Dollar Tree, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for the fiscal year ended February 1, 2014 (fiscal 2013), not a stand-alone 2012 Q4 filing. It includes unaudited quarterly results; fiscal 2013’s fourth quarter was 13 weeks. Fiscal 2012 included 53 weeks, versus 52 weeks in fiscal 2013.
Business context
Dollar Tree operated 4,992 discount variety stores in the U.S. and Canada, primarily selling merchandise for $1 or less in the U.S. The business is a single operating segment. The company emphasizes new stores, store expansions, consumables, and adding freezers and coolers; it had those fixtures in approximately 3,160 stores at year-end.
Financial and operating performance
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net sales | $7,840.3 million | $7,394.5 million |
| Gross profit | $2,789.8 million; 35.6% margin | $2,652.7 million; 35.9% margin |
| Operating income | $970.3 million; 12.4% margin | $920.1 million; 12.4% margin |
| Net income | $596.7 million | $619.3 million |
| Diluted EPS | $2.72 | $2.68 |
| Operating cash flow | $793.4 million | $677.7 million |
| Capital expenditures | $330.1 million | $312.2 million |
- Sales increased 6.0% as reported; excluding the prior year’s approximately $125 million 53rd-week sales, growth was 7.9%. Comparable-store sales rose 2.4%, from 1.9% more transactions and a 0.5% higher average ticket.
- Net income declined about 3.6%, while diluted EPS rose 1.5%; the filing attributes the per-share result in part to substantial share repurchases. Fiscal 2012 net income included a $60.8 million pre-tax gain from selling the Ollie’s investment.
- Gross margin declined 0.3 percentage point, which management attributed primarily to lost occupancy and distribution cost leverage from the extra week in fiscal 2012. SG&A fell to 23.2% of sales from 23.5%, mainly due to lower incentive compensation and inventory service fees.
- Cash and cash equivalents were $267.7 million at year-end, down from $399.9 million. Working capital was $692.2 million. Inventory was $1,035.3 million, versus $971.7 million.
- Total debt, including capital lease obligations, was $769.8 million, versus $271.3 million a year earlier. This included $750 million of senior notes issued in September 2013, with maturities in 2020, 2023 and 2025, and $12.8 million of demand revenue bonds. No balance was outstanding on the $750 million revolving credit facility at year-end. The demand bonds were repaid after year-end, on March 3, 2014.
Changes, outlook and management commentary
- The store count increased from 4,671 to 4,992. During fiscal 2013, the company opened 343 stores, expanded or relocated 71, and closed 22. Selling square footage grew 6.9%.
- Management planned approximately $350–$360 million in fiscal 2014 capital expenditures, including store projects, coolers and freezers in about 320 additional stores, expansion of the Joliet distribution center, and initial work on an eleventh distribution center. It estimated $258.8 million for opening and expanding stores, including capital expenditures, initial inventory and pre-opening costs.
- The company said operating cash flow and potential borrowings under its credit facility should fund working capital and planned capital expenditures for the next few years. It gave no specific fiscal 2014 sales or earnings guidance in the supplied filing text.
- Management estimated that later Easter timing could add about $8 million to first-quarter fiscal 2014 sales versus the prior-year quarter. SNAP benefit reductions took effect after November 1, 2013; management did not expect a material sales impact.
- The company repurchased $1,112.1 million of shares in fiscal 2013, including shares under accelerated repurchase agreements. It had $1.0 billion remaining under its board authorization at year-end and did not anticipate paying dividends in the foreseeable future.
Risks, contingencies and unusual items
- Margins are exposed to merchandise, freight, fuel, occupancy, wage and benefit cost increases; the fixed-price model limits the ability to pass higher costs directly to customers. A rising consumables mix may also pressure gross margin.
- Other material risks include competition, weaker consumer spending, seasonal sales concentration, supply-chain and import disruption (particularly goods sourced from China), distribution interruptions, cyber and technology risks, and the ability to expand profitably.
- Pending matters included employment-related collective or class actions, lease-exclusive disputes, and a California investigation into disposal of damaged retail products. The company said outcomes and potential losses for unresolved matters could not generally be estimated; one Pennsylvania plaintiff’s experts asserted approximately $6.2 million in damages, while the company disputed that claim.
- Fiscal 2013 interest expense rose by $12.9 million, primarily due to the new senior notes. The $750 million note proceeds were used to finance share repurchases, increasing debt while reducing shareholders’ equity.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether comparable-store sales and transaction growth remain strong, and whether the newer stores and cooler/freezer initiative generate expected returns.
- Whether gross-margin pressure from product mix, freight and occupancy costs persists, and whether management can offset wage and other cost inflation.
- Debt service and liquidity after the large share repurchases, including the timing and final share count under the collared accelerated repurchase agreement.
- Actual fiscal 2014 capital spending, store openings, distribution-center expansion and cash generation compared with management’s plans.
- Developments in the unresolved employment, lease and environmental matters, including any material change in estimated exposure.