Dollar Tree, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 and 39 weeks ended November 1, 2014, compared with periods ended November 2, 2013. This does not match the request metadata of 2013 Q3.
Business context and reporting period
Dollar Tree operated 5,077 U.S. stores and 205 Canadian stores at November 1, 2014, with 45.8 million selling square feet. In the first 39 weeks of fiscal 2014, it opened 301 stores, expanded 66 and closed 11. Comparable-store sales rose 5.9% for the quarter and 3.9% for the 39-week period, supported by higher customer traffic and average ticket.
Financial performance
| Metric | 13 weeks ended Nov. 1, 2014 | 13 weeks ended Nov. 2, 2013 | 39 weeks ended Nov. 1, 2014 | 39 weeks ended Nov. 2, 2013 |
|---|---|---|---|---|
| Net sales | $2,095.2 million | $1,884.7 million | $6,126.6 million | $5,605.4 million |
| Gross profit | $725.3 million | $659.9 million | $2,115.9 million | $1,964.6 million |
| Operating income | $219.7 million | $204.3 million | $656.6 million | $622.1 million |
| Net income | $133.0 million | $125.4 million | $392.7 million | $383.6 million |
| Diluted EPS | $0.64 | $0.58 | $1.90 | $1.73 |
| Gross margin | 34.6% | 35.0% | 34.5% | 35.0% |
| Operating margin | 10.5% | 10.8% | 10.7% | 11.1% |
Quarterly sales increased 11.2%; 39-week sales increased 9.3%. For the 39-week period, operating cash flow was $388.5 million, capital expenditures were $254.4 million, and net cash used in investing activities was $243.8 million. Net cash used in financing was $4.8 million. Cash increased to $407.6 million from $267.7 million at fiscal year-end.
At November 1, 2014, total borrowings were $757.0 million, all long-term; $737.1 million was available under the unsecured credit agreement. Current assets were $1,796.1 million and current liabilities were $866.5 million. Cash paid for interest during the 39 weeks was $17.2 million.
Material changes and management commentary
- Gross margin declined year over year, primarily from higher domestic trucking and distribution costs and lower initial markups on higher-value products. Quarterly freight cost pressure was partly offset by lower occupancy costs as sales increased.
- SG&A was 24.1% of sales for the quarter and 23.8% for the 39 weeks. Excluding Family Dollar transaction expenses, the respective rates were 23.4% and 23.5%. Reported operating margin was lower; excluding those expenses, management said quarterly operating margin was 11.2% and 39-week margin was 11.1%.
- Interest expense rose to $9.3 million for the quarter and $25.8 million for the 39 weeks, largely reflecting $750 million of Senior Notes issued in September 2013.
- Management attributed comparable-store growth to increased traffic and average ticket, with ongoing rollout of frozen and refrigerated merchandise. About 3,540 stores had such merchandise, versus about 3,110 a year earlier.
- Operating cash flow increased by $21.8 million year over year for the 39-week period. Capital expenditures fell versus the prior year, when distribution-center construction and expansions required higher spending.
Outlook, merger, risks and contingencies
Dollar Tree had agreed to acquire Family Dollar for $59.60 in cash plus a variable number of Dollar Tree shares per Family Dollar share. Completion remained subject to shareholder, regulatory and other conditions; the Family Dollar shareholder meeting was scheduled for December 23, 2014. Dollar General had made a competing conditional $80-per-share cash offer, which Family Dollar’s board recommended shareholders reject.
Dollar Tree expected approximately $175 million of merger-related expenses and approximately $165 million of capitalizable financing costs. It projected $300 million in annual cost synergies by the end of the third year after closing, with $300 million in one-time costs to achieve them. Management expected the transaction to be dilutive to GAAP EPS during the first 12 months after closing, but accretive excluding one-time synergy costs. The company expected to arrange approximately $9.5 billion of bank and bond financing; its stated pro forma indebtedness after the transaction was approximately $8.747 billion.
Key risks include failure or delay of the merger, regulatory conditions or litigation, integration challenges, failure to realize projected synergies, increased indebtedness and interest expense, variable-rate exposure, and potential EPS and share-price dilution. The filing also describes employment-related collective and class actions, store lease restrictions, a product-disposal investigation, a CPSC investigation and merger-related shareholder litigation. The company said it could not estimate potential losses for several matters; it considered the accrued estimated loss in the environmental matter immaterial. No material loss range was provided for the other described proceedings.
Diesel fuel swap contracts covered about 20% of domestic truckload fuel needs from November 2014 through January 2015 and about 40% from February 2015 through January 2016. Their fair value was a $1.1 million liability at November 1, 2014; fair-value changes were recorded in other expense.
Most important facts for investors to verify
- Merger status, consideration, financing terms, regulatory conditions and outcome of the competing Dollar General offer.
- Whether projected cost savings are achieved, and the ultimate merger, integration and financing costs.
- Debt levels, interest-rate exposure, credit availability and the combined company’s capacity to service debt.
- Whether comparable-store growth persists and whether freight, merchandise and distribution costs continue to pressure margins.
- Developments and potential financial effects of the disclosed litigation and regulatory matters; several outcomes and loss ranges were not estimable in the filing.