Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-25464
DOLLAR TREE, INC.
(Exact name of registrant as specified in its charter)
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Virginia | 26-2018846 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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500 Volvo Parkway, Chesapeake, Virginia | 23320 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (757) 321-5000 |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Name of each exchange on which registered |
Common Stock, par value $.01 per share | NASDAQ |
Securities registered pursuant to section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of common stock held by non-affiliates of the registrant on August 3, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was $21,167,164,088, based upon the closing sale price for the registrant’s common stock on such date. For purposes of this computation, all executive officers and directors have been deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the registrant.
On March 25, 2019, there were 238,204,351 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company to be held June 13, 2019, which will be filed with the Securities and Exchange Commission not later than May 31, 2019.
DOLLAR TREE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
TABLE OF CONTENTS
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| PART I | |
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Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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| PART II | |
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Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
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| PART III | |
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Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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| PART IV | |
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Item 15. | | |
Item 16. | | |
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This Annual Report on Form 10-K (this “Form 10-K”) contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding:
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• | the potential effect of inflation and other general business or economic conditions on our costs and profitability, including the potential effect of future changes in prevailing wage rates and overtime regulations and our plans to address these changes, shipping rates, domestic and import freight costs (including the effects of potential disruptions and increases in domestic freight costs due to the shortage in truck drivers), fuel costs and wage and benefit costs, consumer spending levels, and population, employment and job growth and/or losses in our markets; |
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• | the ability to retain key personnel at Family Dollar and Dollar Tree, including in connection with the consolidation of the Family Dollar headquarters from North Carolina to Virginia; |
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• | our anticipated sales, comparable store net sales, net sales growth, gross profit margin, earnings and earnings growth, inventory levels and our ability to leverage selling, general and administrative and other fixed costs; |
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• | the outcome and costs of pending or potential litigation or governmental investigations; |
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• | our growth plans, including our plans to add, renovate, re-banner, expand, relocate or close stores and any related costs or charges, our anticipated square footage increase, and our ability to renew leases at existing store locations; |
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• | the effect of changes in trade and labor laws, including the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative, the potential effect of anti-dumping duties imposed by the United States Department of Commerce, and the effect of the Fair Labor Standards Act as it relates to the qualification of our managers for exempt status, minimum wage and health care law; |
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• | the average size of our stores to be added in 2019 and beyond; |
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• | the effect of our consumable merchandise initiatives, including the increase in the number of our stores with freezers and coolers and the roll-outs of adult beverage and Snack Zone, on our results of operations; |
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• | the effect of the Family Dollar store support center consolidation, renovation initiative, store closings and other initiatives on Family Dollar’s sales and costs; |
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• | the net sales per square foot, net sales and operating income of our stores; |
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• | the benefits, results and effects of the Family Dollar acquisition and integration and the combined Company’s plans, objectives, expectations (financial or otherwise), including synergies, the cost to achieve synergies, the costs and length of time to complete the store support center consolidation and the effect on earnings per share; |
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• | the effect of changes in tax laws and regulatory interpretations of such laws; |
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• | our seasonal sales patterns including those relating to the length of the holiday selling seasons; |
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• | the capabilities of our inventory supply chain technology and other systems; |
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• | the reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China; |
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• | the capacity, performance and cost of our distribution centers, including future automation; |
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• | our cash needs, including our ability to fund our future capital expenditures and working capital requirements and our ability to service our debt obligations, including our expected annual interest expense; |
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• | our expectations regarding competition and growth in our retail sector; |
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• | our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the Financial Accounting Standards Board; |
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• | our assessment of the impact on the Company of certain actions by activist shareholders and the Company’s potential responses to these actions; and |
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• | management’s estimates associated with our critical accounting policies, including inventory valuation, accrued expenses and valuations for impairment analyses. |
A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Item 1A. Risk Factors” beginning on page 12 of this Form 10-K, as well as “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 27 of this Form 10-K and elsewhere in this Form 10-K.
We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements.
We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-K, whether as a result of new information, future events, or otherwise.
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 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 securities analyst regardless of the content of the statement or report. Furthermore, we have a policy against confirming projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
INTRODUCTORY NOTE: Unless otherwise stated, references to “we,” “our” and “us” generally refer to Dollar Tree, Inc. and its direct and indirect subsidiaries on a consolidated basis. Unless specifically indicated otherwise, any references to “2019” or “fiscal 2019,” “2018” or “fiscal 2018,” “2017” or “fiscal 2017,” and “2016” or “fiscal 2016,” relate to as of or for the years ended February 1, 2020, February 2, 2019, February 3, 2018 and January 28, 2017, respectively.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.dollartree.com as soon as reasonably practicable after electronic filing of such reports with the Securities and Exchange Commission (“SEC”).
PART I
Item 1. Business
Overview
We are a leading operator of discount variety stores. We believe the convenience and value we offer are key factors in growing our base of loyal customers. At February 2, 2019, we operated 15,237 discount variety retail stores. Our stores operate under the names of Dollar Tree, Family Dollar and Dollar Tree Canada.
On July 6, 2015, we completed our purchase of Family Dollar Stores, Inc. and its more than 8,200 stores. This transformational transaction created the largest discount retailer (by store count) in North America. The Dollar Tree and Family Dollar brands have complementary business models. Everything is $1.00 at Dollar Tree stores while Family Dollar is a neighborhood variety store offering merchandise largely for $10.00 or less.
We operate in two reporting business segments: Dollar Tree and Family Dollar. For discussion of the operating results of our reporting business segments, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Segment Information” beginning on page 27 of this Form 10-K and “Note 11 - Segment Reporting” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Dollar Tree
Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price point of $1.00. The Dollar Tree segment includes 7,001 stores operating under the Dollar Tree and Dollar Tree Canada brands, 12 distribution centers in the United States and two in Canada and a store support center in Chesapeake, Virginia. Our stores predominantly range from 8,000 - 10,000 selling square feet. In our Dollar Tree stores in the United States, we sell all items for $1.00 or less and in our Dollar Tree Canada stores, we sell all items for $1.25(CAD) or less. Our revenue and assets in Canada are not material.
We strive to exceed our customers’ expectations of the variety and quality of products they can purchase for $1.00 by offering items we believe typically sell for higher prices elsewhere. We buy approximately 58% to 60% of our merchandise domestically and import the remaining 40% to 42%. Our domestic purchases include basic, seasonal, home, closeouts and promotional merchandise. We believe our mix of imported and domestic merchandise affords our buyers flexibility that allows them to consistently exceed our customers’ expectations. In addition, direct relationships with manufacturers permit us to select from a broad range of products and customize packaging, product sizes and package quantities that meet our customers’ needs.
The addition of frozen and refrigerated merchandise to more of our Dollar Tree stores has been one of our ongoing initiatives. We added freezers and coolers to 460 additional stores in 2018. As of February 2, 2019, we have freezers and coolers in approximately 5,665 of our Dollar Tree stores. We plan to install them in 500 new and existing stores during fiscal 2019. Over the past year, we rolled out a new layout to a number of our Dollar Tree stores, which we call our Snack Zone. This layout highlights our immediate consumption snack offerings in the front of the store near the checkout areas. As of February 2, 2019, we have this layout in approximately 930 Dollar Tree stores and we plan to implement Snack Zone in 1,000 new and existing stores in fiscal 2019. We believe these initiatives have and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers.
At any point in time, we carry approximately 7,300 items in our Dollar Tree stores and as of the end of fiscal 2018 approximately 40% of our items are automatically replenished. The remaining items are pushed to the stores and a portion can be reordered by our store managers on a weekly basis. Through automatic replenishment and our store managers’ ability to order product, each store manager is able to satisfy the demands of their particular customer base.
We maintain a balanced selection of products within traditional variety store categories. We offer a wide selection of everyday basic products and we supplement these basic, everyday items with seasonal, closeout and promotional merchandise. We attempt to keep certain basic consumable merchandise in our stores continuously to establish our stores as a destination and increase traffic in our stores. Closeout and promotional merchandise is purchased opportunistically and represents less than 10% of our purchases.
The merchandise mix in our Dollar Tree stores consists of:
•consumable merchandise, which includes candy and food, health and beauty care, and everyday consumables such as
household paper and chemicals, and in select stores, frozen and refrigerated food;
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• | variety merchandise, which includes toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and |
•seasonal goods, which includes, among others, Valentine’s Day, Easter, Halloween and Christmas merchandise.
