Dollar Tree - 10-Q quarterly report FY

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

Certain 2004 amounts have been reclassified for comparability with the current period presentation. As described in Note 1 of the Company’s Form 10-K filed April 14, 2005, in the fourth quarter of 2004, the Company changed the estimated useful lives on certain fixed assets and adjusted its lease accounting practices to reflect guidance issued by the SEC in February 2005.

For the 13 weeks ended July 30, 2005 and July 31, 2004, 3,471,013 and 1,586,457 stock options, respectively, are not included in the calculation of the weighted average number of shares and dilutive potential shares outstanding because their effect would be anti-dilutive. For the 26 weeks ended July 30, 2005 and July 31, 2004, 1,853,452 and 1,523,277 stock options, respectively, are not included in the calculation of the weighted average number of shares and dilutive potential shares outstanding because their effect would be anti-dilutive.

The Company currently applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock option plans. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123.

If the accounting provisions of SFAS No. 123 had been adopted, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated in the following table:

These pro forma amounts for SFAS No. 123 may not be representative of future disclosures because compensation cost is reflected over the options' vesting periods and because additional options may be granted in future periods.

On June 2, 2005, the Board of Directors granted options to purchase 271,000 shares of the Company’s common stock and 247,707 restricted stock units under the Company’s Equity Incentive Plan and the Executive Officer Equity Incentive Plan. The exercise price of the options granted is $24.95 per share, which represents the fair market value of the Company’s stock at the date of grant. For proforma disclosure purposes, the fair value of these newly granted options was calculated using the Black-Scholes option-pricing model with the following assumptions: expected term in years of 4.6; expected volatility of 49.4%; annual dividend yield of zero; and risk free rate of 3.7%. Using these assumptions the weighted fair value of options granted on June 2, 2005 was $11.35. These options vest over a three-year period. The fair value of the restricted stock units, $6,180,290, is being expensed ratably over the three-year vesting period.

The Company's comprehensive income reflects the effect of recording derivative financial instruments pursuant to SFAS No. 133. The following table provides a reconciliation of net income to total comprehensive income:

The cumulative effect of implementing SFAS No. 133 recorded in "accumulated other comprehensive loss" is being amortized to expense over the remaining lives of the related interest rate swaps.

In November 2002, the Company’s Board of Directors authorized the repurchase of up to $200.0 million of the Company’s common stock. Stock repurchases were to be made until November 2005 either in the open market or through privately negotiated transactions. During the 26 weeks ended July 30, 2005, the Company repurchased approximately 2.0 million shares for approximately $55.3 million, under this authorization.

In March 2005, the Company’s Board of Directors authorized the repurchase of up to $300.0 million of the Company’s stock through March 2008. The previous November 2002 authorization was concurrently terminated. As of the termination date, the Company had repurchased approximately 5.1 million shares for approximately $142.0 million under the November 2002 authorization. During the 13 weeks and 26 weeks ended July 30, 2005, the Company repurchased approximately 0.1 million shares and 2.8 million shares for approximately $2.0 million and $75.1 million, respectively under the March 2005 authorization.

In March 2005, the Company purchased $15.1 million of investments in a restricted account to collateralize long-term insurance obligations. These investments replaced higher cost stand by letters of credit and surety bonds. This amount is included in “other assets” on the accompanying Condensed Consolidated Balance Sheet at July 30, 2005.

In 2005, the Company was served with a lawsuit by former employees in Oregon who allege that they did not properly receive sufficient meal breaks and paid rest periods. They also allege other wage and hour violations. The plaintiffs have requested the Oregon state court to certify the case as a class action.

The Company was served in another lawsuit that alleged various intellectual property violations. The Company settled the lawsuit in May 2005. While the terms of the settlement are confidential, the Company is indemnified by a supplier.

On August 29, 2005, Hurricane Katrina devastated primarily the Gulf coasts of Louisiana and Mississippi. At least seven of the Company’s stores were destroyed and the Company is waiting on sufficient information to determine the impact on other stores. Because of the recency of this event, the Company cannot currently make a determination on Hurricane Katrina’s overall impact to the Company’s results of operations and financial position for future reporting periods.

