes in the amount of $22.2 million ($13.6 million net of tax) of which $11.7 million ($7.1 million net of tax) was related to stock options, $7.2 million ($4.4 million net of tax) was related to equity appreciation rights and $3.3 million ($2.0 million net of tax) was related to restricted stock as discussed in more detail below. Of these amounts, $6.9 millionunit awards are automatically converted into shares of the expense for equity appreciation rights and $2.5 million of the expense for restrictedcommon stock was attributable toon the vesting of certain awards in conjunction with the Company’s initial public offering.date.

For the year ended January 30, 2009, the Company recorded share-based compensation expense and a corresponding reduction in net income before income taxes in the amount of $10.0



100



million ($6.1 million net of tax) of which $8.9 million ($5.4 million net of tax) was related to stock options and $1.1 million ($0.7 million net of tax) was related to restricted stock.

The fair value of each option grant is separately estimated by applying the Black-Scholes-Merton option pricing valuation model.        The weighted average for key assumptions used in determining the fair value of all stock options granted in the years ended January 28, 2011, January 29, 201031, 2014, February 1, 2013, and January 30, 2009,February 3, 2012, and a summary of the methodology applied to develop each assumption, are as follows:


 

January 28, 2011

January 29, 2010

January 30, 2009

Expected dividend yield

0

%

0

%

%

Expected stock price volatility

39.1

%

41.2

%

40.2 

%

Weighted average risk-free interest rate

2.8

%

2.8

%

2.8 

%

Expected term of options (years)

7.0

 

7.4

 

7.4 

 

 
 January 31,
2014
 February 1,
2013
 February 3,
2012
 

Expected dividend yield

  0% 0% 0%

Expected stock price volatility

  26.2% 26.8% 38.7%

Weighted average risk-free interest rate

  1.2% 1.5% 2.3%

Expected term of options (years)

  6.3  6.3  6.8 


Expected dividend yield - yield—This is an estimate of the expected dividend yield on the Company’sCompany's stock. The Company is subject to limitations on the payment of dividends under its Credit Facilities as further discussed in Note 7. An increase in the dividend yield will decrease compensation expense.


Expected stock price volatility - volatility—This is a measure of the amount by which the price of the Company’sCompany's common stock has fluctuated or is expected to fluctuate. Subsequent toFor awards issued under the MergerPlan through October 2011, the expected volatilities have beenwere based upon the historical volatilities of a peer group of four companies asdeemed to be comparable. Beginning in November 2011, the Company’s common stock has only beenexpected volatilities for awards are based on the historical volatility of the Company's publicly traded for a limited period of time relative to the expected term of the options.common stock. An increase in the expected volatility will increase compensation expense.


Weighted average risk-free interest rate - rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected term of options - options—This is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of 10 years. Due to the relatively limited historical data for grants issued subsequent to the Merger, theThe Company has estimated the expected term as the mid-point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

At January 28, 2011, 53,434 Rollover Options were outstanding, all of which were exercisable. The aggregate intrinsic value of these outstanding Rollover Options was $1.4 million with a weighted average remaining contractual term of 4.3 years, and a weighted average exercise price of $2.1875.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10. Share-based payments (Continued)



101



A summary of MSA Time Options activity during the periodyear ended January 28, 201131, 2014 is as follows:


(Intrinsic value amounts reflected in thousands)

Options
Issued

Average Exercise Price

Remaining Contractual Term in Years

Intrinsic
Value

Balance, January 29, 2010

 

 6,123,052 

 

$

8.68

 

 

 

 

 

 

 

Granted

 

 348,784 

 

 

27.39

 

 

 

 

 

 

 

Exercised

 

 (342,293)

 

 

8.15

 

 

 

 

 

 

 

Canceled

 

 (351,412)

 

 

10.53

 

 

 

 

 

 

 

Balance, January 28, 2011

 

 5,778,131 

 

$

9.73

 

 

7.3

 

$

108,104

 

Vested or expected to vest at January 28, 2011

 

 5,491,477 

 

$

9.55

 

 

7.2

 

$

103,695

 

Exercisable at January 28, 2011

 

 2,773,235 

 

$

8.31

 

 

7.0

 

$

55,706

 

(Intrinsic value amounts reflected in thousands)
 Options
Issued
 Average
Exercise Price
 Remaining
Contractual
Term in Years
 Intrinsic
Value
 

Balance, February 1, 2013

  1,350,642 $13.69       

Granted

           

Exercised

  (871,037) 11.11       

Canceled

  (15,042) 25.17       
          

Balance, January 31, 2014

  464,563 $18.15  5.6 $17,730 
          
          

Exercisable at January 31, 2014

  292,807 $15.43  5.3 $11,973 
          
          


The weighted average grant date fair value of MSA Time Options granted during 2010, 20092011 was $13.47. The intrinsic value of MSA Time Options exercised during 2013, 2012 and 20082011 was $12.61, $6.73$39.4 million, $117.3 million and $4.17,$41.4 million, respectively.

A summary of MSA Performance Options activity during the periodyear ended January 28, 201131, 2014 is as follows:


(Intrinsic value amounts reflected in thousands)

Options
Issued

Average Exercise Price

Remaining Contractual Term in Years

Intrinsic
Value

Balance, January 29, 2010

 

 6,251,623 

 

$

8.67

 

 

 

 

 

 

 

Granted

 

 348,784 

 

 

27.39

 

 

 

 

 

 

 

Exercised

 

 (777,249)

 

 

8.13

 

 

 

 

 

 

 

Canceled

 

 (326,134)

 

 

10.58

 

 

 

 

 

 

 

Balance, January 28, 2011

 

 5,497,024 

 

$

9.82

 

 

7.3

 

$

102,369

 

Vested or expected to vest at January 28, 2011

 

 5,198,923 

 

$

9.62

 

 

7.3

 

$

97,838

 

Exercisable at January 28, 2011

 

 3,426,809 

 

$

8.68

 

 

7.0

 

$

67,597

 

(Intrinsic value amounts reflected in thousands)
 Options
Issued
 Average
Exercise Price
 Remaining
Contractual
Term in Years
 Intrinsic
Value
 

Balance, February 1, 2013

  1,264,826 $13.96       

Granted

           

Exercised

  (868,441) 11.28       

Canceled

  (20,076) 22.69       
          

Balance, January 31, 2014

  376,309 $19.68  5.8 $13,790 
          
          

Exercisable at January 31, 2014

  336,716 $18.56  5.7 $12,714 
          
          

The weighted average grant date fair value of MSA Performance Options granted during 2011 was $12.61, $6.73 and $4.17 during 2010, 2009 and 2008, respectively.

In April 2010, the Company granted 100,000 options to its Chief Executive Officer with an exercise price of $29.38 and a vesting period of one year from the date of grant.

$13.47. The total intrinsic value of allMSA Performance Options exercised during 2013, 2012 and 2011 was $39.1 million, $106.4 million and $41.8 million, respectively.

