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Moody's Raises Outlook on Dollar General (DG) to Positive; Views Dollar Store Segment Favorably

March 25, 2014 12:26 PM EDT
Moody's Investor Service today changed Dollar General Corporation's rating outlook to positive. At the same time Moody's affirmed Dollar General's senior unsecured rating at Baa3. The change in outlook to positive acknowledges Dollar General's continued outperformance of its US dollar store peers and its ability to maintain modestly positive comparable store sales despite the many pressures its core customer is facing. The positive outlook acknowledges Dollar General maintaining EBITA to interest expense above 6.0 times and Moody's expectation that Dollar General's credit metrics are expected to improve further over the next twelve to eighteen months.

The following ratings are affirmed:

Senior unsecured at Baa3

Senior unsecured shelf at (P) Baa3

RATINGS RATIONALE

Dollar General's Baa3 senior unsecured rating is supported by its market position as the largest dollar-store chain in the U.S. Moody's views the dollar store sector favorably and expect that it will continue to grow given its low price points and its relative resistance to economic cycles. Dollar General's earnings are expected to continue to grow along with the industry. This will be driven by sales growth from its store expansion plans and comparable store sales growth of 3% to 4% offsetting the gross margin pressure and rising selling, general, and administrative expenses that Dollar General is facing due to a price sensitive customer.

The rating reflects Dollar General's solid credit metrics and its very good liquidity. The rating also acknowledges Dollar General's balanced and prudent financial policy, the cornerstone of which is a 3.0 times lease adjusted debt to EBITDAR targeted leverage ratio. Moody's anticipates that Dollar General will use excess cash flow after capital expenditures to make share repurchases and may potentially also borrow to finance share repurchases but only to the extent it stays within its leverage target.

Dollar General's ratings are constrained by its geographic concentration. While operating over 11,000 stores in 40 states, Dollar General is heavily concentrated in the south, which accounts for approximately 47% of their store base. However, this concentration risk will slowly dissipate as Dollar General continues to grow its store count in underpenetrated markets.

An upgrade would require continued strong operating performance particularly in light of Dollar General's ongoing sizable store expansion. Quantitatively, an upgrade would require Dollar General maintaining debt to EBITDA around 3.0 times and EBITA to interest expense above 5.0 times.

Downward rating pressure would result should Dollar General's financial policies become more aggressive. Ratings could also be downgraded should Dollar General's operating performance deteriorate or debt levels increase such that debt to EBITDA is sustained above 3.5 times or EBITA to interest expense falls below 4.0 times.

The principal methodology used in this rating was the Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.


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