UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2016August 4, 2017

Commission File Number: 001-11421

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

100 MISSION RIDGE

GOODLETTSVILLE, TN  37072

(Address of principal executive offices, zip code)

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

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 ☒  No ☐

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 ☒  No ☐

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

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

The registrant had 276,264,260273,259,005 shares of common stock outstanding on November 28, 2016.August 25, 2017.

PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.Basis of presentation

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by U.S. GAAP for annual financial statements or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of January 29, 2016February 3, 2017 which has beenwas derived from the audited consolidated financial statements at that date. Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2016February 3, 2017 for additional information.

The Company’s fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 20162017 fiscal year is scheduled to be a 53-week52-week accounting period ending on February 3, 2017,2, 2018, and the 20152016 fiscal year was a 52-week53-week accounting period that ended on January 29, 2016.February 3, 2017.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position as of October 28, 2016August 4, 2017 and results of operations for the 13-week and 39-week26-week accounting periods ended October 28,August 4, 2017 and July 29, 2016 and October 30, 2015 have been made.

The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Because the Company’s business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

The Company uses the last-in, first-out (“LIFO”) method of valuing inventory. 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’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded a LIFO provision (benefit) of $(3.8)$(0.5) million and $(1.7)$(2.9) million in the respective 13-week periods, and $(8.1)$0.3 million and $(2.3)$(4.3) million in the respective 39-week26-week periods, ended October 28, 2016August 4, 2017 and October 30, 2015.July 29, 2016. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued comprehensive new accounting standards related to the recognition of revenue, which specified an effective date for annual reporting periods beginning after December 15, 2016, with early adoption not permitted. In August 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, with earlier adoption permitted only for annual reporting periods beginning after December 15, 2016. The new guidance allows for companies to use either a full retrospective or a modified retrospective approach in the adoption of this guidance. The Company is currentlyformed a project team to assess and implement the standard by compiling a list of the applicable revenue streams, evaluating these transition approaches, as wellrelevant contracts and comparing the Company’s current accounting policies to the new standard. As a result of the efforts of this project team, the Company has identified customer incentives and gross versus net considerations as the potential timingareas in which it would most likely be affected by the new guidance. The Company is continuing to assess all the impacts of adoptionthe new standard and the design of internal control over financial reporting, but based upon the terms of the Company’s agreements and an evaluation of the materiality of these transactions related to customer incentives and gross versus net considerations, the Company does not expect the adoption to have a material effect on the Company’s consolidated results of adoptionoperations, financial position or cash flows. The Company currently expects to complete this work in 2017 and to adopt this guidance on its consolidated financial statements.February 3, 2018 using the modified retrospective approach.

In February 2016, the FASB issued new guidance related to lease accounting, which when effective will require a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after

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.

The Company’s 20112012 and earlier tax years are not open for further examination by the Internal Revenue Service (“IRS”). Due to the filing of an amended federal income tax return for the 2012 tax year, the IRS may, to a limited extent, examine the Company’s 2012 income tax filings. The IRS, at its discretion, may choose to examine the Company’s 2013 through 20152016 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, the Company’s 2012 and later tax years remain open for examination by the various state taxing authorities.

As of October 28, 2016,August 4, 2017, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $6.3$3.1 million, $1.0$0.9 million and $0.9$0.8 million, respectively, for a total of $8.2$4.8 million. This total amount is reflected in noncurrent Other liabilities in the condensed consolidated balance sheet.

