Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-03-20, FY ended January 30, 2026) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: workers' compensation and general liability reserves)
One-line verdict: Dollar General's F grade reflects a structurally leveraged discount retailer that is improving but not yet healed. Net income recovered to $1.51B from the FY2025 trough of $1.13B, and operating cash flow surged 21% to $3.6B, but the balance sheet still carries $15.7B in debt (mostly operating leases) with only $1.1B in cash. Debt/EBITDA of 4.8x is elevated, SG&A consumes 83% of gross profit, and the Z-Score of 1.54 sits in the grey zone. The filing discloses "significant impairment charges, the majority of which relate to the pOpshelf stores" and warns that "inventory shrinkage and damages" remain a material operational concern. M-Score is unavailable due to insufficient data.
| Metric | Result |
|---|---|
| ❌ Red Flags | **2** (Cash-to-debt, goodwill+intangibles vs equity) |
| ⚠️ Watch Items | **2** (SG&A ratio 83.2%, leverage 4.8x) |
| Checks Completed | **14/18** (4 N/A: DSO, AR, impairment, M-Score) |
| Beneish M-Score | **N/A** (insufficient data) |
| Auditor | Ernst & Young LLP — Unqualified opinion, 1 critical audit matter |
A Turnaround in Progress
Dollar General operates over 20,000 stores. FY2026 (fiscal year ended January 30, 2026) shows early signs of recovery:
| Metric | FY2024 | FY2025 | FY2026 | Trend |
|---|---|---|---|---|
| Net Sales | $38.7B | $40.6B | $42.7B | +5.2% |
| Net Income | $1.66B | $1.13B | $1.51B | Recovering from FY2025 trough |
| Gross Margin | 30.3% | 29.6% | 30.7% | Rebounded |
| Net Margin | 4.3% | 2.8% | 3.5% | Recovering |
| Operating Profit | $2.45B | $1.71B | $2.20B | +28.6% |
Per the income statement: "Net sales $42,724.4, Cost of goods sold $29,624.7, Gross profit $13,099.7." Operating profit recovered 29% from the FY2025 nadir. The filing attributes improvement to same-store sales growth and SG&A leverage gains, partially offset by "increases in wage expenses, including increases in minimum wages."
Cash Flow: Strongly Recovering
| Metric | FY2024 | FY2025 | FY2026 |
|---|---|---|---|
| Operating Cash Flow | $2.39B | $3.00B | $3.63B |
| Net Income | $1.66B | $1.13B | $1.51B |
| **CFFO / Net Income** | **1.44** | **2.66** | **2.40** |
| CapEx | $1.70B | $1.31B | $1.24B |
| Free Cash Flow | $0.69B | $1.69B | $2.39B |
CFFO/NI of 2.40 is extremely strong — the business generates $2.40 in cash for every dollar of net income, reflecting significant D&A add-backs from the massive store base. FCF tripled from $691M to $2.39B as CapEx moderated from $1.70B to $1.24B. This FCF provides genuine capacity for deleveraging.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | — | Insufficient data (cash-register retailer) |
| A2 | AR vs Revenue Growth | — | Insufficient data |
| A3 | Revenue vs CFFO | ✅ | Revenue +5.2%, CFFO +21.3% |
Dollar General is a cash-register retailer with minimal trade receivables, so DSO and AR metrics are not applicable. Revenue and cash flow are both growing, with CFFO outpacing revenue growth — a healthy sign.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | Inventory -5.7% vs COGS +3.6% |
| B2 | CapEx vs Revenue | ✅ | CapEx -5.2% vs revenue +5.2% |
| B3 | SG&A Ratio | ⚠️ | SG&A/Gross Profit = 83.2% (exceeds 70%) |
| B4 | Gross Margin | ✅ | 30.7%, +1.1pp |
B3 — SG&A consuming 83% of gross profit is a structural feature of discount retail. Dollar General operates 20,000+ stores with labor-intensive operations. SG&A of $10.9B against gross profit of $13.1B leaves only $2.2B in operating profit — a razor-thin 5.2% operating margin. The filing notes SG&A increased 5.8%, driven partly by labor cost inflation.