For information regarding the amounts and percentages of our net sales contributed by the above merchandise categories for the last three fiscal years, please refer to “Note 11 - Segment Reporting” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Family Dollar
Our Family Dollar segment operates general merchandise discount retail stores providing customers with a selection of competitively-priced merchandise in convenient neighborhood stores. Our stores predominantly range from 6,000 - 8,000 selling square feet. In our 8,236 Family Dollar stores, we sell merchandise at prices that generally range from $1.00 to $10.00. The Family Dollar segment consists of our store operations under the Family Dollar brand, 11 distribution centers and a store support center in Matthews, North Carolina. During fiscal 2019, we plan to consolidate our Matthews, North Carolina store support center with our store support center in Chesapeake, Virginia in our newly-completed office tower in the Summit Pointe development in Chesapeake, Virginia.
Our Family Dollar stores provide customers with a quality, high-value assortment of basic necessities and seasonal merchandise. We offer competitively-priced national brands from leading manufacturers alongside name brand equivalent-value, lower-priced private labels. We purchase merchandise from a wide variety of suppliers and generally have not experienced difficulty in obtaining adequate quantities of merchandise. In fiscal 2018, we purchased approximately 13% of our merchandise through our relationship with McLane Company, Inc., which distributes consumable merchandise from multiple manufacturers. In addition, approximately 18% of our merchandise is imported directly.
We are executing several initiatives in our Family Dollar stores to increase sales. During fiscal 2018, we completed more than 500 Family Dollar renovations, and have completed more than 875 renovations since launching this initiative in the second quarter of fiscal 2017. After continued development, experimentation and testing, we have recently rolled out a new model for both new and renovated Family Dollar stores known as H2. At the end of fiscal 2018, we had approximately 200 stores with this format. This new H2 model has significantly improved merchandise offerings, including Dollar Tree $1.00 merchandise sections and establishing a minimum number of freezer and cooler doors, throughout the store. The stores with the H2 format have increased traffic and provided an average comparable store net sales lift in excess of 10% over control stores. The H2 format performs well in a variety of locations, and especially in locations where Family Dollar has in the past been the most challenged. We plan to renovate at least 1,000 stores to this format in 2019 and roll-out this format in new stores and we will pursue an accelerated renovation schedule in future years.
While the number of items in a given store can vary based on the store’s size, geographic location, merchandising initiatives and other factors, our typical Family Dollar store generally carries approximately 7,700 basic items alongside items that are ever-changing and seasonally-relevant throughout the year.
The merchandise mix in our Family Dollar stores consists of:
•consumable merchandise, which includes food and beverages, tobacco, health and beauty aids, household chemicals,
paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies;
•home products, which includes housewares, home décor, giftware, and domestics, including comforters, sheets and
towels;
•apparel and accessories merchandise, which includes clothing, fashion accessories and shoes; and
•seasonal and electronics merchandise, which includes Valentine’s Day, Easter, Halloween and Christmas merchandise,
personal electronics, including pre-paid cellular phones and services, stationery and school supplies, and toys.
For information regarding the amounts and percentages of our net sales contributed by the above merchandise categories for the last three fiscal years, please refer to “Note 11 - Segment Reporting” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Business Strategy
Continue to execute our proven and best‑in‑class retail business strategy. We will continue to execute our proven strategies that have generated a history of success and continued growth for the Company. Key elements of our strategy include:
•aiming continuously to “Wow” the customer with a compelling, fun and fresh merchandise assortment comprising a
variety of the things you want and things you need, all at incredible values in bright, clean and friendly stores;
•maintaining a flexible sourcing merchandise model that allows a variety of products to be sold as long as desired
merchandise margin thresholds are met;
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• | growing both the Dollar Tree and Family Dollar brands; |
•pursuing a “more, better, faster” approach to the roll-out of new Dollar Tree and Family Dollar stores to broaden our
geographic footprint;
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• | maintaining customer relevance by ensuring that we reinvent ourselves constantly through new merchandise categories and initiatives; |
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• | leveraging the complementary merchandise expertise of each segment including Dollar Tree’s sourcing and product development expertise and Family Dollar’s consumer package goods and national brands sourcing expertise; and |
•maintaining a prudent approach with our use of capital for the benefit of our shareholders.
Operate a diversified and complementary business model across both fixed‑price and multi‑price point strategies. We plan to operate and grow both the Dollar Tree and Family Dollar brands. We will utilize the reach and scale of our combined company to serve a broader range of customers in more ways, offering better prices and more value for the customer. Dollar Tree stores will continue to operate as single price point retail stores. At Dollar Tree, everything is $1.00, offering the customer a balanced mix of things they need and things they want. Our shopping experience will remain fun and friendly as we exceed our customers’ expectations for what they can buy for $1.00. Dollar Tree serves a broad range of income customers in suburban locations. Family Dollar stores will continue to operate using multiple price points, serving customers as their “neighborhood discount store,” offering great values on everyday items and a convenient shopping experience. Family Dollar primarily serves a lower than average income customer in urban and rural locations. We will benefit from an expanded target customer profile and utilize the store concepts of both Dollar Tree and Family Dollar to serve a broader range of customer demographics to drive further improvements in sales and profitability.
Deliver significant synergy opportunities through continued integration of Family Dollar. Our acquisition of Family Dollar has provided us with significant opportunities to achieve meaningful cost synergies. We executed a detailed integration plan and exceeded our target of approximately $300 million of estimated annual run‑rate cost synergies by July 2018, achieving more than $450 million in synergies. These synergies did not account for one-time costs to achieve synergies, investments back into the business, integration costs, or cost increases due to inflation, vendor increases, or other factors that are not caused by the business combination. Sources of synergies continue to include the following:
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• | Savings from sourcing and procurement of merchandise and non-merchandise goods and services driven by leveraging the combined volume of the Dollar Tree and Family Dollar segments, among other things; |
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• | Re-bannering to optimize store formats; |
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• | A reduction in overhead and corporate selling, general and administrative expenses by eliminating redundant positions, optimizing processes, integrating our technology resources and consolidating our store support centers; and |
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• | Savings resulting from the optimization of distribution and logistics networks. |
Take advantage of significant white-space opportunity. Over the past decade we have built a solid and scalable infrastructure, which provides a strong foundation for our future growth. We are committed to growing our combined business to take advantage of significant white space opportunities that we believe exist for both the Dollar Tree and Family Dollar store concepts. Using our proven real estate strategy across our combined business, we intend to drive future store openings by capitalizing on data‑driven insights regarding location, target customer profile, competitive dynamics and cost structure. Over the long-term, we believe that the market can support more than 10,000 Dollar Tree stores and 15,000 Family Dollar stores across the United States, and approximately 1,000 Dollar Tree stores in Canada.
Convenient Locations and Store Size. We focus primarily on opening new Dollar Tree stores in strip shopping centers anchored by large retailers who draw target customers we believe to be similar to ours. Our stores are successful in metropolitan areas, mid-sized cities and small towns. We open new Family Dollar stores in strip shopping centers, freestanding buildings and downtown buildings. The range of our new store sizes, 8,000 - 10,000 selling square feet for Dollar Tree and 7,000 - 9,000 selling square feet for Family Dollar, allows us to target a particular location with a store that best suits that market and takes advantage of available real estate opportunities. Our stores are attractively designed and create an inviting atmosphere for shoppers by using bright lighting, vibrant colors and decorative signs. We enhance the store design with attractive merchandise displays. We believe this design attracts new and repeat customers and enhances our image as both a destination and impulse purchase store.
For more information on retail locations and retail store leases, see “Item 2. Properties” beginning on page 20 of this Form 10-K.
Profitable Stores with Strong Cash Flow. We maintain a disciplined, cost-sensitive approach to store site selection in order to minimize the initial capital investment required and maximize our potential to generate high operating margins and strong cash flows. We believe that our stores have a relatively small shopping radius, which allows us to profitably concentrate multiple stores within a single market. Our ability to open new stores is dependent upon, among other factors, locating suitable sites and negotiating favorable lease terms.
The strong cash flows generated by our stores allow us to self-fund infrastructure investment and new stores. Over the past five years, cash flows from operating activities have exceeded capital expenditures.