The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $5.2$2.2 million in the coming twelve months principally as a result of the effective settlement of uncertain tax positions. As of October 28, 2016,August 4, 2017, approximately $6.3$3.1 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

The effective income tax rates for each of the 13-week and 39-week26-week periods ended October 28, 2016August 4, 2017 were 36.2% and 36.1%37.2%, respectively, compared to rates of 37.0%36.8% and 37.6%36.1%, respectively, for the 13-week and 39-week26-week periods ended October 30, 2015. July 29, 2016.  The tax raterates for the 20162017 13-week period was lowerand 26-week periods were higher than for the comparable 2015 period2016 periods primarily due to the retroactive enactmentrecognition of a tax benefit in 2015 of federal jobs tax credits (principally the Work Opportunity Tax Credit or “WOTC”) for employees hired after December 31, 2014.  The tax rate for the 2016 39-week period was lower than for the comparable 2015 period primarily dueperiods associated with stock based compensation that did not reoccur to the retroactive enactment of the WOTC as well as the 2016 adoption of amendments to accounting guidance for share-based payment discussed in Note 1. While the Company eventually did benefit from the WOTC associated with employees hiredsame extent in the 13-week and 39-week periods ended October 30, 2015, the benefit could not be recognized until the federal laws authorizing the credits were retroactively reenacted in December 2015.2017 periods.

4.Current and long-term obligations

The Company’s senior unsecured credit facilities (the “Facilities”)Current and long‑term obligations consist of the following:

On February 22, 2017, the Company entered into an unsecured amended and restated credit agreement for a $425.0$175.0 million senior unsecured term loan facility (the “Term Facility”) and a $1.0$1.25 billion senior unsecured revolving credit facility (the “Revolving Facility”) which(collectively, the “Facilities”) that provides for the issuance of letters of credit up to $175.0 million. The Facilities areTerm Facility is scheduled to mature on October 20, 2020.2020, and the Revolving Facility is scheduled to mature on February 22, 2022.

Borrowings under the Facilities bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of August 4, 2017 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Facilities, and customary fees on letters of credit issued under the Revolving Facility.  As of August 4, 2017, the

commitment fee rate was 0.15%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Facilities are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings. The weighted average all-in interest rate for borrowings under the Facilities was 2.3% as of August 4, 2017.

The Facilities can be voluntarily prepaid in whole or in part at any time without penalty. There is no required principal amortization under the Facilities.  The Facilities contain a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional liens; sell all or substantially all of the Company’s assets; consummate certain fundamental changes or change in the Company’s lines of business; and incur additional subsidiary indebtedness. The Facilities also contain financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of August 4, 2017, the Company was in compliance with all such covenants.  The Facilities also contain customary events of default.

As of October 28, 2016,August 4, 2017, the entire balance of the Term Facility was outstanding, and under the Revolving Facility, the Company had no outstanding borrowings, outstanding letters of credit of $15.5$10.6 million, and borrowing availability of $984.5 million$1.24 billion that, due to reservedits intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $531.5$723.9 million. In addition, as of October 28, 2016August 4, 2017, the Company had outstanding letters of credit of $33.6$37.2 million which were issued pursuant to separate agreements.

OnAs of August 1, 2016,4, 2017, the Company established a commercial paper program under which the Company may issuehad outstanding unsecured commercial paper notes (the “CP Notes”). of $515.5 million classified as long-term obligations on the condensed consolidated balance sheet due to its intent and ability to refinance these obligations as long-term debt. Under this program, the Company may issue the CP Notes

The following table presents the Company’s assets and liabilities disclosed at fair value as of October 28, 2016,August 4, 2017, aggregated by the level in the fair value hierarchy within which those measurements are classified.

On June 11, 2013, the EEOC filed a lawsuit in the United States District Court for the Northern District of Illinois entitled Equal Opportunity Commission v. Dolgencorp, LLC d/b/a Dollar General 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.

The court has bifurcated the issues of liability and damages for purposes of discovery and trial.  Fact discovery related to liability is to be completed on or before April 17, 2017. In response to various discovery motions, the court has entered orders requiring the Company’s production of documents, information and electronic data for the period 2004 to present.

Currently pending is the EEOC’s Motion for Partial Summary Judgment relating to two of the Company’s defenses challenging the sufficiency of the Commission’s conciliation efforts and the scope of its investigation.

