Please email ft@debtwire.com or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731 for further information on Debtwire and how to receive more articles like the one below.
--------------------------------------------------------------------------------------------------------
Dollar General’s investors are concerned about how much “clean” EBITDA can be booked, after stripping away add-backs from its operational overhaul and its USD 7.3bn July buyout by Kolberg Kravis Roberts & Co. The discount retailer reported improved earnings in 1Q07 but the uncertainty about the stripping away of add-backs, combined with softening consumer spending and weaker performance by some comparables, is giving analysts pause for thought.
The company is expected to report quarterly results for the period ending 4 August in September or October, versus its usual end-August schedule, said the first sellsider and the first buysider.
Raw EBITDA figures are much harder to estimate because of the numerous add-backs associated with Dollar General’s ongoing restructuring as well as legal and professional fees in regards to the buyout, analysts agreed.
Officials at the company declined to comment.
Project Alpha, the operational overhaul Dollar General launched in November 2006, includes plans to upgrade existing stores, reduce store openings, close under-performing stores and liquidate unused inventory, according to company documents.
Goldman Sachs, lead book-runner and syndication agent for the LBO financing, projected that Dollar General would book USD 140m in EBITDA for 2Q07, including add-backs, said three sellsiders and a second buysider. This compares favorably with adjusted EBITDA of approximately USD 130m for 2Q06, the sellsiders and the second buysider agreed. Adjusted EBITDA could climb as high as USD 160m, said the first buysider.
Adjusted EBITDA for FY06 was approximately USD 646m, after USD 198m of add-backs, said the second buysider. Trailing 12-month add-backs through 1Q07 were higher at USD 228m on reported EBITDA of USD 430m, said two sellsiders and the second buysider. The USD 228m figure included USD 154m of Project Alpha add-backs and USD 62m of SG&A costs related to store closings and inventory clearance, said the first sellsider.
Opinions vary but store closing costs can usually be allowed as one-time charges, said a second sellsider. Meanwhile, pre-opening business costs and inventory markdowns are considered normal course of business and are not usually allowed, he added.
Dollar General announced plans to close 400 stores in FY07, approximately 281 of which had been closed as of 4 May, according to the company’s quarterly report. A majority of those stores, if not all, have been closed by now, said the first sellsider.
Prior to Project Alpha, Dollar General would put unused merchandise during a specific season in storage and try to re-sell it the following year. Unsold goods were usually marked down as 1% of total sales, said the first sellsider. In contrast, Project Alpha requires a pro-forma mark down level of 2.4% of total sales through 3Q07, he said.
Investors expressed concern that the 2.4% might not accurately reflect a sale of all merchandise by that time, said the first sellsider. If the unsold inventory has not been liquidated by then, the inventory markdowns could continue into the following quarters.
Even if unsold inventory add-backs are added on for next year, they represent arbitrary figures and are not reflective of the company’s true performance, said the second buysider. He pointed to Dollar General’s increased same-store sales – 3.3% in 2006 and 2% in 2005 – as a truer indicator of the company’s performance.
Despite Dollar General’s decision to shutter stores, it will retain a strong geographic focus and a promising brand name that will carry it through the immediate turmoil, argued an industry banker. KKR would not have made its USD 2.8bn equity investment – 37% of acquisition price – without a strong belief in the credit, the second buysider said.
Strong sponsorship notwithstanding, analysts pointed to the high leverage built into Dollar General’s LBO as a red flag. The company is about 11X levered on a reported basis, said the second buysider. On an adjusted basis, the company was 7.5X levered as of February 2007, according to a Moody’s report. This is expected to step-down to 7.3X by the fiscal year ending February 2008, as per the report.
Concern over consumer spending and industry turbulence is making Dollar General a “show me” story, said a third sellsider. While big box stores seem to be benefiting from more frugal consumers, that shift has yet to flow through to discount retailers like Family Dollar.
July sales for general merchandisers, including discount and dollar stores, increased 3.3% versus a 2.6% estimate, according to an August Citigroup research note. Back-to-school traffic is expected to spur August sales, according to the report, which does not include Dollar General but compares discount retailers such as Family Dollar, Wal-mart and Target.
Family Dollar, a public, North Carolina-based comparable, recently released softer than expected quarterly earnings and cut guidance for the upcoming year, several analysts said. The company released a 0.5% rise in same store sales for July, said a fifth sellside analyst.
Dollar General’s capital structure includes a USD 3.425m credit facility consisting a USD 1.7bn first-out piece, a USD 600m first-loss piece, a USD 1bn asset-based revolver and a USD 125m “first-in, last-out” asset-based revolver. Dollar General also has USD 1.175m 10.625% senior notes due 2015 and USD 725m senior PIK notes due 2017.
The USD 1.7bn first-out piece was bid/offered at 92.19/93.69 and the USD 600m first-loss piece was bid/offered at 88.67/90.33, as last reported on Markit. Meanwhile, the senior notes were at 89.75 and the PIK notes at 84, as last reported on Markit.
--------------------------------------------------------------------------------------------------------
Debtwire is the most informed news service available on global distressed debt and leveraged finance and is used by hedge funds, proprietary trading desks, asset managers, restructuring financial and legal advisors. Debtwire provides clients with articles such as the one above in real-time via an online platform and personalized email and BlackBerry alerts. For further information on Debtwire please email ft@debtwire.com
or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731
