10-QPeriod: Q3 FY2003

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Sep 30, 2002

Filed November 14, 2002For Securities:DLTR

Summary

Dollar Tree Stores, Inc. reported a solid third quarter for fiscal year 2002, demonstrating robust revenue growth and improved profitability. Net sales increased by 15.5% year-over-year, driven by both new store openings and a modest increase in comparable store sales. The company has expanded its store footprint significantly, operating 2,179 stores by the end of the quarter. This growth was coupled with an improvement in gross profit margin to 35.6%, attributed to better distribution costs and reduced inventory shrink. Diluted Earnings Per Share (EPS) stood at $0.17 for the quarter, up from $0.13 in the prior year period, signaling operational efficiencies and effective cost management. Operationally, the company continues its expansion strategy, opening 83 new stores and expanding 32 others during the quarter, adding approximately 0.8 million selling square feet. While the company faces ongoing challenges related to competition and economic conditions, management expresses confidence in its growth plans and outlook for the fourth quarter. The adoption of SFAS No. 142 has eliminated goodwill amortization, positively impacting reported earnings. Investors should note the significant increase in merchandise inventories and the continued investment in capital expenditures for store growth and supply chain improvements.

Key Highlights

  • 1Net sales for the third quarter of 2002 increased by 15.5% to $513.5 million compared to the same period in 2001.
  • 2Comparable store net sales increased by 0.2% for the third quarter of 2002.
  • 3Gross profit margin improved to 35.6% in Q3 2002 from 34.7% in Q3 2001, driven by lower distribution costs and improved shrink results.
  • 4Diluted Earnings Per Share (EPS) rose to $0.17 in Q3 2002 from $0.13 in Q3 2001.
  • 5The company expanded its store base to 2,179 stores by September 30, 2002, up from 1,935 stores in the prior year.
  • 6Merchandise inventories significantly increased to $533.9 million at September 30, 2002, from $296.5 million at December 31, 2001, reflecting seasonal build-up and expansion.
  • 7The company adopted SFAS No. 142, ceasing goodwill amortization, which positively impacted operating income and net income.

Frequently Asked Questions

The primary driver of Dollar Tree's sales growth in the third quarter of 2002 was the significant increase in the number of stores operated, alongside a small increase in comparable store net sales. The company opened 83 new stores and expanded 32 existing ones during the quarter, contributing to a 15.5% year-over-year increase in net sales.

The adoption of SFAS No. 142, which requires goodwill and intangible assets with indefinite useful lives to be tested for impairment rather than amortized, eliminated goodwill amortization starting January 1, 2002. This change positively impacted operating income and net income by reducing non-cash expenses. The report shows that goodwill amortization in Q3 2001 was approximately $0.5 million, and for the first nine months of 2001, it was $1.5 million, which no longer impacted results in 2002.

For the fourth quarter of 2002, Dollar Tree expected net sales to increase approximately 15-16% compared to the fourth quarter of 2001, reaching $825-$830 million. This forecast was based on flat comparable store net sales and projected store opening plans. The company also indicated that it did not expect a material impact from west coast port disruptions on its fourth-quarter results.

Key risks and challenges highlighted include adverse economic conditions impacting consumer spending, potential failures in meeting store opening or expansion goals, difficulties in hiring and retaining key employees, vulnerability to competition (including from larger retailers like Wal-Mart), disruptions in operating and expanding systems, challenges with imported goods due to potential port disruptions or cost increases, and the overall difficulty in securing a consistent supply of quality, low-cost merchandise. Additionally, the company noted that proposed changes to accounting standards for special purpose entities could materially affect its future financial condition.