The Company is vigorously defending the Wage/Hour Litigation and believes that its criminal background check process is both lawfulpolicies and necessary to a safe environmentpractices comply with federal and state laws and that these actions are not appropriate 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, atAt this time, it is not possible to predict whether the actionthese matters will ultimately be permitted to proceed as a class or in aother similar fashionaction, or the size of any putative class.class or classes. Likewise, at this time it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of this actionthese matters on the merits or otherwise.  For these reasons, 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, the resolution of this matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

On May 23, 2013, a lawsuit entitled Juan Varela v. Dolgen California and Does 1 through 50 (“Varela”) was filed in the Superior Court of the State of California for the County of Riverside.  In the original complaint, the Varela 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 and seeks to represent a putative class of California “key carriers” as to these claims.  The Varela plaintiff also asserts a claim for unfair business practices and seeks to proceed under California’s Private Attorney General Act (the “PAGA”).

On November 4, 2014, the Varela plaintiff filed an amended complaint to add Victoria Lee Dinger Main as a named plaintiff and to add putative class claims on behalf of “key carriers” for alleged inaccurate wage statements and failure to provide appropriate pay upon termination in violation of California law.

The Company filed answers to both the complaint and amended complaint.  The court recently vacated the deadlines for the filing of motions related to class certification in light of other discovery matters pending before the court.  No new deadlines have been set.   

On January 15, 2015, a lawsuit entitled Kendra Pleasant v. Dollar General Corporation, Dolgen California, LLC, and Does 1 through 50 (“Pleasant”) was filed in the Superior Court of the State of California for the County of San Bernardino in which the plaintiff seeks to proceed under the PAGA for various alleged violations of California’s Labor Code.  Specifically, the plaintiff alleges that she and other similarly situated non-exempt California store-level employees were not paid for all time worked, provided meal and rest breaks, reimbursed for necessary work related expenses, and provided with accurate wage statements and seeks to recover unpaid wages, civil and statutory penalties, interest, attorneys’ fees and costs. The court has stayed proceedings in this matter until resolution of the Varela matter.  

On February 20, 2015, a lawsuit entitled Julie Sullivan v. Dolgen California and Does 1 through 100 (“Sullivan”) was filed in the Superior Court of the State of California for the County of Alameda in which the plaintiff alleges that she and other similarly situated Dollar General Market store managers in the State of California were improperly classified as exempt employees and were not provided with meal and rest breaks and accurate wage statements in violation of California law.  The Sullivan plaintiff also alleges that she and other California store employees were not provided with printed wage statements, purportedly in violation of California law.  The plaintiff seeks to recover unpaid wages, including overtime pay, civil and statutory penalties, interest, injunctive relief, restitution, and attorneys’ fees and costs.

On May 25, 2017, in response to the Notice of Proposed Action, the Company filed an action in New Mexico federal court seeking a declaratory judgment that the Attorney General is prohibited by, among other things, the United States Constitution, from pursuing the New Mexico Motor Oil Matter and an order enjoining the Attorney General from pursuing such an action.  (Dollar General Corporation v. Hector H. Balderas, D.N.M., Case No. 1:17-cv-00588). Thereafter, on or before December 5, 2016.June 20, 2017, the New Mexico Attorney General filed an action in the First Judicial District Court, County of Santa Fe, New Mexico pertaining to the New Mexico Motor Oil Matter.  (Hector H. Balderas v. Dolgencorp, LLC, Case No. D-101-cv-2017-01562).  The Company removed this matter to New Mexico federal court on July 26, 2017, and has filed a motion to dismiss the action. The State has moved to remand the matter to state court. (Hector H. Balderas v. Dolgencorp, LLC, D.N.M., Case No. 1:17-cv-772).

