Dollar Tree, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended May 1, 2021, the first quarter of fiscal 2021, compared with the 13 weeks ended May 2, 2020. The request metadata says “2020 Q1,” but the filing itself covers Q1 2021. Dollar Tree operates more than 15,700 stores through its Dollar Tree and Family Dollar segments.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $6,476.8 million | $6,286.8 million | +3.0% |
| Total revenue | $6,479.7 million | $6,286.8 million | +3.1% |
| Gross profit / margin | $1,964.1 million / 30.3% | $1,794.9 million / 28.5% | Margin +1.8 pts |
| Operating income / margin | $519.9 million / 8.0% | $365.9 million / 5.8% | Income +42.1%; margin +2.2 pts |
| Net income | $374.5 million | $247.6 million | +51.2% |
| Diluted EPS | $1.60 | $1.04 | +$0.56 |
| Operating cash flow | $556.2 million | $959.0 million | -$402.8 million |
| Capital expenditures | $224.9 million | $235.8 million | -$10.9 million |
Gross-margin improvement reflected higher sales of higher-margin discretionary goods, improved Family Dollar initial mark-on, lower shrink and markdown costs, partly offset by higher freight. Operating income also benefited from substantially lower COVID-related expenses than in the prior-year quarter. Net interest expense fell to $33.0 million from $40.2 million; the effective tax rate was 23.1%, versus 23.9%.
Segments and comparable sales
- Dollar Tree: Sales rose 7.9% to $3,321.3 million; comparable sales increased 4.7% on a constant-currency basis. Operating income was $400.3 million and operating margin was 12.1%, up from 9.2%.
- Family Dollar: Sales declined 1.7% to $3,155.5 million; comparable sales fell 2.8%. Operating income increased to $211.4 million and operating margin rose to 6.7% from 5.5%.
- Consolidated comparable sales increased 0.8%: average ticket rose 9.6%, while customer traffic fell 8.0%. Family Dollar traffic declined 12.7%.
The prior-year comparison was affected by the early-pandemic surge in Family Dollar essential-product sales, while Dollar Tree’s Easter selling season was disrupted. Easter sales were strong in both banners in Q1 2021.
Financial position and liquidity
- At May 1, 2021, cash and cash equivalents were $1,473.9 million; merchandise inventory was $3,604.6 million, up from $3,427.0 million at January 30, 2021.
- Long-term debt, net, was $3,227.8 million, with no current debt portion. The company reported no borrowings on its revolving credit facility and $1.15 billion available under it.
- Operating lease liabilities totaled $6,454.8 million, including current and long-term amounts.
- Operating cash flow was lower year over year, primarily because of increased merchandise inventories. Cash used for share repurchases was $241.3 million; the company repurchased approximately 2.15 million shares for $250.0 million during the quarter.
- Cash, cash equivalents and restricted cash totaled $1,520.8 million at quarter-end. The company had $2.15 billion remaining under its board share-repurchase authorization.
Outlook, commentary and risks
- The filing provides no formal full-year earnings or sales guidance. Management said fiscal 2021 COVID-related costs were expected to be approximately $30 million, versus $279 million in fiscal 2020, and expected shrink as a percentage of sales to be significantly lower than in fiscal 2020.
- Management expected state and local minimum-wage increases to add $45–$50 million to 2021 costs. It expected shipping and domestic freight cost increases of $220–$250 million in the last three quarters of fiscal 2021 versus the same period of fiscal 2020.
- Shipping capacity constraints, port congestion and distribution-center staffing shortages could delay imported goods, constrain expedited distribution, pressure merchandise margins or reduce sales. Inflation, wage increases, fuel costs and potential changes to federal tax policy were also cited as risks.
- Initiatives include Dollar Tree Plus! (in more than 240 locations), Family Dollar H2-format renovations (approximately 2,800 stores; at least 1,250 renovations planned for fiscal 2021), adult beverages and Combination Stores. Management reported an average first-year comparable-sales lift exceeding 10% for renovated H2 stores versus non-renovated stores.
- Legal matters include FDA allegations concerning certain imported topical OTC products, employment-related claims, and product-related consumer and personal-injury litigation. The company said it did not believe these matters would materially affect its business or financial condition, but acknowledged they could affect results in the period resolved; some potential losses could not be estimated.
- Management reported effective disclosure controls as of May 1, 2021. It implemented a new lease-administration and accounting system during the quarter. No significant impairment charges were recorded.
Important facts for investors to verify
- Whether elevated freight, shipping delays and labor shortages persist, and how they affect product availability, sales and gross margin.
- Whether Family Dollar’s traffic and comparable-sales declines reverse, and whether Dollar Tree’s sales momentum continues against pandemic-distorted comparisons.
- Whether management’s expected cost increases, including freight and wage costs, are offset by lower COVID-related costs and shrink.
- Inventory levels, cash conversion and operating cash flow in subsequent quarters, given the quarter’s inventory-driven cash-flow decline.
- Progress and returns from store renovations, Dollar Tree Plus!, adult-beverage expansion and Combination Stores, alongside the pace of share repurchases.
- Developments in the disclosed legal and FDA matters; the filing does not provide a clear estimate of potential losses for certain proceedings.