How strong was Dollar Tree's profitability in fiscal 1999?

Profitability improved on every line. Net income was $98.5 million, up 37.7% from $71.6 million, and diluted EPS rose to $1.45 from $1.06. Gross margin reached 37.7%, and SG&A fell to 24.1% of sales from 24.7%, lifting the operating margin to 13.6%. Figures are restated for pooling-of-interests mergers.

What is the main source of growth, and can comparable store sales sustain it?

Most growth comes from new stores, which contributed about 81% of the sales increase. Comparable store sales rose 5.6%, but management expects a more modest 2% to 3% increase in 2000 and notes that as a fixed-price retailer it can grow comparable sales only by selling more units, not by raising prices. Continued growth therefore depends heavily on opening roughly 225 to 235 stores a year and on store-level economics, which the company reports at about $195,000 average store operating income in the first full year.

What are the biggest risks to the business?

The primary risks are trade policy and import costs. Roughly 40% to 45% of purchases are imported, mainly from China, whose normal trade relations status is reviewed annually and could be revoked, potentially raising tariffs substantially. Higher trans-Pacific freight rates cost about $5.0 million in 1999, and a proposed federal minimum wage increase could raise payroll costs. Competition from other single-price-point retailers such as 99 Cents Only and Dollar Express is also expected to increase.

How is the balance sheet and liquidity position?

The balance sheet is conservative. Cash rose to $176.5 million, total debt was $82.1 million including capital leases, and shareholders' equity reached $361.0 million. The company had $135.0 million available under its revolving credit facility, with about $42.4 million committed to letters of credit. Management believes operating cash flow and credit facility borrowings can fund planned capital spending for several years.

Does the company pay dividends, and are there any notable legal or Year 2000 issues?

Dollar Tree pays no dividends and plans to retain earnings for growth and debt repayment; its credit facilities also restrict dividend payments. Legal matters appear manageable: the Alper lawsuit is dormant, though it could be refiled, and the company is recalling three products in the ordinary course. For Year 2000, the company spent under $150,000, reports no disruptions so far, and flags uncertainty about Chinese suppliers' readiness.

DLTR 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 17, 2000. Cited figures are marked; the original filing is the authoritative source.

Dollar Tree Stores, Inc. (DLTR) reported a strong fiscal 1999 with net sales up 26.9% to $1.198 billion^a and net income up 37.7% to $98.5 million, or $1.45 per diluted share.

Operating income rose 34.9% to $162.4 million^b, and the operating margin expanded to 13.6% from 12.8%, driven by a gross margin gain to 37.7% and SG&A leverage on a 5.6% comparable store sales increase. Results are restated for the poolings of interests with 98 Cent Clearance Center (December 1998) and Only $One (June 1999), so comparisons are on a combined basis. The balance sheet strengthened considerably.

Cash and equivalents rose to $176.5 million, shareholders' equity grew to $361.0 million^c, and total debt was $82.1 million including capital leases. Operating cash flow reached $120.7 million, which funded $47.9 million of capital expenditures, and the company is not paying dividends, retaining earnings for growth. Management plans to open 225 to 235 stores in 2000 and budgets $77.5 million in total capital expenditures.

Key risks for investors are concentrated in the supply chain and cost structure. Roughly 40%^d to 45% of purchases are imported, mainly from China, so changes in normal trade relations status (up for annual review, extended through July 2, 2000) or punitive tariffs could materially raise costs. Ocean freight rates rose sharply in 1999, and a proposed federal minimum wage increase is pending.

Because the company cannot raise its fixed $1.00 price point, margin protection depends on cost control and comparable store growth. Management guides to a 2% to 3% comparable store increase in 2000 and a slight gross margin decline from changing merchandise mix.

02—Key points

Key Highlights

Net sales rose 26.9% to $1,198.0 million in 1999, with about 81% of the increase coming from new stores and about 19% from comparable store growth of 5.6%.
Net income increased 37.7% to $98.5 million; diluted EPS was $1.45, up from $1.06 in 1998.
Operating income grew 34.9% to $162.4 million, and the operating margin expanded to 13.6% from 12.8%.
The store base reached 1,383 locations in 33 states, up from 1,179 a year earlier after 208 openings in 1999.
Cash and equivalents increased to $176.5 million, and operating cash flow was $120.7 million against $47.9 million of capital expenditures.
Import dependence is significant: about 40% to 45% of purchases are imported, primarily from China, with exposure to tariff and trade-status risk.
No dividends are planned; earnings are retained for expansion and debt repayment, and 2000 plans call for 225 to 235 new stores.

03—Questions

Frequently Asked Questions

How strong was Dollar Tree's profitability in fiscal 1999?
Profitability improved on every line. Net income was $98.5 million, up 37.7% from $71.6 million, and diluted EPS rose to $1.45 from $1.06. Gross margin reached 37.7%, and SG&A fell to 24.1% of sales from 24.7%, lifting the operating margin to 13.6%. Figures are restated for pooling-of-interests mergers.
What is the main source of growth, and can comparable store sales sustain it?
Most growth comes from new stores, which contributed about 81% of the sales increase. Comparable store sales rose 5.6%, but management expects a more modest 2% to 3% increase in 2000 and notes that as a fixed-price retailer it can grow comparable sales only by selling more units, not by raising prices. Continued growth therefore depends heavily on opening roughly 225 to 235 stores a year and on store-level economics, which the company reports at about $195,000 average store operating income in the first full year.
What are the biggest risks to the business?
The primary risks are trade policy and import costs. Roughly 40% to 45% of purchases are imported, mainly from China, whose normal trade relations status is reviewed annually and could be revoked, potentially raising tariffs substantially. Higher trans-Pacific freight rates cost about $5.0 million in 1999, and a proposed federal minimum wage increase could raise payroll costs. Competition from other single-price-point retailers such as 99 Cents Only and Dollar Express is also expected to increase.
How is the balance sheet and liquidity position?
The balance sheet is conservative. Cash rose to $176.5 million, total debt was $82.1 million including capital leases, and shareholders' equity reached $361.0 million. The company had $135.0 million available under its revolving credit facility, with about $42.4 million committed to letters of credit. Management believes operating cash flow and credit facility borrowings can fund planned capital spending for several years.
Does the company pay dividends, and are there any notable legal or Year 2000 issues?
Dollar Tree pays no dividends and plans to retain earnings for growth and debt repayment; its credit facilities also restrict dividend payments. Legal matters appear manageable: the Alper lawsuit is dormant, though it could be refiled, and the company is recalling three products in the ordinary course. For Year 2000, the company spent under $150,000, reports no disruptions so far, and flags uncertainty about Chinese suppliers' readiness.

04—Continue

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