The Company is vigorously defending these matters and believes that the labeling, marketing and sale of its private-label motor oil compliescomply with applicable federal and state requirements and isare not misleading.  The Company further believes that these matters are not appropriate for class or similar treatment.  The Company intends to vigorously defend these actions; however, atAt this time, however, it is not possible to predict whether any of these casesmatters will be permitted to proceed as a class or in a similar fashion, whether on a statewide or nationwide basis, or the size of any putative class.class or classes.  Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these actionsmatters on the merits or otherwise.  For these reasons, the Company is unable to estimate the potential loss or range of loss in these matters; however if the Company is not successful in its defense efforts, the resolution of the Motor Oil MDL or the New Mexico Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

Shareholder Litigation

The Company is defending litigation filed in January and February 2017 in which the plaintiffs, on behalf of themselves and a putative class of shareholders, allege that between March 10, 2016 and December 1, 2016, the Company and certain of its officers (the “Individual Defendants”) violated federal securities laws by misrepresenting the impact to sales of changes to certain federal programs that provide supplemental nutritional assistance to individuals. (Iron Workers Local Union No. 405 Annuity Fund v. Dollar General Corporation, et al., M.D. Tenn. Case No. 3:17-cv-00063; Julia Askins v. Dollar General Corporation, et al., M.D. Tenn., Case No. 3:17-cv-00276; Bruce Velan v. Dollar General Corporation, et al., M.D. Tenn., Case No. 3:17-cv-00275) (collectively “the Shareholder Litigation”).  The plaintiffs in the Shareholder Litigation seek the following relief: compensatory damages, unspecified equitable relief, pre- and post-judgment interest and attorneys’ fees and expenses. The court has consolidated the cases, appointed a lead plaintiff and entered a preliminary scheduling order. A motion to dismiss filed by the Company and the Individual Defendants is pending.

The Company believes that the statements at issue in the Shareholder Litigation complied with the federal securities laws and intends to vigorously defend this matter.  At this time, it is not possible to predict whether the Shareholder Litigation will be permitted to proceed as a class or the size of any putative class.  Likewise, at this time, it is not possible to estimate the value of the claims asserted in this action, and no assurances can be given that the Company will be successful in its defense on the merits or otherwise.  For these actionsreasons, the Company is unable to estimate the potential loss or range of loss in this matter; however if the Company is not successful in its defense efforts, the resolution of the Shareholder Litigation could have a material adverse effect on the Company’s consolidated financial statements as a whole.

In February 2014, certain California District Attorneys’ Offices (“California DAs”), representing California’s county environmental authorities, informedThe Company is also defending shareholder derivative actions filed in April, July and August 2017, in which each plaintiff asserts, purportedly on behalf of the Company, that they were investigatingsome or all of the following claims against the Company’s hazardous waste handlingboard of directors and disposal practices in certain of its California storesofficers based upon factual allegations substantially similar to those in the Shareholder Litigation: alleged breach of fiduciary duties, unjust enrichment, violation of federal securities laws, abuse of control, and its California distribution center.  On September 22, 2016,gross mismanagement.  (Robert Anderson v. Todd Vasos, et al., M.D. Tenn. Case No. 3:17-cv-00693; Sharon Shaver v. Todd J. Vasos, et al., Chancery Court for the California DAs provided a settlement demand toTwentieth Judicial District of Davidson County, Tennessee, Case No. 17-797-I; Glenn Saito v. Todd Vasos, et al., M.D. Tenn., Case No. 3:17-cv-01138) (collectively “the Derivative Litigation”). The plaintiffs in the Derivative Litigation seek, purportedly on behalf of the Company, that included a proposed civil penaltysome or all of the following relief: compensatory damages, injunctive relief, disgorgement, restitution and certain injunctive relief.  The Company does not believe thatattorneys’ fees and expenses. Proceedings in theAnderson matter have been stayed pending resolution of this matter is likelythe motion to have a material adverse effect ondismiss in the Company's consolidated financial statements as a whole. Nonetheless, SEC regulations require disclosures of certain environmental matters when a governmental authority is a party to the proceeding unlessShareholder Litigation, and the Company reasonably believesand other defendants in the proceeding will resultremaining derivative actions (Shaver and Saito) expect to seek a similar stay in no monetary sanctions or in monetary sanctions, exclusive of interest and costs, of less than $100,000.  As noted above, it now appears that this matter is likely to result in monetary sanctions, which the Company expects to exceed $100,000.those actions.

