10-QPeriod: Q3 FY2005

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Oct 30, 2004

Filed December 9, 2004For Securities:DLTR

Summary

Dollar Tree Stores, Inc. reported its third-quarter 2004 results, showing a year-over-year increase in net sales driven by new store openings and expansions, though comparable store sales saw only a modest increase. The company's gross profit margin experienced a slight decline due to increased merchandise and freight costs, as well as higher markdown and occupancy expenses. Selling, general, and administrative expenses also rose as a percentage of sales, primarily from increased depreciation and store operating costs, leading to a decrease in operating income margin. Financially, the company has secured a new five-year, $450 million revolving credit facility, which was used in part to repay existing variable-rate debt and invest in short-term securities. Despite operational cost pressures, Dollar Tree continues to expand its store base, aiming for larger store formats, and is actively engaged in a share repurchase program. The company is also managing potential market risks through interest rate swaps and is addressing ongoing litigation, which it believes will not materially impact its operations.

Key Highlights

  • 1Net sales increased by 8.8% for the 13-week period and 12.2% for the 39-week period ended October 30, 2004, compared to the prior year.
  • 2Comparable store net sales showed a slight increase of 0.7% for the 13-week period and 0.2% for the 39-week period, positively impacted by relocated and expanded stores.
  • 3Gross profit margin decreased to 35.4% from 36.6% year-over-year for the 13-week period, attributed to increased merchandise costs, inbound freight, markdowns, and occupancy costs.
  • 4Operating income margin decreased to 7.4% for the quarter and 7.5% for the year-to-date period, reflecting higher cost of goods sold and SG&A expenses relative to sales.
  • 5The company entered into a new $450 million revolving credit facility in March 2004 and had $250 million outstanding as of October 30, 2004.
  • 6Dollar Tree repurchased approximately $16.8 million and $48.6 million of its common stock during the 13-week and 39-week periods, respectively.
  • 7The company continues its store expansion strategy, with plans to open larger store formats (10,000-15,000 sq ft) and has nearly completed the rollout of its new point-of-sale systems.

Frequently Asked Questions

Net sales increased by 8.8% for the 13-week period and 12.2% for the 39-week period ended October 30, 2004, compared to the same periods in the previous year. This growth was primarily driven by the addition of new stores and expanded store footprints.

Profitability was affected by a decrease in gross profit margin and an increase in selling, general, and administrative (SG&A) expenses as a percentage of sales. The gross margin decline was due to higher merchandise costs, increased inbound freight expenses (driven by fuel costs), higher markdowns, and increased occupancy costs. SG&A expenses rose due to increased depreciation from new stores and technology investments, as well as higher store operating costs.

The company entered into a new $450 million, five-year revolving credit facility in March 2004, replacing its previous facility. As of October 30, 2004, $250 million was outstanding under this new facility. The company also has a $125 million Letter of Credit Reimbursement and Security Agreement. The company is actively managing its liquidity and capital resources to fund its expansion and operations.

Key risks include the ability to meet store opening targets, the potential impact of inflation and economic changes on costs, disruptions to the supply chain (especially for imported goods), increased shipping and fuel costs, and the resolution of ongoing legal proceedings related to employment matters. The company also notes that its fixed $1.00 price point makes it vulnerable to rising operating and merchandise costs.