10-QPeriod: Q3 FY2004

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Nov 1, 2003

Filed December 11, 2003For Securities:DLTR

Summary

Dollar Tree Stores, Inc. reported solid growth in the third quarter ended November 1, 2003, with net sales increasing by 19.4% year-over-year to $665.2 million. This growth was driven by a 1.7% increase in comparable store net sales and the contribution from new and expanded stores, reflecting the company's successful expansion strategy. The company also completed the acquisition of Greenbacks, Inc. for $100 million, significantly expanding its geographical reach and distribution capabilities. Despite topline growth, gross profit margin slightly declined to 36.6% due to increased freight and occupancy costs, the adoption of FIN 46, and the inclusion of Greenbacks' lower-margin sales. However, selling, general, and administrative expenses as a percentage of sales decreased slightly, leading to a marginal dip in operating margin to 9.1% from 9.2% in the prior year period. For the nine-month period ended November 1, 2003, net sales grew by 20.8% to $1.9 billion. The company continues to invest in growth, with plans for new distribution centers and significant square footage expansion in fiscal year 2004. The balance sheet shows substantial growth in assets, particularly property and equipment, reflecting these investments. Total liabilities also increased, partly due to the Greenbacks acquisition and revolving credit facility. Shareholders' equity showed a healthy increase, driven by retained earnings and additional paid-in capital. Investors should note the ongoing investments in infrastructure and expansion, balanced against pressures on gross margins. The company also provided cautious guidance for the fourth quarter and fiscal year 2004, anticipating continued sales and earnings growth within the 15%-20% range.

Key Highlights

  • 1Net sales for the third quarter of 2003 increased by 19.4% to $665.2 million, driven by comparable store sales growth and expansion.
  • 2The company completed the acquisition of Greenbacks, Inc. for $100 million, expanding its store count and distribution network.
  • 3Gross profit margin decreased slightly to 36.6% due to higher freight costs, occupancy costs, and the impact of the Greenbacks acquisition.
  • 4Operating income as a percentage of net sales saw a slight decrease to 9.1% from 9.2% in the prior year's comparable quarter.
  • 5For the nine months ended November 1, 2003, net sales grew by 20.8% to $1.9 billion.
  • 6The company is investing heavily in infrastructure, with plans for new distribution centers and significant square footage growth in fiscal year 2004.
  • 7A new $150 million revolving credit facility was established, with $39.7 million outstanding at the end of the quarter.

Frequently Asked Questions

The acquisition of Greenbacks, Inc. for $100 million significantly expanded Dollar Tree's geographical reach and distribution infrastructure. It contributed to the 19.4% increase in net sales for the third quarter. However, it also put downward pressure on the gross profit margin due to Greenbacks' lower-margin sales and contributed to increased interest expense from the acquisition financing.

The adoption of FIN 46 (Consolidation of Variable Interest Entities) resulted in the consolidation of four distribution centers that were previously accounted for as operating leases. This led to an increase in assets and liabilities on the balance sheet and added approximately $1.0 million in non-cash depreciation expense to the cost of sales and $1.0 million in additional interest expense for the third quarter of 2003, impacting both gross profit and operating income.

Dollar Tree expects net sales for fiscal year 2004 to be between $3.2 and $3.3 billion, with sales and earnings growth projected in the 15%-20% range compared to fiscal 2003. The company anticipates continued investment in new and expanded stores, distribution centers, and technology, with approximately 20% square footage growth planned for 2004.

The company entered into a $150 million revolving credit facility in May 2003, which it used to fund seasonal inventory purchases and distribution center construction. At November 1, 2003, $39.7 million was outstanding under this facility, though the balance was cleared by December 2, 2003. The company also has a $125 million Letter of Credit Reimbursement and Security Agreement. Long-term borrowings were $167.4 million at the quarter's end.