Dollar Tree, Inc. — Form 10-Q Summary
Period clarification: The filing is for the 13 and 39 weeks ended October 28, 2017, not 2016 Q3 as stated in the request metadata. Comparisons are with the periods ended October 29, 2016.
Business context and reporting period
Dollar Tree operated 14,744 stores across 48 states, the District of Columbia, and five Canadian provinces. It reports two segments: Dollar Tree, which sells primarily at a fixed $1 price, and Family Dollar. The filing covers the third quarter and first 39 weeks of fiscal 2017; results are unaudited.
Financial performance
| Metric | 13 weeks ended Oct. 28, 2017 | Change vs. prior year | 39 weeks ended Oct. 28, 2017 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $5,316.6 million | +6.3% | $15,884.9 million | +5.3% |
| Gross profit / margin | $1,666.0 million / 31.3% | +9.6%; margin up from 30.4% | $4,920.9 million / 31.0% | +7.3%; margin up from 30.4% |
| Operating income / margin | $425.2 million / 8.0% | Up from $342.4 million / 6.8% | $1,233.5 million / 7.8% | Up from $1,118.3 million / 7.4% |
| Net income | $239.9 million | Up from $171.6 million | $674.2 million | Up from $574.4 million |
| Diluted EPS | $1.01 | Prior year $0.72 | $2.84 | Prior year $2.43 |
Third-quarter comparable-store sales rose 3.2% on a constant-currency basis: 5.0% at Dollar Tree and 1.5% at Family Dollar. For the first 39 weeks, they rose 1.8% overall: 3.5% at Dollar Tree and 0.3% at Family Dollar.
For the first 39 weeks, cash from operations was $592.6 million, down from $655.3 million. Capital expenditures were $449.4 million, making operating cash flow less capital expenditures approximately $143.2 million. Cash declined by $466.3 million to $400.1 million, principally alongside debt repayments and working-capital needs. The company reported $1,091.8 million available on its revolving credit facility.
At October 28, 2017, total borrowings were reported as $5,781.2 million; balance-sheet debt, including current maturities, was approximately $5,722.9 million net. The company prepaid $500.0 million of Term Loan A-1 during the second quarter. Current assets were $3,972.6 million and current liabilities $2,039.9 million. Debt covenants were in compliance, and the company’s leverage ratio was below the 3.50-to-1.00 threshold cited for certain dividend restrictions.
Material changes and unusual items
- Third-quarter gross margin improved on lower merchandise costs, markdowns, and occupancy costs as a percentage of sales. SG&A declined to 23.3% of sales from 23.6%.
- First-nine-month SG&A included a $53.5 million impairment of the receivable tied to the divested Dollar Express stores. Excluding that charge, management reported operating income of $1,287.0 million and an operating margin of 8.1%.
- Net interest expense fell to $69.7 million in the quarter and $220.2 million year to date, reflecting lower debt and prior-period refinancing costs.
- The effective tax rate was 32.4% for the quarter and 33.4% year to date. Prior-year comparisons benefited from tax items, including a $21.4 million state-tax-related benefit in the prior-year quarter.
- After quarter-end, Connecticut notified the company that a $7.0 million loan plus interest had been forgiven; the company expects to record a $7.4 million non-operating gain in fiscal fourth quarter 2017.
Outlook, risks, and contingencies
The filing provides no specific quantified earnings or sales guidance. Management described growth initiatives including store openings, Family Dollar renovations, and expansion of frozen and refrigerated offerings at Dollar Tree. It cautioned that results may be affected by labor, freight, merchandise, fuel, and other cost pressures; competition; consumer demand; supply-chain or technology disruptions; and the execution and costs of integrating Family Dollar.
Legal matters include employment class and representative actions, product-related claims, and litigation with Sycamore Partners and Dollar Express. Dollar Tree seeks more than $52 million in that dispute; the opposing parties have counterclaimed for more than $500 million. The company says it cannot assure outcomes and may be unable to estimate potential losses in several matters. Management reported no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Confirm the reporting period: the actual filing covers the quarter ended October 28, 2017.
- Track comparable-store sales by segment and whether recent Family Dollar improvements persist.
- Assess cash conversion and inventory: operating cash flow declined while inventory increased.
- Review debt repayment, liquidity, variable-rate exposure, and covenant headroom; the filing estimates a 50-basis-point rate increase would add $7.9 million in annual interest expense.
- Monitor collection and litigation developments related to Dollar Express, including the counterclaim, and the status and potential cost of other legal matters.
- Consider the $53.5 million receivable impairment and the expected $7.4 million fourth-quarter loan-forgiveness gain when evaluating reported and underlying performance.