For more information on our results of operations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 27 of this Form 10-K.
Cost Control. We believe that our substantial buying power and our flexibility in making sourcing decisions contributes to our successful purchasing strategy, which includes targeted merchandise margin goals by category. We also believe our ability to negotiate with our vendor partners allows us to minimize the margin impact of economic pressures such as tariffs. We buy products on an order-by-order basis and have no material long-term purchase contracts or other assurances of continued product supply or guaranteed product cost. No vendor accounted for more than 10% of total merchandise purchased in any of the past five years.
Our supply chain systems continue to provide us with valuable sales information to assist our buyers and improve merchandise allocation to our stores. We use this information to target our inventory levels in our distribution centers and stores in order to plan for capacity and labor needs.
Information Systems. We believe that investments in technology help us to increase sales and control costs. Our inventory management system provides information to calculate our estimate of inventory cost under the retail inventory method, which is widely used in the retail industry. Our automated replenishment system replenishes key items, based on actual store-level sales and inventory.
Point-of-sale data allows us to track sales and inventory by merchandise category at the store level and assists us in planning for future purchases of inventory. We believe that this information allows us to ship the appropriate product to stores at the quantities commensurate with selling patterns. Using this point-of-sale data to plan purchases has helped us manage our inventory levels.
Corporate Culture and Values. We believe that honesty and integrity, and treating people fairly and with respect are core values within our corporate culture. We believe that running a business, and certainly a public company, carries with it a responsibility to be above reproach when making operational and financial decisions. Our executive management team visits and shops at our stores like every customer, and ideas and individual creativity on the part of our associates are encouraged, particularly from our store managers who know their stores and their customers. We have standards for store displays, merchandise presentation, and store operations. We maintain an open door policy for all associates. Our distribution centers are operated based on objective measures of performance and virtually everyone in our store support centers is available to assist associates in our stores and distribution centers.
Our disclosure committee meets at least quarterly and monitors our internal controls over financial reporting to ensure that our public filings contain discussions about the potential risks our business faces. We believe that we have appropriate controls in place to be able to certify our financial statements. Additionally, we have complied with the listing requirements for the Nasdaq Global Select Market.
Seasonality. For information on the impact of seasonality, see “Item 1A. Risk Factors” beginning on page 12 of this Form 10-K and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 27 of this Form 10-K.
Growth Strategy
Store Openings and Square Footage Growth. The primary factors contributing to our net sales growth have been new store openings, an active store expansion and remodel program, and selective mergers and acquisitions. In the last five years, net sales increased at a compound annual growth rate of 27.6%, including the addition of Family Dollar. We expect that the majority of our future sales growth will come from new store openings in our Dollar Tree and Family Dollar segments and our store expansion and relocation program as well as our renovation initiatives.
At January 31, 2015, we operated 5,367 stores in the United States and Canada. At February 2, 2019, we operated 15,012 stores in 48 states and the District of Columbia, as well as 225 stores in Canada. Our selling square footage increased from
approximately 46.5 million square feet at January 31, 2015 to 120.1 million square feet at February 2, 2019. Our store growth has resulted from opening new stores and our July 2015 acquisition of more than 8,200 Family Dollar stores.
Our growth and productivity statistics are reported based on selling square footage because our management believes the use of selling square footage yields a more accurate measure of store productivity. We expect to increase the selling square footage in our stores in the future by opening new stores in underserved markets and strategically increasing our presence in our existing markets via new store openings and store expansions (expansions include store relocations). In fiscal 2019 and beyond, we plan to predominantly open Dollar Tree stores that are approximately 8,000 - 10,000 selling square feet and Family Dollar stores that are approximately 7,000 - 9,000 selling square feet. We believe these store sizes allow us to achieve our objectives in the markets in which we plan to expand.
In addition to new store openings, we plan to continue our Dollar Tree store expansion program to increase our net sales per store and take advantage of market opportunities. We target stores for expansion based on the current sales per selling square foot and changes in market opportunities. Stores targeted for expansion are generally less than 7,000 selling square feet in size. Store expansions generally increase the existing store size by approximately 2,600 selling square feet. At February 2, 2019, 3,909 of our Dollar Tree stores, totaling 64% of our Dollar Tree segment selling square footage, were 8,000 selling square feet or larger.
Since 1995, we have added a total of 695 stores through several mergers and acquisitions, excluding our acquisition of Family Dollar. Historically, our acquisition strategy has been to target companies that have a similar single price point concept that have shown success in operations or companies that provide a strategic advantage. We evaluate potential acquisition opportunities as they become available. On July 6, 2015, we completed our acquisition of Family Dollar which allowed us to create a diversified company with complementary business models.
From time to time, we also acquire the rights to store leases through bankruptcy or other proceedings. We will continue to take advantage of these opportunities as they arise depending upon several factors including their fit within our location and selling square footage size parameters.
Merchandising and Distribution. Expanding our customer base is important to our growth plans. We plan to continue to stock our stores with a compelling mix of ever-changing merchandise that our customers have come to appreciate. Consumable merchandise typically leads to more frequent return trips to our stores resulting in increased sales. The presentation and display of merchandise in our stores are critical to communicating value to our customers and creating a more exciting shopping experience. We believe our approach to visual merchandising results in higher sales volume and an environment that encourages impulse purchases.
A strong and efficient distribution network is critical to our ability to grow and to maintain a low-cost operating structure. In 2018, we began construction on our Morrow County, Ohio distribution center, which will be 1.2 million square feet and automated, and will initially serve stores in our Dollar Tree segment. We expect this facility to be operational in the third quarter of 2019. Additionally, in 2018 we completed our Warrensburg, Missouri distribution center, which is 1.2 million square feet, automated and currently serves stores in our Dollar Tree segment. In 2016, we completed our Cherokee County, South Carolina distribution center, which is 1.5 million square feet, automated and currently serves stores in our Dollar Tree segment. In addition, we expanded our Dollar Tree Stockton, California distribution center to 0.9 million square feet. In fiscal 2019, we announced plans to construct a new 1.2 million square foot distribution center in Rosenberg, Texas which is expected to provide service directly to Dollar Tree and Family Dollar stores and be operational by the summer of 2020.
Our St. George, Utah distribution center services both Family Dollar and Dollar Tree stores. In addition, we ship select product from our Dollar Tree distribution centers to our Family Dollar distribution centers and in fiscal 2019, we expect to ship select product from our Dollar Tree distribution centers directly to certain of our Family Dollar stores. We believe our distribution center network is currently capable of supporting approximately $28.0 billion in annual sales in the United States. New distribution sites are strategically located to reduce stem miles, maintain flexibility and improve efficiency in our store service areas. We also are a party to an agreement which provides distribution services from two facilities in Canada.
Our Dollar Tree stores receive approximately 90% of their inventory from our distribution centers via contract carriers and our Family Dollar stores receive approximately 75% of their inventory from our distribution centers. The remaining store inventory, primarily perishable consumable items and other vendor-maintained display items, are delivered directly to our stores from vendors. Our Family Dollar stores receive approximately 13% of their merchandise from McLane Company, Inc. For more information on our distribution center network, see “Item 2. Properties” beginning on page 20 of this Form 10-K.
Competition
Our segment of the retail industry is fragmented and highly competitive and we expect competition to increase in the future. We operate in the discount retail sector, which is currently and is expected to continue to be highly competitive with respect to price, store location, merchandise quality, assortment and presentation and customer service. Our competitors include single-price dollar stores, multi-price dollar stores, mass merchandisers, discount retailers, drug stores, convenience stores, independently-operated discount stores and a wide variety of other retailers. In addition, several competitors have sections within their stores devoted to “one dollar” price point merchandise, which further increases competition. We believe we differentiate ourselves from other retailers by providing high-value, high-quality, low-cost merchandise in attractively-designed stores that are conveniently located. Our sales and profits could be reduced by increases in competition. There are no significant economic barriers for others to enter our retail sector.
