01—Abstract
Summary
Summary of the 10-K filed March 28, 1997. Cited figures are marked; the original filing is the authoritative source.
Dollar Tree Stores, Inc. (NASDAQ: DLTR) reported a strong fiscal 1996, with net sales rising 64.2% to $493.0 milliona from $300.2 million, and net income increasing 61% to $33.8 million, or $1.19 per share, from $21.0 million, or $0.76 per share, in 1995.
The growth was driven by the January 1996 acquisition of Dollar Bills, Inc. (136 stores, about $104.7 millionb of 1996 sales), by 104 new store openings, and by a 6.2% comparable store sales increase. Operating margin held at 12.2%, though gross margin slipped to 36.9% from 37.5% due to a shift toward lower-margin domestic consumables and higher shrinkage at the acquired stores. The company ended 1996 with 737 stores in 26 states and total assets of $171.1 million, and it has no plans to pay dividends.
The balance sheet strengthened considerably. A June 1996 public offering raised $25.3 million, and total debt fell to $4.4 millionc at year-end from $14.5 million in 1995, while shareholders' equity grew to $101.6 million. Inventories rose sharply to $75.1 million from $40.1 million, reflecting the acquisition and the early seasonal buy, which the company flagged as a working capital consideration.
Management plans 145 to 150 new stores in 1997 and 175 to 180 in 1998, supported by a roughly $29 milliond Store Support Center in Chesapeake, Virginia, expected to be operational in early 1998, and a planned $30 million senior unsecured debt issuance. Investors should weigh the company's strong unit economics and consistent profitability against several risks. Roughly a third of purchases are imported, with China as the largest source, so changes to China's most-favored-nation trade status could raise costs.
The company also faces execution risk on the new distribution center and on store growth, and it is subject to seasonality, with the fourth quarter producing most of its operating income. Finally, a lawsuit brought by former Dollar Bills shareholders was dismissed in federal court, although a state-law claim remains possible and the company considers its outcome unlikely to be material.
02—Key points
Key Highlights
- Net sales rose 64.2% to $493.0 million in 1996, driven by the Dollar Bills acquisition (about $104.7 million contribution), 104 new stores, and a 6.2% comparable store sales increase.
- Net income grew 61% to $33.8 million, or $1.19 per share, from $21.0 million, or $0.76 per share, in 1995; operating margin was stable at 12.2%.
- Gross margin declined to 36.9% from 37.5%, reflecting a shift toward lower-margin domestic consumables and higher shrinkage at the Dollar Bills stores.
- Store count reached 737 across 26 states; the company plans 145-150 openings in 1997 and 175-180 in 1998.
- Total debt fell to $4.4 million from $14.5 million, and shareholders' equity rose to $101.6 million after a June 1996 public offering that raised $25.3 million.
- A new $29 million Store Support Center (distribution center and headquarters) in Chesapeake, Virginia, is expected to be operational in early 1998, raising store-servicing capacity to about 1,600 units from 1,000.
- Roughly 32% of 1996 purchases (cost basis) were imported, mainly from China, so changes in China's MFN status or tariffs present a material risk.
03—Questions
Frequently Asked Questions
How did the Dollar Bills acquisition affect Dollar Tree's 1996 results?
The January 1996 acquisition of Dollar Bills, Inc. for about $52.6 million in cash added 136 stores and contributed about $104.7 million, or roughly 54% of the sales increase. It also added goodwill of about $48 million, amortized over 25 years, and increased inventory and borrowing. The acquired stores carry more consumables and have lower margins and higher shrinkage, which pressured gross margin in 1996.
Is Dollar Tree's debt level a concern for investors?
Not at year-end 1996. Total debt was reduced to $4.4 million, consisting mainly of a $3.0 million revolving credit balance and capital leases, down from $14.5 million in 1995. The company plans to issue about $30 million in senior unsecured notes in 1997 to refinance existing borrowings and fund the new distribution center, and it expects a substantial portion of construction interest to be capitalized.
What are the main risks to Dollar Tree's growth strategy?
Key risks include the ability to open and profitably operate 145-150 new stores in 1997 and 175-180 in 1998, the on-time and on-budget completion of the Chesapeake distribution center, dependence on Chinese imports and China's MFN trade status, seasonality with the fourth quarter producing most operating income, and rising minimum wage costs that management says limit future payroll savings. Management also notes that comparable store sales growth is expected to slow from historical levels.
Does Dollar Tree pay dividends, and how is its stock performing?
No. Dollar Tree intends to retain all earnings for growth and debt repayment, and its credit agreement restricts dividends. The stock trades on NASDAQ under DLTR, and it traded at $36 3/8 on March 14, 1997, up from a 1996 high of $45 and a low of $16 21/64 in the first quarter. The company had approximately 4,200 beneficial shareholders at that date.
Are there material legal proceedings against the company?
The former Dollar Bills shareholders, the Alpers, sued over the acquisition, alleging fraud, misuse of confidential information, and antitrust and securities violations, and sought at least $10 million in damages. The federal court dismissed all federal claims on November 26, 1996, and the plaintiffs did not appeal. State-law claims could still be refiled, and a state appeal is pending. Management believes the plaintiffs are unlikely to prevail and that the outcome will not be materially adverse, but it acknowledges the outcome is uncertain.
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