Business context and reporting period
Dollar Tree, Inc.’s filing covers the 13 and 39 weeks ended October 31, 2015. The request metadata says 2014 Q3, but the filing itself is for 2015 Q3. On July 6, 2015, Dollar Tree acquired Family Dollar for $6.8 billion in cash and 28.5 million Dollar Tree shares valued at $2.3 billion. Family Dollar’s results are included from the acquisition date, making reported growth versus 2014 substantially acquisition-driven. At quarter-end, the combined company operated 14,038 stores.
Key financial results
| Metric | 13 weeks ended Oct. 31, 2015 | 13 weeks ended Nov. 1, 2014 | 39 weeks ended Oct. 31, 2015 | 39 weeks ended Nov. 1, 2014 |
|---|---|---|---|---|
| Net sales | $4,945.2 million | $2,095.2 million | $10,133.1 million | $6,126.6 million |
| Gross profit | $1,400.0 million | $725.3 million | $3,004.1 million | $2,115.9 million |
| Operating income | $223.7 million | $219.7 million | $579.9 million | $656.6 million |
| Interest expense, net | $98.4 million | $9.3 million | $484.6 million | $25.8 million |
| Net income | $81.9 million | $133.0 million | $53.4 million | $392.7 million |
| Diluted EPS | $0.35 | $0.64 | $0.24 | $1.90 |
Quarterly sales rose 136.0%, principally from Family Dollar’s $2,673.5 million of sales; nine-month sales rose 65.4%, including $3,485.1 million from Family Dollar. Dollar Tree comparable-store sales rose 1.7% in the quarter and 2.5% year to date on a reported basis (2.1% and 2.8% on a constant-currency basis). Dollar Tree’s quarterly gross margin was 34.0%, down from 34.6%; its operating margin was 9.9%, down from 10.5%.
Quarterly consolidated operating income edged higher, but net income fell as substantially higher acquisition-related interest and financing costs outweighed the operating increase. Nine-month operating income and net income declined. Family Dollar recorded a $96.1 million operating loss for the post-acquisition period, including SKU rationalization and liquidation markdowns, purchase-accounting costs, depreciation and intangible amortization. Its post-acquisition net loss was $115.2 million.
Cash flow, debt and liquidity
- Operating cash flow was negative $50.5 million for the 39 weeks, versus positive $388.5 million in the prior-year period. Management cited lower net income and an increase in inventory and other working-capital effects.
- Investing cash outflow was $6,876.6 million, largely reflecting $6,527.7 million of net cash used for the Family Dollar acquisition. Capital expenditures were $336.5 million.
- Financing cash inflow was $7,170.4 million, including $8.2 billion of debt proceeds. Cash ended at $1,106.9 million.
- At October 31, total borrowings were approximately $8.5 billion; balance-sheet debt was $8,343.5 million, including current and long-term portions. The company reported $1,186.8 million available under its revolving credit facility and was in compliance with debt covenants.
- Total current assets were $4,628.0 million and current liabilities were $2,161.2 million. Inventory was $3,185.3 million. Long-term debt net of issuance costs was $8,248.0 million.
- Approximately 50% of debt carried variable rates. The filing estimates that a 1 percentage-point increase in LIBOR would increase annual interest expense by $24.4 million.
Material changes, outlook and risks
- The acquisition substantially expanded the balance sheet, debt, store base and reported sales; the filing’s historical comparisons are not like-for-like. Acquisition purchase-price allocations remained preliminary.
- Family Dollar results included $73.0 million of SKU rationalization and planned-liquidation markdowns and $101.4 million of purchase-accounting expenses, primarily inventory step-up, intangible amortization and higher depreciation. Dollar Tree expected a further approximately $10.8 million inventory step-up charge to gross profit over the remainder of 2015.
- Dollar Tree expected approximately $12.5 million of fourth-quarter costs to rebanner Deals stores as Dollar Tree stores. The November 1, 2015 divestiture of 330 Family Dollar stores to Dollar Express, required by the FTC, removed stores representing approximately $45.5 million of annual operating income. The company expected $5–$10 million of closing and transition set-up costs and lease guarantees for 316 stores; the guarantee amount was not known.
- The filing provides no specific consolidated earnings or sales guidance. Management identified integration execution, realization and cost of synergies, substantial indebtedness and debt service, variable interest rates, divestiture impacts, labor and freight costs, merchandise mix, competition, supply-chain disruption and litigation as risks.
- Legal matters include employment-related class and collective actions and an ongoing Consumer Product Safety Commission investigation; the company said outcomes could not be assured, and in some matters losses could affect results when resolved.
Important facts for investors to verify
- Whether Family Dollar integration produces expected synergies and improves its operating performance after acquisition-related markdowns and purchase-accounting charges subside.
- The final purchase-price allocation, goodwill and intangible-asset values, and any subsequent impairment or integration charges.
- Debt repayment capacity, interest expense, variable-rate exposure, covenant headroom and the effect of seasonal working-capital needs on cash flow.
- The realized financial impact of the 330-store divestiture, including foregone earnings, transition costs and lease guarantees.
- Whether Dollar Tree can sustain comparable-store sales growth while addressing margin pressure from shrink, freight, merchandise and distribution costs.