        A summary of the Company's other stock option activity during the year ended January 31, 2014 is as follows:

(Intrinsic value amounts reflected in thousands)
 Options
Issued
 Average
Exercise Price
 Remaining
Contractual
Term in Years
 Intrinsic
Value
 

Balance, February 1, 2013

  1,211,771 $42.77       

Granted

  875,269  48.80       

Exercised

  (53,813) 41.51       

Canceled

  (192,685) 46.69       
          

Balance, January 31, 2014

  1,840,542 $45.26  8.5 $20,356 
          
          

Exercisable at January 31, 2014

  369,424 $38.51  7.4 $6,580 
          
          


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Share-based payments (Continued)

        The weighted average grant date fair value of other options repurchased bygranted was $13.86, $13.54 and $13.14 during 2013, 2012 and 2011, respectively. The intrinsic value of other options exercised during 2013, 2012, and 2011 was $0.8 million, $0.3 million and $1.6 million, respectively.

        The number of performance share unit awards earned is based upon the Company's annual financial performance in the year of grant as specified in the award agreement. A summary of performance share unit award activity during the year ended January 31, 2014 is as follows:

(Intrinsic value amounts reflected in thousands)
 Units
Issued
 Intrinsic
Value
 

Balance, February 1, 2013

  162,688    

Granted

  72,846    

Converted to common stock

  (54,973)   

Canceled

  (21,142)   
      

Balance, January 31, 2014

  159,419 $8,978 
      
      

        The weighted average grant date fair value of performance share units granted was $48.11 and $45.25 during 2013 and 2012, respectively. No performance share units were granted during 2011.

        A summary of restricted stock unit award activity during the year ended January 31, 2014 is as follows:

(Intrinsic value amounts reflected in thousands)
 Units
Issued
 Intrinsic
Value
 

Balance, February 1, 2013

  288,927    

Granted

  509,440    

Converted to common stock

  (98,063)   

Canceled

  (83,777)   
      

Balance, January 31, 2014

  616,527 $34,723 
      
      

        The weighted average grant date fair value of restricted stock units granted was $48.20, $45.33 and $33.16 during 2013, 2012 and 2011, respectively.

        In March 2012, the Company under termsissued a performance-based award of 326,037 shares of restricted stock to its Chairman and Chief Executive Officer. This restricted stock award had a fair value on the management stockholders’ agreements during 2010, 2009grant date of $45.25 per share and 2008 was $0.1 million, $0.8 millionmay vest in the future if certain specified earnings per share targets for fiscal years 2014 and $2.5 million, respectively.2015 are achieved.

At January 28, 2011, the total unrecognized compensation cost related to non-vested stock options was $30.8 million with an expected weighted average expense recognition period of 2.8 years.


The Company currently believes that the performance targets related to the unvested MSA Performance Options and restricted stock will be achieved. If such goals are not met, and there is no change in control or certain public offerings of the Company’s common stockevent occurs which would result in the



102



acceleration of vesting of these awards as specified in the Performance Options,underlying agreements, future compensation cost relating to these unvested Performance Optionsawards will not be recognized.

Through January 28, 2011, all Time Options and Performance Options have been granted to employees. During the fourth quarter of 2009, the Company granted 33,051 non-qualified stock options to members of its Board of Directors. These options vest ratably on an annual basis over a four year period from the date of grant.  

In January 2008, the Company granted 508,572 nonvested restricted shares to its Chief Executive Officer. As a result of the Company’s initial public offering these shares vested, at a total fair value equal to $11.5 million. Subsequent to the offering, the Company granted a total of 9,084 restricted stock unit awards to members of its Board of Directors. For 2010, 2009 and 2008, the share-based compensation expense related to nonvested shares before income taxes was less than $0.1 million, $3.3 million ($2.0 million net of tax) and $1.1 million ($0.7 million net of tax), respectively.        At January 28, 2011,31, 2014, the total unrecognized compensation cost related to nonvested restrictedstock-based awards was $53.5 million with an expected weighted average expense recognition period of 1.5 years.

        In October 2007, the Company's Board of Directors adopted an Equity Appreciation Rights Plan, which plan was later amended and restated (as amended and restated, the "Rights Plan"). The Rights



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Share-based payments (Continued)

Plan provides for the granting of equity appreciation rights to nonexecutive managerial employees. During 2011, 818,847 equity appreciation rights were granted, 768,561 of such rights vested, primarily in conjunction with the Company's December 2011 stock offering and 50,286 of such rights were cancelled. No such rights are outstanding as of January 31, 2014.

        The fair value method of accounting for share-based awards not yet recognized was approximately $0.1 million.

All nonvested restricted stock and restricted stock unit awards grantedresulted in the periods presented had a purchase price of zero. The Company recordsshare-based compensation expense on(a component of SG&A expenses) and a straight-line basis over the restriction period based on the market price of the underlying stock on the date of grant. The nonvested restricted stock unit awards granted under the plan to non-employee directors during 2009 vested or are scheduled to vestcorresponding reduction in one-third increments at each of the Company’s three subsequent annual shareholder meetings.net income before income taxes as follows:

12.

(In thousands)
 Stock
Options
 Performance
Share Units
 Restricted
Stock Units
 Equity
Appreciation
Rights
 Total 

Year ended January 31, 2014

                

Pre-tax

 $7,634 $3,448 $9,879 $ $20,961 

Net of tax

 $4,649 $2,100 $6,016 $ $12,765 

Year ended February 1, 2013

                

Pre-tax

 $14,078 $4,082 $3,504 $ $21,664 

Net of tax

 $8,578 $2,487 $2,135 $ $13,200 

Year ended February 3, 2012

                

Pre-tax

 $15,121 $ $129 $8,731 $23,981 

Net of tax

 $9,208 $ $79 $5,317 $14,604 

11. Related party transactions

Affiliates        From time to time the Company has conducted business with entities deemed to be related parties under U.S. GAAP, including Kohlberg Kravis Roberts & Co. L.P. or "KKR" and Goldman, Sachs & Co. For purposes of certain of the Investors participated as (i) lenders in the Company’s Credit Facilities discussed in Note 7; (ii) initial purchasers of the Company’s Notes discussed in Note 7; (iii) counterpartiesthis disclosure, reference to certain interest rate swaps discussed in Note 8 and (iv) as advisors in the Merger.

The Company believes affiliates ofthese entities includes their respective affiliates. In recent years, KKR and Goldman Sachs & Co. (among other entities) are lenders under the Term Loan Facility. The amount of principal outstanding under the Term Loan Facility from the dateowned a significant percentage of the Merger to September 30, 2009, was $2.3 billion. The Company paid principal of $336.5 million during the remainder of 2009Company's common stock, and approximately $53.4 million, $74.8 million and $133.4 million of interestcollectively held three seats on the Term Loan Facility during 2010, 2009 and 2008, respectively.

Goldman, Sachs & Co. is a counterparty to an amortizing interest rate swap with a notional amountCompany's Board of $323.3 million and $396.7 million asDirectors. As of January 28, 2011 and January 29, 2010, respectively, entered into in connection with the Term Loan Facility. The Company paid Goldman, Sachs & Co. approximately $12.9 million, $17.9 million and $9.5 million in 2010, 2009 and 2008, respectively, pursuant to the interest rate swap as further discussed in Note 8.