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’s consolidated 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’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’s financial position or may negatively affect operating results if changes to the Company’s business operation are required.

7.Segment reporting

The Company manages its business on the basis of one reportable operating segment. As of October 28, 2016,August 4, 2017, all of the Company’s operations were located within the United States with the exception of certain subsidiaries in Hong Kong and China and a liaison office in India, which collectively are not material with regard to assets, results of operations or otherwise to the condensed consolidated financial statements. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

Review Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Dollar General Corporation

We have reviewed the condensed consolidated balance sheet of Dollar General Corporation and subsidiaries (the Company) as of October 28, 2016,August 4, 2017, and the related condensed consolidated statements of income and comprehensive income for the thirteen week and thirty-ninetwenty-six week periods ended October 28,August 4, 2017 and July 29, 2016, and October 30, 2015, and the condensed consolidated statements of cash flows for the thirty-ninetwenty-six week periods ended October 28, 2016August 4, 2017 and October 30, 2015.July 29, 2016.  These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dollar General Corporation and subsidiaries as of January 29, 2016February 3, 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein) and we expressed an unqualified opinion on those consolidated financial statements in our report dated March 22, 2016.24, 2017. In our opinion, the accompanying condensed consolidated balance sheet of Dollar General Corporation and subsidiaries as of January 29, 2016,February 3, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended January 29, 2016.February 3, 2017. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

Executive Overview

We are among the largest discount retailers in the United States by number of stores, with 13,20513,865 stores located in 4344 states as of October 28, 2016, geographically concentratedAugust 4, 2017, with the greatest concentration of stores 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. Our merchandise includes high-quality national brands from leading manufacturers, as well as our own value and comparable quality and value 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 locations.

Because the customers we serve are value-conscious, many with low or fixed incomes, we are intensely focused on helping them make the most of their spending dollars. We believe our convenient store formatformats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years.years and through a variety of macroeconomic environments. Like other retailers, we have been operating for several years in an environment with ongoing macroeconomic challenges and uncertainties. Our core customers are often among the first to be affected by negative or uncertain economic conditions and are among the last to feel the effects of improving economic conditions whereparticularly when, as in the recent past, economic trends have beenare inconsistent and their duration is unknown. OurThe primary macroeconomic factors that affect our core customers have experienced both positiveinclude the unemployment and negative general economic factors over the past year,underemployment rates, wage growth, fuel prices and changes to certain government assistance programs, such as lower gasoline prices and unemployment rates coupled with rising rents and medical costs, a continued reduction in governmentalthe 2016 changes to the Supplemental Nutrition Assistance Program, participation rates andwhich has had the effect of not only reducing benefit levels but also eliminating benefit eligibility for certain individuals. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their budget, such as rent and varying wage growth.healthcare, which have increased during 2016 and in the first half of 2017 at a rate that was greater than many of our core customers’ growth in income.  We believe the overall net effect of thesethe macroeconomic factors listed above has negatively impacted our traffic and, consequentlyalong with deflationary pressures, including both lower commodity costs and pricing actions on our products, has adversely affected same-store sales particularlyfor the past several quarters. Although we believe that macroeconomic factors as a whole had less of a negative impact on same-store sales results in the second and thirdquarter of 2017 compared to recent quarters, we continue to monitor these factors as they have the potential to negatively affect our sales results for the remainder of 2016.the year.

WeDuring 2017 we have continued to make progress on our initiatives as we continue to pursue long-term growth opportunities. At the same time, we remain committed to ourthe following long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus. We are keenly focused on executing the following priorities:focus: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.

