Business context and reporting period
Dollar Tree, Inc. operates the Dollar Tree and Family Dollar discount-store segments, with 15,370 stores at May 2, 2020. The filing covers the 13 weeks ended May 2, 2020, compared with the 13 weeks ended May 4, 2019. Although the request identifies “2019 Q1,” the filing itself is for fiscal 2020 Q1.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $6,286.8 million | $5,808.7 million |
| Gross profit | $1,794.9 million | $1,727.2 million |
| Operating income | $365.9 million | $385.5 million |
| Net income | $247.6 million | $267.9 million |
| Diluted EPS | $1.04 | $1.12 |
| Net cash from operations | $959.0 million | $614.1 million |
- Sales increased 8.2%. Gross margin declined to 28.5% from 29.7%, and operating margin fell to 5.8% from 6.6%.
- Operating cash flow rose primarily because inventory was lower at quarter-end. Capital expenditures were $235.8 million; investing cash outflow was $235.9 million.
- Cash and cash equivalents were $1,755.1 million at May 2, 2020. Current assets exceeded current liabilities by $661.2 million.
- Total borrowings were approximately $4.3 billion, including $750 million drawn on the revolving facility; $363.4 million remained available. The company reported compliance with debt covenants.
- Operating lease liabilities totaled approximately $6.15 billion. The company paid the remaining $250 million of floating-rate notes due 2020.
Material changes and segment performance
- Enterprise comparable-store sales grew 7.0%, reflecting a 15.5% increase in average ticket offset by a 7.4% decline in traffic.
- Family Dollar sales rose 12.6%; comparable sales increased 15.5%. Segment operating income was $175.5 million versus $91.9 million, with operating margin improving to 5.5% from 3.2%.
- Dollar Tree sales rose 4.0%, but comparable sales declined 0.9%. Segment operating income fell to $282.0 million from $394.2 million, and operating margin declined to 9.2% from 13.3%.
- Operating income included approximately $73.2 million of COVID-19-related expenses. Higher essential-product sales, generally lower-margin, Easter markdowns, tariffs and freight costs pressured gross margin; COVID-19 pay and safety costs added expense.
- The company did not repurchase shares in the quarter, compared with $100 million of repurchases in Q1 2019, and temporarily suspended buybacks.
Outlook, risks and unusual items
- Management said the pandemic’s future effects were difficult to predict and gave no specific earnings guidance in the supplied filing text. Stores and distribution centers remained open as essential businesses, but customer visits fell, average tickets increased, and demand and product mix shifted. Suppliers and distribution centers were strained for certain essential goods.
- COVID-19 response measures included hiring more than 25,000 associates since early March, hourly wage premiums, bonuses, protective equipment and enhanced cleaning. Management expected wage premiums and guaranteed store-manager bonuses to continue for at least the first six weeks of Q2.
- Management planned 325 new Dollar Tree and 175 new Family Dollar stores in fiscal 2020, while noting construction and permitting delays. H2 renovations were expected to reach approximately 750 stores. The filing gives differing adult-beverage rollout descriptions: approximately 900 stores planned in one passage, and 80 already completed plus approximately 800 additional in another.
- Key risks include prolonged pandemic effects on traffic, demand, labor costs and supply; possible further disruptions or tariffs affecting imports, especially from China; and uncertainty around discretionary and seasonal sales, including holiday demand. The company also cited substantial indebtedness, competition, execution and litigation risks.
- Legal matters include an FDA proceeding involving certain imported OTC products, employment claims, accessibility claims, and product-related consumer and personal-injury lawsuits. Management did not believe the matters would materially affect the business or financial condition, but said outcomes could affect results in the period resolved.
- The CARES Act change to the recovery period for eligible qualified improvement property resulted in an estimated $67 million reclassification from income taxes payable to deferred income taxes. No significant impairment charges were recorded in the quarter.
Important facts for investors to verify
- Confirm the reporting period: the filing is fiscal 2020 Q1, not 2019 Q1.
- Assess whether pandemic-driven sales and average-ticket gains persist, and whether traffic, product mix and seasonal demand recover.
- Track margin recovery, including COVID-related costs, tariffs, freight, shrink and markdowns, particularly in the Dollar Tree segment.
- Monitor cash generation, inventory, revolving-credit availability, debt maturities and covenant compliance.
- Clarify the adult-beverage rollout target and evaluate the effect of store-opening and renovation delays.
- Follow supply availability, pandemic-related operating costs and developments in the disclosed legal and FDA matters.