Trademarks
We are the owners of several federal service mark registrations including “Dollar Tree,” the “Dollar Tree” logo, and the Dollar Tree logo with a “1.” In addition, we own a registration for “Dollar Bill$.” We also acquired the rights to use trade names previously owned by Everything’s A Dollar, a former competitor in the $1.00 price point industry. Several trade names were included in the purchase, including the mark “Everything’s $1.00.” We also own the logo mark for “Everything’s $1.” With the acquisition of Dollar Giant, we became the owner of several trademarks in Canada. With the acquisition of Family Dollar, we became the owners of the trademarks “Family Dollar,” “Family Dollar Stores” and other names and designs of certain merchandise sold in Family Dollar stores. We have federal trademark registrations for a number and variety of private labels that we use to market many of our product lines. Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly maintained and renewed, they have a perpetual duration.
Employees
We employed approximately 57,200 full-time and 124,900 part-time associates on February 2, 2019. Part-time associates work an average of less than 30 hours per week. The number of part-time associates fluctuates depending on seasonal needs. We consider our relationship with our associates to be good, and we have not experienced significant interruptions of operations due to labor disagreements.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Any failure to meet market expectations, including our comparable store sales growth rate, earnings and earnings per share or new store openings, could cause the market price of our stock to decline. You should carefully consider the specific risk factors listed below together with all other information included or incorporated in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise. In such event, our business, financial condition, results of operations or prospects could be materially adversely affected.
Our profitability is vulnerable to cost increases.
Future increases in costs such as wage and benefit costs, the cost of merchandise, duties, merchandise loss (due to theft, damage, or errors), shipping rates, freight costs, fuel costs and store occupancy costs would reduce our profitability. Wage rates, labor costs, and inflation are expected to increase in 2019. The minimum wage has increased in certain states and local jurisdictions and is scheduled to increase further in 2019.
In our Dollar Tree segment, we do not raise the sales price of our merchandise to offset cost increases because we are committed to selling primarily at the $1.00 price point to continue to provide value to the customer. We are dependent on our ability to adjust our product assortment, to operate more efficiently or to increase our comparable store net sales in order to offset cost increases. We can give no assurance that we will be able to operate more efficiently or increase our comparable store net sales in the future. Although Family Dollar, unlike Dollar Tree, can raise the price of merchandise, customers would buy fewer products if prices were to increase. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 27 of this Form 10-K for further discussion of the effect of economic factors on our operations.
We could encounter additional disruptions in our distribution network and have encountered and expect to encounter additional costs in distributing merchandise, such as freight cost increases due to the truck driver shortage and fuel cost increases.
Our success is dependent on our ability to transport merchandise to our distribution centers and then ship it to our stores in a timely and cost-effective manner. We also rely on third parties to deliver certain merchandise directly from vendors to our stores. We may not anticipate, respond to or control all of the challenges of operating our receiving and distribution systems. Additionally, if a vendor fails to deliver on its commitments, we could experience merchandise shortages that could lead to lost sales or increased costs. Some of the factors that could have an adverse effect on our distribution network or costs are:
•Shipping disruption. Our oceanic shipping schedules may be disrupted or delayed from time to time.
| |
• | Shipping costs. We could experience increases in shipping rates imposed by the trans-Pacific ocean carriers. Changes in import duties, import quotas and other trade sanctions could increase our costs. |
•Efficient operations. Distribution centers and other aspects of our distribution network are difficult to operate
efficiently and we have and could experience a reduction in operating efficiency.
•Diesel fuel costs. We have experienced volatility in diesel fuel costs over the past few years.
| |
• | Trucking costs. We have experienced significant increases in trucking cost due to the truck driver shortage and other factors. |
•Vulnerability to natural or man-made disasters. A fire, explosion or natural disaster at a port or any of our distribution
facilities could result in a loss of merchandise and impair our ability to adequately stock our stores. Some facilities are
vulnerable to earthquakes, hurricanes or tornadoes.
•Labor disagreement. Labor disagreements, disruptions or strikes may result in delays in the delivery of merchandise
to our distribution centers or stores and increase costs.
•War, terrorism and other events. War and acts of terrorism in the United States, the Middle East, or in China or other
parts of Asia, where we buy a significant amount of our imported merchandise, could disrupt our supply chain or
increase our transportation costs.
•Economic conditions. Suppliers may encounter financial or other difficulties.
•McLane Company, Inc. In fiscal 2018, we purchased approximately 13% of our merchandise for our Family Dollar
segment through our relationship with McLane Company, Inc., which distributes consumable merchandise from multiple
manufacturers. A disruption in our relationship with McLane Company, Inc. could have a significant near-term impact
on our operations.
Integrating Family Dollar’s operations with ours may be more difficult, costly or time consuming than expected, including disruptions or the loss of key personnel in connection with the consolidation of the Family Dollar headquarters from North Carolina to Virginia.
The success of the Family Dollar acquisition (the “Acquisition”), including anticipated benefits, synergies and cost savings, will depend, in part, on our ability to successfully combine and integrate the businesses and cultures of the Family Dollar segment into our company. The integration is not yet complete. It is possible that the remaining integration process will take longer than anticipated and could result in the loss of key employees, higher than expected costs or unexpected costs, ongoing diversion of management attention, increased competition, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, vendors and employees. If we experience difficulties with the integration process, the anticipated benefits of the Acquisition may not be realized fully, or may take longer to realize than expected, which could adversely affect our results of operations or business.
Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.
Our growth and performance is dependent on the skills, experience and contributions of our associates, executives and key personnel for both Dollar Tree and Family Dollar. Various factors, including the Acquisition, the integration process, constraints on overall labor availability, wage rates, regulatory or legislative impacts, and benefit costs could impact our ability to attract and retain qualified associates at our stores, distribution centers and corporate offices.
Risks associated with our domestic and foreign suppliers, including, among others, increased taxes, duties, tariffs or other restrictions on trade (including Section 301 tariffs imposed by the United States Trade Representative on imported Chinese goods), could adversely affect our financial performance.
We are dependent on our vendors to supply merchandise in a timely and efficient manner. If a vendor fails to deliver on its commitments due to financial or other difficulties, we could experience merchandise shortages which could lead to lost sales or increased merchandise costs if alternative sources must be used.
We rely on the availability of imported goods at favorable wholesale prices. Merchandise imported directly accounts for approximately 40% to 42% of our Dollar Tree segment’s total retail value purchases and 17% to 19% of our Family Dollar segment’s total retail value purchases. In addition, we believe that a significant portion of our goods purchased from domestic vendors is imported. China is the source of a substantial majority of our imports. Imported goods are generally less expensive than domestic goods and increase our profit margins. A disruption in the flow of our imported merchandise or an increase in the cost of those goods may significantly decrease our profits. Risks associated with our reliance on imported goods may include disruptions in the flow of or increases in the cost of imported goods because of factors such as:
•an increase in duties, tariffs or other restrictions on trade;
•raw material shortages, work stoppages, strikes and political unrest;
•economic crises and international disputes or conflicts;
•changes in currency exchange rates or policies and local economic conditions, including inflation in the country of origin;
•potential changes to, or withdrawal of the United States from, international trade agreements;
•changes in leadership and the political climate in countries from which we import products; and
•failure of the United States to maintain normal trade relations with China and other countries.
We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
We rely extensively on our computer and technology systems and, in certain cases, those of third-party service providers to manage inventory, process credit card and customer transactions and summarize results. Our ability to effectively manage our business and coordinate the distribution and sale of our merchandise depends significantly on the reliability, integrity and capacity of these systems and on our ability to successfully integrate the Dollar Tree and Family Dollar systems. We also rely on third-party providers and platforms for some of these computer and technology systems and support.
Although we have operational safeguards in place, they may not be effective in preventing the failure of these systems or platforms to operate effectively and be available to us. Such failures may be caused by various factors, including power outages, catastrophic events, physical theft, computer and network failures, inadequate or ineffective redundancy, problems with transitioning to upgraded or replacement systems or platforms, flaws in third-party software or services, errors or improper use by our employees or third party service providers, or a breach in the security of these systems or platforms, including through computer viruses and cyber-attacks.
If these systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions and may receive negative publicity, which could adversely affect our results of operations and business. In addition, remediation of any problems with our systems could result in significant, unplanned expenses.
If we are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business reputation and adversely affect our results of operations or business.
Many of our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment systems, and for administrative functions, including human resources, payroll, accounting, and internal and external communications, contain personal, financial or other information that is entrusted to us by our customers and associates. Many of our information technology systems also contain proprietary and other confidential information related to our business and suppliers.
