01—Abstract
Summary
Summary of the 10-K filed March 17, 2011. Cited figures are marked; the original filing is the authoritative source.
Dollar Tree's fiscal 2010 10-K (year ended January 29, 2011) shows a strong year of growth and profitability.
Net sales rose 12.4% to $5.88 billiona, driven by a 6.3% increase in comparable store net sales, 235 new stores, and the November 2010 acquisition of 86 Dollar Giant stores in Western Canada, the company's first move outside the U.S. Operating income grew 22.9% to $630.0 million, and operating margin expanded to 10.7% from 9.8%. Diluted EPS rose 30.8% to $3.10. Gross margin held at 35.5% despite a $26.3 million non-cash inventory adjustment from moving to about 30 inventory pools.
Excluding that charge, gross margin would have been 35.9%. Cash generation remained solid, with operating cash flow of $518.7 millionb against capital expenditures of $178.7 million. Management returned substantial capital through buybacks: 9.3 million shares were repurchased for $414.7 million in fiscal 2010, leaving $345.9 million under Board authorization.
Total debt was $266.5 millionc, mostly a $250.0 million term loan, against $486.0 million of cash and short-term investments. The company does not pay dividends. Management guided to fiscal 2011 capital expenditures of $215 to $225 million, including roughly 225 freezer and cooler installations and about 6.9% selling square footage growth.
Key investor watch items include rising import and freight costs (roughly 40% to 45% of purchases are imported, mostly from China), the company's stated policy of not raising its $1.00d price point to offset cost inflation, and several pending wage-and-hour and equal-pay class actions. Management states that none of these is expected to be materially adverse, but it acknowledges that adverse outcomes could affect results in the period they are resolved.
02—Key points
Key Highlights
- Net sales increased 12.4% to $5,882.4 million, with comparable store net sales up 6.3% on a 5.0% rise in transactions and a 1.3% rise in average ticket.
- Operating income rose 22.9% to $630.0 million, expanding operating margin to 10.7% from 9.8%; net income reached $397.3 million, with diluted EPS of $3.10 (up 30.8%).
- Gross margin was 35.5%, flat year over year, but was reduced by a $26.3 million non-cash inventory adjustment; excluding it, margin would have been 35.9%.
- Store base grew to 4,101 stores (including 86 Canadian Dollar Giant stores acquired in November 2010), with selling square footage up 8.8% to 35.1 million.
- Operating cash flow was $518.7 million, and the company repurchased 9.3 million shares for $414.7 million, with $345.9 million left under Board authorization.
- Freezers and coolers were installed in about 1,840 stores, and roughly 225 more are planned for 2011, supporting the shift toward consumables (49.5% of sales, up from 48.0%).
- Pending wage-and-hour and equal-pay class actions remain, which management does not expect to have a material adverse effect.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Dollar Tree, Inc. kept $0.07.
- Revenue$5.88B100.0%
- Cost of revenue−$3.79B64.5%
- Gross profit$2.09B35.5%
- Operating costs−$1.46B24.8%
- Operating income$630.0M10.7%
- Interest, other & tax−$232.7M4.0%
- Net income$397.3M6.8%
Where FY2011 revenue went
$5.88B- Cost of revenue: $3.77B, 64% of revenue
- SG&A: $1.46B, 25% of revenue
- Net income: $397.3M, 6.8% of revenue
- Interest, other & tax: $232.7M, 4.0% of revenue
Kept 6.8% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed March 17, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $5.88B$5.23B | +12.4% |
| Cost of Revenue | $3.77B$3.37B | +11.7% |
| Gross Profit | $2.09B$1.86B | +12.4% |
| SG&A Expenses | $1.46B$1.34B | +8.5% |
| Operating Income | $630.00M$512.80M | +22.9% |
| Net Income | $397.30M$320.50M | +24.0% |
| EPS (Basic) | $1.56$1.20 | +30.5% |
| EPS (Diluted) | $1.55$1.19 | +30.8% |
| Shares Outstanding (Basic) | 254.10M268.20M | −5.3% |
| Shares Outstanding (Diluted) | 256.00M270.00M | −5.2% |
05—Questions
Frequently Asked Questions
How much did Dollar Tree grow in fiscal 2010, and what drove it?
Net sales grew 12.4% to $5.88 billion. About 6.3 percentage points of growth came from comparable store sales, which rose on higher transaction counts (up 5.0%) and a modestly higher average ticket (up 1.3%). The rest came from new stores, including the 86 Dollar Giant stores acquired in November 2010. Management credited the growth partly to a larger consumables mix, the rollout of frozen and refrigerated products, and expanded tender acceptance, including food stamps (SNAP) at about 3,500 stores.
Did the $26.3 million inventory charge change the underlying profitability picture?
Only modestly. The charge arose from moving to about 30 inventory pools for the retail inventory method, a prospective change with no effect on prior periods. It reduced gross margin by about 0.4 percentage points, leaving reported gross margin at 35.5%. Excluding the charge, operating margin would have been 11.1% rather than 10.7%. Management described the change as preferable because it gives a more accurate estimate of store-level inventory cost.
What are the main risks to margins going forward?
The principal risks are cost inflation and supply chain disruption. Roughly 40% to 45% of purchases are imported, mostly from China, so changes in trans-Pacific shipping rates, duties, currency, or trade relations could raise costs. Diesel fuel, wages (including effects of minimum wage increases), and occupancy costs are also pressures. The company will not raise its $1.00 price point to offset these costs, so it depends on efficiency gains and comparable sales growth. The shift toward lower-margin consumables could also weigh on gross margin.
How is Dollar Tree funding growth and returning capital to shareholders?
Growth is primarily self-funded. Operating cash flow of $518.7 million covered $178.7 million of 2010 capital expenditures, and the company expects fiscal 2011 capex of $215 to $225 million. Dollar Tree repurchased $414.7 million of stock in fiscal 2010 and has $345.9 million remaining under its authorization. It does not pay dividends, and management expects to retain cash for expansion, debt repayment, and buybacks. Debt is modest at $266.5 million, consisting of a $250.0 million unsecured term loan due in 2013 and $16.5 million of demand revenue bonds, with the $300.0 million revolver undrawn.
What legal exposures should investors be aware of?
The company faces several employment-related collective and class actions. These include a Fair Labor Standards Act overtime claim covering about 265 store managers, a California class action covering about 184 store managers, an Equal Pay Act suit with about 363 opt-in plaintiffs, a gender discrimination appeal, and an off-the-clock wage claim in Florida. Management states that it does not believe any of these matters will have a material adverse effect on its business or financial condition. It also cautions that an adverse outcome could materially affect results in the period in which a case is resolved.
06—Continue