The Company entered into a sponsor advisory agreement, dated July 6, 2007, with31, 2014, KKR and Goldman, Sachs & Co. pursuant to which those entities provided managementhave liquidated their investment in the Company's common stock and advisory services tono one directly employed by either KKR or Goldman, Sachs & Co. remained on the Company. Under the termsCompany's Board of the sponsor advisory agreement, among other things, the Company was obliged to pay to those entities an aggregate, initial management fee ofDirectors.



103



$5.0 million annually. Upon the completion of the Company’s initial public offering discussed in Note 2, pursuant to the advisory agreement, the Company paid a fee of $63.6 million from cash generated from operations to        KKR and Goldman, Sachs & Co., which amount included a transaction fee equal served in various capacities related to 1%, or $4.8 million,the amendments and refinancing of the gross primary proceeds from the offering accounted for as a cost of raising equity and a corresponding reduction to Additional paid-in capital; and approximately $58.8 millionCompany's debt discussed in further detail in Note 5. In connection with its termination, which is includedthese efforts in SG&A expenses for 2009. Including2013 and 2012, the transaction and terminationCompany paid KKR fees discussed above, the total management fees and other expenses incurred for the years ended January 28, 2011, January 29, 2010 and January 30, 2009 totaled $0.2 million, $68.0of $0.7 million and $6.6$1.6 million, respectively. In addition, on July 6, 2007, the Company entered into a separate indemnification agreement with the parties to the sponsor advisory agreement, pursuant to which the Company agreed to provide customary indemnification to such partiesrespectively, and their affiliates.

From time to time, the Company uses Capstone Consulting, LLC, a team of executives who work exclusively with KKR portfolio companies providing certain consulting services. The Chief Executive Officer of Capstone served on the Company’s Board of Directors until March 2009. Although neither KKR nor any entity affiliated with KKR owns any of the equity of Capstone, prior to January 1, 2007 KKR had provided financing to Capstone. The aggregate fees incurred for Capstone services for the periods ended January 28, 2011, January 29, 2010 and January 30, 2009 totaled zero, $0.2 million and $3.0 million, respectively.

The Company entered into an underwriting agreement with KKR Capital Markets (an affiliate of KKR),paid Goldman, Sachs & Co., Citigroup Global Markets Inc., fees of $2.2 million and several other entities to serve as underwriters in connection with its initial public offering. The Company provided underwriting discounts of approximately $27.4$1.7 million, pursuant to the underwriting agreement, approximately $6.0 million of which was provided to each of (a)respectively.

        KKR Capital Markets; (b) Goldman, Sachs & Co.; and (c) Citigroup Global Markets Inc. The Company paid approximately $3.3 million in expenses related to the initial public offering (excluding underwriting discounts and commissions), including the offering-related expenses of the selling shareholder which the Company was required to pay under the terms of an existing registration rights agreement.

Affiliates of KKR and of Goldman, Sachs & Co. served as underwriters in connection with themultiple secondary offerings of the Company’sCompany's common stock held by certain existing shareholders that were completedexecuted at various dates in April 20102013, 2012 and December 2010.2011. The Company did not sell shares of common stock, receive proceeds from the secondarysuch shareholders' sales of shares of common stock or pay any underwriting fees in connection with eitherany of the secondary offering.offerings. Certain members of ourthe Company's management including certain of our executive officers, exercised registration rights in connection with such offerings.




13.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Segment reporting

The Company manages its business on the basis of one reportable segment. See Note 1 for a brief description of the Company’sCompany's business. As of January 28, 2011,31, 2014, all of the Company’sCompany's operations were located within the United States with the exception of a Hong Kong subsidiary, and a liaison office in India, the collective assets and revenues of which are not material. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

(In thousands)

2010

 

2009

 

2008

Classes of similar products:

 

 

 

 

 

 

 

 

Consumables

$

9,332,119

 

$

8,356,381

 

$

7,248,418

Seasonal

 

1,887,917

 

 

1,711,471

 

 

1,521,450

Home products

 

917,638

 

 

869,772

 

 

862,226

Apparel

 

897,326

 

 

858,756

 

 

825,574

Net sales

$

13,035,000

 

$

11,796,380

 

$

10,457,668


(In thousands)
 2013 2012 2011 

Classes of similar products:

          

Consumables

 $13,161,825 $11,844,846 $10,833,735 

Seasonal

  2,259,516  2,172,399  2,051,098 

Home products

  1,115,648  1,061,573  1,005,219 

Apparel

  967,178  943,310  917,136 
        

Net sales

 $17,504,167 $16,022,128 $14,807,188 
        
        

13. Common stock transactions

14.        On August 29, 2012, the Company's Board of Directors authorized a common stock repurchase program, which was increased on March 19, 2013 and again on December 4, 2013. As of January 31, 2014, a total of $2.0 billion had been authorized under the program and $1.02 billion remained available for repurchase. The repurchase authorization has no expiration date and allows repurchases from time to time in the open market or in privately negotiated transactions. The timing and number of shares purchased depends on a variety of factors, such as price, market conditions, compliance with the covenants and restrictions under our debt agreements and other factors. Repurchases under the program may be funded from available cash or borrowings under the Company's credit facilities discussed in further detail in Note 5.

        During the years ended January 31, 2014, February 1, 2013, and February 3, 2012, the Company repurchased approximately 11.0 million shares of its common stock at a total cost of $620.1 million, approximately 14.4 million shares at a total cost of $671.4 million, and approximately 4.9 million shares of its common stock at a total cost of $185.0 million, respectively, pursuant to its common stock repurchase programs.



DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Quarterly financial data (unaudited)


The following is selected unaudited quarterly financial data for the fiscal years ended January 28, 201131, 2014 and January 29, 2010.February 1, 2013. Each quarterly period listed below was a 13-week accounting period. The sum of the four quarters for any given year may not equal annual totals due to rounding.

(In thousands)
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

2013:

             

Net sales

 $4,233,733 $4,394,651 $4,381,838 $4,493,945 

Gross profit

  1,295,148  1,377,290  1,328,493  1,434,811 

Operating profit

  395,000  412,822  390,241  538,122 

Net income

  220,083  245,475  237,385  322,173 

Basic earnings per share

  0.67  0.76  0.74  1.01 

Diluted earnings per share

  0.67  0.75  0.74  1.01 

 


(In thousands)

 

First

Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

2010:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

3,111,314

 

$

3,214,155

 

$

3,223,427 

 

$

3,486,104

 

Gross profit

 

999,756

 

 

1,035,979

 

 

1,010,668 

 

 

1,130,153

 

Operating profit

 

290,723

 

 

300,757

 

 

274,334 

 

 

408,251

 

Net income

 

135,996

 

 

141,195

 

 

128,120 

 

 

222,546

 

Basic earnings per share

 

0.40

 

 

0.41

 

 

0.38 

 

 

0.65

 

Diluted earnings per share

 

0.39

 

 

0.41

 

 

0.37 

 

 

0.64

 


(In thousands)

 