We have procedures and technology in place to safeguard our customers’ debit and credit card information, our associates’ private data, suppliers’ data, and our business records and intellectual property and other sensitive information. Despite these measures, cyber-attacks are rapidly evolving and becoming increasingly sophisticated and difficult to detect and we may be vulnerable to, and unable to anticipate, detect and appropriately respond to, data security breaches and data loss, including cyber-security attacks. If we or any third-party systems we use experience a data security breach, we could be exposed to negative publicity, government enforcement actions and private litigation. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores or not shopping in our stores altogether.
Moreover, significant capital investments and other expenditures could also be required to remedy cybersecurity problems and prevent future security breaches, including costs associated with additional security technologies, personnel and experts for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems.
The unavailability of our information technology systems or the failure of those systems or software to perform as anticipated for any reason and any inability to respond to, or recover from, such an event, could disrupt our business, decrease performance and increase overhead costs. If we are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs. Any of these factors could have a material adverse effect on our results of operations or business.
Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.
Existing store sales growth is critical to good operating results and is dependent on a variety of factors including merchandise quality, relevance and availability, store operations and customer satisfaction. In addition, increased competition could adversely affect our sales. Failure to meet our sales targets, including in our renovated stores, could result in our needing to record material non-cash impairment charges related to our intangible assets.
Our highest sales periods are during the Christmas and Easter seasons, and we generally realize a disproportionate amount of our net sales and our operating and net income during the fourth quarter. In anticipation, we stock extra inventory and hire many temporary employees to prepare our stores. A reduction in sales during these periods could adversely affect our operating results, particularly operating and net income, to a greater extent than if a reduction occurred at other times of the year. Untimely merchandise delays due to receiving or distribution problems could have a similar effect. When Easter is observed earlier in the year, the selling season is shorter and, as a result, our sales could be adversely affected. Easter was observed on April 16, 2017 and April 1, 2018, and will be observed on April 21, 2019.
Expanding our square footage profitably depends on a number of uncertainties, including our ability to locate, lease, build out and open or expand stores in suitable locations on a timely basis under favorable economic terms. Obtaining an increasing number of profitable stores is an ever increasing challenge. In addition, our expansion is dependent upon third-party developers’ abilities to acquire land, obtain financing, and secure necessary permits and approvals. We also open or expand stores within our established geographic markets, where new or expanded stores may draw sales away from our existing stores. We may not manage our expansion effectively, and our failure to achieve our expansion plans could materially and adversely affect our business, financial condition and results of operations.
We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.
Under U.S. generally accepted accounting principles, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred.
In fiscal 2018, we recorded a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge related to our Family Dollar reporting unit, as a result of a strategic and operational reassessment of the Family Dollar segment following challenges that the business has experienced that have impacted our ability to grow the business at the originally estimated rate when the Company made the acquisition in 2015. These challenges include slower sales growth, increased freight costs driven by the driver shortage, reinvestment in store labor and higher shrink. In the future, failure to address these challenges, significant negative industry or general economic trends, other disruptions to our business and unanticipated significant changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. We will continue to monitor key assumptions and other factors utilized in our goodwill impairment analysis, and if business or other market conditions develop that are materially different than we currently anticipate, we will conduct an additional impairment evaluation. Any reduction in or impairment of the value of goodwill or intangible assets will result in a charge against earnings, which could have a material adverse impact on our reported results of operations and financial condition. For additional information on goodwill impairments please refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Our profitability is affected by the mix of products we sell.
Our gross profit margin could decrease if we increase the proportion of higher cost goods we sell in the future. Imported merchandise is generally lower cost than domestic goods. If duties increase, increasing the cost of imported goods, we may sell less imported goods and our profitability may suffer. In recent years, the percentage of our sales from higher cost consumable products has increased and we can give no assurance that this trend will not continue. In addition, carrying a greater proportion of higher cost goods can lead to higher shrink. As a result, our gross profit margin could decrease unless we are able to maintain our current merchandise cost sufficiently to offset any decrease in our product margin percentage. We can give no assurance that we will be able to do so.
In our Family Dollar segment, our success also depends on our ability to select and obtain sufficient quantities of relevant merchandise at prices that allow us to sell such merchandise at profitable and appropriate prices. A sales price that is too high causes products to be less attractive to our customers and our sales at Family Dollar could suffer. We are continuing to implement our everyday low price strategy at Family Dollar to drive customer loyalty and have a strategic pricing team to improve our value and to increase profitability. Inability to successfully implement our pricing strategies at Family Dollar could have a negative effect on our business.
In addition, our Family Dollar segment has a substantial number of private brand items and the number of items has been increasing. We believe our success in maintaining broad market acceptance of our private brands depends on many factors, including our pricing, costs, quality and customer perception. We may not achieve or maintain our expected sales for our private brands and, as a result, our business and results of operations could be adversely impacted. Additionally, the increased number of private brands could negatively impact our existing relationships with our non-private brand suppliers.
Our business or the value of our common stock could be negatively affected as a result of actions by activist shareholders.
We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. The Board of Directors and management team are committed to acting in the best interests of all of our shareholders. There is no assurance that the actions taken by the Board of Directors and management in seeking to maintain constructive engagement with the Company’s shareholders will be successful. Activist shareholders who disagree with the composition of the Board of Directors, the Company’s strategy or the way the Company is managed may seek to effect change through various strategies that range from private engagement to publicity campaigns, proxy contests, efforts to force transactions not supported by the Board of Directors and litigation.
On January 2, 2019, an activist shareholder, Starboard Value and Opportunity Master Fund Ltd. (“Starboard”), delivered to us a notice of its intention to nominate seven director candidates for election to the Board of Directors at the 2019 Annual Meeting of Stockholders of the Company to be held June 13, 2019 (the “2019 Annual Meeting”). If Starboard is successful, it is possible that Starboard-nominated directors could constitute a majority of the Board of Directors following the 2019 Annual Meeting. Starboard has also made public statements calling for changes to the Company’s strategy.
Responding to these actions may be costly and time-consuming, disrupt our operations, divert the attention of our Board of Directors, management and employees, and interfere with the Company’s store support center consolidation and the ability to execute its strategic plan and attract and retain qualified executive leadership. A contested election could also require us to incur substantial legal and public relations fees and proxy solicitation expenses. The perceived uncertainty as to the Company’s future direction resulting from activist strategies could also affect the market price and volatility of the Company’s common stock.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation involving employees, consumers, suppliers, competitors, shareholders, government agencies, or others through private actions, class actions, governmental investigations, administrative proceedings, regulatory actions or other litigation. Our products could also cause illness or injury, harm our reputation, and subject us to litigation. We are dependent on our vendors to ensure that the products we buy comply with all applicable safety standards. However, product liability, personal injury or other claims may be asserted against us relating to product contamination, product tampering, mislabeling, recall and other safety issues with respect to the products that we sell. We seek but may not be successful in obtaining contractual indemnification and insurance coverage from our vendors, and if we do not have adequate contractual indemnification or insurance available, such product liability or safety claims could adversely affect our business, financial condition and results of operations. Our ability to obtain the benefit of contractual indemnification from foreign vendors may be hindered by our ability to enforce contractual indemnification obligations against such vendors. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
For example, we are currently defendants in state employment-related class and representative actions and litigation concerning injury from products. The outcome of litigation is difficult to assess or quantify. Plaintiffs in these types of lawsuits or proceedings may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss may remain unknown for substantial periods of time. In addition, certain of these matters, if decided adversely to us or settled by us, may result in an expense that may be material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend current and future litigation or proceedings may be significant. There also may be adverse publicity associated with litigation, including litigation related to product or food safety, customer information and environmental or safety requirements, which could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.
For a discussion of current legal matters, please see “Item 3. Legal Proceedings” beginning on page 23 of this Form 10-K and “Note 5 - Commitments and Contingencies” under the caption “Contingencies” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K. Resolution of these matters, if decided against the Company, could have a material adverse effect on our results of operations, accrued liabilities or cash flows.
Pressure from competitors may reduce our sales and profits.
