10-QPeriod: Q1 FY2019

DOLLAR TREE, INC. Quarterly Report for Q2 Ended May 5, 2018

Filed May 31, 2018For Securities:DLTR

Summary

Dollar Tree, Inc. reported net sales of $5,553.7 million for the 13 weeks ended May 5, 2018, an increase of 5.0% compared to the prior year. While the Dollar Tree segment showed robust performance with a 4.0% comparable store net sales increase (on a constant currency basis), the Family Dollar segment experienced a 1.1% decrease in comparable store net sales. Net income for the quarter was $160.5 million, down from $200.5 million in the prior year, resulting in a diluted EPS of $0.67, compared to $0.85. This decline in profitability was significantly impacted by a substantial increase in interest expense, driven by a comprehensive debt refinancing effort that included the issuance of new notes and credit facilities, alongside the repayment of existing debt and associated fees and premiums. Despite the decrease in net income, the company achieved a positive operating income of $437.6 million, up from $388.8 million, largely due to the absence of a significant receivable impairment charge recorded in the prior year. The company also saw a significant reduction in its effective tax rate to 22.6% from 36.1%, primarily due to the Tax Cuts and Jobs Act. The company's balance sheet reflects a substantial increase in long-term debt following the refinancing, with $5,082.0 million in long-term debt outstanding at the end of the quarter. Management is focused on integrating initiatives to improve Family Dollar's performance, including store renovations and private brand development, alongside ongoing strategies for the Dollar Tree segment like expanding frozen and refrigerated merchandise.

Financial Highlights

5 data points
Beta

Revenue

$6.36B

33.0% Gross Margin

Net Income

$1.04B

16.4% Net Margin

EPS (Diluted)

$4.37

Financial Statements
Beta
Revenue$6.36B
Gross Profit$2.10B
Operating Income$765.60M
Net Income$1.04B
EPS (Diluted)$4.37

Key Highlights

  • 1Net sales increased 5.0% year-over-year to $5.55 billion, driven by new store openings and positive comparable store sales in the Dollar Tree segment.
  • 2Diluted EPS decreased to $0.67 from $0.85, impacted by higher interest expenses related to a significant debt refinancing.
  • 3Operating income increased to $437.6 million, up from $388.8 million in the prior year, benefiting from the absence of a prior year receivable impairment charge.
  • 4The effective tax rate decreased significantly to 22.6% from 36.1% due to the Tax Cuts and Jobs Act.
  • 5The Dollar Tree segment demonstrated strong comparable store sales growth of 4.0% (constant currency), while the Family Dollar segment saw a decline of 1.1% (constant currency).
  • 6The company completed a major debt refinancing, issuing new notes and credit facilities totaling approximately $4.6 billion and repaying existing debt, leading to substantial upfront costs but expected annual interest savings.
  • 7Cash flows from operations decreased by $43.1 million, primarily due to an increase in inventory.

Frequently Asked Questions

The decrease in net income and EPS was primarily driven by a significant increase in interest expense. This was a direct result of a comprehensive debt refinancing strategy executed during the quarter, which involved repaying existing debt, incurring prepayment premiums, and accelerating the expensing of deferred financing costs. While this refinancing is expected to yield annual interest savings, the immediate impact on the income statement was substantial.

The Dollar Tree segment continues to show strength, with comparable store net sales increasing by 4.0% on a constant currency basis, driven by growth in customer count and average ticket. In contrast, the Family Dollar segment experienced a 1.1% decrease in comparable store net sales on a constant currency basis, primarily due to decreased traffic, though an increase in average ticket provided some offset. The company is executing renovation initiatives and private brand development to improve Family Dollar's performance.

The Tax Cuts and Jobs Act significantly reduced the company's effective tax rate to 22.6% for the quarter, down from 36.1% in the prior year. This reduction is attributed to the decrease in the federal corporate tax rate from 35% to 21% starting in 2018. This tax benefit was partially reinvested into store hourly payroll costs.

In the first quarter, Dollar Tree executed a major debt refinancing. This involved issuing approximately $4.6 billion in new senior notes and securing new senior credit facilities, including a revolving credit facility and a term loan. The proceeds were used to repay existing senior secured credit facilities and redeem outstanding acquisition notes. This resulted in a significant increase in total long-term debt to $5,082.0 million at May 5, 2018, compared to previous periods, while also reducing future annual interest payments.