01—Abstract
Summary
Summary of the 10-K filed March 25, 1999. Cited figures are marked; the original filing is the authoritative source.
Dollar Tree Stores, Inc. (Nasdaq: DLTR) closed fiscal 1998 with 1,156 stores in 31 states, up from 946 a year earlier, and reported net sales of $918.8 milliona (up 27.0%) and net income of $68.9 million, or $1.03 diluted EPS (up from $0.75).
Results are restated on a pooling-of-interests basis to include Step Ahead Investments, the operator of 66 larger "98 Cent Clearance Center" stores in California and Nevada, which was merged in December 1998. Operating margin rose to 12.8% reported (13.4% excluding merger costs), driven by a 37.7% gross margin, leverage on SG&A, and an unusually heavy import mix in 1998 that management does not expect to repeat in 1999. The balance sheet is conservative: shareholders' equity reached $244.2 millionb, debt totaled about $46.5 million, cash was $71.1 million, and the company had $135 million of revolving credit capacity at year-end.
Operating cash flow was $68.7 millionc, which funded most of the $53.3 million in capital spending. Management plans 215 to 225 new stores in 1999 (with 20 to 25 larger-format stores), roughly $50 million in capital expenditures, and a new Stockton, California distribution center. The company stated that it does not pay dividends and does not issue forecasts.
Investors should weigh several risks: a majority of merchandise is imported, mainly from China, so China's most-favored-nation trade status and possible tariffs are material; ocean freight costs and proposed minimum-wage increases could pressure margins; management expects gross margin to decline in 1999 as the mix shifts toward consumables; and the company faces growing competition from other single-price-point retailers. Other items include a Memphis lease liability it has not yet sublet, a product-liability claim tied to a dog-leash recall, and Year 2000 readiness work that management says is largely complete.
02—Key points
Key Highlights
- Net sales rose 27.0% to $918.8 million in 1998, and comparable store sales grew 6.8%.
- Net income increased 38% to $68.9 million, and diluted EPS rose to $1.03 from $0.75.
- Gross margin improved to 37.7% (37.9% excluding merger costs), helped by greater purchasing power and higher import volume.
- The store base grew to 1,156 locations, with 217 stores opened in 1998, and 215 to 225 openings are planned for 1999.
- Shareholders' equity was $244.2 million at year-end, with $71.1 million in cash and total debt of about $46.5 million.
- Management expects 1999 gross margin to decline as the merchandise mix shifts toward lower-margin consumables.
- Risks include reliance on Chinese imports and the possible loss of China's most-favored-nation tariff status, along with rising freight and minimum-wage costs.
03—Questions
Frequently Asked Questions
How did Dollar Tree perform financially in 1998?
Net sales grew 27.0% to $918.8 million, operating income rose to $117.9 million (12.8% of sales), and net income reached $68.9 million, or $1.03 per diluted share. Results include $5.3 million of merger costs from the Step Ahead acquisition and are presented on a pooling-of-interests basis.
What was the effect of the Step Ahead merger?
The December 1998 merger added 66 larger 98 Cent Clearance Center stores in California and Nevada. Historical financials were restated to combine both companies, and Step Ahead's 1998 results cover only 11 months, which slightly depresses the combined figures.
What are the main risks to future earnings?
The most significant risks are the company's dependence on imports (about 40% of 1999 purchases at retail, mostly from China), the possibility of higher tariffs or loss of China's MFN status, rising ocean freight and minimum-wage costs, and a planned shift toward consumables that management expects to lower gross margin. Competition from other $1.00 retailers is also increasing.
How is the company funding its expansion?
Operating cash flow of $68.7 million in 1998 covered most of the $53.3 million in investing outflows. The company has a $135 million unsecured revolver (about $46.5 million drawn at year-end), along with $30 million of 7.29% senior notes and $19 million of variable-rate bonds for the Olive Branch distribution center. Management believes these sources are sufficient for planned capital spending.
Does Dollar Tree pay dividends, and what are its legal exposures?
Dollar Tree does not pay cash dividends and does not expect to in the foreseeable future, and its credit facilities restrict dividends. Legal matters include a dormant lawsuit from the former Dollar Bills owners, which the company does not expect to be material, and a product-liability claim tied to a recall of about 155,000 dog leashes.
04—Continue