Dollar Tree, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended May 4, 2019, with comparison to the 13 weeks ended May 5, 2018. Although the request metadata says “2018 Q1,” this filing reports fiscal 2019 first-quarter results. Dollar Tree operated 15,264 stores in 48 states and five Canadian provinces across its Dollar Tree and Family Dollar segments.
Financial results and liquidity
- Revenue: Net sales were $5.81 billion, up 4.6%. Comparable sales rose 2.2% on a constant-currency basis, reflecting a 1.9% increase in average ticket and 0.3% increase in customer count.
- Profit and margins: Gross profit increased 1.6% to $1.73 billion, but gross margin fell to 29.7% from 30.6%. Operating income declined to $385.5 million from $437.6 million, and operating margin fell to 6.6% from 7.9%. Net income was $267.9 million, or $1.12 diluted EPS, versus $160.5 million, or $0.67, a year earlier.
- Cash flow: Operating cash flow was $614.1 million, compared with $387.6 million. Capital expenditures were $209.2 million; investing cash outflow was $192.4 million. Financing cash outflow was $117.5 million, including $100.0 million of share repurchases. Cash and cash equivalents were $725.8 million at quarter-end.
- Debt and liquidity: Long-term borrowings totaled approximately $4.3 billion, including $750 million of floating-rate notes due 2020. The company reported $1.1 billion available under its revolving credit facility. A 1 percentage-point increase in LIBOR would increase annual interest expense by $7.5 million.
- Balance sheet: Adoption of lease accounting added operating lease right-of-use assets of approximately $6.1 billion and lease liabilities of approximately $6.1 billion. Current assets were $4.25 billion and current liabilities $3.98 billion; comparisons are affected by the new lease standard.
Material changes versus the prior comparable period
- Operating results weakened despite sales growth: increased merchandise and freight costs, shrink, distribution expenses and Family Dollar store-closure lease costs contributed to lower gross and operating margins.
- Family Dollar sales rose 2.9%, but segment operating income fell to $90.4 million from $143.8 million; gross margin declined to 24.8% from 26.7%. Dollar Tree sales rose 6.3%, while segment operating income increased to $390.9 million from $372.7 million.
- Net income and EPS increased in part because the prior-year quarter included $114.7 million of debt-extinguishment loss and substantial refinancing-related interest expense. Interest expense was $41.4 million versus $230.0 million.
- Operating cash flow improved primarily due to lower cash payments for inventory and higher accrued liabilities, partly offset by lower trade payables.
Outlook, management commentary, risks and contingencies
- The Family Dollar optimization plan targets at least 1,000 H2-format renovations in 2019, as many as 390 store closures, approximately 200 re-banners to Dollar Tree, adult-beverage rollout in approximately 1,000 stores, and expanded freezers and coolers in approximately 400 stores. Management cited H2 test-store comparable-sales lifts exceeding 10% versus control stores.
- Management estimated approximately $28 million of 2019 store-closure costs and approximately $30 million of additional initiative costs; it also expected approximately $37 million of 2019 pre-tax costs for consolidating support centers. The filing reports $7.5 million of closure costs, $13 million of initiative costs and $7.6 million of consolidation costs incurred in the quarter.
- Tariffs remain a material uncertainty. Management said existing Section 301 tariffs affected products representing about 9% of sales volume and that mitigation efforts had reduced most expected 2019 impact. Proposed List 4 tariffs could have a materially greater effect; their timing, scope and impact were uncertain.
- The company reported higher domestic freight costs associated with the truck-driver shortage and anticipated higher import freight costs beginning in the third quarter. Other cited risks include wage and benefit increases, Family Dollar integration and store performance, competition, consumer spending, supply-chain disruption, debt and interest-rate exposure.
- Pending matters include employment-related class and representative actions and product-related lawsuits. Management did not believe the matters would materially affect business or financial condition, but said outcomes could affect results and that it could not estimate potential losses for certain cases.
- No specific earnings or sales guidance for the full year is provided in the supplied filing text. Results for the quarter are not necessarily indicative of the full fiscal year.
Important facts for investors to verify
- Whether Family Dollar renovations, closures and re-bannering improve traffic, comparable sales and segment profitability.
- The extent to which freight, shrink, tariff and wage pressures persist, and whether mitigation offsets them.
- Cash generation and debt-service capacity, including the maturity and floating-rate exposure of the $750 million notes.
- The costs and execution progress of the Family Dollar optimization and support-center consolidation plans.
- The impact of newly recognized lease assets and liabilities on balance-sheet comparisons and store economics.