Business context and reporting period
Dollar Tree, Inc. operates the Dollar Tree and Family Dollar discount-store segments, with 15,187 stores in 48 states and five Canadian provinces at November 3, 2018. The filing covers the 13 and 39 weeks ended November 3, 2018, compared with periods ended October 28, 2017. The request metadata says “2017 Q3,” but the filing itself is for fiscal 2018 Q3.
Financial performance
| Metric | 13 weeks ended Nov. 3, 2018 | Prior-year quarter | 39 weeks ended Nov. 3, 2018 | Prior-year period |
|---|---|---|---|---|
| Net sales | $5,538.8 million | $5,316.6 million | $16,618.1 million | $15,884.9 million |
| Gross profit | $1,671.9 million | $1,666.0 million | $5,035.4 million | $4,920.9 million |
| Operating income | $387.8 million | $425.2 million | $1,207.9 million | $1,233.5 million |
| Net income | $281.8 million | $239.9 million | $716.2 million | $674.2 million |
| Diluted EPS | $1.18 | $1.01 | $3.00 | $2.84 |
- Quarterly sales rose 4.2%; comparable-store sales grew 1.0% on a constant-currency basis, driven by a 1.3% higher average ticket, partly offset by 0.3% lower customer count. Nine-month sales rose 4.6%; comparable sales increased 1.4%.
- Quarterly gross margin fell to 30.2% from 31.3%; operating margin declined to 7.0% from 8.0%. For the nine months, gross margin was 30.3% versus 31.0%, and operating margin was 7.3% versus 7.8%.
- Quarterly net income increased despite lower operating income, primarily alongside a lower effective tax rate (17.1% versus 32.4%) and lower quarterly interest expense ($47.6 million versus $69.7 million). The quarter included a $15.7 million tax benefit.
- For the nine months, interest expense increased to $323.7 million from $220.2 million, including debt-redemption premiums and accelerated financing-cost write-offs. The prior-year period included a $53.5 million receivable impairment; excluding it, prior-year operating income was $1,287.0 million, above the current period.
Segments and material changes
- Dollar Tree: Quarterly sales increased 6.3% to $2,853.8 million; comparable sales rose 2.3% constant currency. Operating income was $331.9 million, with an 11.6% margin versus 11.8%. Frozen and refrigerated offerings were in about 5,580 stores; Snack Zone was in about 820.
- Family Dollar: Quarterly sales increased 2.0% to $2,685.0 million, but comparable sales declined 0.4%, as a 2.3% drop in customer count outweighed a 1.9% higher average ticket. Operating income fell to $55.9 million from $107.9 million; margin declined to 2.1% from 4.1%, reflecting lower gross margin, freight, markdowns, distribution costs, shrink and occupancy costs. More than 150 stores were renovated in the quarter and over 450 during fiscal 2018 to date.
- Gross-margin pressure also reflected higher domestic freight and distribution payroll costs, unfavorable inventory shrink and, at Family Dollar, promotional markdowns. Management cited freight disruption and costs associated with the U.S. truck-driver shortage.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,050.9 million, versus $592.6 million; investing cash outflow was $619.4 million, versus $445.5 million, including $622.7 million of capital expenditures versus $449.4 million. Financing cash outflow was $820.6 million. Cash declined $389.5 million to $708.3 million.
- At November 3, 2018, total assets were $16.65 billion, current assets $4.75 billion and current liabilities $2.14 billion. Long-term debt, net, was $5.04 billion; total debt principal was $5.08 billion. The company reported approximately $1.1 billion available under its revolving facility and was in compliance with debt covenants.
- In April 2018, the company refinanced debt, issuing $4.0 billion of notes and entering into $2.03 billion of senior credit facilities. It repaid legacy credit-facility loans and redeemed $2.5 billion of 5.75% acquisition notes. Management expects approximately $48 million of annual cash interest savings from the refinancing.
- About $1.5 billion, or 30% of debt, was variable-rate. A 1 percentage-point increase in LIBOR would raise annual interest expense by an estimated $15.3 million.
Outlook, risks and unusual items
- The filing provides no specific consolidated sales or earnings guidance. Management described store growth and renovations, Dollar Tree food and Snack Zone initiatives, and Family Dollar merchandising improvements as sales initiatives.
- Management expected $40 million to $49 million of pretax expense for consolidating the Family Dollar and Dollar Tree support centers in Chesapeake, Virginia, with completion expected by fall 2019. Approximately $2.3 million was recorded in Q3; another $4 million to $6 million was expected in Q4 2018.
- Tariffs on Chinese goods could adversely affect costs. Management said about 9% of products by sales volume would have been affected when tariffs were implemented and reported mitigation of approximately 80% of potential 2019 impact at Dollar Tree and 50% at Family Dollar; final scope and effect remained uncertain.
- The company planned to adopt the new lease standard in fiscal 2019 and estimated a discounted $5.5 billion to $6.5 billion increase in reported assets and liabilities, with immaterial income-statement and cash-flow impact expected.
- Legal matters include employment-related class and representative actions and product-injury lawsuits. Management did not expect a material effect on business or financial condition but could not assure results would not be materially affected in the period resolved; potential losses for certain matters could not be estimated.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is fiscal 2018 Q3, not 2017 Q3.
- Track whether Family Dollar’s comparable sales, customer counts and margins improve, and whether renovation activity produces the intended results.
- Monitor freight, shrink, markdowns, payroll and other cost pressures against sales growth and margin recovery.
- Assess progress and actual costs of the support-center consolidation, tariff mitigation, and expected refinancing savings.
- Review debt service and variable-rate exposure, lease-standard implementation estimates, and developments in legal proceedings.