Dollar Tree, Inc. — Form 10-Q summary
Reporting period: The filing covers the 13 and 26 weeks ended July 29, 2017, compared with the periods ended July 30, 2016. The filing’s reporting dates therefore do not match the “2016 Q2” label in the request metadata.
Business context and reporting period
Dollar Tree operated 14,581 stores across 48 states, the District of Columbia and five Canadian provinces. Its reporting segments are Dollar Tree, which sells merchandise at a fixed $1 price, and Family Dollar, a neighborhood discount retailer. During the first half, the company added 297 stores and ended the period with 114.5 million selling square feet.
Financial performance
| Metric | 13 weeks ended July 29, 2017 | Prior-year quarter | 26 weeks ended July 29, 2017 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $5,281.2 million | $4,996.3 million | $10,568.3 million | $10,082.1 million |
| Gross profit | $1,627.8 million | $1,512.4 million | $3,254.9 million | $3,066.9 million |
| Gross margin | 30.8% | 30.3% | 30.8% | 30.4% |
| Operating income | $419.5 million | $357.2 million | $808.3 million | $775.9 million |
| Operating margin | 7.9% | 7.1% | 7.6% | 7.7% |
| Net income | $233.8 million | $170.2 million | $434.3 million | $402.8 million |
| Diluted EPS | $0.98 | $0.72 | $1.83 | $1.70 |
Second-quarter comparable-store sales increased 2.4% overall, with Dollar Tree up 3.9% and Family Dollar up 1.0%. First-half comparable-store sales increased 1.2% overall: Dollar Tree rose 2.9%, while Family Dollar declined 0.2%.
For the quarter, gross margin improvement reflected lower merchandise and freight costs and lower markdowns, partly offset by higher distribution and occupancy costs. For the first half, lower merchandise and freight costs were partly offset by higher markdowns, shrink, distribution and occupancy costs. Quarterly SG&A was 22.9% of sales versus 23.1% a year earlier. First-half SG&A was 23.2% versus 22.7%, including a $53.5 million receivable impairment; excluding that charge, SG&A was 22.6%.
Net interest expense was $75.8 million for the quarter and $150.5 million for the first half, down from $87.3 million and $174.6 million, respectively, primarily reflecting lower debt outstanding after prior-year debt prepayments. Effective tax rates were 32.0% for the quarter and 33.9% for the first half. The 2017 rates included a $9.9 million tax benefit from a North Carolina statutory-rate reduction and a $5.6 million reduction in reserves for uncertain tax positions; the prior-year first half included a one-time state tax benefit related to the Family Dollar acquisition.
Cash flow, debt and liquidity
- First-half operating cash flow was $675.2 million, compared with $680.3 million. Capital expenditures were $271.7 million, versus $355.9 million.
- Cash and cash equivalents were $693.3 million at July 29, 2017, down from $866.4 million at fiscal year-end. Financing cash outflow was $579.1 million, including $569.3 million of principal payments.
- Total borrowings were $5,822.7 million, and $1,091.5 million was available under the revolving credit facility. On July 27, the company prepaid $500 million of its Term Loan A-1. Debt covenants were in compliance; the company reported its defined net leverage ratio below the 3.50-to-1.00 threshold relevant to dividend restrictions.
- About $1.6 billion, or 28% of debt, was subject to variable interest rates. Management estimated a 50-basis-point rate increase would raise annual interest expense by $8.1 million.
Material changes, outlook, risks and unusual items
- Receivable impairment: The company wrote off a $50.9 million divestiture-related receivable from Dollar Express in the first quarter and impaired a further $2.6 million in the second quarter, for $53.5 million in the first half. The amounts related to merchandise and services provided under a transition services agreement after the Family Dollar divestiture. The company said it would pursue collection and did not expect further impairment.
- Segment results: First-half Family Dollar operating income was $203.8 million, down from $232.8 million, including the impairment. Excluding the charge, management reported Family Dollar operating margin of 4.8%, versus 4.4% a year earlier. Dollar Tree first-half operating income rose to $604.5 million from $543.1 million.
- Litigation: Dollar Tree and Family Dollar sued Sycamore Partners and Dollar Express seeking more than $52 million, including for unpaid goods and services and alleged unauthorized use of marks. Sycamore and Dollar Express denied liability and counterclaimed for more than $500 million. The company also disclosed employment-related class and collective actions and other proceedings; it could not estimate losses for certain matters. It stated that litigation could materially affect results in the period resolved.
- Outlook: The filing provides no specific numeric sales or earnings guidance. Management cited store growth, Dollar Tree initiatives, refrigerated and frozen merchandise expansion, and Family Dollar renovations as sales opportunities. The company completed 111 Family Dollar renovations in the quarter. Results are subject to risks including integration and realization of Family Dollar synergies, cost inflation, freight and supplier risks, competition, labor regulation, litigation, distribution disruption and substantial indebtedness.
- Accounting: The company expected the forthcoming lease accounting standard to materially increase balance-sheet assets and liabilities, but not materially affect income statements. It did not expect the new revenue-recognition standard to have a material financial-statement impact.
Important facts for investors to verify
- Confirm that the $53.5 million Dollar Express receivable impairment is fully reflected and monitor any further collectability or litigation developments.
- Track Family Dollar comparable-store sales and operating performance, including whether renovations improve results beyond the quarter.
- Assess debt reduction, variable-rate exposure, revolving-credit availability and compliance with debt covenants.
- Review the status and potential financial exposure of the Dollar Express/Sycamore counterclaim and employment-related litigation; the filing does not provide a clear loss estimate for several cases.
- Reconcile reported first-half operating-margin decline with the company’s stated 8.2% margin excluding the impairment.