10-QPeriod: Q1 FY2011

DOLLAR TREE, INC. Quarterly Report for Q2 Ended May 1, 2010

Filed May 20, 2010For Securities:DLTR

Summary

Dollar Tree, Inc. reported solid top-line growth for the first quarter of fiscal year 2010, with net sales increasing by 12.6% to $1,352.6 million, driven by a 6.5% increase in comparable store net sales. This growth was fueled by increased customer traffic and a higher average ticket price, further supported by strategic initiatives like expanded frozen and refrigerated merchandise offerings and increased SNAP acceptance. Despite the overall revenue strength, net income saw a modest increase to $63.6 million from $60.4 million in the prior year period, with diluted EPS rising to $0.73 from $0.66. A notable event impacting profitability was a non-cash charge of $26.3 million related to a change in the company's inventory costing methodology. This adjustment, which improves the accuracy of inventory valuation using multiple pools, significantly reduced the reported gross profit margin. However, excluding this charge, the gross profit margin improved due to favorable occupancy, distribution, shrink, and merchandise costs. The company also continued its aggressive share repurchase program, deploying substantial capital towards buying back stock, impacting cash flows from financing activities.

Key Highlights

  • 1Net sales increased 12.6% to $1,352.6 million, with comparable store net sales growing by 6.5%.
  • 2Diluted earnings per share (EPS) rose to $0.73 from $0.66 in the prior year's comparable period.
  • 3A significant non-cash charge of $26.3 million was recorded due to a change in inventory costing methodology, impacting gross profit margin.
  • 4Excluding the inventory adjustment charge, gross profit margin increased, driven by lower occupancy, distribution, shrink, and merchandise costs.
  • 5The company repurchased a substantial amount of its common stock, including $200 million under an Accelerated Share Repurchase (ASR) agreement, leading to a significant increase in net cash used in financing activities.
  • 6Capital expenditures increased, partly due to investments in a new distribution center in San Bernardino, California.
  • 7Disclosure controls and procedures were deemed effective, although a change in internal control over financial reporting was noted due to the inventory costing methodology refinement.

Frequently Asked Questions

Net sales increased by 12.6% to $1,352.6 million, primarily driven by a 6.5% increase in comparable store net sales. This growth was attributed to higher customer traffic, an increased average ticket price, expanded offerings of frozen and refrigerated merchandise, and increased acceptance of food stamps (SNAP).

The company implemented a change in its inventory costing methodology, moving from one inventory pool to approximately thirty pools. This resulted in a non-cash charge of $26.3 million in the first quarter of fiscal 2010, which negatively impacted the reported gross profit margin. However, the company stated this change provides a more accurate estimate of inventory costs.

The company used a significant portion of its cash for financing activities, notably through share repurchases. This included a $200 million Accelerated Share Repurchase (ASR) agreement, leading to a substantial increase in net cash used in financing activities compared to the prior year. Capital expenditures also increased, partly for the new distribution center.

Dollar Tree is involved in several class and collective action lawsuits concerning employment-related matters and pay discrimination. While the company is vigorously defending itself, it does not believe these matters will individually or in aggregate have a material adverse effect on its business or financial condition. However, it cautions that the resolution of one or more of these lawsuits could materially affect its results of operations in the period they are resolved.