The ratings on Goodlettsville, Tenn.-based Dollar General Corp. reflect its highly leveraged capital structure, thin cash flow protection measures, past execution difficulties that have resulted in falling operating margins, and participation in the highly competitive discount retail environment. Gross margins have been under pressure as a result of rapid growth, uneven merchandising, a lack of focus on store-level profitability, and inventory markdowns incurred during 2006 related to the company's elimination of its "packaway" inventory management model. However, success with its turnaround initiatives centered on merchandising, inventory management, and real estate pruning have contributed to significant improvement in profitability. Lower levels of markdowns and improvements in inventory shrink contributed to about 100 basis points in gross margin improvement in the quarter
