Dollar Tree, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2014, the 13 weeks ended May 3, 2014, compared with the 13 weeks ended May 4, 2013. The request metadata says “2013 Q1,” but the filing covers 2014 Q1.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $2,000.3 million | $1,865.8 million | +7.2% |
| Gross profit | $696.6 million | $656.0 million | +6.2% |
| Gross margin | 34.8% | 35.2% | Down 0.4 percentage points |
| Operating income | $231.9 million | $216.6 million | +7.1%; margin 11.6% in both periods |
| Interest expense, net | $8.1 million | $0.6 million | Increased primarily due to Senior Notes |
| Net income | $138.3 million | $133.5 million | +3.6% |
| Diluted EPS | $0.67 | $0.59 | +13.6% |
| Operating cash flow | $198.2 million | $129.3 million | +$68.9 million |
| Capital expenditures | $71.9 million | $103.2 million | Down $31.3 million |
Liquidity, debt and capital allocation
- Cash and cash equivalents were $387.1 million at May 3, 2014, versus $267.7 million at February 1, 2014, and $383.3 million a year earlier.
- Total borrowings were $757.0 million, all reported as long-term at quarter-end. Long-term debt was $257.0 million at May 4, 2013; the increase principally reflects $750.0 million of Senior Notes issued in September 2013. The company also repaid $12.8 million of debt during the quarter.
- The company reported $737.1 million available under its unsecured credit agreement. Of $230.0 million in letter-of-credit agreements, approximately $143.5 million supported routine imported-merchandise purchases.
- Cash from operations exceeded investing outflows of $71.6 million and financing outflows of $7.5 million; cash increased by $119.4 million during the quarter.
- No open-market share repurchases occurred during the quarter. Under previously funded accelerated share repurchase agreements, 1.9 million additional shares were delivered in February; a further 1.2 million shares were delivered May 15, after quarter-end. The company reported $1.0 billion remaining under its Board authorization.
Operating developments and comparisons
- Sales growth primarily reflected new stores. Comparable-store sales rose 1.9% including currency effects, or 2.0% on a constant-currency basis; management attributed the increase primarily to higher customer traffic.
- The company operated 4,891 U.S. stores and 189 Canadian stores, with 44.0 million selling square feet, versus 4,763 stores and 41.2 million square feet a year earlier. In the quarter it opened 94 stores, expanded 28 and closed 6.
- Frozen and refrigerated merchandise was available in approximately 3,270 stores, up from approximately 2,780 a year earlier. SNAP acceptance expanded to approximately 4,710 qualified stores from approximately 4,310.
- Gross margin pressure came from higher freight costs, attributed to severe weather and truck availability, and higher distribution costs, including the Windsor, Connecticut distribution center and labor costs. SG&A fell to 23.2% of sales from 23.6%, reflecting lower incentive compensation and health-care costs, partly offset by higher utility costs. Operating margin remained at 11.6%.
- Diluted weighted-average shares declined to 207.7 million from 225.2 million, helping lift EPS more than net income.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year earnings or sales guidance. Management discusses growth initiatives and risks but does not give quantified forecasts.
- Management noted seasonal working-capital needs typically peak in September and October. Results for the quarter are not necessarily indicative of the full fiscal year.
- Key stated risks include cost inflation, economic weakness, competition, product mix, supplier and distribution disruptions, technology and data-security incidents, labor availability, legal claims, and debt-covenant compliance.
- Legal matters include lease-exclusive disputes, employment class and collective actions, a California environmental investigation concerning disposal of damaged products, and a CPSC staff investigation related to 15 prior Letters of Advice. The company says it will defend these matters and does not expect them to materially affect its business or financial condition, but says a material effect on results in the period of resolution cannot be ruled out. It could not estimate potential losses for most matters; one plaintiff’s experts asserted approximately $6.2 million in damages in a Pennsylvania case, while the company’s experts disputed that damages were provable.
- The company had diesel-price contracts covering 0.8 million gallons, about 20% of domestic truckload fuel needs from August through October 2014. Their quarter-end fair value was immaterial; changes in fair value are recorded in other expense rather than hedge accounting.
- Management concluded disclosure controls were effective as of May 3, 2014, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and traffic trends continue, and how new stores and refrigerated offerings affect sales and profitability.
- Whether freight, distribution, wage, utility and other cost pressures continue to weigh on gross margin.
- The debt terms, interest burden and available borrowing capacity, particularly as seasonal working-capital needs rise.
- Developments and potential financial exposure in the lease, employment, environmental and product-safety matters.
- How the remaining share-repurchase authorization is used and its effect on cash, debt and per-share results.