We seek to drive profitable sales growth through initiatives such as improvement in our in-stock position,aimed at increasing customer traffic and average transaction amount, as well as an ongoing focus on enhancing our margins while maintaining both everyday low price and affordability.

We expectIn the first half of 2017, consistent with historical performance, our sales of consumables, which tend to have lower gross margins, have been the key drivers of net sales growthand customer traffic, while sales of non-consumables, which tend to continuehave higher gross margins, have contributed to be driven primarily by consumables and we expect non-consumables sales to continue to contribute to our profitable sales growth.  However, in recent periods deflationary pressure resulting inIn addition, during the first half of 2017, our mix of consumables sales has shifted somewhat toward lower prices has negatively affected our sales performance. Same-store sales growth is key to achieving our objectives, and in light of the current operating environment we have made certain pricing adjustments as well as labor and marketing investments in designated geographies with a focus on the consumables category. We will continue to evaluate and refresh these pricing adjustments across various items, categories and markets as we move through the remainder of the year. These steps are being taken in an attempt to further grow our market share by increasing both item units sold and customer traffic, although it will likely take time to achieve the full benefit of these initiatives.

During 2016 we have made significant progress with the rollout of other initiatives designed to drive sales,margin consumable departments such as the expansion of coolers in existing stores and the expansion of certain product classes including health and beauty care and party and stationery. We have updated our customer segmentation information and have been able to gain deeper insights into the spending habits for each of our core customer segments. This helps drive our categoryperishables

and tobacco. We expect the trends of consumables, and lower margin consumables, comprising a larger percentage of our sales to continue throughout at least the remainder of the year.

Our initiatives are designed to increase customer traffic and average transaction amounts as we believe same-store sales growth is key to achieving our financial objectives.  In the first half of 2017, we have made significant progress on many of these initiatives, which include the continued expansion of coolers, the rollout of additional strategies across each of our merchandise departments, including a redesign of our Health and Beauty department to drive further product awareness and market share, a continued focus on improving our in-stock position and the addition of a queue line in a portion of our existing store base.  We will continue to utilize our customer segmentation information and other tools, which have provided us with deeper insights into the spending habits of each of our core customer segments, to refine these initiatives and drive our category management process as we optimize our merchandise assortment and expand into those products that we believe are most likely to drive customer traffic to our stores.

Our in-stock improvement initiative is designed  We also continue to ensure the right products are available on the shelf whenenhance our advertising effectiveness by expanding our digital capabilities and further integrating our traditional and digital media mix to reach our customers shopwhere, when and how they decide to engage with us while also targeting a higher return on investment. Many of these initiatives support our plans to continue investing in our stores. We have selectivelyexisting store base, with a goal to drive increased customer traffic and average transaction amount and as a result our incremental labor investment in those stores where we believe such increases will generate positive financial returns. We believe this will continue to improve overall customer satisfaction and convenience, in addition to driving same-store sales in these stores.  We have a disciplined approach to this labor investment and are able to quickly evaluate whether it delivers on our profitability expectations, reallocating resources as necessary.sales.

We demonstrate our commitment to the affordability needs of our core customer by pricing more than 80% of our stock-keeping units at $5 or less as of the end of the third quarterfirst half of 2016.  However,2017.  Even as we work to provide everyday low prices and meet our customers’ affordability needs, we also remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, efforts to improve distribution and transportation efficiencies, global sourcing and pricing and markdown optimization. With respect to category management, we strive to maintain an appropriate mix of consumables and non-consumables sales because, as noted above, the mix of sales affects profitability becausedue to the varying gross margin associated with sales of productsmargins between, and even within, ourthe consumables category generally is lower than that associated with sales of products within ourand non-consumables categories. Even within each category, however, there are varying levels of gross margin associated with the specific items. We strive to consistently balance inventory shrink with our in-stock position. To further support our efforts to reduce inventory shrink, we continue to implement additional in-store defensive merchandising and technology-based tools, such as Electronic Article Surveillance and video-enabled exception basedexception-based reporting, in select stores. We strive to balance these and other shrink reduction efforts with our efforts to improve our in-stock position. We also seek to reduce our stem miles and optimize loads to improve distribution and transportation efficiencies. 

