Discount-Variety Stores Industry Module 4- Simple Analysis and Parsimonious Forecasting

1. Discount-Variety Stores Industry Module 4- Simple Analysis and Parsimonious Forecasting Kate Johnson

2. “Save Time. Save Money.” • Largest discount retailer in the US by number of stores • Goodlettsville, Tennessee • 11,000 stores • 40 States • Southern, Southwestern, Midwestern, Eastern US • Merchandise is typically $10 or less • Founded in 1939 • Stock publicly traded in 2009

3. Product Types • Two brands: 1)High quality nationalbrands from leading manufacturers 2)Comparable quality privatebrand selections 10,000 SKUS/store 10$ or less

4. How are they profitable? • Convenient Locations • Time Saving Shopping Experience • Everyday Low Prices on Quality Merchandise • Key items in a broad range of general merchandise categories • Most basic shopping needs are met in one trip

5. But DG is a Dollar Store? • Dollar General is more suited to be compared with Walmart, Target, and Costco, as not everything is $1 (DLTR) and they have produce (unlike FDO) • Characteristics such as industry and size are often chosen for comparable

6. Gross Margins • DG 32% • Target 30% • Costco 13% • Walmart 24%

7. Enterprise Profit Margin EPAT Sales • How much operating profit the firm earns from each sales dollar • Higher EPM is preferable • EPM affected by: -gross profit -level of enterprise expenses required from firm to support its products/services -level of competition -firm’s willingness and ability to control costs

8. DG EPM computation EPAT Sales

9. EPAT and EPM same as EPAT and EPM from sales • EPM wasn’t initially unstable • No impairment charge, discontinued operations, financial translation, or G/L on cash flow hedges

10. Where are other (income) expenses? • Other (Income) Expense included in computation of FEAT not EPAT

11. EATO Sales avg(NEA) • Measures the productivity of the firm’s enterprise assets • Reveals the level of sales the firm realizes from each dollar invested in enterprise assets • Higher EATO preferable • Can be increased by: • Increasing sales for a given level of investment in enterprise assets • Reducing the amount of enterprise assets necessary to generate a dollar of sales

12. DG EATO Sales avg(NEA)

13. Trade-Offs between EPM and EATO • EPM and EATO largely affected by firm’s business model • Infinite number of combinations of EPM and EATO could yield a given RNEA • Careful when comparing performance of firms across different industries • Wholesalers and retailers hold fewer assets and can operate on a lower EPM and achieve a sufficient RNEA because their EATO is far greater

14. 3 Step Sequence of Parsimonious Forecasting • Forecast revenues via forecasts of sales growth rates • Forecast EPAT via forecasts of EPM and components of EPM • Forecast NEA via forecasts of EATO and components of EATO

15. Sales Growth(All) Dollar General Average= 11.28% Sales Growth Rate Forecast= 10.9%

16. 10.9% Why this rate for sales growth? • 2012 23rd consecutive year of same-store sales growth • Less cyclical model than most retailers • Same store sales growth increased 4.4% in the third quarter and has increased 4.0% this year and will continue to increase due to new store expansion strategy and remodeling- sales growth p3 • Same store sales has been predicted to increase 4.5% for the fiscal year • Net sales per square foot has been increasing $216-$213-$201 • Net sales in third quarter increased 10.5% compared to the third quarter of 2012 • Net sales has increased 10.1% over the comparable 2012 period to $13.1 billion • Since the third quarter, the company new expects total net sales for the 2013 fiscal year to increase to 10.5% over the 2012 fiscal year • The company plans to open approximately 700 new stores in 2014 and remodel or relocate approximately 525 stores, expanding selling square footage by 6% to 7% • Wanted to take into account the risk of consumers not accepting the new format of the stores and new products (markets, tobacco) • Additionally, the uncertainty of the economy and the “level down” of stores

17. 3rd Quarter Results- End 11/ 1/ 2013 • 2012 Net Sales Was $16,022,128 Sales are in fact Increasing compared to last year

18. Comparable EPM from Sales EPAT Sales DG Average 6.86% Forecast 6.70%

19. Notes on EPM • Forecasted slightly lower than average EPM because gross profit has increased this year due to the increase in consumables and sale of lower margin items (tobacco, perishables) • Did improve costs through transportation efficiencies (distribution centers) and lower than average fuel costs • Slowly decreasing inventory shrinkage • DG had higher markdowns • Higher in 2009 due to “level down”

20. More on EPM

21. Comparable EATO Sales avg(NEA) EATO average is 2.0 Enterprise Asset Turnover Forecast 2.25

22. Notes on EATO • Steadily increasing despite the other firms which fluctuate • Will further examine in the full-information forecast

23. Completing Parsimonious Forecast • Because FYE is February 1, 2013 data is not available yet • Thus, 2013 data was the first year forecasted • Parsimonious forecasting will thus have to be adjusted when these numbers are released