First

Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

2009:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

2,779,937

 

$

2,901,907

 

$

2,928,751 

 

$

3,185,785

 

Gross profit

 

855,358

 

 

906,042

 

 

903,082 

 

 

1,025,389

 

Operating profit

 

224,869

 

 

233,217

 

 

216,239 

 

 

278,933

 

Net income

 

83,006

 

 

93,590

 

 

75,649 

 

 

87,197

 

Basic earnings per share

 

0.26

 

 

0.29

 

 

0.24 

 

 

0.26

 

Diluted earnings per share

 

0.26

 

 

0.29

 

 

0.24 

 

 

0.26

 

(In thousands)
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

2012:

             

Net sales

 $3,901,205 $3,948,655 $3,964,647 $4,207,621 

Gross profit

  1,228,256  1,263,223  1,226,123  1,367,799 

Operating profit

  384,324  387,214  361,389  522,349 

Net income

  213,415  214,140  207,685  317,422 

Basic earnings per share

  0.64  0.64  0.62  0.97 

Diluted earnings per share

  0.63  0.64  0.62  0.97 


As discussed in Note 11,5, in the first quarter of 20102013, the Company incurred share-based compensationterminated its senior secured credit facilities, resulting in a pretax loss of $18.9 million ($11.5 million net of tax, or $0.04 per diluted share) which was recognized as Other (income) expense.

        As discussed in Note 8, in the second quarter of 2013, the Company recorded expenses associated with an agreement to settle a legal matter, resulting in a pretax loss of $13.3$8.5 million ($8.15.2 million net of tax, or $0.02 per diluted share) for the accelerated vesting of certain share-based awards in conjunction with a secondary offering of the Company’s common stock which is included in SG&A expenses.was recognized as Selling, general and administrative expense.



105



As discussed in Note 7,5, in the second quarter of 2010,2012, the Company repurchased $50.0 million principal amount ofredeemed its outstanding Senior Notes,senior subordinated notes due 2017, resulting in a pretax loss of $6.5$29.0 million ($4.017.7 million net of tax, or $0.01$0.05 per diluted share) which iswas recognized as Other (income) expense.

As discussed in Note 7, in the third quarter of 2010, the Company repurchased $65.0 million principal amount of its outstanding Senior Notes, resulting in a pretax loss of $8.2 million ($5.0 million net of tax, or $0.01 per diluted share) which is recognized as Other (income) expense.

As discussed in Note 11, in the fourth quarter of 2010 the Company incurred share-based compensation expenses of $3.8 million ($2.3 million net of tax, or $0.01 per diluted share) for the accelerated vesting of certain share-based awards in conjunction with a secondary offering of the Company’s common stock which is included in SG&A expenses.

As discussed in Note 12, in the fourth quarter of 2009, the Company terminated an advisory agreement with KKR and Goldman, Sachs & Co. pursuant to which those entities provided management and advisory services to the Company, which resulted in a pretax charge of approximately $58.8 million ($46.2 million net of tax, or $0.14 per diluted share), which is included in SG&A expenses.


As discussed in Note 7, in the fourth quarter of 2009, the Company repurchased $195.7 million principal amount of its outstanding Senior Notes, $205.2 million principal amount of its outstanding Senior Subordinated Notes, and repaid $325.0 million principal amount on the Term Loan Facility, resulting in a pretax loss of $55.3 million ($33.8 million net of tax, or $0.10 per diluted share) which is recognized as Other (income) expense.


As discussed in Note 11, in the fourth quarter of 2009 the Company incurred share-based compensation expenses of $9.4 million ($5.8 million net of tax, or $0.02 per diluted share) for the accelerated vesting of certain share-based awards in conjunction with the Company’s initial public offering, which is included in SG&A expenses.


15.

Guarantor subsidiaries

Certain of the Company’s subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed on a joint and several basis the Company's obligations under certain outstanding debt obligations. Each of the Guarantors is a direct or indirect wholly-owned subsidiary of the Company. The following consolidating schedules present condensed financial information on a combined basis, in thousands.




 

January 28, 2011

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

111,545

 

$

364,404

 

$

21,497

 

$

-

 

$

497,446

 

Merchandise inventories

 

-

 

 

1,765,433

 

 

-

 

 

-

 

 

1,765,433

 

Income taxes receivable

 

13,529

 

 

-

 

 

-

 

 

(13,529

)

 

-

 

Deferred income taxes receivable

 

8,877

 

 

-

 

 

6,825

 

 

(15,702

)

 

-

 

Prepaid expenses and other current assets

 

741,352

 

 

3,698,117

 

 

4,454

 

 

(4,338,977

)

 

104,946

 

Total current assets

 

875,303

 

 

5,827,954

 

 

32,776

 

 

(4,368,208

)

 

2,367,825

 

Net property and equipment

 

105,155

 

 

1,419,133

 

 

287

 

 

-

 

 

1,524,575

 

Goodwill

 

4,338,589

 

 

-

 

 

-

 

 

-

 

 

4,338,589

 

Intangible assets, net

 

1,199,200

 

 

57,722

 

 

-

 

 

-

 

 

1,256,922

 

Deferred income taxes receivable

 

-

 

 

-

 

 

47,690

 

 

(47,690

)

 

-

 

Other assets, net

 

5,337,522

 

 

12,675

 

 

304,285

 

 

(5,596,171

)

 

58,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

11,855,769

 

$

7,317,484

 

$

385,038

 

$

(10,012,069

)

$

9,546,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

$

-

 

$

1,157

 

$

-

 

$

-

 

$

1,157

 

Accounts payable

 

3,691,564

 

 

1,541,593

 

 

50,824

 

 

(4,330,340

)

 

953,641

 

Accrued expenses and other

 

68,398

 

 

226,225

 

 

61,755

 

 

(8,637

)

 

347,741

 

Income taxes payable

 

11,922

 

 

13,246

 

 

14,341

 

 

(13,529

)

 

25,980

 

Deferred income taxes payable

 

-

 

 

52,556

 

 

-

 

 

(15,702

)

 

36,854

 

Total current liabilities

 

3,771,884

 

 

1,834,777

 

 

126,920

 

 

(4,368,208

)

 

1,365,373

 

Long-term obligations

 

3,534,447

 

 

3,000,877

 

 

-

 

 

(3,248,254

)

 

3,287,070

 

Deferred income taxes payable

 

417,874

 

 

228,381

 

 

-

 

 

(47,690

)

 

598,565

 

Other liabilities

 

67,932

 

 

27,250

 

 

136,400

 

 

-

 

 

231,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

9,153

 

 

-

 

 

-

 

 

-

 

 

9,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Common stock

 

298,819

 

 

23,855

 

 

100

 

 

(23,955

)

 

298,819

 

Additional paid-in capital

 

2,945,024

 

 

431,253

 

 

19,900

 

 

(451,153

)

 

2,945,024

 

Retained earnings

 

830,932

 

 

1,771,091

 

 

101,718

 

 

(1,872,809

)

 

830,932

 

Accumulated other comprehensive loss

 

(20,296

)

 

-

 

 

-

 

 

-

 

 

