10-QPeriod: Q2 FY2006

DOLLAR TREE, INC. Quarterly Report for Q2 Ended Jun 30, 2005

Filed September 8, 2005For Securities:DLTR

Summary

Dollar Tree Stores, Inc. reported its second-quarter results for the period ending July 30, 2005. While net sales saw an increase of 9.2% year-over-year to $769.0 million for the quarter, driven by new store openings, the company experienced a slight decrease in comparable store net sales (-1.5% for the quarter and -2.3% for the year-to-date). This decline was attributed to a decrease in transactions, impacted by higher fuel costs affecting consumer disposable income. Profitability metrics showed pressure, with gross profit margin declining due to increased occupancy, merchandise, and shrink costs, partially offset by distribution efficiencies. Selling, general, and administrative expenses as a percentage of sales also decreased due to lower payroll-related and operating expenses, but this was offset by increased store operating costs and depreciation. Consequently, operating income as a percentage of net sales decreased compared to the prior year. The company is actively managing its inventory and capital resources, including a significant stock repurchase program, while also facing the potential impact of Hurricane Katrina on its operations.

Key Highlights

  • 1Net sales for the 13 weeks ended July 30, 2005, increased by 9.2% to $769.0 million compared to $704.2 million in the prior year period.
  • 2Comparable store net sales decreased by 1.5% for the 13-week period and 2.3% for the 26-week period, primarily due to fewer transactions attributed to higher fuel costs.
  • 3Gross profit margin decreased to 34.0% from 35.6% year-over-year, driven by increased occupancy costs, merchandise costs (including inbound freight), and shrink expense.
  • 4Selling, general, and administrative expenses as a percentage of net sales improved slightly, but operating income margin declined due to the combined impact of lower gross margins and increased store operating costs.
  • 5The company repurchased approximately $75.1 million of its stock under a new $300 million authorization during the 26 weeks ended July 30, 2005.
  • 6Cash flows from operating activities increased by $39.3 million year-over-year, largely due to improved inventory management (11% decrease in inventory per store).
  • 7The company noted the potential impact of Hurricane Katrina, with at least seven stores destroyed and an inability to determine its full effect on future results.

Frequently Asked Questions

The increase in net sales was primarily driven by the company's store expansion strategy, including the opening of new stores and relocation of existing ones. Sales from new and relocated stores contributed to the overall net sales growth.

Comparable store sales decreased due to a decline in the number of transactions. Management attributed this to higher fuel costs, which reduced consumers' disposable income and led to fewer shopping trips.

The gross profit margin was negatively impacted by several factors, including higher occupancy costs (partly due to sales deleveraging), increased merchandise costs (including inbound freight due to higher fuel costs and new import contracts), and a rise in shrink expense. A shift towards lower-margin consumable products also played a role.

Dollar Tree is actively managing its capital through a stock repurchase program authorized up to $300 million. Liquidity is supported by internally generated funds and borrowings under credit facilities. Cash flow from operations improved due to better inventory management, and investing activities saw a decrease in outflows partly due to managing short-term investments.