Discount Variety Stores Industry Module 2 Kate Johnson

1. Discount Variety Stores Industry Module 2 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. Step 1Original Balance Sheet

6. Step 2: NEANELNEA

7. NEA

8. NFL

9. Check

10. Uncertainties • 1) Cash and Cash Equivalents • 2) Income taxes receivable • 3) Redeemable common stock

11. Cash and Cash Equivalents • Goal: estimate amount of cash required to fund normal enterprise operations -collecting from customers - paying bills and employees - buying inventory • Threshold for necessary cash: (1/52 times sales) • Historically, Dollar General carries less than one week of sales in cash (with the exception of 2010)

12. Cash and Cash Equivalents Two things to contemplate: 2009, 2011, 2012 less than a weeks sales in cash is on the balance sheet? Why is there over 2% in 2010 and higher than usual in 2009?

13. Cash and Cash Equivalents Continued • Less than 2% is normalfor this industry! • These companies tend to have excellent cash management • Average for the past 4 years: • Target • Wal-Mart 1.4% • Costco 1.5% • Dollar General 1.85% • Curiously, however, Dollar Tree 5.4%

14. 2009 and 2010 explanation: During the recession, consumers went downward regarding retail shopping. Therefore, Dollar General experienced higher than average profits, particularly in 2010 (2009 too). -Thus, cash was higher than normal -Registers kept more full of cash -Massive amounts of additional projects in 2011 and 2012 Therefore, I didn’t separate enterprise/financing cash for 2010*

15. Income Taxes Receivable

16. Redeemable Common Stock

17. Step 3 Original Income Statement

18. Step 4 Calculate EPAT

19. Tax Rate in computing EPAT

20. FEAT

21. Investigate Further • Interest Income (and lack thereof) • Interest expense for 2012 changes when compared • No comprehensive income from 2011 • Other income/expense • Why in 2010 were expenses so low? • Unrealized net gain on hedged transactions

22. Interest Income and Changing Interest Expense

23. Comprehensive Income-sometimes not included on I/S

24. Other (Income) Expense • Despite Module 2 telling us to wait until Module 10 to figure this out • “Notes” and “Interest” make this sound like financing, so it was eliminated from EPAT calculation

25. Unrealized net gain on hedged transactions A security whose price is dependent upon or derived from one or more underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Assumption: This is used in the computation of FEAT, not EPAT Why this needs to be investigated further: -Hedging can be either a financing or enterprising activity. -Oftentimes, discount retailers hedgefuel cost. Fuel is core to their operations (diesel moves the product) and EPAT. -DG could also be hedging interest rates on their variable rate debt which could be financing and FEAT.

27. Tax Benefit Allocated to Financing Activities • Is this an example? Even though not on I/S?