(20,296

)

Total shareholders’ equity

 

4,054,479

 

 

2,226,199

 

 

121,718

 

 

(2,347,917

)

 

4,054,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

11,855,769

 

$

7,317,484

 

$

385,038

 

$

(10,012,069

)

$

9,546,222

 





 

January 29, 2010

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

97,620

 

$

103,001

 

$

21,455

 

$

-

 

$

222,076

 

Merchandise inventories

 

-

 

 

1,519,578

 

 

-

 

 

-

 

 

1,519,578

 

Income taxes receivable

 

9,924

 

 

1,645

 

 

-

 

 

(4,026

)

 

7,543

 

Deferred income taxes receivable

 

16,066

 

 

-

 

 

3,559

 

 

(19,625

)

 

-

 

Prepaid expenses and other current assets

 

625,157

 

 

3,040,792

 

 

704

 

 

(3,570,401

)

 

96,252

 

Total current assets

 

748,767

 

 

4,665,016

 

 

25,718

 

 

(3,594,052

)

 

1,845,449

 

Net property and equipment

 

99,452

 

 

1,228,829

 

 

105

 

 

-

 

 

1,328,386

 

Goodwill

 

4,338,589

 

 

-

 

 

-

 

 

-

 

 

4,338,589

 

Intangible assets, net

 

1,201,223

 

 

83,060

 

 

-

 

 

-

 

 

1,284,283

 

Deferred income taxes receivable

 

-

 

 

-

 

 

36,405

 

 

(36,405

)

 

-

 

Other assets, net

 

4,288,270

 

 

8,920

 

 

297,757

 

 

(4,528,135

)

 

66,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

10,676,301

 

$

5,985,825

 

$

359,985

 

$

(8,158,592

)

$

8,863,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

$

1,822

 

$

1,849

 

$

-

 

$

-

 

$

3,671

 

Accounts payable

 

3,033,723

 

 

1,311,063

 

 

46,818

 

 

(3,560,651

)

 

830,953

 

Accrued expenses and other

 

72,320

 

 

226,571

 

 

53,149

 

 

(9,750

)

 

342,290

 

Income taxes payable

 

4,086

 

 

-

 

 

4,465

 

 

(4,026

)

 

4,525

 

Deferred income taxes payable

 

-

 

 

44,686

 

 

-

 

 

(19,625

)

 

25,061

 

Total current liabilities

 

3,111,951

 

 

1,584,169

 

 

104,432

 

 

(3,594,052

)

 

1,206,500

 

Long-term obligations

 

3,645,820

 

 

2,689,492

 

 

13,178

 

 

(2,948,775

)

 

3,399,715

 

Deferred income taxes payable

 

394,045

 

 

188,532

 

 

-

 

 

(36,405

)

 

546,172

 

Other liabilities

 

115,701

 

 

40,065

 

 

146,582

 

 

-

 

 

302,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

18,486

 

 

-

 

 

-

 

 

-

 

 

18,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Common stock

 

298,013

 

 

23,855

 

 

100

 

 

(23,955

)

 

298,013

 

Additional paid-in capital

 

2,923,377

 

 

431,253

 

 

19,900

 

 

(451,153

)

 

2,923,377

 

Retained earnings

 

203,075

 

 

1,028,459

 

 

75,793

 

 

(1,104,252

)

 

203,075

 

Accumulated other comprehensive loss

 

(34,167

)

 

-

 

 

-

 

 

-

 

 

(34,167

)

Total shareholders’ equity

 

3,390,298

 

 

1,483,567

 

 

95,793

 

 

(1,579,360

)

 

3,390,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

10,676,301

 

$

5,985,825

 

$

359,985

 

$

(8,158,592

)

$

8,863,519

 





 

For the year ended January 28, 2011

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

311,280

 

$

13,035,000

 

$

84,878

 

$

(396,158

)

$

13,035,000

 

Cost of goods sold

 

-

 

 

8,858,444

 

 

-

 

 

-

 

 

8,858,444

 

Gross profit

 

311,280

 

 

4,176,556

 

 

84,878

 

 

(396,158

)

 

4,176,556

 

Selling, general and administrative expenses

 

283,069

 

 

2,948,346

 

 

67,234

 

 

(396,158

)

 

2,902,491

 

Operating profit

 

28,211

 

 

1,228,210

 

 

17,644

 

 

-

 

 

1,274,065

 

Interest income

 

(44,677

)

 

(7,025

)

 

(19,986

)

 

71,468

 

 

(220

)

Interest expense

 

300,934

 

 

44,723

 

 

23

 

 

(71,468

)

 

274,212

 

Other (income) expense

 

15,101

 

 

-

 

 

-

 

 

-

 

 

15,101

 

Income (loss) before income taxes

 

(243,147

)

 

1,190,512

 

 

37,607

 

 

-

 

 

984,972

 

Income tax expense (benefit)

 

(102,448

)

 

447,881

 

 

11,682

 

 

-

 

 

357,115

 

Equity in subsidiaries’ earnings, net of taxes

 

768,556

 

 

-

 

 

-

 

 

(768,556

)

 

-

 

Net income

$

627,857

 

$

742,631

 

$

25,925

 

$

(768,556

)

$

627,857

 



 

For the year ended January 29, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

306,036

 

$

11,796,380

 

$

91,265

 

$

(397,301

)

$

11,796,380

 

Cost of goods sold

 

-

 

 

8,106,509

 

 

-

 

 

-

 

 

8,106,509

 

Gross profit

 

306,036

 

 

3,689,871

 

 

91,265

 

 

(397,301

)

 

3,689,871

 

Selling, general and administrative expenses

 

337,224

 

 

2,734,793

 

 

61,897

 

 

(397,301

)

 

2,736,613

 

Operating profit (loss)

 

(31,188

)

 

955,078

 

 

29,368

 

 

-

 

 

953,258

 

Interest income

 

(52,047

)

 

(10,968

)

 

(19,674

)

 

82,545

 

 

(144

)

Interest expense

 

375,280

 

 

52,980

 

 

29

 

 

(82,545

)

 

345,744

 

Other (income) expense

 

55,542

 

 

-

 

 

-

 

 

-

 

 

55,542

 

Income (loss) before income taxes

 

(409,963

)

 

913,066

 

 

49,013

 

 

-

 

 

552,116

 

Income tax expense (benefit)

 

(149,478

)

 

346,117

 

 

16,035

 

 

-

 

 

212,674

 

Equity in subsidiaries’ earnings, net of taxes

 

599,927

 

 

-

 

 

-

 

 

(599,927

)

 

-

 

Net income

$

339,442

 

$

566,949

 

$

32,978

 

$

(599,927

)

$

339,442

 





 

For the year ended January 30, 2009

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

236,682

 

$

10,457,668

 

$

97,917

 

$

(334,599

)

$

10,457,668

 

Cost of goods sold

 

-

 

 

7,396,571

 

 

-

 

 

-

 

 

7,396,571

 

Gross profit

 

236,682

 

 

3,061,097

 

 

97,917

 

 

(334,599

)

 

3,061,097

 

