Dollar Tree, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for fiscal 2012, ended February 2, 2013—not a 2011 fourth-quarter filing. Fiscal 2012 included 53 weeks; fiscal 2011 included 52 weeks.
Business context and reporting period
Dollar Tree operated 4,671 discount variety stores in the U.S. and Canada, primarily selling merchandise at $1.00 or less in the U.S. The company’s strategy centers on store growth, value merchandise, cost control, and expanding consumables, including frozen and refrigerated goods. At year-end, 2,550 stores had freezers and coolers; consumables represented 51.4% of sales.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $7,394.5 million | $6,630.5 million |
| Gross profit / margin | $2,652.7 million / 35.9% | $2,378.3 million / 35.9% |
| Operating income / margin | $920.1 million / 12.4% | $782.1 million / 11.8% |
| Net income | $619.3 million | $488.3 million |
| Diluted earnings per share | $2.68 | $2.01 |
| Cash from operating activities | $677.7 million | $686.5 million |
Sales rose 11.5%; comparable-store sales increased 3.4%, driven by 2.8% more transactions and a 0.6% higher average ticket. The extra fiscal week contributed approximately $125 million in sales. Net income included a $60.8 million pretax gain on the sale of the company’s Ollie’s investment ($38.1 million after tax, or $0.16 per diluted share).
SG&A declined to 23.5% of sales from 24.1%, supporting operating-margin expansion. Gross margin was unchanged: improved initial markups and occupancy and distribution leverage were offset by higher-cost consumables and freight.
Cash and cash equivalents were $399.9 million, working capital was $798.1 million, and total debt, including capital leases, was $271.3 million. The balance sheet reported $250.0 million outstanding on a $750.0 million revolving facility, plus $14.3 million of demand revenue bonds and a $7.0 million Connecticut loan. Capital expenditures were $312.2 million. The company repurchased $340.2 million of shares and had $859.8 million remaining under its repurchase authorization. Operating lease obligations totaled $2.15 billion.
Material changes versus the prior comparable period
- Sales growth slowed from 12.7% in FY2011 to 11.5% in FY2012, while comparable-store growth eased from 6.0% to 3.4%.
- Operating margin improved by 60 basis points; net income increased about 27% and diluted EPS about 33%. The investment-sale gain and lower weighted-average share count from repurchases contributed to reported earnings growth.
- Operating cash flow decreased $8.8 million, principally reflecting greater cash use for inventory and prepaid rent, partly offset by higher earnings and income taxes payable.
- The company opened 345 stores, expanded or relocated 87, and closed 25; selling square footage grew 7.7% to 40.5 million square feet.
Outlook, risks, contingencies, and unusual items
- Management estimated FY2013 capital expenditures of $320–$330 million, including new and expanded stores, freezer/cooler installations in about 475 stores, and distribution-center construction and expansion. Management expected to fund working capital and planned investment from operating cash flow and potential credit-facility borrowings.
- FY2013 was expected to have 52 weeks. Management noted that earlier Easter could reduce first-quarter sales by about $4 million, and one fewer weekend between Thanksgiving and Christmas could affect holiday visits.
- Key risks include cost inflation (particularly merchandise, freight, fuel, wages, and occupancy), pressure to maintain the fixed-price value proposition, a rising consumables mix that may weigh on gross margin, competition, dependence on imports—especially from China—and distribution or technology disruptions.
- Employment-related collective and class actions remained pending; the company said it could not estimate a potential range of loss. In a separate store-manager case, a jury ruled for the company, while plaintiffs were expected to seek post-trial relief. Winn-Dixie’s requested monetary damages were denied; injunctive relief applied to one Dollar Tree store, and Winn-Dixie appealed.
- The report describes a nonrecurring $26.3 million noncash inventory-accounting adjustment recorded in FY2010, not FY2012. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate recurring operating performance from the $60.8 million pretax investment-sale gain and assess earnings growth excluding this item.
- Compare comparable-store sales on consistent week-count and holiday-calendar bases; monitor the slowdown in quarterly comparable-store growth.
- Track gross-margin effects from consumables, freight, and other costs, as the fixed-price model limits price flexibility.
- Review planned capital spending, store productivity, distribution capacity, share repurchases, and debt-facility covenant headroom.
- Monitor pending employment litigation and the Winn-Dixie appeal; the filing provides no clear estimate of potential losses for unresolved matters.