 

 

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the risk factors described below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" sections in our Annual Report on Form 10-K filed April 14, 2005:

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this quarterly report and you should not expect us to do so.

Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others. Thus, to the extent that reports issued by securities analysts contain any financial projections, forecasts or opinions, such reports are not our responsibility.

At July 30, 2005 we operated 2,856 stores in 48 states, with 22.1 million selling square feet compared to 2,612 stores with 18.7 million square feet at July 31, 2004. During the 26 weeks ended July 30, 2005, we opened 139 stores, expanded 57 stores and closed 18 stores, compared to 116 stores opened, 73 stores expanded and 17 stores closed during the 26 weeks ended July 31, 2004. As of the end of the second quarter, we expect to meet our 14%-16% square footage growth target for fiscal 2005. In the 13 and 26 weeks ended July 30, 2005, we added approximately 0.9 million and 1.7 million selling square feet, respectively, of which approximately 0.2 million and 0.4 million, respectively, was added through expanding existing stores. The average size of stores opened during the 13 and 26 weeks ended July 30, 2005 was approximately 10,000 selling square feet (or about 12,500 gross square feet). For the remainder of 2005, we continue to plan to open stores that have approximately 10,000 selling square feet (or about 12,500 gross square feet). These stores generate higher sales and operating income per store than our smaller stores and we believe that they create an improved shopping environment that invites customers to shop longer and buy more.

For the 13 and 26 weeks ended July 30, 2005, we experienced a decrease in comparable store net sales of 1.5% and 2.3%, respectively. This decrease was the result of a decline of 2.6% and 3.0% in transactions, respectively, partially offset by an increase of 1.1% and 0.7% in transaction size, respectively. We believe comparable store net sales were primarily affected by the impact of higher fuel costs, which leave our customers with less disposable income, causing them to make fewer shopping trips. We have initiatives in place that we believe will help offset some of the effect that higher fuel costs are having on our sales, including increased advertising of featured products and continued expansion of forms of payment accepted by our stores.

Based on the results for the 26 weeks ended July 30, 2005 and continued high fuel costs, we estimate that sales for the third quarter of 2005 will be in the range of $775.0 to $800.0 million and earnings per diluted share will be in the range of $0.28 to $0.31. For fiscal 2005, we estimate sales will be in the range of $3.330 billion to $3.380 billion and diluted earnings per share will be in the range of $1.57 to $1.66. These estimates do not give consideration to the effects of Hurricane Katrina as it is too early to determine its impact on sales and earnings for the remainder of the year.

 

Results of Operations

Our business requires capital to open new stores, expand our distribution network and operate existing stores. Our working capital requirements for existing stores are seasonal in nature and typically reach their peak in the months of September and October. Historically, we have satisfied our seasonal working capital requirements for existing stores and funded our store opening and expansion programs from internally generated funds and borrowings under our credit facilities.

The following table compares cash flow information for the 26 weeks ended July 30, 2005 and July 31, 2004:

The $39.3 million increase in cash provided by operating activities was primarily due to an 11% decrease in inventory per store at July 30, 2005 compared to July 31, 2004.  The inventory per store decrease is the result of an initiative to lower backroom inventory levels and increase inventory turns through a reduction in current year purchases. This increase in cash was partially offset by decreased earnings before depreciation and amortization and other non-cash items.

The $98.6 million decrease in cash used in investing activities was primarily the result of an increase in the net proceeds from short-term investing activities. A portion of these proceeds was used to repurchase common stock in the current year as part of our stock repurchase program. In addition, capital expenditures were higher in the prior year due to higher expenditures for our distribution center and point-of-sale projects that were completed in the first half of fiscal 2004. Partially offsetting these decreases in cash used in investing activities, we purchased $15.1 million of investments in a restricted account to collateralize certain long-term insurance obligations. These investments replaced higher cost stand by letters of credit and surety bonds.

