Dollar Tree, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 30, 2010, compared with periods ended October 31, 2009. Although the request metadata says 2009 Q3, the filing itself reports 2010 Q3 results. Financial statements are unaudited.
Business context and results
Dollar Tree operated 4,009 stores in 48 states at quarter-end, versus 3,803 a year earlier. It opened 216 stores, expanded 95 and closed 13 during the 39-week period. Comparable-store sales rose 8.7% for the quarter and 7.3% year to date, driven by increased traffic and average ticket. The company cited continued rollout of frozen and refrigerated merchandise and increased acceptance of SNAP benefits as supporting sales.
| Metric | 13 weeks ended Oct. 30, 2010 | Year-over-year change | 39 weeks ended Oct. 30, 2010 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,426.6 million | +14.2% | $4,157.1 million | +13.2% |
| Gross profit | $506.0 million | — | $1,439.7 million | — |
| Gross margin | 35.5% | 35.3% prior year | 34.6% | 34.8% prior year; 35.3% excluding inventory charge |
| Operating income | $140.9 million | +30.9% | $371.3 million | +26.1% |
| Operating margin | 9.9% | 8.6% prior year | 8.9% | 8.0% prior year; 9.6% excluding inventory charge |
| Net income | $93.2 million | +36.7% | $234.8 million | +26.6% |
| Diluted EPS | $0.73 | $0.51 prior year | $1.82 | $1.37 prior year |
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $174.8 million, down from $222.6 million. Management attributed the decline mainly to higher inventory from receipt timing and increased incentive compensation payouts.
- Investing cash outflow was $186.0 million, including $146.7 million of capital expenditures, versus $117.9 million of investing outflow a year earlier. Spending included freezer installations and the San Bernardino distribution center.
- Financing cash outflow was $250.9 million, principally reflecting $275.9 million of share repurchases. Cash and equivalents decreased $262.1 million to $309.5 million; short-term investments were $82.5 million.
- At October 30, 2010, total debt was $266.5 million ($16.5 million current and $250.0 million long-term). The company reported $300.0 million available under its revolving credit facility. Approximately $121.6 million of letters of credit had been issued for routine imported-merchandise purchases.
- Current assets were $1,366.4 million and current liabilities were $566.5 million. Merchandise inventory was $934.9 million, up from $679.8 million at January 30, 2010.
Material changes, outlook and notable items
- Quarterly gross margin improved modestly as occupancy and distribution costs, markdowns and shrink were lower as a percentage of sales. Year-to-date reported margin was reduced by a $26.3 million non-cash charge recorded in Q1 after the company changed from one to approximately 30 inventory pools. Management said the change may increase quarterly gross-margin variability.
- Management said higher-cost consumables and inbound freight were pressuring merchandise costs and expected these factors to weigh on gross-margin rate for the remainder of 2010, while higher sales were expected to leverage fixed costs. No specific earnings or sales guidance was provided.
- Q3 other income included $5.0 million of dividend income from the company’s 10.5% investment in Ollie’s Holdings. An additional $2.5 million of the dividend reduced the carrying value of that investment.
- The company repurchased approximately $275.9 million of shares year to date, including a $200.0 million accelerated repurchase. A further $469.8 million remained under the June 2010 authorization at quarter-end. Shares outstanding were 125.6 million, down from 131.3 million at fiscal year-end. Per-share figures reflect a retroactive 3-for-2 stock split.
- After quarter-end, Dollar Tree completed its acquisition of 86 Dollar Giant stores in Canada for approximately $51.8 million plus assumed liabilities, marking its first expansion outside the United States.
- Fuel derivatives covered approximately 65% of fuel needs for November 2010–January 2011 and 20% for February–April 2011. Management identified exposure to fuel, freight, wage and merchandise costs, economic conditions, imported-goods supply, competition, seasonal sales and litigation.
- Several employment-related collective or class actions remained pending. The company said it did not expect them to materially harm its business or financial condition, but could not rule out an adverse effect on results in the period of resolution. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales growth and traffic trends persist, and how the Canadian acquisition contributes to results.
- How freight, consumables mix, shrink and the revised inventory method affect future gross margins and quarterly volatility.
- Whether inventory growth converts to sales and cash, given lower year-to-date operating cash flow and seasonal working-capital needs.
- The pace and funding of further share repurchases relative to capital spending, liquidity and the remaining credit availability.
- Developments in the pending employment lawsuits and the actual costs or outcomes of those matters.