Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1999 for Dollar Tree Stores, Inc. and subsidiaries. The company operates as a fixed-price point retailer. The 1998 comparative figures reflect a combination of Dollar Tree and Step Ahead Investments, Inc. following a pooling-of-interests transaction in December 1998.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Net Sales | $221.2 million | $175.5 million |
| Gross Profit | $79.1 million | $62.7 million |
| Gross Margin | 35.7% | 35.7% |
| Operating Income | $17.9 million | $13.4 million |
| Net Income | $10.7 million | $7.7 million |
| Diluted EPS | $0.16 | $0.12 |
| Cash and Equivalents (End of Period) | $17.8 million | $5.8 million |
| Total Debt (Current + Long-term) | $48.5 million | $46.5 million |
| Net Cash Used in Operating Activities | $(48.4) million | $(42.3) million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 26.0% ($45.7 million), driven by 257 net new stores and a 5.4% increase in comparable store sales.
- Store Activity: The company opened 48 new stores and closed one in Q1 1999, compared to 39 openings and two closures in Q1 1998.
- Profitability: Operating income rose 34.2% to $17.9 million. Operating margin improved to 8.1% from 7.6% due to better leverage of fixed costs.
- Cash Flow: Net cash used in operating activities increased to $48.4 million (from $42.3 million), primarily due to building inventory levels. Cash and cash equivalents decreased significantly from $71.1 million at year-end 1998 to $17.8 million at March 31, 1999.
- Interest Expense: Decreased to $0.5 million from $0.7 million due to lower debt levels and a higher cash position.
Guidance, Outlook, and Risks
- Expansion Plan: Management plans to expand by 215 to 225 stores in 1999. Future net sales growth is expected to come primarily from new store openings.
- Comparable Sales Outlook: Management expects a lower comparable store sales increase for Q2 1999 because the Easter holiday (April 3, 1999) shifted sales into Q1. The internal business plan targets a 2-3% increase in comparable store sales for the full year 1999.
- Cost Pressures: Import shipping contracts renewed in May 1999 at higher rates, potentially increasing costs by up to $4 million in 1999. Management believes this will be offset by other savings. Potential federal minimum wage increases are also noted as a risk.
- Year 2000 Compliance: The company is in the re-testing phase of Y2K compliance. While internal systems are largely compliant, there is uncertainty regarding international suppliers, particularly in China, which could disrupt the supply chain.
- Subsequent Events: Entered an interest rate swap on April 1, 1999, to fix rates on $19.0 million of debt. Agreed to sublease the Memphis distribution facility through March 2000.
Investor Verification Checklist
- Verify the impact of the $4 million increase in shipping costs on full-year margins.
- Monitor Q2 comparable store sales to confirm the anticipated slowdown due to the Easter holiday shift.
- Assess the progress of Year 2000 compliance for international suppliers, specifically in China.
- Track the execution of the 215-225 store expansion plan for 1999.
- Review the status of the sublease for the Memphis facility and the negotiation for the new Stockton, California distribution center.