The retail industry is highly competitive. The marketplace is highly fragmented as many different retailers compete for market share by utilizing a variety of store formats and merchandising strategies, including mobile and online shopping. We expect competition to increase in the future. There are no significant economic barriers for others to enter our retail sector. Some of our current or potential competitors have greater financial resources than we do. We cannot guarantee that we will continue to be able to compete successfully against existing or future competitors. Please see “Item 1. Business” beginning on page 6 of this Form 10-K for further discussion of the effect of competition on our operations.
A downturn or changes in economic conditions could impact our sales or profitability.
Deterioration in economic conditions, such as those caused by a recession, inflation, higher unemployment, consumer debt levels, trade disputes or international conflict, as well as adverse weather conditions or terrorism, could reduce consumer spending or cause customers to shift their spending to products we either do not sell or do not sell as profitably. Adverse economic conditions could disrupt consumer spending and significantly reduce our sales, decrease our inventory turnover, cause greater markdowns or reduce our profitability due to lower margins.
Furthermore, factors that could adversely affect consumer disposable income could decrease our customers’ spending on products we sell. Factors that could reduce our customers’ disposable income and over which we exercise no influence include
but are not limited to, the adverse economic conditions described above as well as increases in fuel or other energy costs and interest rates, lack of available credit, higher tax rates and other changes in tax laws, concerns over government mandated participation in health insurance programs, increasing healthcare costs, and changes in, decreases in, or elimination of, government subsidies such as unemployment and food assistance programs.
Many of the factors identified above that affect disposable income, as well as commodity rates, transportation costs (including the costs of diesel fuel), costs of labor, insurance and healthcare, foreign exchange rate fluctuations, lease costs, barriers or increased costs associated with international trade and other economic factors also affect our ability to implement our corporate strategy effectively, our cost of goods sold and our selling, general and administrative expenses, and may have other adverse consequences which we are unable to fully anticipate or control, all of which may adversely affect our sales or profitability. We have limited or no ability to control many of these factors.
Changes in federal, state or local law, including regulations and interpretations or guidance thereunder, or our failure to adequately estimate the impact of such changes or comply with such laws, could increase our expenses, expose us to legal risks or otherwise adversely affect us.
Our business is subject to a wide array of laws and regulations. The minimum wage has increased or is scheduled to increase in multiple states, provinces and local jurisdictions. Significant legislative changes in regulations such as the health-care legislation, that impact our relationship with our workforce could increase our expenses and adversely affect our operations. Changes in other regulatory areas, such as consumer credit, privacy and information security, product and food safety, worker safety or environmental protection, among others, could cause our expenses to increase or product recalls. In addition, if we fail to comply with applicable laws and regulations, particularly wage and hour laws, we could be subject to legal risk, including government enforcement action and class action civil litigation, which could adversely affect our results of operations.
The price of our common stock is subject to market and other conditions and may be volatile.
The market price of our common stock may fluctuate significantly in response to a number of factors. These factors, some of which may be beyond our control, include the perceived prospects and actual results of operations of our business; changes in estimates of our results of operations by analysts, investors or us; trading activity by our large shareholders; trading activity by sophisticated algorithms (high-frequency trading); our actual results of operations relative to estimates or expectations; actions or announcements by us or our competitors; litigation and judicial decisions; legislative or regulatory actions or changes; and changes in general economic or market conditions. In addition, the stock market in general has from time to time experienced extreme price and volume fluctuations. These market fluctuations could reduce the market price of our common stock for reasons unrelated to our operating performance.
Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures.
In connection with the Acquisition, we substantially increased our indebtedness, which could adversely affect our ability to fulfill our obligations and have a negative impact on our financing options and liquidity position. As of February 2, 2019, our total indebtedness is $4.3 billion. In addition, we have $1.25 billion of additional borrowing availability under our revolving credit facility, less amounts outstanding for letters of credit totaling $182.9 million.
Our high level of debt could have significant consequences, including the following:
•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or
other general corporate purposes;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments, instead of other purposes,
thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•limiting our ability to refinance our indebtedness on terms acceptable to us or at all;
•imposing restrictive covenants on our operations;
•placing us at a competitive disadvantage to competitors carrying less debt; and
•making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures.
In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect the opinions of the ratings agencies of our financial strength, operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a particular rating in the future.
The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.
The agreements that govern our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability to:
•incur, assume or guarantee additional indebtedness;
•declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for
value, equity interests;
•make loans, advances or other investments;
•incur liens;
•sell or otherwise dispose of assets, including capital stock of subsidiaries;
•enter into sale and lease-back transactions;
•consolidate or merge with or into, or sell all or substantially all of our assets to, another person; and
•enter into transactions with affiliates.
In addition, certain of these agreements require us to comply with certain financial maintenance covenants. Our ability to satisfy these financial maintenance covenants can be affected by events beyond our control, and we cannot assure you that we will meet them.
A breach of the covenants under these agreements could result in an event of default under the applicable indebtedness, which, if not cured or waived, could result in us having to repay our borrowings before their due dates. Such default may allow the debt holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If we are forced to refinance these borrowings on less favorable terms or if we were to experience difficulty in refinancing the debt prior to maturity, our results of operations or financial condition could be materially affected. In addition, an event of default under our credit facilities may permit the lenders under our credit facilities to terminate all commitments to extend further credit under such credit facilities. Furthermore, if we are unable to repay the amounts due and payable under our credit facilities, those lenders may be able to proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of notes accelerate the repayment of such borrowings, we cannot assure you that we will have sufficient assets to repay such indebtedness.
As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively, take advantage of new business opportunities or grow in accordance with our plans.
Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Certain of our indebtedness, including borrowings under our revolving credit facility, is subject to variable rates of interest and exposes us to interest rate risk. Interest rates, while historically low, have recently begun to increase. When interest rates increase, our debt service obligations on the variable rate indebtedness increase even though the amount borrowed remains the same, and our net income decreases. An increase (decrease) of 1.0% on the interest rate would result in an increase (decrease) of $7.5 million in annual interest expense. Although we may enter into interest rate swaps, involving the exchange of floating-rate for fixed-rate interest payments, to reduce interest rate volatility, we cannot assure you we will be able to do so.
Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.
Our Articles of Incorporation and Bylaws currently contain provisions that may delay or discourage a takeover attempt that a shareholder might consider in his/her best interest. These provisions, among other things:
•provide that only the Board of Directors, chairman or president may call special meetings of the shareholders;
•establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder
proposals to be considered at shareholders’ meetings; and
•permit the Board of Directors, without further action of the shareholders, to issue and fix the terms of preferred stock,
which may have rights senior to those of the common stock.