Inventory declining 6% while revenue grows 5% is excellent — the company is clearing excess inventory that was a problem in prior years.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 2.40 |
| C2 | Free Cash Flow | ✅ | FCF $2.4B, FCF/NI = 1.58 |
| C3 | Accruals Ratio | ✅ | -6.9% |
| C4 | Cash vs Debt | ❌ | Cash $1.1B covers only 7% of debt $15.7B |
C4 — The debt is mostly operating leases. Dollar General's $15.7B "total debt" includes operating lease liabilities, which are the capitalized value of 20,000+ store leases. This is the normal capital structure of a large-format discount retailer, not excessive financial leverage. Traditional long-term debt is a fraction of this total.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ❌ | $5.5B = 65% of equity |
| D2 | Leverage | ⚠️ | Debt/EBITDA = 4.8x |
| D3 | Soft Asset Growth | ✅ | Other assets -1.9% |
| D4 | Asset Impairment | — | No write-off data |
D1 — Goodwill of $4.34B and intangibles of $1.20B primarily from the 2007 leveraged buyout by KKR. At 65% of equity, this is moderate compared to the consumer staples companies in this batch.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF after acquisitions positive |
| E2 | Goodwill Surge | ✅ | Goodwill+Intangibles 0% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | — | Insufficient data |
Key Risks from the 10-K
1. Inventory Shrinkage — An Ongoing Operational Crisis
The filing warns: "We experience significant inventory shrinkage and damages." This has been Dollar General's most persistent operational problem — theft, spoilage, and operational losses eating into margins. The company has invested in store security and labor but the filing acknowledges the problem is not solved.
2. pOpshelf Impairment and Strategic Failure
Per the filing: the company "closed approximately half of its pOpshelf stores and converted an additional six to Dollar General stores, as well as incurred significant impairment charges, the majority of which relate to the pOpshelf stores." The pOpshelf concept — targeting higher-income consumers — has failed. The write-downs represent sunk capital.
3. Workers' Compensation Reserves — EY's Critical Audit Matter
Ernst & Young flagged the self-insurance reserves as the sole critical audit matter: "At January 30, 2026, the Company's reserves for self-insurance risks were $377.6 million, which includes workers compensation and general liability reserves." The estimation involves "undiscounted future claims" with significant actuarial judgment. With 20,000+ stores, workplace injury exposure is substantial.
4. Tariff Risk on Imported Goods
The filing addresses the risk of "tariffs and other measures" on imported merchandise. Dollar General sources significant product from China. New tariffs could compress already thin margins or force price increases that drive value-conscious consumers to competitors.
5. Labor Cost Inflation
The filing warns about "increases in wage expenses, including increases in minimum wages by federal, states and localities." As a labor-intensive retailer with 190,000+ employees, minimum wage increases directly impact the cost structure.
Summary
Grade: F. A recovering discount retailer with structural leverage and unresolved shrinkage.
Dollar General's operations are improving: revenue growing, margins recovering, FCF tripling, and inventory declining. The F grade reflects the heavily leased capital structure ($15.7B in total debt/leases), goodwill at 65% of equity, and the absence of M-Score data for manipulation screening. The genuine concerns are the persistent inventory shrinkage problem, failed pOpshelf experiment (impairments taken), and exposure to tariffs and minimum wage increases that compress already thin margins. CFFO/NI of 2.40 and FCF of $2.4B provide meaningful deleveraging capacity if management chooses to prioritize it.
**Disclaimer**: This report is based on Dollar General's FY2026 10-K filed with SEC EDGAR on March 20, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter — self-insurance reserves)
Fiscal year ended: January 30, 2026