DLTR

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for Dollar Tree Stores, Inc. and subsidiaries. The filing includes unaudited condensed consolidated financial statements. A significant event during this period was the completion of a merger on June 30, 1999, with Tehan's Merchandising, Inc. (Only $One), a New York-based operator of 24 stores. This transaction was accounted for as a pooling of interests, requiring retroactive restatement of prior period financial data to include Only $One's results.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 23.4% for the quarter and 24.5% for the six-month period compared to 1998. This growth was driven by new store openings (66 new stores in Q2 1999) and a 1.8% increase in comparable store net sales for the quarter.
• Profitability: Operating income rose 21.9% for the quarter and 27.8% for the six-month period. Gross margins improved to 36.8% (Q2) and 36.3% (YTD) due to reduced inventory shrinkage and distribution efficiencies, partially offset by higher domestic merchandise costs.
• Merger Impact: The acquisition of Only $One resulted in approximately $1.0 million in merger-related costs and expenses, primarily inventory writedowns and professional fees, recorded in Q2 1999.
• Cash Flow: Net cash used in operating activities improved significantly to $(19.9) million for the six months ended June 30, 1999, compared to $(54.7) million in the prior year. This improvement was largely due to lower inventory build-up compared to 1998, when the company stockpiled imports to avoid shipping shortages.
• Debt Reduction: Interest expense decreased due to lower debt levels and a higher cash position. Total borrowings stood at $49.0 million with $135.0 million available under the bank facility.

Guidance, Outlook, and Risks

• Expansion Plans: Management plans to expand by 230 to 235 stores in 1999, including the 24 acquired Only $One stores. Future net sales growth is expected to come primarily from new store openings.
• Comparable Sales Outlook: The internal business plan calls for a 2% to 3% increase in comparable store net sales for calendar year 1999. Management anticipates future comparable sales increases may be lower than historical rates due to the fixed-price business model.
• Cost Risks: The company faces potential cost increases from rising transpacific shipping rates and proposed federal minimum wage hikes. Management believes shipping rate increases can be offset by other cost savings.
• Year 2000 Compliance: The company is in the final phases of Year 2000 compliance testing. While internal systems are largely compliant, there are risks regarding international suppliers, particularly in China, and third-party logistics providers. Estimated total modification costs are under $275,000.
• Capital Projects: An $18.0 million operating lease was entered into for a new distribution center in Stockton, California, scheduled to be operational in Q1 2000.

Investor Verification Checklist

• Verify the sustainability of the 1.8% comparable store sales increase given the fixed-price model and seasonal timing shifts (Easter holiday).
• Monitor the integration of the 24 Only $One stores and the impact of the $1.0 million merger-related costs on future margins.
• Assess the risk of supply chain disruptions from international suppliers (specifically China) related to Year 2000 compliance.
• Track the execution of the 230-235 store expansion plan and the associated capital expenditures.
• Review the impact of potential minimum wage legislation on payroll costs, as the company cannot pass these costs to consumers via price increases.