10-QPeriod: Q2 FY2009

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Aug 2, 2008

Filed September 10, 2008For Securities:DLTR

Summary

Dollar Tree, Inc. reported solid financial results for the second quarter and first half of fiscal year 2008, demonstrating continued sales growth and operational improvements. For the 13 weeks ended August 2, 2008, net sales increased by 12.5% year-over-year, driven by a 6.5% increase in comparable store net sales. This growth was fueled by a higher number of transactions and an increased average transaction size, reflecting successful initiatives like expanded payment options and the rollout of frozen and refrigerated merchandise. Despite a slight decrease in gross profit margin due to increased merchandise and freight costs, partially offset by lower shrink and markdown expenses, the company managed to improve its operating income margin. This was achieved through effective cost control in selling, general, and administrative expenses, particularly in payroll and depreciation. The company also provided forward-looking guidance for the third quarter and full fiscal year 2008, anticipating continued positive comparable store net sales and earnings per share growth, though acknowledging potential headwinds from a shift in merchandise mix towards lower-margin consumables and rising fuel costs.

Key Highlights

  • 1Net sales for the 13 weeks ended August 2, 2008, increased 12.5% to $1,093.1 million, compared to $971.2 million in the prior year period.
  • 2Comparable store net sales increased by 6.5% for the 13 weeks and 4.3% for the 26 weeks ended August 2, 2008, indicating healthy same-store performance.
  • 3Gross profit margin slightly decreased to 33.2% for the 13-week period, attributed to higher merchandise and freight costs, despite reductions in shrink and markdown expenses.
  • 4Selling, general, and administrative expenses as a percentage of net sales decreased to 27.6% for the 13-week period, reflecting successful cost management.
  • 5Net income for the 13 weeks increased to $37.6 million ($0.42 per diluted share) from $32.6 million ($0.33 per diluted share) in the prior year.
  • 6The company entered into a new $550.0 million Credit Agreement, providing a $300.0 million revolving line of credit and a $250.0 million term loan, enhancing financial flexibility.
  • 7Dollar Tree provided fiscal year 2008 guidance, projecting sales between $4.61 billion and $4.68 billion and diluted earnings per share between $2.33 and $2.43.

Frequently Asked Questions

Sales growth was driven by a combination of a 6.5% increase in comparable store net sales for the 13-week period and sales from new stores. The comparable store sales increase was attributed to a higher number of transactions and an increase in the average transaction size, supported by initiatives like accepting more forms of payment and expanding frozen/refrigerated merchandise.

The company demonstrated effective expense management. Selling, general, and administrative expenses decreased as a percentage of net sales due to lower payroll-related costs (leveraging comparable store sales increases and improved workers' compensation) and lower depreciation. While gross profit margin saw pressure from higher merchandise and freight costs, the overall operating income margin improved due to these SG&A efficiencies.

Dollar Tree expects continued growth. For the third quarter of 2008, estimated sales are between $1.075 billion and $1.105 billion, with diluted EPS between $0.40 and $0.43. For the full fiscal year 2008, projected sales are between $4.61 billion and $4.68 billion, and diluted EPS is expected to be between $2.33 and $2.43. This guidance assumes low to low-mid single-digit positive comparable store net sales.

As of August 2, 2008, Dollar Tree had $268.0 million in long-term borrowings and $0.7 million in capital lease commitments. The company has $300.0 million available on its revolving credit facility under a new $550.0 million Credit Agreement, providing significant liquidity to fund operations and capital expenditures. The company also had approximately $453.7 million remaining under its Board-approved share repurchase authorizations, though no repurchases were made in the reported period.