Selling, general and administrative expenses

 

210,665

 

 

2,499,331

 

 

73,214

 

 

(334,599

)

 

2,448,611

 

Litigation settlement and related costs, net

 

32,000

 

 

-

 

 

-

 

 

-

 

 

32,000

 

Operating profit (loss)

 

(5,983)

 

 

561,766

 

 

24,703

 

 

-

 

 

580,486

 

Interest income

 

(62,722

)

 

(36,844

)

 

(13,532

)

 

110,037

 

 

(3,061

)

Interest expense

 

427,365

 

 

74,586

 

 

18

 

 

(110,037

)

 

391,932

 

Other (income) expense

 

(2,788

)

 

-

 

 

-

 

 

-

 

 

(2,788

)

Income (loss) before income taxes

 

(367,838

)

 

524,024

 

 

38,217

 

 

-

 

 

194,403

 

Income tax expense (benefit)

 

(115,924

)

 

190,146

 

 

11,999

 

 

-

 

 

86,221

 

Equity in subsidiaries’ earnings, net of taxes

 

360,096

 

 

-

 

 

-

 

 

(360,096

)

 

-

 

Net income

$

108,182

 

$

333,878

 

$

26,218

 

$

(360,096

)

$

108,182

 





 

For the year ended January 28, 2011

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

627,857

 

$

742,631

 

$

25,925

 

$

(768,556

)

$

627,857

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

33,015

 

 

221,851

 

 

61

 

 

-

 

 

254,927

 

Deferred income taxes

 

17,817

 

 

47,719

 

 

(14,551

)

 

-

 

 

50,985

 

Tax benefit of stock options

 

(13,905

)

 

-

 

 

-

 

 

-

 

 

(13,905

)

Loss on debt retirement, net

 

14,576

 

 

-

 

 

-

 

 

-

 

 

14,576

 

Non-cash share-based compensation

 

15,956

 

 

-

 

 

-

 

 

-

 

 

15,956

 

Noncash inventory adjustments and asset impairments

 

-

 

 

7,607

 

 

-

 

 

-

 

 

7,607

 

Other non-cash gains and losses

 

1,395

 

 

4,547

 

 

-

 

 

-

 

 

5,942

 

Equity in subsidiaries’ earnings, net

 

(768,556

)

 

-

 

 

-

 

 

768,556

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

-

 

 

(251,809

)

 

-

 

 

-

 

 

(251,809

)

Prepaid expenses and other current assets

 

(1,646

)

 

(3,642

)

 

(4,869

)

 

-

 

 

(10,157

)

Accounts payable

 

(5,446

)

 

124,120

 

 

4,750

 

 

-

 

 

123,424

 

Accrued expenses and other

 

(28,442

)

 

(12,410

)

 

(1,576

)

 

-

 

 

(42,428

)

Income taxes

 

18,136

 

 

14,891

 

 

9,876

 

 

-

 

 

42,903

 

Other

 

816

 

 

(2,008

)

 

(2

)

 

-

 

 

(1,194

)

Net cash provided by (used in) operating activities

 

(88,427

)

 

893,497

 

 

19,614

 

 

-

 

 

824,684

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(22,830

)

 

(397,322

)

 

(243

)

 

-

 

 

(420,395

)

Sales of property and equipment

 

-

 

 

1,448

 

 

-

 

 

-

 

 

1,448

 

Net cash used in investing activities

 

(22,830

)

 

(395,874

)

 

(243

)

 

-

 

 

(418,947

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

631

 

 

-

 

 

-

 

 

-

 

 

631

 

Repayments of long-term obligations

 

(129,217

)

 

(1,963

)

 

-

 

 

-

 

 

(131,180

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(13,723

)

 

-

 

 

-

 

 

-

 

 

(13,723

)

Tax benefit of stock options

 

13,905

 

 

-

 

 

-

 

 

-

 

 

13,905

 

Changes in intercompany note balances, net

 

253,586

 

 

(234,257

)

 

(19,329

)

 

-

 

 

-

 

Net cash provided by (used in) financing activities

 

125,182

 

 

(236,220

)

 

(19,329

)

 

-

 

 

(130,367

)

Net increase in cash and cash equivalents

 

13,925

 

 

261,403

 

 

42

 

 

-

 

 

275,370

 

Cash and cash equivalents, beginning of year

 

97,620

 

 

103,001

 

 

21,455

 

 

-

 

 

222,076

 

Cash and cash equivalents, end of year

$

111,545

 

$

364,404

 

$

21,497

 

$

-

 

$

497,446

 





 

For the year ended January 29, 2010

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

339,442

 

$

566,949

 

$

32,978

 

$

(599,927

)

$

339,442

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

36,541

 

 

220,048

 

 

182

 

 

-

 

 

256,771

 

Deferred income taxes

 

(18,571

)

 

67,317

 

 

(33,886

)

 

-

 

 

14,860

 

Tax benefit of stock options

 

(5,390

)

 

-

 

 

-

 

 

-

 

 

(5,390

)

Loss on debt retirement, net

 

55,265

 

 

-

 

 

-

 

 

-

 

 

55,265

 

Non-cash share-based compensation

 

17,295

 

 

-

 

 

-

 

 

-

 

 

17,295

 

Noncash inventory adjustments and asset impairments

 

-

 

 

647

 

 

-

 

 

-

 

 

647

 

Other non-cash gains and losses

 

3,221

 

 

4,699

 

 

-

 

 

-

 

 

7,920

 

Equity in subsidiaries’ earnings, net

 

(599,927

)

 

-

 

 

-

 

 

599,927

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

-

 

 

(100,248

)

 

-

 

 

-

 

 

(100,248

)

Prepaid expenses and other current assets

 

2,582

 

 

(10,252

)

 

372

 

 

-

 

 

(7,298

)

Accounts payable

 

26,535

 

 

79,515

 

 

(1

)

 

-

 

 

106,049

 

Accrued expenses and other

 

(20,672

)

 

10,494

 

 

(2,465

)

 

-

 

 

(12,643

)

Income taxes

 

48,494

 

 

(50,112

)

 

2,771

 

 

-

 

 

1,153

 

Other

 

(3,203

)

 

2,171

 

 

32

 

 

-

 

 

(1,000

)

Net cash provided by (used in) operating activities

 

(118,388

)

 

791,228

 

 

(17

)

 

-

 

 

672,823

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(34,647

)

 

(216,032)

 

 

(68

)

 

-

 

 

(250,747

)

Sales of property and equipment

 

-

 

 

2,701

 

 

-

 

 

-

 

 

2,701

 

Net cash used in investing activities

 

(34,647

)

 

(213,331

)

 

(68

)

 

-

 

 

(248,046

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

443,753

 

 

-

 

 

-

 

 

-

 

 

443,753

 

Issuance of long-term obligations

 

-

 

 

1,080

 

 

-

 

 

-

 

 

1,080

 

Repayments of long-term obligations

 

(782,518

)

 

(2,742

)

 

-

 

 

-

 

 

(785,260

)

Payment of cash dividends and related amounts

 

(239,731

)

 

-

 

 

-

 

 

