Balancing growth with tight fiscal focus

David Tehle, EVP and CFO, Dollar General

Organizational capacity.” That’s Dollar General’s shorthand for the discipline and rigorous financial modeling that the company applies to its rapid store expansion and remodeling program. It sums up Dollar General’s remarkable and sustained ability to balance cash flow and rational capital spending plans with the most determined and aggressive new-store construction and renovation program in all of retailing.

(Click here  to download the full special report.)



“We’re very big on organizational capacity,” said David Tehle, Dollar General’s EVP and CFO. It serves as a motto, he said, for “how we decide how many stores to open or remodels we can do successfully” without sacrificing profitability, sound investment principles or sustained sales momentum.



That wasn’t always the case. Tehle, a 10-year Dollar General veteran, remembers a time when the company “pushed too hard” with its store-expansion schedule, and ended up overextended and shuttering many stores in 2006. Given the rigorous financial disciplines and new information technology Dollar General has embraced since the management overhaul of 2008, however, “we’re not going to make that mistake again,” Tehle promised.



What hasn’t changed is Dollar General’s commitment to organic growth — whatever the outcome of its bidding war with rival Dollar Tree to purchase the Family Dollar chain. “In terms of our capital, our No. 1 priority is investing in the stores,” Tehle told DSN. “And that means opening new stores, doing remodels and relocations, and having the capital necessary to make those stores look like we want them to on the inside.”



It also means “putting capital into organizational infrastructure,” said the CFO. “We’ve got to feed those stores [with] distribution centers. And when we’re opening 600 or 700 stores a year, we’re going to have to look at opening a new DC maybe every two years.”



“We’re targeting about a 6% to 7% sq footage growth in stores each year,” Tehle added. “And we have to make sure we have the right systems ... and the right people. So that’s where we’re putting our capital.”



Whatever cash is left each year — and “we always have cash left over,” said Tehle — recently has been invested in repurchasing shares of company stock. “We started our stock buyback program in December 2011, and we’ve bought back $2.3 billion worth,” he noted. “Our investors have supported this move.”



With cash flow strong and the market for dollar stores continuing to expand, Tehle sees years of growth potential ahead for Dollar General. “We’ve identified 14,000 opportunities [for new stores],” he said. “We went public in 2009, and at that time we identified 10,000 opportunities. So it’s actually grown since then.”



  There are two reasons for that, said Tehle. “A lot of that has to do with the economy, which is creating new customers. Also, we’ve got better real-estate software, which has helped us pinpoint locations in a lot more detail. So we feel there’s a huge growth trajectory yet to come.”



It comes down to “a very robust store location process,” agreed Todd Vasos, COO, based on proprietary software and IT systems that analyze a slew of factors, such as local demographics, traffic patterns, local competition and population density to sift out new locations.



The rich potential for new openings across the United States offers plenty of opportunity for domestic expansion, without having to look beyond the nation’s borders for the time being, said Tehle. Although a move into Canada, Mexico or some other country could come down the road, he said, “right now, we’re sticking to our knitting. There are so many opportunities domestically.



‘A lot of magic’ in a small box



To keep close tabs on sales and profitability, Tehle and his team monitor same-store sales performance early each morning. Other key performance metrics tracked by the financial team include gross margin trends, along with sales, general and administrative costs as a percentage of sales. Tehle also focuses daily on operating profit and EBITDA. “When we went private, we began to focus more on EBITDA,” Tehle explained. “That’s the measure that really captures your business, so we take a hard look at that.” In fiscal 2013, Dollar General reported a 3.3% rise in same-store sales and a 9.2% hike in overall revenues, to $17.5 billion. Net earnings topped $1 billion in the face of severe winter weather and a torrid store-construction strategy that saw the opening of 650 new units, and the company also generated enough cash flow to repurchase another $620 million of its own stock.



Those numbers make a telling case for Dollar General as a good investment: Its stock performance in recent years has eclipsed that of both the S&P 500 index and a much smaller index of retail company stocks. Behind that performance, said the CFO, is a winning combination of savvy, responsive merchandising, operating disciplines that control costs effectively and a solid reputation among tens of millions of Americans for providing good everyday value on the products they need.



“There’s a lot of magic to our box,” Tehle declared. “It’s a small box — about 7,500 sq. ft. — and you can open them in rural America and small towns. It doesn’t take that many people for one of our stores to be profitable. We don’t have to be in big cities.”



The other “secret sauce” to Dollar General’s success, said Tehle, is the quality of the management and store people. “I’ve never seen anything like the team that [CEO] Rick Dreiling brought in with him in 2008. It changed the whole nature of who we are and what we’re doing, and allowed us to go public a lot quicker than [former owner and investment firm] KKR planned on. We went private in July 2007, and went public again in November 2009. And it’s all based on performance.” Another benchmark: Dollar General went public in 2009 at $21 per share. As of mid-September, the stock had reached $63 per share.



Thanks to company stock buybacks, Dollar General also has reduced its publicly traded shares from roughly 340 million to 303 million over the past several years, boosting earnings per share and reducing stock dilution.