10-QPeriod: Q2 FY2020

DOLLAR TREE, INC. Quarterly Report for Q3 Ended Aug 3, 2019

Filed August 29, 2019For Securities:DLTR

Summary

Dollar Tree, Inc. reported net sales of $5.74 billion for the thirteen weeks ended August 3, 2019, a 3.9% increase year-over-year. While consolidated net sales grew, operating income saw a significant decline to $268.9 million from $382.5 million in the prior year's comparable period, primarily due to increased operating and corporate expenses, and higher payroll costs. This was further impacted by a gross profit margin contraction to 28.7% from 30.1%, driven by higher merchandise costs (including freight), increased markdowns, and shrink costs, particularly within the Family Dollar segment. The company is actively undergoing a store optimization program for Family Dollar, which includes the H2 renovation initiative, closure of under-performing stores, and re-bannering of some locations to the Dollar Tree brand. These initiatives, while aimed at improving long-term performance, contributed to increased expenses in the current quarter. The company also highlighted potential impacts from Section 301 tariffs on Chinese goods, though mitigation efforts are underway.

Financial Highlights

44 data points
Beta

Revenue

$5.81B

29.7% Gross Margin

Net Income

$267.90M

4.6% Net Margin

EPS (Diluted)

$1.12

Total Assets

$19.35B

Cash & Equivalents

$725.80M

Free Cash Flow

$404.90M

Financial Statements
Beta
Revenue$5.81B
Cost of Revenue$4.08B
Gross Profit$1.73B
SG&A Expenses$1.34B
Operating Income$385.50M
Net Income$267.90M
EPS (Basic)$1.13
EPS (Diluted)$1.12
Shares Outstanding (Basic)238.00M
Shares Outstanding (Diluted)239.10M

Key Highlights

  • 1Consolidated net sales increased by 3.9% to $5.74 billion for the thirteen weeks ended August 3, 2019, compared to the prior year.
  • 2Operating income decreased by 29.7% to $268.9 million, impacted by higher operating, corporate, and payroll expenses.
  • 3Gross profit margin declined to 28.7% from 30.1% year-over-year, primarily due to increased merchandise costs, markdowns, and shrink, especially at Family Dollar.
  • 4Family Dollar segment is undergoing a significant optimization program including store renovations (H2 model), closures, and re-bannering, which incurred associated costs.
  • 5Dollar Tree segment showed stable performance with net sales increasing 6.8% and operating income margin at 11.3%.
  • 6The company is managing potential impacts from Section 301 tariffs on imported goods, with mitigation strategies being implemented.
  • 7Cash flow from operations increased to $844.0 million for the 26 weeks ended August 3, 2019, up from $768.8 million in the prior year.

Frequently Asked Questions

The decrease in operating income was primarily driven by an increase in selling, general, and administrative (SG&A) expenses, which rose by 7.7% to $1.38 billion. This increase was due to higher operating and corporate expenses related to store support center consolidation and store closure write-offs, as well as increased payroll expenses to support store-level initiatives. Additionally, gross profit margin declined due to higher merchandise costs, markdowns, and shrink, particularly within the Family Dollar segment.

The Family Dollar segment experienced a slight net sales increase of 0.9% for the thirteen weeks ended August 3, 2019, but its operating income margin significantly decreased to 0.6% from 4.1% in the prior year. To address this, Dollar Tree is executing a store optimization program that includes rolling out the 'H2' renovation model (which has shown a positive sales lift), closing under-performing stores (accelerating closures in 2019), and re-bannering approximately 200 stores to the Dollar Tree brand. These initiatives are expected to improve performance but have incurred associated costs in the current period.

Dollar Tree is exposed to Section 301 tariffs on goods imported from China. The company indicated that approximately 9% of its products were affected by earlier tariff lists, and a significant portion of its products could be affected by new tariff lists (List 4A and 4B). While the company has implemented mitigation strategies such as negotiating price concessions, canceling orders, and changing product mix, it estimates potential additional tariff costs between September and December 2019. The full impact depends on the success of these mitigation efforts and future tariff developments, with the potential for a material adverse effect if not sufficiently mitigated.

Dollar Tree adopted the new lease accounting standard (ASC 842) effective February 3, 2019. This adoption resulted in the recognition of significant operating lease right-of-use assets ($6.2 billion) and corresponding operating lease liabilities ($6.1 billion) on the balance sheet. It also led to a cumulative effect adjustment reducing retained earnings by $65.3 million, net of tax, as of February 3, 2019. The adoption did not have a material impact on the income statements or cash flow statements.