-

 

 

(239,731

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(5,928

)

 

-

 

 

-

 

 

-

 

 

(5,928

)

Tax benefit of stock options

 

5,390

 

 

-

 

 

-

 

 

-

 

 

5,390

 

Changes in intercompany note balances, net

 

537,052

 

 

(537,638

)

 

586

 

 

-

 

 

-

 

Net cash provided by (used in) financing activities

 

(41,982

)

 

(539,300

)

 

586

 

 

-

 

 

(580,696

)

Net increase (decrease) in cash and cash equivalents

 

(195,017

)

 

38,597

 

 

501

 

 

-

 

 

(155,919

)

Cash and cash equivalents, beginning of year

 

292,637

 

 

64,404

 

 

20,954

 

 

-

 

 

377,995

 

Cash and cash equivalents, end of year

$

97,620

 

$

103,001

 

$

21,455

 

$

-

 

$

222,076

 





 

For the year ended January 30, 2009

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

OTHER
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

TOTAL

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

108,182

 

$

333,878

 

$

26,218

 

$

(360,096

)

$

108,182

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

34,638

 

 

213,003

 

 

258

 

 

-

 

 

247,899

 

Deferred income taxes

 

(4,681

)

 

16,500

 

 

61,615

 

 

-

 

 

73,434

 

Tax benefit of stock options

 

(950

)

 

-

 

 

-

 

 

-

 

 

(950

)

Gain on debt retirement, net

 

(3,818

)

 

-

 

 

-

 

 

-

 

 

(3,818

)

Non-cash share-based compensation

 

9,958

 

 

-

 

 

-

 

 

-

 

 

9,958

 

Noncash inventory adjustments and asset impairments

 

-

 

 

50,671

 

 

-

 

 

-

 

 

50,671

 

Other non-cash gains and losses

 

714

 

 

5,538

 

 

-

 

 

-

 

 

6,252

 

Equity in subsidiaries’ earnings, net

 

(360,096

)

 

-

 

 

-

 

 

360,096

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

-

 

 

(173,014

)

 

-

 

 

-

 

 

(173,014

)

Prepaid expenses and other current assets

 

(2,310

)

 

3,765

 

 

(2,053

)

 

-

 

 

(598

)

Accounts payable

 

18,717

 

 

121,546

 

 

93

 

 

-

 

 

140,356

 

Accrued expenses and other

 

11,427

 

 

46,177

 

 

11,132

 

 

-

 

 

68,736

 

Income taxes

 

56,596

 

 

(10,797

)

 

(11,813

)

 

-

 

 

33,986

 

Other

 

2,529

 

 

11,643

 

 

(88

)

 

-

 

 

14,084

 

Net cash provided by (used in) operating activities

 

(129,094

)

 

618,910

 

 

85,362

 

 

-

 

 

575,178

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(16,467

)

 

(189,058

)

 

(21

)

 

-

 

 

(205,546

)

Purchases of short-term investments

 

-

 

 

-

 

 

(9,903

)

 

-

 

 

(9,903

)

Sales of short-term investments

 

-

 

 

-

 

 

61,547

 

 

-

 

 

61,547

 

Sales of property and equipment

 

-

 

 

1,266

 

 

-

 

 

-

 

 

1,266

 

Net cash provided by (used in) investing activities

 

(16,467

)

 

(187,792

)

 

51,623

 

 

-

 

 

(152,636

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

4,228

 

 

-

 

 

-

 

 

-

 

 

4,228

 

Repayments under revolving credit facility

 

(102,500

)

 

-

 

 

-

 

 

-

 

 

(102,500

)

Repayments of long-term obligations

 

(40,780

)

 

(3,645

)

 

-

 

 

-

 

 

(44,425

)

Repurchases of common stock and settlement of equity awards, net of employee taxes paid

 

(3,009

)

 

-

 

 

-

 

 

-

 

 

(3,009

)

Tax benefit of stock options

 

950

 

 

-

 

 

-

 

 

-

 

 

950

 

Changes in intercompany note balances, net

 

570,989

 

 

(422,448

)

 

(148,541

)

 

-

 

 

-

 

Net cash provided by (used in) financing activities

 

429,878

 

 

(426,093

)

 

(148,541

)

 

-

 

 

(144,756

)

Net increase (decrease) in cash and cash equivalents

 

284,317

 

 

5,025

 

 

(11,556

)

 

-

 

 

277,786

 

Cash and cash equivalents, beginning of year

 

8,320

 

 

59,379

 

 

32,510

 

 

-

 

 

100,209

 

Cash and cash equivalents, end of year

$

292,637

 

$

64,404

 

$

20,954

 

$

-

 

$

377,995

 





ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


Not applicable.


ITEM 9A.

CONTROLS AND PROCEDURES


(a)

Disclosure Controls and Procedures.    Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

        

(b)

Management’s    Management's Annual Report on Internal Control Over Financial Reporting.Our management prepared and is responsible for the consolidated financial statements and all related financial information contained in this report. This responsibility includes establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.


To comply with the requirements of Section 404 of the Sarbanes–OxleySarbanes-Oxley Act of 2002, management designed and implemented a structured and comprehensive assessment process to evaluate the effectiveness of its internal control over financial reporting. Such assessment was based on criteria established inInternal Control—Integrated Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Management regularly monitors our internal control over financial reporting, and actions are taken to correct any deficiencies as they are identified. Based on its assessment, management has concluded that our internal control over financial reporting is effective as of January 28, 2011.31, 2014.


Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on management's assessment of our internal control over financial reporting. Such attestation report is contained below.





114



(c)    Attestation Report of Independent Registered Public Accounting Firm.


Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of


Dollar General Corporation


We have audited Dollar General Corporation and subsidiaries’subsidiaries' internal control over financial reporting as of January 28, 2011,31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Dollar General Corporation and subsidiaries’subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’sManagement's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’scompany's internal control over financial reporting based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’scompany's assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




115



In our opinion, Dollar General Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 28, 2011,31, 2014, based onthe COSO criteria.criteria.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries as of January 28, 201131, 2014 and January 29, 2010,February 1, 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended January 28, 2011, January 29, 2010, and January 30, 200931, 2014, of Dollar General Corporation and subsidiaries and our report dated March 22, 201120, 2014 expressed an unqualified opinion thereon.

     /s/ Ernst & Young LLP

/s/ Ernst & Young LLP

Nashville, Tennessee
March 20, 2014



Nashville, Tennessee

March 22, 2011


(d)

Changes in Internal Control Over Financial ReportingReporting..    There have been no changes during the quarter ended January 28, 201131, 2014 in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


ITEM 9B.

OTHER INFORMATION


        On March 18, 2014, each of Messrs. Dreiling, Vasos, Tehle, Flanigan and Ravener entered into an amendment to his existing employment agreement (each, an "Amendment to Employment Agreement") with the Company to (1) eliminate the right to receive a gross-up payment on any excise tax imposed under Section 280G of the Internal Revenue Code of 1986, as amended; and (2) provide for capped payments (taking into consideration all payments covered by Section 280G of the Internal Revenue Code) of $1 less than the amount that would trigger the excise tax under Section 280G of the Internal Revenue Code unless the relevant officer's after-tax benefit would be at least $50,000 more than it would be without the payments being capped, in which case, the payments will not be capped (with the officer, not the Company paying the excise tax). Each officer, other than Mr. Dreiling, will only have the right to such uncapped payments if such officer signs a release of claims against the Company in the form attached to his employment agreement.

