Dollar Tree, Inc. — Form 10-K Summary
Period clarification: The metadata identifies “2009 Q4,” but this filing is an annual report for the 52-week fiscal year ended January 29, 2011 (fiscal 2010), with comparisons to fiscal 2009 ended January 30, 2010.
Business context
Dollar Tree operated 4,101 discount variety stores in the U.S. and Canada at year-end, generally selling merchandise for $1 or less in the U.S. and C$1.25 or less in Canada. Growth is driven by new stores, comparable-store sales, expansions and acquisitions. The November 2010 acquisition of 86 Dollar Giant stores marked the company’s first retail expansion outside the U.S.
Financial performance and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $5,882.4 million | $5,231.2 million |
| Gross profit | $2,087.6 million; 35.5% margin | $1,856.8 million; 35.5% margin |
| Operating income | $630.0 million; 10.7% margin | $512.8 million; 9.8% margin |
| Net income | $397.3 million | $320.5 million |
| Diluted EPS | $3.10 | $2.37 |
| Operating cash flow | $518.7 million | $581.0 million |
- Sales increased 12.4%; comparable-store sales rose 6.3%, driven by 5.0% more transactions and a 1.3% increase in average ticket. Comparable growth was lower than fiscal 2009’s 7.2%.
- Reported gross margin was flat. Excluding the $26.3 million non-cash inventory-method adjustment, fiscal 2010 gross margin was 35.9%. Operating margin improved as a share of sales, including from lower relative payroll, depreciation and store operating costs.
- Investing cash outflow was $374.1 million and financing cash outflow was $404.3 million. Capital expenditures were $178.7 million; operating cash flow less capital expenditures was approximately $340 million.
- Cash and short-term investments totaled $486.0 million at year-end, compared with $599.4 million a year earlier; working capital was $800.4 million versus $829.7 million.
- Total debt, including capital leases, was approximately $267.8 million. The $250 million term loan was outstanding, with no borrowings on the $300 million revolver. The company repurchased approximately $414.7 million of shares during the year.
Outlook, commentary and risks
- Management planned approximately 6.9% selling-square-footage growth in fiscal 2011, including about 225 additional stores with freezers and coolers. Estimated fiscal 2011 capital expenditures were $215–$225 million. The filing provides no detailed earnings or sales forecast.
- Management expected the later Easter in 2011 to potentially add about $15 million to first-quarter sales versus the prior year. Results are seasonal, with a disproportionate share of sales and income typically in the fourth quarter and around Easter.
- Management said a continued shift toward consumables could pressure merchandise margins. The fixed-price model limits the ability to pass through increases in merchandise, freight, fuel, wages and occupancy costs; import supply and shipping conditions, particularly involving China, are additional risks.
- Other cited risks include intense retail competition, execution and returns from store expansion, economic weakness, distribution disruption and employment, product-safety, tax and other regulatory matters.
- The filing describes several employment-related class or collective actions, including wage-and-hour and equal-pay claims. The company did not expect them to materially affect its business or financial condition, but acknowledged a possible material effect on results or cash flows when resolved.
- Unusual item: A prospective change from one to approximately 30 inventory pools resulted in a $26.3 million non-cash charge to gross profit and a corresponding inventory reduction in fiscal 2010.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Reconcile the $26.3 million inventory-method charge and assess the underlying gross-margin trend.
- Track comparable-store sales, transaction growth and quarterly trends, including the reported fourth-quarter slowdown in comparable sales.
- Evaluate the effect of consumables mix, freight, fuel and merchandise-cost inflation on margins under the fixed-price model.
- Review cash generation against planned capital spending, store growth and continued share repurchases; confirm debt maturities and credit-agreement covenants.
- Monitor Dollar Giant integration and expansion results, as well as the status and potential exposure from employment litigation.