Dollar Tree, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended April 29, 2017 (fiscal 2017 first quarter), compared with the 13 weeks ended April 30, 2016. This differs from the request metadata of “2016 Q1.”
Business context and reporting period
Dollar Tree operated 14,482 discount stores across 48 states and five Canadian provinces, in two segments: Dollar Tree and Family Dollar. The quarter’s results are interim and are not necessarily indicative of the full fiscal year ending February 3, 2018.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $5,287.1 million | $5,085.8 million |
| Gross profit / margin | $1,627.1 million / 30.8% | $1,554.6 million / 30.6% |
| Operating income / margin | $388.8 million / 7.4% | $418.7 million / 8.2% |
| Net income | $200.5 million | $232.7 million |
| Diluted earnings per share | $0.85 | $0.98 |
| Operating cash flow | $430.7 million | $311.0 million |
| Capital expenditures | $110.3 million | $175.9 million |
Sales increased 4.0%; comparable-store sales rose 0.5% overall, comprising 2.5% growth at Dollar Tree and a 1.2% decline at Family Dollar. Gross margin improved 0.2 percentage points. Reported operating income and net income fell, primarily reflecting a $50.9 million receivable impairment; excluding that charge, operating income was $439.7 million and operating margin was 8.3%.
Cash and cash equivalents were $1,154.9 million at quarter-end. Total borrowings were $6,364.2 million, with $1,090.0 million available under the revolving credit facility; net debt was approximately $5.2 billion. Current assets were $4,278.1 million and current liabilities were $2,240.6 million. The company reported covenant compliance and a consolidated total net leverage ratio below the 3.50-to-1.00 threshold specified in its debt agreements. Cash from operations less capital expenditures was $320.4 million.
Material changes versus the prior comparable period
- Net sales grew $201.3 million, supported by new stores and modest comparable-store growth. Store count increased to 14,482 from 13,997.
- Dollar Tree segment sales rose 7.9%; operating income increased to $315.4 million from $280.7 million, with operating margin expanding to 12.3% from 11.8%.
- Family Dollar sales grew 0.5%, but comparable-store sales declined 1.2%. Segment operating income fell to $73.4 million from $138.0 million; margin declined to 2.7% from 5.1%, reflecting the receivable impairment, higher SG&A and lower gross margin.
- Interest expense declined to $74.7 million from $87.3 million, mainly due to debt prepayments in the second half of 2016. The effective tax rate increased to 36.1% from 29.8%; the prior-year rate included a one-time state-tax benefit.
- Operating cash flow increased by $119.7 million, largely because of changes in accounts payable and income taxes payable. Capital expenditures were lower than in the prior-year quarter.
Outlook, commentary, risks and unusual items
- The company gave no specific quantified sales or earnings guidance in the supplied filing. Management described seasonal working-capital needs, typically peaking in September and October.
- Management attributed Family Dollar’s comparable-store decline partly to delayed government tax-refund checks. Dollar Tree’s results benefited from lower merchandise and freight costs and continued rollout of frozen and refrigerated goods; higher markdowns partly offset those benefits.
- The $50.9 million charge relates to a receivable from the buyer of 330 divested stores under a transition-services arrangement. The balance was written down to zero. Management expected at least another $2.0 million to be recorded and impaired in the quarter ending July 29, 2017, and said it expected to take appropriate enforcement actions, potentially including litigation.
- Risks highlighted include Family Dollar integration and synergy execution, cost inflation and labor expenses, supplier and tariff exposure, competition, sales trends, litigation, technology and distribution disruptions, and substantial indebtedness. About $2.2 billion, or 34% of total debt, was exposed to variable rates; the filing estimated a 100-basis-point LIBOR increase would add $21.6 million to annual interest expense.
- Legal matters include employment-related class and collective actions and product-related litigation. The company stated it could not assure that unresolved matters would not materially affect results in the period of resolution. A preliminary settlement had been reached in a Family Dollar pay-discrimination class action covering approximately 30,000 current and former female store managers; settlement terms were still being finalized.
- The company expected the new lease accounting standard to materially increase reported assets and liabilities, but not materially affect income statements. It reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting period: the filing covers Q1 2017, not Q1 2016 as stated in the request metadata.
- Track collections, litigation and any further impairment related to the Dollar Express divestiture receivable.
- Assess whether Family Dollar can reverse its comparable-store sales decline and improve its operating margin.
- Monitor debt reduction, variable-rate exposure, covenant headroom and access to revolving credit.
- Review the resolution and potential financial effect of the disclosed legal proceedings and the terms of the preliminary class-action settlement.