Not applicable.        Except as described herein, all other terms of such officers' existing employment agreements with the Company and other previously disclosed compensatory arrangements remain in full force and effect.

        The foregoing description of each Amendment to Employment Agreement is not a complete summary of the terms of each such document, and reference is made to the complete text of each such document attached hereto as Exhibits 10.26, 10.32, 10.34, 10.39 and 10.45 and incorporated by reference herein.




116



PART III


ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


(a)

Information Regarding Directors and Executive Officers.    The information required by this Item 10 regarding our directors and director nominees is contained under the captions “—Who"Who are the nominees this year,” “—What" "What are the backgrounds of this year’syear's nominees,” “—Are" "Are there any familial relationships between any of the nominees” and “—Hownominees," "How are directors identified and nominated," and "What particular experience, qualifications, attributes or skills led the Board of Directors to conclude that each nominee should serve as a director of Dollar General," all under “Proposalthe heading "Proposal 1: Election of Directors,” as well as “Corporate Governance—Does the Board have standing Audit, Compensation, and Nominating Committees,” allDirectors" in our definitive Proxy Statement to be filed for our 2011 Annual Meeting of Shareholders to be held on May 25, 201129, 2014 (the “2011"2014 Proxy Statement”Statement"), which information under such captions is incorporated herein by reference. Information required by this Item 10 regarding our executive officers is contained in Part I of this Form 10-K under the caption “Executive"Executive Officers of the Registrant," which information under such caption is incorporated herein by reference.

(b)

Compliance with Section 16(a) of the Exchange Act.Act.    Information required by this Item 10 regarding compliance with Section 16(a) of the Exchange Act is contained under the caption “Section"Section 16(a) Beneficial Ownership Reporting Compliance”Compliance" in the 20112014 Proxy Statement, which information under such caption is incorporated herein by reference.

(c)

Code of Business Conduct and Ethics.    We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and Board members. This Code is posted on the Investor Information section of our Internet website at www.dollargeneral.com. If we choose to no longer post such Code, we will provide a free copy to any person upon written request to Dollar General Corporation, c/o Investor Relations Department, 100 Mission Ridge, Goodlettsville, TN 37072. We intend to provide any required disclosure of an amendment to or waiver from the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our Internet website located at www.dollargeneral.com promptly following the amendment or waiver. We may elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to or in lieu of the website disclosure. The information contained on or connected to our Internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.


(d)

Procedures for Shareholders to Nominate Directors. Information required by this Item 10 regarding    There have been no material changes to the procedures by which shareholderssecurity holders may recommend nominees to ourthe registrant's Board of Directors is contained under the captions “—How are directors identified and nominated,” “—How are nominees evaluated; what are the minimum qualifications” and “—Can shareholders nominate directors,” all under “Proposal 1: Election of Directors” in the 2011 Proxy Statement, which information under such captions is incorporated herein by reference.Directors.



(e)

Audit Committee Information.    Information required by this Item 10 regarding our audit committee and our audit committee financial expertexperts is contained under the captions “Corporate"Corporate Governance—Does the Board have standing Audit, Compensation and Nominating Committees”Committees" and “—"—Does Dollar General have an audit committee financial expert serving on its Audit Committee”Committee" in the 20112014 Proxy Statement, which information under such captions is incorporated herein by reference.


ITEM 11.

EXECUTIVE COMPENSATION


The information required by this Item 11 regarding director and executive officer compensation, including the Compensation Committee Report, the risks arising from our compensation policies and practices for employees, and compensation committee interlocks and insider participation is contained under the captions “Director Compensation”"Director Compensation" and “Executive Compensation”"Executive Compensation" in the 20112014 Proxy Statement, which information under such captions is incorporated herein by reference.





ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


(a)

Equity Compensation Plan Information.The following table sets forth information about securities authorized for issuance under our compensation plans (including individual compensation arrangements) as of January 28, 2011:



31, 2014:


Plan category
 Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
 Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
 Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)
 

Equity compensation plans approved by security holders(1)

  3,521,872 $36.97  19,871,333 

Equity compensation plans not approved by security holders

       
        

Total(1)

  3,521,872 $36.97  19,871,333 
        
        

Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

Weighted-average exercise price of outstanding options, warrants and rights
(b)

Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)

 

 

 

 

Equity compensation plans approved by security holders(1)

11,469,706

$9.95

17,837,497

 


 


Equity compensation plans not approved by security holders

--

--

--

 


 


Total(1)

11,469,706

      $9.95

17,837,497

 

 

 

 

(1)

Column (a) consists of shares of common stock issuable upon exercise of outstanding options and upon vesting and payment of restricted stock units under the 2007 Stock Incentive Plan and shares of common stock issuable upon exercise of outstanding options under the 1998 Stock Incentive Plan. Restricted stock units are settled for shares of common stock on a one-for-one basis and have no exercise price. Accordingly, those units have been excluded for purposes of computing the weighted-average exercise price in column (b). Column (c) consists of shares reserved for issuance pursuant to the 2007 Stock Incentive Plan, whether in the form of stock, restricted stock, restricted stock units, or other stock-based awards or upon the exercise of an option or right. Although certain options remain outstanding under the 1998 Stock Incentive Plan, no future awards may be granted thereunder.


(1)
Column (a) consists of shares of common stock issuable upon exercise of outstanding options and upon vesting and payment of share units under the Amended and Restated 2007 Stock Incentive Plan. Share units are settled for shares of common stock on a one-for-one basis and have no exercise price. Accordingly, those units have been excluded for purposes of computing the weighted-average exercise price in column (b). Column (c) consists of shares reserved for issuance pursuant to the Amended and Restated 2007 Stock Incentive Plan, whether in the form of stock, restricted stock, share units, or other share-based awards or upon the exercise of an option or right.


(b)    Other InformationInformation..    The information required by this Item 12 regarding security ownership of certain beneficial owners and our management is contained under the caption “Security Ownership”"Security Ownership" in the 20112014 Proxy Statement, which information under such caption is incorporated herein by reference.


ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



The information required by this Item 13 regarding certain relationships and related transactions is contained under the caption “Transactions"Transactions with Management and Others”Others" in the 20112014 Proxy Statement, which information under such caption is incorporated herein by reference.


The information required by this Item 13 regarding director independence is contained under the caption “Director Independence”"Director Independence" in the 20112014 Proxy Statement, which information under such caption is incorporated herein by reference.




ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES


The information required by this Item 14 regarding fees we paid to our principal accountant and the pre-approval policies and procedures established by the Audit Committee of our Board of Directors is contained under the caption “Fees"Fees Paid to Auditors”Auditors" in the 20112014 Proxy Statement, which information under such caption is incorporated herein by reference.



PART IV


ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES