10-QPeriod: Q2 FY2015

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Aug 2, 2014

Filed August 21, 2014For Securities:DLTR

Summary

Dollar Tree, Inc. reported solid financial performance for the second quarter and first half of fiscal year 2014. Net sales saw a notable increase of 9.5% and 8.4% respectively for the 13- and 26-week periods ending August 2, 2014, driven by new store openings and a 4.4% and 3.1% increase in comparable store sales. While gross profit margin saw a slight decrease due to higher freight, merchandise, and distribution costs, the company managed SG&A expenses effectively, keeping them flat as a percentage of sales when adjusted for acquisition-related costs. This resulted in a slight decrease in operating income margin. A significant development is the announcement of a proposed merger with Family Dollar Stores, Inc., which is expected to close by early 2015. This transaction is being financed through a combination of cash, bank debt, and bonds, and is anticipated to generate substantial cost synergies. The company also experienced a significant increase in cash from operating activities and a decrease in cash used for investing and financing activities, largely due to the absence of share repurchases in the current period.

Financial Highlights

43 data points
Beta

Revenue

$2.00B

34.8% Gross Margin

Net Income

$138.30M

6.9% Net Margin

EPS (Diluted)

$0.67

Total Assets

$2.95B

Cash & Equivalents

$387.10M

Free Cash Flow

$126.30M

Financial Statements
Beta
Revenue$2.00B
Cost of Revenue$1.30B
Gross Profit$696.60M
SG&A Expenses$464.70M
Operating Income$231.90M
Net Income$138.30M
EPS (Basic)$0.67
EPS (Diluted)$0.67
Shares Outstanding (Basic)206.80M
Shares Outstanding (Diluted)207.70M

Key Highlights

  • 1Net sales increased by 9.5% and 8.4% for the 13-week and 26-week periods ending August 2, 2014, respectively, indicating strong top-line growth.
  • 2Comparable store sales increased by 4.4% and 3.1% for the respective periods, demonstrating healthy performance in existing stores.
  • 3The company announced a proposed merger with Family Dollar, a significant strategic move expected to close by early 2015, with plans to finance it through a mix of debt and equity.
  • 4Gross profit margin declined slightly due to increased freight, merchandise, and distribution costs, impacting overall profitability.
  • 5Selling, general, and administrative expenses were well-managed, remaining stable as a percentage of sales, even with acquisition-related costs factored out.
  • 6Net cash provided by operating activities increased significantly by $65.0 million in the 26-week period, reflecting improved operational cash generation.
  • 7The company repurchased $1.0 billion in shares through Accelerated Share Repurchase agreements in the prior year, but no shares were repurchased in the current period, impacting financing cash flows.

Frequently Asked Questions

Sales growth is primarily driven by the opening of new stores and an increase in comparable store sales. The company saw a 4.4% increase in comparable store sales for the 13-week period and a 3.1% increase for the 26-week period, attributed to higher customer traffic and average ticket prices.

The acquisition of Family Dollar is a major strategic event. While expected to close by early 2015 and aiming for significant cost synergies, it will involve substantial financing, leading to increased debt and merger-related expenses. The company projects the merger to be dilutive to earnings per share in the first twelve months on a GAAP basis, but accretive excluding one-time synergy costs.

The gross profit margin decreased primarily due to higher freight costs (due to driver shortages), increased merchandise costs (lower initial mark-up and product mix changes), and higher distribution costs (new distribution center and labor). The company is actively managing these cost pressures through various initiatives.

Net cash provided by operating activities increased by $65.0 million for the 26-week period compared to the prior year. This improvement was mainly due to an increase in accounts payable and accrued expenses, partially offset by higher prepaid rent. Investing activities saw a decrease in cash used due to lower capital expenditures, while financing activities used significantly less cash due to the absence of share repurchases seen in the prior year.