Dollar Tree, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 and 26 weeks ended July 31, 2010, compared with the periods ended August 1, 2009. This conflicts with the request metadata stating “2009 Q2”; the filing itself is for fiscal 2010’s second quarter.
Business context and reporting period
Dollar Tree operated 3,925 stores in 48 states at July 31, 2010, up from 3,717 a year earlier. In the first half, it opened 130 stores, expanded 68, and closed 11. Comparable-store sales rose 6.7% for the quarter and 6.6% for the half, attributed to higher customer traffic and average ticket. Frozen and refrigerated merchandise was available in approximately 1,680 stores.
Financial performance
| Metric | 13 weeks ended July 31, 2010 | 26 weeks ended July 31, 2010 |
|---|---|---|
| Net sales | $1,377.9 million; up 12.7% | $2,730.5 million; up 12.6% |
| Gross profit | $483.5 million | $933.7 million |
| Gross margin | 35.1%, versus 34.5% | 34.2%, versus 34.5%; 35.2% excluding the inventory adjustment |
| SG&A as a percentage of sales | 25.8%, versus 27.2% | 25.8%, versus 26.8% |
| Operating income | $127.8 million; 9.3% margin | $230.4 million; 8.4% margin |
| Net income | $78.0 million, versus $56.9 million | $141.6 million, versus $117.3 million |
| Diluted EPS | $0.61, versus $0.42 | $1.10, versus $0.86 |
First-half results included a $26.3 million non-cash charge to gross profit from a prospective change to the inventory-cost estimation method. Without this charge, first-half gross margin was 35.2% and operating margin was 9.4%.
For the first half, operating cash flow was $153.8 million, compared with $134.0 million. Capital expenditures were $90.1 million, and net cash used in investing activities was $97.8 million. Net cash used in financing activities was $198.3 million, mainly reflecting share repurchases. Cash and cash equivalents were $429.3 million at July 31, down from $571.6 million at January 30; short-term investments were $51.0 million.
At July 31, total debt was $266.5 million, including $16.5 million current and $250.0 million long-term. The company reported $300.0 million available under its revolving credit facility. Current assets were $1,261.7 million and current liabilities were $491.9 million. Approximately $159.4 million was committed to letters of credit for routine imported-merchandise purchases.
Material changes and management commentary
- Quarterly gross margin improved year over year, with lower occupancy and distribution costs and favorable shrink adjustments. SG&A ratios also declined, reflecting sales leverage and lower workers’ compensation accruals.
- For the first half, reported gross margin was reduced by the $26.3 million inventory-method adjustment. The new method uses approximately 30 inventory pools rather than one and may increase quarter-to-quarter gross-margin variability.
- Management said a greater mix of lower-margin consumables supports more frequent customer visits and sales, but, together with higher freight costs, is expected to pressure gross-margin rate for the remainder of 2010. No specific earnings or sales guidance was provided.
- The company repurchased $200.0 million of shares through an accelerated share repurchase agreement, which settled on August 6, 2010 at 5.0 million total shares. It also repurchased approximately 0.6 million additional shares for $18.4 million during the first half. The board authorized another $500.0 million of repurchases; $542.2 million remained authorized at July 31.
- Seasonal working-capital needs typically peak in September and October. Capital spending increased, including freezer installations and costs for the San Bernardino distribution center, which opened in the first quarter.
Risks, contingencies, and unusual items
- Pending employment-related collective and class actions include claims concerning overtime classification and gender pay. The company stated it did not expect these matters to materially affect its business or financial condition, but said resolutions could materially affect results for the period in which they occur.
- Fuel derivatives covered approximately 65% of estimated fuel needs from August 2010 through January 2011 and 20% from February through April 2011. Their July 31 fair value was a $0.5 million liability; changes in fair value are recorded in earnings because the contracts do not qualify for hedge accounting.
- Interest-rate swaps had a $2.5 million liability at July 31 and expire in March 2011. The company also identified exposure to fuel costs, interest rates, foreign currency, imported-goods availability, freight, wages, competition, and economic conditions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing is for the quarter ended July 31, 2010, notwithstanding the “2009 Q2” request metadata.
- Assess the underlying margin trend separately from the one-time $26.3 million inventory adjustment, and monitor the stated expected pressure from consumables mix and freight.
- Review cash usage and repurchase activity alongside seasonal working-capital needs, capital spending, and the $300.0 million of reported revolver availability.
- Monitor the employment litigation outcomes, fuel and interest-rate derivative exposures, and management’s dependence on imported merchandise and related supply costs.