Dollar Tree, Inc. — Form 10-Q Summary
Period note: The request identifies 2018 Q2, but the supplied filing is for the 13 and 26 weeks ended August 3, 2019, compared with periods ended August 4, 2018.
Business context and reporting period
Dollar Tree operated 15,115 stores across 48 states and five Canadian provinces, in two segments: Dollar Tree, with fixed-price merchandise, and Family Dollar. The filing covers the second quarter and first half of fiscal 2019; interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | 13 weeks ended Aug. 3, 2019 | 13 weeks ended Aug. 4, 2018 | 26 weeks ended Aug. 3, 2019 | 26 weeks ended Aug. 4, 2018 |
|---|---|---|---|---|
| Net sales | $5,740.6 million | $5,525.6 million | $11,549.3 million | $11,079.3 million |
| Gross profit | $1,648.5 million | $1,663.9 million | $3,375.7 million | $3,363.5 million |
| Operating income | $268.9 million | $382.5 million | $654.4 million | $820.1 million |
| Net income | $180.3 million | $273.9 million | $448.2 million | $434.4 million |
| Diluted EPS | $0.76 | $1.15 | $1.88 | $1.82 |
| Operating cash flow | — | $844.0 million | $768.8 million |
- Quarterly sales rose 3.9%; comparable sales increased 2.4%, reflecting higher average ticket and customer count. First-half sales rose 4.2%; comparable sales increased 2.3% on a constant-currency basis.
- Quarterly gross margin fell to 28.7% from 30.1%, and operating margin to 4.7% from 6.9%. First-half gross margin declined to 29.2% from 30.4%, and operating margin to 5.7% from 7.4%.
- Quarterly net income declined despite sales growth. First-half net income increased, while operating income fell; the comparison was affected by prior-year debt-refinancing charges in interest expense.
- First-half capital expenditures were $502.5 million, versus $394.3 million. Operating cash flow less capital expenditures was $341.5 million, compared with $374.5 million in the prior-year period; this is a simple calculation, not a company-defined measure.
- At August 3, 2019, cash and cash equivalents were $623.4 million. Long-term debt was $4.3 billion, including $750 million of floating-rate notes classified as current debt; $1.1 billion was available under the revolving credit facility.
- Adoption of the new lease standard led to recognition of operating lease right-of-use assets and liabilities of approximately $6.2 billion and $6.1 billion, respectively, at transition. At quarter-end, operating lease liabilities totaled $5,982.4 million on a present-value basis. This accounting change affects balance-sheet comparability.
Material changes and management commentary
- Dollar Tree segment sales grew 6.8% in the quarter and operating income increased slightly to $334.0 million; segment operating margin declined to 11.3% from 11.9%.
- Family Dollar quarterly sales rose 0.9%, but operating income fell to $15.4 million from $113.6 million and operating margin contracted to 0.6% from 4.1%. Lower gross margin, markdowns, shrink, freight costs, and store-closure expenses weighed on results.
- Family Dollar’s optimization program includes H2 store renovations, accelerated closures, re-bannering stores to Dollar Tree, and investments in adult beverages and expanded freezers/coolers. By August 3, the company had renovated approximately 1,000 H2 stores, closed 312 stores, and re-bannered 151 stores.
- The company expected to close as many as 390 Family Dollar stores in 2019 and renovate at least 1,150 stores to the H2 model. It estimated approximately $39.5 million of store-closure costs and $30 million of incremental initiative costs for 2019; $19.4 million and $21 million, respectively, had been incurred through the second quarter as described in the filing.
- Management cited higher freight and merchandise costs, Family Dollar markdowns and shrink, store-support-center consolidation costs, store-closure write-offs, and increased payroll as pressures on margins.
- Management expected higher import freight costs beginning in the third quarter and from low-sulphur fuel requirements for ships effective in January 2020. It said mitigation had reduced most of the existing Lists 1–3 tariff effects through September, but the ultimate impact of further tariffs remained uncertain. The filing estimated approximately $26 million of additional tariffs from September 1 to December 15, 2019, and $14.7 million from December 15, 2019 to January 31, 2020, before mitigation.
Liquidity, risks, and contingencies
- Seasonal working-capital needs typically peak in September and October. First-half operating cash flow increased year over year, while investing outflows increased largely because of Family Dollar renovations and re-banners.
- The company repurchased 1.84 million shares for approximately $188.4 million in the first half and had $811.6 million remaining under its repurchase authorization.
- A 1 percentage-point increase in LIBOR would increase annual interest expense on the $750 million floating-rate notes by approximately $7.5 million.
- Risks highlighted include tariffs and supplier exposure, freight and wage inflation, competition, store execution and integration, substantial indebtedness, interest-rate exposure, technology and data security, and litigation.
- The company faced employment-related class and representative actions, thousands of employment arbitrations, product-related litigation, and other claims. It stated that it could not estimate potential losses for certain matters; outcomes could affect results in the period resolved.
Important facts for investors to verify
- Confirm the applicable reporting period: this filing is for Q2 2019, not Q2 2018.
- Track whether Family Dollar’s H2 renovations and store-optimization actions improve sales, margins, and operating income, and whether planned closure and initiative costs stay within estimates.
- Assess the company’s ability to offset tariffs, freight inflation, and other cost increases without further gross-margin deterioration.
- Monitor cash generation against capital spending, debt maturities and refinancing needs, and the seasonal working-capital peak.
- Review lease obligations and their effect on balance-sheet comparisons following adoption of the lease accounting standard.
- Follow the outcome and potential financial impact of pending litigation and other contingencies, for which loss estimates are not clear in the filing.