Business Context and Reporting Period
Company: Dollar Tree, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 28, 2012
Business Overview: Dollar Tree is the leading operator of discount variety stores offering merchandise primarily at a fixed price of $1.00. As of January 28, 2012, the company operated 4,351 stores across 48 U.S. states, the District of Columbia, and Canada. The company expanded its international presence through the acquisition of 86 Dollar Giant stores in Canada in late 2010.
Key Financial Metrics
| Metric | Fiscal 2012 (2011) | Fiscal 2011 (2010) | Change |
|---|---|---|---|
| Net Sales | $6,630.5 million | $5,882.4 million | +12.7% |
| Gross Profit | $2,378.3 million | $2,087.6 million | +13.9% |
| Operating Income | $782.1 million | $630.0 million | +24.1% |
| Net Income | $488.3 million | $397.3 million | +22.9% |
| Diluted EPS | $4.03 | $3.10 | +30.0% |
| Gross Margin | 35.9% | 35.5% | +40 bps |
| Operating Margin | 11.8% | 10.7% | +110 bps |
| Net Cash from Operating Activities | $686.5 million | $518.7 million | +32.4% |
| Total Debt | $265.8 million | $267.8 million | -0.7% |
| Cash & Short-term Investments | $288.3 million | $486.0 million | -40.7% |
Note: Fiscal 2012 refers to the year ended Jan 28, 2012; Fiscal 2011 refers to the year ended Jan 29, 2011.
Material Changes vs. Prior Period
- Store Growth: The company opened 278 new stores and expanded 91 existing stores in fiscal 2012, increasing total selling square footage by 6.9% to 37.6 million square feet.
- Comparable Store Sales: Comparable store net sales increased by 6.0%, driven by a 4.8% increase in transaction volume and a 1.2% increase in average ticket size.
- Merchandise Mix: Consumable merchandise (food, health, household) grew to 50.8% of sales from 49.5% in the prior year. The company added freezers and coolers to 380 additional stores, bringing the total to 2,220 stores with refrigerated capabilities.
- Share Repurchases: The company repurchased 8.7 million shares for approximately $645.9 million in fiscal 2012, compared to 9.3 million shares for $414.7 million in fiscal 2011. This included two Accelerated Share Repurchase (ASR) agreements.
- Inventory Adjustment: Fiscal 2011 included a one-time, non-cash charge of $26.3 million related to a change in inventory valuation methodology (moving from one inventory pool to approximately 30 pools). This charge impacted the prior year's gross profit and operating income.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Estimated capital expenditures for fiscal 2013 are projected between $330.0 million and $340.0 million. This includes funding for new stores, store expansions, adding freezers/coolers to 325 stores, and constructing a new distribution center in the Northeast U.S.
- Expansion Strategy: The company plans to continue opening stores in the 8,000 to 10,000 selling square foot range. It also plans to expand the "Deal$" format, which sells items above the $1.00 price point.
- Seasonality: Management noted that the earlier date of Easter in 2012 (April 8) compared to 2011 (April 24) could result in an estimated $8.0 million decrease in first-quarter sales compared to the prior year.
Risks and Contingencies
- Cost Inflation: Profitability is vulnerable to increases in merchandise, wage, fuel, and shipping costs. The company cannot raise prices to offset these costs due to its fixed-price model.
- Supply Chain: Approximately 40-42% of merchandise is imported, primarily from China. Disruptions in trade relations, shipping rates, or fuel costs could significantly impact margins.
- Legal Proceedings: The company is a defendant in several employment-related class actions (wage and hour, overtime) and a lawsuit filed by Winn-Dixie Stores regarding exclusive rights to sell certain items in shared shopping centers. Management does not believe these will have a material effect on financial condition but cannot guarantee the outcome.
- Competition: The discount retail sector is highly competitive with low barriers to entry.
Investor Verification Checklist
- Margin Sustainability: Verify the ability to maintain gross margins near 36% while increasing the mix of higher-cost consumable goods and facing potential inflation in freight and labor costs.
- Store Productivity: Monitor net sales per selling square foot ($182 in 2012) to ensure new store openings and expansions are meeting productivity targets.
- Legal Exposure: Track the status of the Winn-Dixie lawsuit (trial set for May 2012) and the various wage-and-hour class actions, as adverse rulings could impact operating expenses.
- Capital Allocation: Confirm the execution of the $330-$340 million capital expenditure plan for 2013, specifically the construction of the new Northeast distribution center.
- Shareholder Returns: Monitor the remaining $1.2 billion authorization for share repurchases and the company's commitment to not paying dividends.