However, we believe that these provisions allow our Board of Directors to negotiate a higher price in the event of a takeover attempt which would be in the best interest of our shareholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Stores
As of February 2, 2019, we operated 15,237 stores in 48 states and the District of Columbia, and five Canadian provinces as detailed below:
|
| | | | | | | | | |
United States | | Dollar Tree | | Family Dollar | | Total |
Alabama | | 132 |
| | 160 |
| | 292 |
|
Arizona | | 130 |
| | 166 |
| | 296 |
|
Arkansas | | 81 |
| | 110 |
| | 191 |
|
California | | 588 |
| | 137 |
| | 725 |
|
Colorado | | 100 |
| | 129 |
| | 229 |
|
Connecticut | | 63 |
| | 56 |
| | 119 |
|
Delaware | | 32 |
| | 31 |
| | 63 |
|
District of Columbia | | 3 |
| | 3 |
| | 6 |
|
Florida | | 509 |
| | 598 |
| | 1,107 |
|
Georgia | | 260 |
| | 405 |
| | 665 |
|
Idaho | | 38 |
| | 51 |
| | 89 |
|
Illinois | | 271 |
| | 225 |
| | 496 |
|
Indiana | | 144 |
| | 209 |
| | 353 |
|
Iowa | | 64 |
| | 32 |
| | 96 |
|
Kansas | | 60 |
| | 50 |
| | 110 |
|
Kentucky | | 108 |
| | 217 |
| | 325 |
|
Louisiana | | 117 |
| | 328 |
| | 445 |
|
Maine | | 39 |
| | 62 |
| | 101 |
|
Maryland | | 122 |
| | 102 |
| | 224 |
|
Massachusetts | | 132 |
| | 97 |
| | 229 |
|
Michigan | | 241 |
| | 387 |
| | 628 |
|
Minnesota | | 119 |
| | 70 |
| | 189 |
|
Mississippi | | 78 |
| | 155 |
| | 233 |
|
Missouri | | 156 |
| | 117 |
| | 273 |
|
Montana | | 15 |
| | 15 |
| | 30 |
|
Nebraska | | 29 |
| | 36 |
| | 65 |
|
Nevada | | 54 |
| | 56 |
| | 110 |
|
New Hampshire | | 39 |
| | 29 |
| | 68 |
|
New Jersey | | 174 |
| | 108 |
| | 282 |
|
New Mexico | | 49 |
| | 134 |
| | 183 |
|
New York | | 327 |
| | 314 |
| | 641 |
|
North Carolina | | 263 |
| | 458 |
| | 721 |
|
North Dakota | | 12 |
| | 23 |
| | 35 |
|
Ohio | | 281 |
| | 476 |
| | 757 |
|
Oklahoma | | 83 |
| | 138 |
| | 221 |
|
Oregon | | 95 |
| | — |
| | 95 |
|
Pennsylvania | | 307 |
| | 315 |
| | 622 |
|
Rhode Island | | 31 |
| | 29 |
| | 60 |
|
South Carolina | | 129 |
| | 245 |
| | 374 |
|
South Dakota | | 13 |
| | 30 |
| | 43 |
|
Tennessee | | 182 |
| | 221 |
| | 403 |
|
Texas | | 527 |
| | 1,095 |
| | 1,622 |
|
Utah | | 63 |
| | 59 |
| | 122 |
|
Vermont | | 11 |
| | 14 |
| | 25 |
|
Virginia | | 186 |
| | 242 |
| | 428 |
|
Washington | | 127 |
| | — |
| | 127 |
|
West Virginia | | 51 |
| | 130 |
| | 181 |
|
Wisconsin | | 129 |
| | 141 |
| | 270 |
|
Wyoming | | 12 |
| | 31 |
| | 43 |
|
Total | | 6,776 |
| | 8,236 |
| | 15,012 |
|
|
| | | |
Canada | | Dollar Tree |
Alberta | | 37 |
|
British Columbia | | 49 |
|
Manitoba | | 13 |
|
Ontario | | 110 |
|
Saskatchewan | | 16 |
|
Total | | 225 |
|
We lease the vast majority of our stores and expect to lease the majority of our new stores as we expand. Our leases typically provide for a short initial lease term, generally five years, with options to extend; however, in some cases we have initial lease terms of seven to fifteen years. We believe this leasing strategy enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions. As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.
Distribution Centers
The following table includes information about the distribution centers that we operate in the United States. Except for 0.4 million square feet of our distribution center in San Bernardino, California, all of our distribution center capacity is owned. In 2018, we completed our Warrensburg, Missouri distribution center, which is 1.2 million square feet, automated and currently serves stores in our Dollar Tree segment. In 2016, we completed our 1.5 million square foot Cherokee County, South Carolina distribution center and expanded our Stockton, California distribution center by 0.3 million square feet. Our St. George, Utah distribution center services both Family Dollar and Dollar Tree stores. In addition, we ship select product from our Dollar Tree distribution centers to our Family Dollar distribution centers and in fiscal 2019, we expect to ship select product from our Dollar Tree distribution centers directly to certain of our Family Dollar stores. We believe our distribution center network is currently capable of supporting approximately $28.0 billion in annual sales in the United States.
|
| | | | | | | | |
Dollar Tree Distribution Centers | | Square Footage | | Family Dollar Distribution Centers | | Square Footage |
Chesapeake, Virginia | | 400,000 |
| | Matthews, North Carolina | | 930,000 |
|
Olive Branch, Mississippi | | 425,000 |
| | West Memphis, Arkansas | | 850,000 |
|
Joliet, Illinois | | 1,470,000 |
| | Front Royal, Virginia | | 907,000 |
|
Stockton, California | | 854,000 |
| | Duncan, Oklahoma | | 907,000 |
|
Savannah, Georgia | | 1,014,000 |
| | Morehead, Kentucky | | 907,000 |
|
Briar Creek, Pennsylvania | | 1,003,000 |
| | Maquoketa, Iowa | | 907,000 |
|
Marietta, Oklahoma | | 1,004,000 |
| | Odessa, Texas | | 907,000 |
|
San Bernardino, California | | 802,000 |
| | Marianna, Florida | | 907,000 |
|
Ridgefield, Washington | | 665,000 |
| | Rome, New York | | 907,000 |
|
Windsor, Connecticut | | 1,001,000 |
| | Ashley, Indiana | | 814,000 |
|
Cherokee County, South Carolina | | 1,512,000 |
| | St. George, Utah* | | 814,000 |
|
Warrensburg, Missouri | | 1,200,000 |
| | | | |
*Services both Dollar Tree and Family Dollar stores |
In 2018, we began construction on our Morrow County, Ohio distribution center, which will be 1.2 million square feet and automated, and will initially serve stores in our Dollar Tree segment. We expect this facility to be operational in the third quarter of 2019. In fiscal 2019, we announced plans to construct a new 1.2 million square foot distribution center in Rosenberg, Texas which is expected to provide service directly to Dollar Tree and Family Dollar stores and be operational by the summer of 2020. All future distribution centers will open with the capability to service both Dollar Tree and Family Dollar stores.
Each of our distribution centers contains advanced materials handling technologies, including radio-frequency inventory tracking equipment and specialized information systems. With the exception of our Ridgefield, Washington facility and our Matthews, North Carolina facility, each of our distribution centers in the United States also contains automated conveyor and sorting systems.
Distribution services in Canada are provided by a third party from facilities in British Columbia and Ontario.
Store Support Center
Our Dollar Tree store support center is located in an approximately 510,000 square foot office tower in the Summit Pointe development, which we own, in Chesapeake, Virginia. Our Family Dollar store support center is located in two buildings totaling approximately 310,000 square feet, which we own, in Matthews, North Carolina. During fiscal 2019, we plan to consolidate our Matthews, North Carolina store support center with our store support center in Chesapeake, Virginia.
We are also developing additional parcels on our Summit Pointe property for mixed-use purposes.
For more information on financing of our new and expanded stores, distribution centers and the Summit Pointe development activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Funding Requirements” beginning on page 27 of this Form 10-K.
Item 3. Legal Proceedings
From time to time, we are defendants in ordinary, routine litigation or proceedings incidental to our business, including allegations regarding:
| |
• | employment-related matters; |
| |
• | infringement of intellectual property rights; |
| |
• | personal injury/wrongful death claims; |
| |
• | product safety matters, which may include product recalls in cooperation with the Consumer Products Safety Commission or other jurisdictions; |
| |
• | real estate matters related to store leases; and |
| |
• | environmental and safety issues. |
In addition, we are currently defendants in national and state employment-related class and collective actions and litigation concerning injury from products. These proceedings are described in “Note 5 - Commitments and Contingencies” under the caption “Contingencies” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
We will vigorously defend ourselves in these matters. We do not believe that any of these matters will, individually or in the aggregate, have a material effect on our business or financial condition. We cannot give assurance, however, that one or more of these lawsuits will not have a material effect on our results of operations for the period in which they are resolved. Based on the information available, including the amount of time remaining before trial, the results of discovery and the judgment of internal and external counsel, we are unable to express an opinion as to the outcome of those matters which are not settled and cannot estimate a potential range of loss except as specified in Note 5. When a range is expressed, we are currently unable to determine the probability of loss within that range.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on The Nasdaq Global Select Market® under the symbol “DLTR.” As of March 25, 2019, we had 2,507 shareholders of record.
We did not repurchase any shares of common stock on the open market in fiscal 2018, fiscal 2017 or fiscal 2016. At February 2, 2019, we had $1.0 billion remaining under Board repurchase authorization.
We anticipate that substantially all of our cash flow from operations in the foreseeable future will be retained for the development and expansion of our business, the repayment of indebtedness and, as authorized by our Board of Directors, the repurchase of stock. Management does not anticipate paying dividends on our common stock in the foreseeable future.
Stock Performance Graph
The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years ended February 2, 2019, compared with the cumulative total returns of the S&P 500 Index and the S&P Retailing Index. The comparison assumes that $100 was invested in our common stock on February 1, 2014, and, in each of the foregoing indices on February 1, 2014, and that dividends were reinvested.
