Dollar Tree, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2012 Q3, but this filing reports the 13 and 39 weeks ended November 2, 2013, compared with periods ended October 27, 2012. The quarter ended November 2, 2013.
Business context
Dollar Tree operated 4,777 stores in the U.S. and 176 in Canada, with 42.9 million selling square feet. In the 39-week period it opened 292 stores, expanded 67, and closed 10. Comparable-store sales rose 3.1% for the quarter and 2.9% year to date, primarily from increased customer traffic. Frozen and refrigerated merchandise was available in about 3,110 stores, versus 2,470 a year earlier.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2013 | Prior-year quarter | 39 weeks ended Nov. 2, 2013 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,884.7 million | $1,720.5 million | $5,605.4 million | $5,148.7 million |
| Gross profit | $659.9 million | $599.6 million | $1,964.6 million | $1,801.9 million |
| Operating income | $204.3 million | $184.2 million | $622.1 million | $556.6 million |
| Net income | $125.4 million | $155.4 million | $383.6 million | $390.7 million |
| Diluted EPS | $0.58 | $0.68 | $1.73 | $1.69 |
- Quarterly sales increased 9.5%; year-to-date sales increased 8.9%. Quarterly gross margin improved to 35.0% from 34.9%; year-to-date gross margin was 35.0%, unchanged. Quarterly operating margin increased to 10.8% from 10.7%; year-to-date rose to 11.1% from 10.8%.
- Quarterly net income fell despite sales and operating-income growth, mainly because the prior-year quarter included a $60.8 million gain on the sale of the Ollie’s Holdings investment. Year-to-date results also reflect that prior-year gain. Interest expense increased with the new senior notes.
- For the 39 weeks, operating cash flow was $366.7 million, capital expenditures were $284.1 million, and investing cash outflow was $269.4 million. Financing cash outflow was $349.0 million, including $1,112.1 million in share repurchases, partly offset by $770.0 million of long-term debt proceeds. Cash declined $252.8 million to $147.1 million.
- At November 2, 2013, total borrowings were $1,019.8 million, including $1,007.0 million of long-term debt excluding the current portion. The company reported $487.1 million available under its unsecured credit agreement. Current assets were $1,487.8 million and current liabilities were $766.8 million.
Material changes and capital allocation
- In September 2013, Dollar Tree issued $750 million of unsecured senior notes, with interest rates of 4.03%–4.78% and maturities from 2020 to 2025. Proceeds financed share repurchases.
- Two accelerated share repurchase agreements covered $1.0 billion in total. The company had received 14.9 million shares under the agreements by November 2, with further share settlement subject to the agreements’ pricing calculations. A further $1.0 billion remained under the board’s $2.0 billion repurchase authorization.
- Accounts payable increased to $526.4 million from $346.5 million at February 2, 2013; inventories rose to $1,237.4 million from $971.7 million. The filing notes that working capital needs are seasonal and typically peak in September and October.
Outlook, risks, and contingencies
- The filing provides no specific numerical earnings or sales guidance. Management said it did not expect the reduction in SNAP benefits after November 1, 2013 to have a material effect on sales.
- Management cited merchandise mix, shrink, distribution and freight costs, fuel, wages, supplier reliability, competition, store growth, and economic conditions as risks to sales or profitability. Fuel contracts covered about 20% of domestic truckload fuel needs from November 2013 through January 2014; their fair value was immaterial.
- Pending matters include wage-and-hour and store-lease litigation, including an FLSA collective action with approximately 6,280 opt-in plaintiffs, and a California environmental investigation. In a Pennsylvania lease case, plaintiff experts asserted damages of approximately $6.2 million, which the company disputes. The company said it could not estimate potential losses for unresolved matters and cautioned that litigation could affect results in the period resolved.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2013, not Q3 2012.
- Review final share deliveries, pricing, and settlement obligations under both accelerated repurchase agreements.
- Assess the effect of added debt and ongoing repurchases on cash, interest expense, and liquidity.
- Monitor comparable-store sales, margins, inventory and shrink, and the return on store openings and capital spending.
- Track developments in the wage-and-hour, lease, and environmental matters; the filing does not provide a clear aggregate loss estimate.