-- U.S. discount retailer Dollar General continues to achieve robust
sales and cash flow growth
-- We are raising the corporate credit rating to investment-grade 'BBB-'
-- At the same time, we are removing all ratings from CreditWatch with
-- The stable outlook reflects our view that positive operating momentum
will drive healthy sales and cash flow growth in 2012, resulting in credit
protection measures in line with an "intermediate" financial risk profile.
On April 30, 2012, Standard & Poor's Ratings Services raised its rating on
discount retailer Dollar General Corp., including the corporate credit rating
to 'BBB-' from 'BB+'. At the same time, we removed the ratings from
CreditWatch with positive implications, where they were placed on March 22,
2012. The outlook is stable.
We also assigned a 'BBB' issue rating to the company's new $880 million term
loan C due 2017.
At the same time, we raised the debt issue rating on Dollar General's term
loan first-loss B-2 to 'BBB-' from 'BB+' and the rating on the subordinated
debt to 'BB' from 'BB-'. In addition, we affirmed our 'BBB' rating on the
company's existing term loan first-out B-1 term loan.
The upgrade reflects our expectations for continued healthy sales and EBITDA
growth while debt levels remain relatively stable in 2012 and 2013, and that
Dollar General will maintain credit protection measures in line with an
"intermediate" financial risk profile.
The ratings on Dollar General reflect our expectation that the company will
maintain credit protection measures in line with its intermediate financial
risk profile, supported by healthy sales growth while managing a rapid store
We view Dollar General's business risk as "satisfactory" because of its strong
market position as the largest dollar-store chain in the U.S., with 10,000
stores, good prospects for future growth, and improved merchandising and
operating efficiencies. Standard & Poor's economists currently forecast GDP
growing 2.1% in 2012 and 2.5% in 2013, unemployment remaining above 8.0% in
2012 and 7.9% in 2013, and consumer spending increasing 2.1% in 2012 and 2.5%
in 2013. Given the company's extreme value proposition and our forecast for
the U.S. economy, we believe Dollar General will continue to benefit from
consumers trading down.
In addition, improved merchandising from increasing its mix of consumables and
private-label goods and better operating efficiency from higher store
productivity have propelled operating margin growth, outperforming its main
peer Family Dollar. We believe these initiatives will continue to support
healthy sales and earnings growth. Still, Dollar General operates in the
highly competitive discount retail sector and is pursuing an aggressive growth
plan, in our opinion. While we expect the positive operating momentum to
continue in 2012, this will likely be at a slower pace than in 2011.
In our base case, we forecast:
-- Revenue growing in the high-single-digit area, reflecting
mid-single-digit same-store sales (compared with 6% same-store sales growth in
2011) and about 625 new store openings;
-- Gross margin to remain relatively stable due to growth in
private-label products and other merchandising initiatives and despite a shift
to lower margin consumables;
-- EBITDA margin to expand modestly due to the positive leverage of
selling, general, and administrative expenses because of solid same-store
sales growth, despite higher expenses to support store openings; and
-- Free cash flow to remain healthy, at about $600 million in 2012,
despite higher capital spending to support store growth.
Still, risks to our base-case forecast include pressure on Dollar General's
core customers' discretionary spending, given high unemployment and the weak
economic recovery. We also see some risk of a reversal of the consumer trading
down to value retail concepts if an economic recovery becomes more robust,
which could limit sales.
We view Dollar General's financial profile as intermediate. In our base case,
we believe that debt leverage could decline to about 2.5x in 2012 compared
with 2.7x in fiscal 2011 due to continued momentum in the business propelling
EBITDA growth while debt levels remain relatively stable. We expect EBITDA to
interest coverage to strengthen to about 6.0x for the same period, compared
with 4.9x in 2011 due to a lower debt burden.
In the future, we expect Dollar General to use the bulk of its free cash flow
to fund share repurchase rather than debt reduction. Dollar General currently
has a $500 million share repurchase program which has largely been completed.
We assess Dollar General's liquidity as "strong," indicating that cash sources
should exceed needs over the next 12 to 18 months. Sources of liquidity
-- Cash flow from operations;
-- $808 million available under its $1.0 billion revolving credit
facility as of Feb. 3, 2012; Dollar General recently expanded this revolver to
$1.2 billion; and
-- Dollar General had about $185 million of borrowings under the revolver
and we expect the company to repay revolver borrowings by year-end, using cash
flow from operations.
We believe these sources would more than adequately cover uses of cash, which
the company uses primarily for capital spending and working capital needs to
fund store growth. Debt maturities are light; the company has about 1% debt
amortization under the term loans. The company faces no debt maturities until
2014, when the revolving credit facility and term loans B-1 and B-2 mature.
There are no maintenance financial covenants under the term loans. Terms under
the revolving credit facility require Dollar General to meet a fixed-charge
coverage ratio only if availability falls below a minimum level.
The stable outlook on Dollar General reflects our view that positive operating
momentum will drive healthy sales and cash flow growth in 2012, resulting in
total debt to EBITDA in the mid 2x area. We expect revenue growth in the
high-single-digit range and margins will expand modestly because of positive
sales leverage while gross margin remains relatively stable. Despite strong
sales growth, margin gains will be tempered by costs increases to support a
rapid store expansion program.
While we believe Dollar General's credit protection measures will improve
further in 2012, this improvement will be limited compared with prior years
given our expectations for debt levels to remain relatively flat. Despite,
higher capital expenditures, we believe that the company will continue to
generate solid levels of free operating cash flow in the $600 million range in
2012. Still, we expect share repurchases activity to consume most of the free
cash flow. In our view, the company will manage its share repurchase activity
consistently with the credit ratio targets it recently issued.
Although unlikely in the near-to-intermediate term, we would consider lowering
the rating if performance falls significantly below our expectations due to
competitive pressure, poor execution, or an over-expansion of its stores.
Under this scenario, sales would have declined in the low-single digits and
gross margins would have fallen by over 50 basis points (bps). At that time,
leverage would approach the mid-3x area. Moreover, debt-financed share
repurchases that cause debt leverage to weaken to above 3x could have a
negative effect on the rating.
We would consider an upgrade if performance remains above expectations, with
the company sustaining leverage below 2x and funds from operations to total
debt in above 40% over the intermediate term. Under this scenario, revenues
would be in the low-teen range and gross margin would expand by 150 bps.
Related Criteria And Research
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded And Off CreditWatch
Dollar General Corp.
Corporate Credit Rating BBB-/Stable/-- BB+/Watch Pos/--
Dollar General Corp.
$880 mil term loan C due 2017 BBB
Upgraded And Off CreditWatch; Recovery Ratings Withdrawn
Dollar General Corp.
Senior Secured BBB- BB+/Watch Pos
Recovery Rating NR 4
Subordinated BB BB-/Watch Pos
Recovery Rating NR 6