The $205.2 million increase in cash used in financing activities resulted in part from our $130.4 million in stock repurchases during the 26 weeks ended July 30, 2005. Also, in the prior year, we entered into a five-year $450.0 million Revolving Credit Facility, under which we received proceeds of $250.0 million. We used a portion of the proceeds under this facility to repay $142.6 million of variable rate debt for our distribution centers and invested the balance in short-term government-sponsored municipal bonds. As of July 30, 2005, we had $250.0 million outstanding and $200.0 million available under this facility.

We also have a $125.0 million Letter of Credit Reimbursement and Security Agreement, under which approximately $90.1 million was committed to letters of credit issued for routine purchases of imported merchandise as of July 30, 2005.

In November 2002, our Board of Directors authorized the repurchase of up to $200 million of our common stock. Stock repurchases were to be made until November 2005 either in the open market or through privately negotiated transactions. During the 26 weeks ended July 30, 2005, we repurchased approximately 2.0 million shares for approximately $55.3 million under this authorization.

In March 2005, our Board of Directors authorized the repurchase of up to $300.0 million of our stock through March 2008. The previous November 2002 authorization was concurrently terminated. As of the termination date, we had repurchased approximately 5.1 million shares for approximately $142.0 million under the November 2002 authorization. During the 13 weeks and 26 weeks ended July 30, 2005, we repurchased approximately 0.1 million shares and 2.8 million shares for approximately $2.0 million and $75.1 million, respectively under the March 2005 authorization.

The prospective method requires that compensation expense be recognized beginning with the effective date, based on the requirements of this statement, for all share-based payments granted after the effective date, and based on the requirements of SFAS No. 123, for all awards granted to employees prior to the effective date of this statement that remain unvested on the effective date.

The provisions of this statement are effective for fiscal 2006. We are currently evaluating the requirements of this revised pronouncement and have not determined our method of adoption.

We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and foreign currency rate fluctuations. We may enter into interest rate swaps to manage our exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts. We do not enter into derivative instruments for any purpose other than cash flow hedging purposes. One of our interest rate swaps does not qualify for hedge accounting treatment under SFAS No. 133, as amended by SFAS No. 138, because it contains provisions that "knockout" the swap when the variable interest rate exceeds a predetermined rate.

The following table summarizes the financial terms and fair values of each of our interest rate swap agreements at July 30, 2005:

Due to the many variables involved in determining the fair value, management is not able to predict the changes in fair value of our interest rate swaps. The fair values are the estimated amounts we would pay or receive to terminate the agreements as of the reporting date. These fair values are obtained from an outside financial institution.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the our disclosure controls and procedures (as defined in Rule 13a-15(e) of Exchange Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

In the second quarter of 2005, we installed a new software application used to calculate our inventory balance under the retail inventory method. We have tested the related application controls and concluded that these new controls are operating effectively. There have been no other changes in our internal control over financial reporting during the quarter ended July 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In 2003, we were served with a lawsuit in California state court by a former employee who alleged that employees did not properly receive sufficient meal breaks and paid rest periods. He also alleged other wage and hourly violations. The suit requested that the California State Court certify the case as a class action. This suit was dismissed with prejudice in May 2005, and the dismissal has been appealed. In May 2005 a new suit alleging similar claims was filed in California.

In 2005, we were served with a lawsuit by former employees in Oregon who allege that they did not properly receive sufficient meal breaks and paid rest periods. They also allege other wage and hour violations. The plaintiffs have requested the Oregon state court to certify the case as a class action.

We will vigorously defend ourselves in these lawsuits. We do not believe that any of these matters will, individually or in the aggregate, have a material adverse effect on our business or financial condition. We cannot give assurance, however, that one or more of these lawsuits will not have a material adverse effect on our results of operations for the period in which they are resolved.

We were served in another lawsuit that alleged various intellectual property violations. We settled the lawsuit in May 2005. While the terms of the settlement are confidential, we are indemnified by a supplier.

From time to time we are defendants in ordinary, routine litigation and proceedings incidental to our business, including:

The following table presents our share repurchase activity for the 13 weeks ended July 30, 2005.

At our Annual Meeting of Shareholders held on June 16, 2005, an amendment to the bylaws to set the size of the Board of Directors at 11 members was approved:

        In addition, the 2005 Employee Stock Purchase Plan was approved:

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.