To support our other operating priorities, we are alsoremain focused on capturing growth opportunities and innovating within our channel. We continued to expand our store count, opening 258 stores and remodeling or relocating a total of 267 stores during the 2016 third quarter. Of these 267 remodels and relocations, 40 projects involved relocating an existing Dollar General store location into a former Walmart Express store location, in connection with our acquisition of a total of 42 former Walmart Express store locations during July and August of 2016.opportunities. In conjunction with the purchase and relocations,2017, we incurred incremental pre-tax selling, general and administrative (“SG&A”) expenses of $13.0 million in the 2016 third quarter.

For fiscal 2016, we plan to open 900 stores and remodel or relocate approximately 900 additional stores. We intend to accelerate square footage growth in 2017 with plans to open approximately 1,285 stores, which includes our originally planned 1,000 new stores andas well as store locations acquired in June 2017 in 35 states from a small-box multi-price point retailer. Additionally, we intend to relocate or remodel an additional 900approximately 760 stores.  We also plan to continue investing in our existingconvert the acquired store base through targeted merchandising initiatives and labor investments with a goalsites to drive increased trips, basket and same-store sales.  the Dollar General banner by the end of November 2017. There can be no assurance that the store sites will be converted to the Dollar General banner within the timeframe anticipated.

We continue to innovate within our channel and during 2016are able to utilize the most productive of our various store formats based on the specific market opportunity.  As has been the case throughout the first half of 2017, we began the implementation ofexpect that our traditional 7,300 square foot store format will continue to be built with the DG16 store layout. This new store layout offers a total of 22 cooler doors, an increase of six cooler doors as compared to our previous new store layout, and is being utilized for all new stores, relocations and remodels. The DG16 store layout also offers a redesigned queueing area and other enhancements that are focused on meeting the evolving demands ofremodels in 2017. In addition, our core customer while also delivering on our operating priorities. We also continue to test a smaller format store (less than 6,000 square feet) which we believe could allowallows us to capture growth opportunities in metropolitan areas as well as rural areas with a low number of households. We continue to incorporate into our existing store base lessons learned from our various store formats and layouts with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.

To support our new store growth and drive productivity, we continue to make investments in our distribution center network. Our Janesville, Wisconsin distribution center is nearing completion with a goal to begin shipping from this facility in early 2017. Our 15thfifteenth distribution center in Jackson, Georgia is also under construction with a goal to begin shipping from this facility in late 2017. We began construction on our sixteenth distribution center in Amsterdam, New York in June 2017 to support our northeast growth.

We have established a position as a low-cost operator, continuously seeking ways to reduce or control costs that do not affect our customer’scustomers’ shopping experience. We have enhancedplan to continue enhancing this position during 2016 through our zero-based budgeting initiative, streamliningover time as we aim to continually streamline our business while also reducing expenses. Our goal isemploying ongoing cost discipline to lower the same-store sales growth required to leverage SG&A expenses. This initiative has been successfulreduce certain expenses as a percentage of sales. We believe these actions will assist in 2016, as evidenced by reductions in advertising, administrative payroll and other costs, and we believe this initiative has the momentummaintaining our ability to leverage SG&A expenses at a lower same-store sales growth percentage over the long-term.long term.  In addition, we remain committed to simplifying or eliminating various

store-level tasks and processes so that those time savings can be reinvested by our store managers and their teams in otherimportant areas such as enhanced customer service, higher in-stock levels and improved store standards. Conversely, SG&A expense may be increased in December 2016 and going forward if we are required to implement our plan to address potential changes to the overtime exemption regulations under the Fair Labor Standards Act. If implemented, we anticipate incremental annualized expense of approximately $60 to $70 million, and the impact