Dollar Tree, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2010 Q3,” but the filing is for the 13 and 39 weeks ended October 29, 2011, compared with periods ended October 30, 2010. The company’s fiscal year ends January 28, 2012. Financial statements are unaudited.
Business context and reporting period
Dollar Tree operated 4,237 stores in the U.S. and 98 in Canada at October 29, 2011, with 37.4 million selling square feet. Over the first 39 weeks, it opened 257 stores, expanded 88, and closed 23. Comparable-store sales grew 4.8% in the quarter and 5.5% year to date. Quarterly comparable-store growth reflected traffic up 3.4% and average ticket up 1.4%.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2011 | 13 weeks ended Oct. 30, 2010 | 39 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 30, 2010 |
|---|---|---|---|---|
| Net sales | $1,596.6 million | $1,426.6 million | $4,684.9 million | $4,157.1 million |
| Gross profit | $560.6 million | $506.0 million | $1,643.8 million | $1,439.7 million |
| Operating income | $164.9 million | $140.9 million | $480.1 million | $371.3 million |
| Net income | $104.5 million | $93.2 million | $300.4 million | $234.8 million |
| Diluted EPS | $0.87 | $0.73 | $2.45 | $1.82 |
Quarterly gross margin was 35.1%, down from 35.5%; operating margin was 10.3%, up from 9.9%. Year-to-date gross margin was 35.1% versus 34.6% reported in 2010, which included a $26.3 million non-cash inventory-method adjustment. Excluding that prior-year adjustment, the company said year-to-date gross margin declined from 35.3% to 35.1%, while operating margin improved from 9.6% to 10.3%. The effective tax rate was 36.4% for the quarter and 37.2% year to date.
Cash flow, balance sheet, debt, and liquidity
- For the 39 weeks, operating cash flow was $318.7 million, versus $174.8 million; investing cash outflow was $22.0 million, versus $186.0 million; and financing cash outflow was $327.6 million, versus $250.9 million.
- Capital expenditures were $196.8 million, compared with $146.7 million, including spending for new and relocated stores and expansion of the Savannah distribution center.
- Cash and cash equivalents were $280.2 million at October 29, 2011, down from $311.2 million at fiscal year-end. Short-term investments were zero, versus $174.8 million at fiscal year-end. Inventory was $1,005.4 million, up from $803.1 million.
- Total debt was $265.5 million, including $15.5 million current and $250.0 million long-term. The company reported $300.0 million available under its revolving credit facility. Capital lease commitments were $0.8 million.
- The company repurchased shares for $345.9 million during the 39 weeks. In October, the board authorized an additional $1.5 billion in repurchases; $1.5 billion remained available at quarter-end.
Material changes and management commentary
Quarterly sales increased 11.9%, driven by new stores and 4.8% comparable-store growth. Year-to-date sales increased 12.7%. Management attributed sales support to increased card use, expansion of frozen and refrigerated offerings (available in about 2,170 stores versus 1,800 a year earlier), and growth in consumables and SNAP-accepting locations.
Quarterly gross margin pressure reflected a greater consumables mix, higher occupancy and distribution costs in Canada, and higher fuel prices, partly offset by improved initial merchandise markup. SG&A declined as a share of sales, supported by lower hourly payroll, incentive compensation and health costs, and sales leverage. Year-to-date cash from operations improved mainly due to lower cash use for inventory and higher earnings before depreciation and amortization.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings, sales, or comparable-store-sales guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Risks highlighted include cost inflation (including fuel, freight, wages and benefits), merchandise sourcing and imports, product mix and margin pressure, competition, economic conditions, store expansion returns, and peak-season sales performance.
- Fuel derivatives covered about 50% of estimated fuel needs from November 2011 through July 2012 and about 20% from August through October 2012. Their quarter-end fair value was a $0.3 million asset; changes in fair value flow through earnings because the contracts do not qualify for hedge accounting.
- Multiple employment-related class or collective actions and a Winn-Dixie exclusivity dispute remained pending. The company said it could not estimate a loss range for unresolved matters; it did not believe the matters would materially affect its business or financial condition, but acknowledged they could materially affect results in the period resolved.
- The $26.3 million non-cash inventory adjustment recorded in first-quarter 2010 followed a prospective change to use multiple inventory pools. The company also completed a $200 million accelerated share repurchase in November 2011, after quarter-end.
Important facts for investors to verify
- Confirm the period: this filing reports third-quarter and year-to-date 2011 results, not 2010 Q3.
- Assess underlying margin trends using the prior-year gross and operating margins excluding the $26.3 million inventory adjustment.
- Review whether inventory growth, seasonal working-capital needs, capital spending, and continued repurchases affect liquidity and cash generation.
- Track unresolved employment and commercial litigation, including potential outcomes and any future loss estimates.
- Evaluate the effect of consumables and refrigerated/frozen expansion, fuel costs, and other cost pressures on sales and margins; the filing gives no specific forward financial guidance.