10-QPeriod: Q2 FY2008

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Aug 4, 2007

Filed September 12, 2007For Securities:DLTR

Summary

Dollar Tree Stores, Inc. reported solid performance for the second quarter of fiscal year 2007, with net sales increasing by 9.9% to $971.2 million, driven by both new store openings and a 4.4% increase in comparable store net sales. This growth was fueled by a higher number of transactions and an increased average transaction size, supported by initiatives like expanded payment options and the rollout of frozen and refrigerated merchandise. The company also saw an improvement in gross profit margin, rising to 33.6% from 33.2% year-over-year, attributed to better initial mark-ups and a higher percentage of import purchases. Diluted earnings per share (EPS) stood at $0.33, up from $0.28 in the prior year's comparable period. The company continues its aggressive expansion strategy, opening 134 new stores and expanding 53 others in the first half of the year, contributing to a 5.2% increase in comparable store net sales for the 26-week period. Despite a slight shift towards lower-margin consumables, margin improvements were achieved through increased import sourcing and operational efficiencies. Dollar Tree also demonstrated a strong commitment to returning capital to shareholders through a significant share repurchase program, having repurchased approximately $211.4 million worth of shares during the quarter, with further repurchase agreements in place.

Key Highlights

  • 1Net sales for the quarter rose 9.9% to $971.2 million, with comparable store net sales increasing by 4.4%.
  • 2Gross profit margin improved to 33.6% from 33.2% in the prior year's second quarter, driven by better merchandise costs and increased import purchases.
  • 3Diluted EPS increased to $0.33 from $0.28 in the comparable period last year.
  • 4The company opened 134 new stores and expanded 53 stores in the first half of the fiscal year, contributing to overall sales growth.
  • 5Significant share repurchase activity occurred, with $211.4 million in shares repurchased during the quarter under an Accelerated Share Repurchase program.
  • 6The company is expanding its product offerings to include more frozen and refrigerated merchandise, aiming to increase customer traffic and transaction size.
  • 7Effective tax rate decreased slightly to 37.1% from 37.4% due to tax credits and the reversal of state tax reserves.

Frequently Asked Questions

Sales growth was driven by a combination of new store openings and a 4.4% increase in comparable store net sales. The rise in comparable store sales was attributed to a higher number of transactions and an increase in the average transaction size, supported by strategic initiatives such as expanding payment options (including EBT cards) and rolling out frozen and refrigerated merchandise to more stores.

Despite a slight shift towards lower-margin consumable products, the gross profit margin improved to 33.6% from 33.2%. This improvement was primarily due to higher initial mark-ups on merchandise and an increase in the proportion of higher-margin imported goods. Buying and distribution costs also decreased as a percentage of sales due to leveraging higher sales volumes.

Dollar Tree is actively returning capital to shareholders through share repurchases. During the second quarter, the company repurchased approximately $211.4 million worth of its common stock. This includes shares received under an Accelerated Share Repurchase (ASR) agreement and additional open market repurchases. The company had approximately $98.4 million remaining under its $500 million share repurchase program authorized in November 2006 as of August 31, 2007.

The company is involved in several ongoing wage and hour lawsuits across different states, primarily concerning allegations of insufficient meal and rest breaks, timely payment of wages, and employee classification. While Dollar Tree states it vigorously defends itself and does not believe these matters will have a material adverse effect on its business or financial condition, it acknowledges that resolution could impact its results of operations. Estimated settlement amounts for some of these cases have been accrued in the financial statements.