Dollar Tree, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 28, 2017 (52 weeks). Although the request metadata says “2015 Q4,” this filing covers FY2016; it is an annual report, not a standalone FY2015 quarterly filing. The company operates Dollar Tree and Family Dollar. Family Dollar was acquired July 6, 2015, so FY2016 includes 52 weeks of its results versus 30 weeks in FY2015.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $20.719 billion | $15.498 billion |
| Gross profit / margin | $6.395 billion / 30.8% | $4.657 billion / 30.1% |
| Operating income / margin | $1.705 billion / 8.2% | $1.050 billion / 6.8% |
| Net income | $896.2 million | $282.4 million |
| Diluted EPS | $3.78 | $1.26 |
| Net cash from operating activities | $1.673 billion | $802.5 million |
| Capital expenditures | $564.7 million | $480.5 million |
Sales rose 33.7%, primarily reflecting the additional 22 weeks of Family Dollar operations, new stores, and comparable-sales growth. Comparable sales increased 1.8% for Dollar Tree, driven by 0.7% more transactions and a 1.1% increase in average ticket. The FY2016 fourth quarter reported sales of $5.635 billion, operating income of $586.5 million, net income of $321.8 million, and diluted EPS of $1.36; comparable sales increased 1.3%.
Gross margin improved from FY2015, which included Family Dollar inventory step-up amortization and $73.0 million of markdowns tied to SKU rationalization and planned liquidations. FY2016 also benefited from higher initial mark-on and favorable freight costs, partly offset by Family Dollar’s lower-margin product mix. Net interest expense declined to $375.5 million from $599.4 million, which included prior-year refinancing and debt-prepayment charges. The effective tax rate was 32.6%, versus 37.0%.
At year-end, cash and cash equivalents were $866.4 million, short-term investments were $4.0 million, and working capital was $1.832 billion. Total debt, including capital lease obligations, was $6.392 billion, down from $7.466 billion. The company reported $1.25 billion of revolving-credit availability, less $160.7 million of outstanding letters of credit. Operating cash flow increased year over year; investing cash use was $483.6 million and financing cash use was $1.061 billion. The company was in compliance with debt covenants.
Material changes and business developments
- Store count reached 14,334, including 6,360 Dollar Tree and 7,974 Family Dollar stores. The company added 584 stores net of closings and rebannering movements.
- FY2016 Family Dollar sales were $10.581 billion, gross profit $2.810 billion, and operating income $399.5 million. FY2015 included only partial-year operations and a $30.8 million segment operating loss.
- Dollar Tree segment sales increased 8.6% to $10.139 billion; operating income rose to $1.305 billion and operating margin to 12.9%.
- The company completed a 1.5-million-square-foot South Carolina distribution center and expanded its Stockton, California facility. It divested 330 Family Dollar stores in November 2015 to meet an FTC acquisition condition; 325 were open at divestiture.
- Debt was refinanced and repaid during the year, including prepayment of the remaining $748.1 million Term Loan B-3 in January 2017.
Outlook, management commentary, and risks
- Management targeted approximately $300 million in annual run-rate cost synergies by the end of July 2018, with $300 million of expected one-time costs to achieve them. The target is not a guarantee and excludes certain inflation, investment, and integration effects.
- FY2017 plans included estimated capital expenditures of $760–$780 million, approximately 400 additional Dollar Tree freezer/cooler installations, and construction of a new Dollar Tree distribution center. Management said it expected to fund working capital and planned capital spending from operating cash flow and potential revolver borrowings.
- Fiscal 2017 was expected to have 53 weeks. Management estimated that the later Easter date could add about $10 million to first-quarter sales versus FY2016. The filing does not provide a clear full-year sales or EPS forecast.
- Key exposures include integration and synergy execution, substantial debt and variable-rate interest expense, imported merchandise costs and potential tariffs or border-adjustment taxes, wage and benefit inflation, freight and fuel costs, competition, seasonal sales concentration, and supply-chain or technology disruptions. A 1 percentage-point increase in rates was estimated to increase annual interest expense by $21.8 million.
- Legal matters include employment-related class and collective actions, product-injury litigation, and a Family Dollar pay-discrimination class action certified for approximately 30,000 current and former female store managers. The company disputes the claims; it said potential losses could exceed insurance coverage if plaintiffs substantially prevail and could not estimate the loss range for certain matters.
- The company reported no impairment of goodwill or indefinite-lived intangible assets in FY2016. Family Dollar’s $3.1 billion trade name and $4.678 billion of segment goodwill remain subject to impairment testing.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance: confirm comparable-sales trends and segment results on comparable reporting periods.
- Track delivery and timing of the $300 million synergy target against the $300 million one-time cost estimate, and assess whether savings are affecting margins and cash flow.
- Review debt maturities, variable-rate exposure, available revolver capacity, covenant headroom, and the ability to fund planned capital expenditures while reducing debt.
- Monitor Family Dollar integration, store rebannering, customer response, and the relative margin effects of consumables and freezer/cooler expansion.
- Follow developments in the certified pay-discrimination case and other litigation, as well as import, tariff, labor-cost, and overtime-rule changes.
KPMG issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of January 28, 2017.