Dollar Tree, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2012, ended October 27, 2012. The filing reports the quarter as 13 weeks and compares it with the periods ended October 29, 2011. The reporting-period metadata’s “2011 Q3” label does not match the filing, which covers 2012 Q3.
Business context and results
Dollar Tree operated 4,630 stores across the United States and Canada, with 40.1 million selling square feet, at quarter-end. It opened 298 stores, expanded 81 and closed 19 during the first 39 weeks. Management attributed sales growth to new stores and higher comparable-store sales, which it linked primarily to increased traffic. The company continued expanding frozen and refrigerated offerings and accepting SNAP at more stores.
| Metric | 13 weeks ended Oct. 27, 2012 | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 27, 2012 | 39 weeks ended Oct. 29, 2011 |
|---|---|---|---|---|
| Net sales | $1,720.5 million | $1,596.6 million | $5,148.7 million | $4,684.9 million |
| Comparable-store sales growth | 1.6% | Not stated here | 3.9% | Not stated here |
| Gross profit | $599.6 million | $560.6 million | $1,801.9 million | $1,643.8 million |
| Gross margin | 34.9% | 35.1% | 35.0% | 35.1% |
| Operating income | $184.2 million | $164.9 million | $556.6 million | $480.1 million |
| Operating margin | 10.7% | 10.3% | 10.8% | 10.3% |
| Net income | $155.4 million | $104.5 million | $390.7 million | $300.4 million |
| Diluted earnings per share | $0.68 | $0.43 | $1.69 | $1.23 |
Financial position, cash flow and capital allocation
- For the first 39 weeks, operating cash flow was $313.4 million, versus $318.7 million a year earlier. Capital expenditures were $236.7 million, versus $196.8 million; management cited more store openings and construction of a Connecticut distribution center.
- Investing activities used $174.7 million, including capital spending, partly offset by $62.3 million of proceeds from the Ollie’s Holdings investment sale. Financing activities used $203.4 million, including $235.3 million in share repurchases. Cash decreased $65.9 million to $222.4 million.
- At October 27, 2012, total borrowings were $264.3 million: $14.3 million current and $250.0 million long-term. The company had $500.0 million available under its $750.0 million five-year revolving credit facility. Approximately $157.0 million was committed to letters of credit for imported merchandise.
- Current assets were $1,408.5 million and current liabilities were $701.0 million. Inventory was $1,133.2 million, up from $867.4 million at January 28, 2012. Shareholders’ equity was $1,538.9 million.
- The company repurchased approximately 5.0 million shares for $235.3 million during the 39-week period; $964.7 million remained under the board authorization. Outstanding shares were 227.2 million at quarter-end, compared with 231.2 million at January 28, 2012.
Material changes and unusual items
- Sales increased 7.8% in the quarter and 9.9% year to date. Management attributed growth to new stores and comparable-store sales gains.
- Gross margin declined 0.2 percentage points in the quarter and 0.1 points year to date. For the quarter, higher freight costs, a greater consumables mix and higher markdowns were partly offset by improved merchandise mark-on. SG&A fell from 24.8% to 24.2% of sales in both comparison periods, supporting higher operating margins.
- Net income includes a $60.8 million pretax gain from the September 28 sale of the company’s Ollie’s Holdings interest. The after-tax gain was $38.1 million and increased diluted EPS by $0.17 for the quarter and $0.16 year to date. The gain materially affects comparisons of reported net income; operating income provides a view before this item.
- The company entered a new $750.0 million unsecured revolving credit agreement in June 2012, replacing its prior $550.0 million facility. The agreement contains financial-ratio requirements and restrictions on certain distributions and new indebtedness.
- A two-for-one stock split was completed in June 2012. Share and per-share figures in the filing are retrospectively adjusted for the split.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or sales guidance. Management said results for the interim periods are not necessarily indicative of full-year results. Its forward-looking discussion identifies sales and store growth, merchandise mix, freight and fuel costs, wages, supplier reliability, distribution disruptions, competition, economic conditions and legal claims as factors that could affect results. The company hedged approximately 20% of domestic truckload diesel needs for November 2012 through April 2013; the contracts do not qualify for hedge accounting.
Several employment-related collective and class actions and a Winn-Dixie lease-related dispute remain in litigation. The company stated it could not estimate a potential loss range for unresolved matters and could not assure that litigation would not materially affect results in the period resolved, although it did not believe the matters would materially affect its business or financial condition. The Winn-Dixie court denied monetary damages and granted injunctive relief for one Dollar Tree store; Winn-Dixie appealed. Management reported no material changes to previously disclosed risk factors, and said disclosure controls were effective with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate underlying operating performance from the $60.8 million Ollie’s Holdings sale gain when assessing net income and EPS growth.
- Track the impact of consumables mix, freight, markdowns and merchandise mark-on on gross margin, alongside comparable-store sales and traffic.
- Assess inventory growth, seasonal working-capital needs, capital spending and the pace of store and distribution-center investment against operating cash flow.
- Monitor share repurchases, remaining authorization, credit-facility availability, covenant compliance and letters of credit.
- Review developments in employment litigation and the Winn-Dixie appeal; the filing does not provide a clear estimated range of potential losses for unresolved cases.