Item 6. Selected Financial Data
The following table presents a summary of our selected financial data for the fiscal years ended February 2, 2019, February 3, 2018, January 28, 2017, January 30, 2016, and January 31, 2015. Fiscal 2017 included 53 weeks, commensurate with the retail calendar, while all other fiscal years reported in the table contain 52 weeks. The selected statement of operations and balance sheet data have been derived from our consolidated financial statements that have been audited by our independent registered public accounting firm. This information should be read in conjunction with the consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial information found elsewhere in this report.
As a result of the Acquisition on July 6, 2015, the statement of operations data below for the year ended January 30, 2016 includes the results of operations of Family Dollar since that date. In addition, the balance sheet information below includes the Family Dollar assets acquired and liabilities assumed for periods after the July 6, 2015 acquisition date.
Comparable store net sales compares net sales for stores which have been open for more than fifteen months by the end of the year prior to the two years being compared, including expanded or remodeled stores. Both our Dollar Tree stores and our acquired Family Dollar stores are included in the comparable store net sales calculation for the years ended February 2, 2019 and February 3, 2018. For all prior years, only our Dollar Tree stores are included in the comparable store net sales calculation. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand. Net sales per store and net sales per selling square foot are calculated for stores open throughout the period presented.
In the fourth quarter of 2018, we recorded a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge related to our Family Dollar reporting unit, which is reflected in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations for the year ended February 2, 2019. This goodwill impairment charge created a net loss for the year ended February 2, 2019, reducing diluted earnings per share by $11.42 per share. For additional information regarding the impairment of the Family Dollar goodwill, refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
As a result of the enactment of the Tax Cuts and Jobs Act (“TCJA”) in 2017, net income and diluted net income per share for the year ended February 3, 2018 increased by $583.7 million and $2.45 per share, respectively.
Amounts in the following tables are in millions, except per share data, number of stores data, net sales per selling square foot data and inventory turns.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended |
| February 2, 2019 | | February 3, 2018 | | January 28, 2017 | | January 30, 2016 | | January 31, 2015 |
Statement of Operations Data: | | | | | | | | | |
Net sales | $ | 22,823.3 |
| | $ | 22,245.5 |
| | $ | 20,719.2 |
| | $ | 15,498.4 |
| | $ | 8,602.2 |
|
Gross profit | 6,947.5 |
| | 7,021.9 |
| | 6,394.7 |
| | 4,656.7 |
| | 3,034.0 |
|
Selling, general and administrative expenses | 7,887.0 |
| | 5,022.8 |
| | 4,689.9 |
| | 3,607.0 |
| | 1,993.8 |
|
Operating income (loss) | (939.5 | ) | | 1,999.1 |
| | 1,704.8 |
| | 1,049.7 |
| | 1,040.2 |
|
Net income (loss) | (1,590.8 | ) | | 1,714.3 |
| | 896.2 |
| | 282.4 |
| | 599.2 |
|
Margin Data (as a percentage of net sales): | | | | | | | |
| | |
|
Gross profit | 30.4 | % | | 31.6 | % | | 30.8 | % | | 30.1 | % | | 35.3 | % |
Selling, general and administrative expenses | 34.5 | % | | 22.6 | % | | 22.6 | % | | 23.3 | % | | 23.2 | % |
Operating income (loss) | (4.1 | )% | | 9.0 | % | | 8.2 | % | | 6.8 | % | | 12.1 | % |
Net income (loss) | (7.0 | )% | | 7.7 | % | | 4.3 | % | | 1.8 | % | | 7.0 | % |
Per Share Data: | |
| | |
| | |
| | |
| | |
|
Diluted net income (loss) per share | $ | (6.66 | ) | | $ | 7.21 |
| | $ | 3.78 |
| | $ | 1.26 |
| | $ | 2.90 |
|
Diluted net income (loss) per share increase (decrease) | (192.4 | )% | | 90.7 | % | | 200.0 | % | | (56.6 | )% | | 6.6 | % |
|
| | | | | | | | | | | | | | | | | | | |
| As of |
| February 2, 2019 | | February 3, 2018 | | January 28, 2017 | | January 30, 2016 | | January 31, 2015 |
Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents and short-term investments | $ | 422.1 |
| | $ | 1,097.8 |
| | $ | 870.4 |
| | $ | 740.1 |
| | $ | 864.1 |
|
Working capital | 2,197.6 |
| | 1,717.2 |
| | 1,832.1 |
| | 1,840.5 |
| | 1,133.0 |
|
Total assets | 13,501.2 |
| | 16,332.8 |
| | 15,701.6 |
| | 15,901.2 |
| | 3,492.7 |
|
Total debt, including capital lease obligations | 4,300.0 |
| | 5,732.7 |
| | 6,391.8 |
| | 7,465.5 |
| | 757.0 |
|
Shareholders’ equity | 5,642.9 |
| | 7,182.3 |
| | 5,389.5 |
| | 4,406.9 |
| | 1,785.0 |
|
| | | | | | | | | |
| Year Ended |
| February 2, 2019 | | February 3, 2018 | | January 28, 2017 | | January 30, 2016 | | January 31, 2015 |
Selected Operating Data: | |
| | |
| | |
| | |
| | |
|
Number of stores open at end of period | 15,237 |
| | 14,835 |
| | 14,334 |
| | 13,851 |
| | 5,367 |
|
Dollar Tree | 7,001 |
| | 6,650 |
| | 6,360 |
| | 5,954 |
| | 5,367 |
|
Family Dollar | 8,236 |
| | 8,185 |
| | 7,974 |
| | 7,897 |
| | — |
|
Gross square footage at end of period | 148.3 |
| | 143.9 |
| | 138.8 |
| | 132.1 |
| | 58.3 |
|
Dollar Tree | 75.4 |
| | 71.6 |
| | 68.5 |
| | 64.2 |
| | 58.3 |
|
Family Dollar | 72.9 |
| | 72.3 |
| | 70.3 |
| | 67.9 |
| | — |
|
Selling square footage at end of period | 120.1 |
| | 116.6 |
| | 112.4 |
| | 108.4 |
| | 46.5 |
|
Dollar Tree | 60.3 |
| | 57.3 |
| | 54.7 |
| | 51.3 |
| | 46.5 |
|
Family Dollar | 59.8 |
| | 59.3 |
| | 57.7 |
| | 57.1 |
| | — |
|
Selling square footage annual growth(2) | 3.0 | % | | 3.7 | % | | 3.7 | % | | 10.3 | % | | 7.4 | % |
Net sales annual growth(1) | 2.6 | % | | 7.4 | % | | 8.6 | % | | 8.5 | % | | 9.7 | % |
Comparable store net sales increase(1) | 1.7 | % | | 1.9 | % | | 1.8 | % | | 2.1 | % | | 4.3 | % |
Net sales per selling square foot(2) | $ | 193 |
| | $ | 194 |
| | $ | 188 |
| | $ | 191 |
| | $ | 192 |
|
Net sales per store(2) | $ | 1.5 |
| | $ | 1.5 |
| | $ | 1.5 |
| | $ | 1.6 |
| | $ | 1.7 |
|
Selected Financial Ratios: | |
| | |
| | |
| | |
| | |
|
Return on assets(2) | (10.7 | )% | | 10.7 | % | | 5.7 | % | | 11.4 | % | | 19.1 | % |
Return on equity(2) | (24.8 | )% | | 27.3 | % | | 18.3 | % | | 31.5 | % | | 40.5 | % |
Inventory turns(2) | 4.1 |
| | 4.4 |
| | 4.1 |
| | 4.5 |
| | 4.4 |
|
(1) Family Dollar was included in the determination of these items for the years ended February 2, 2019 and February 3, 2018
(2) Family Dollar was included in the determination of these items for the years ended February 2, 2019, February 3, 2018 and January 28, 2017
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including:
| |
• | what factors affect our business; |
| |
• | what our net sales, earnings or losses, gross margins and costs were in 2018, 2017 and 2016; |
| |
• | why those net sales, earnings or losses, gross margins and costs were different from the year before; |
| |
• | how all of this affects our overall financial condition; |
| |
• | what our expenditures for capital projects were in 2018 and 2017 and what we expect them to be in 2019; and |
| |
• | where funds will come from to pay for future expenditures. |
As you read Management’s Discussion and Analysis, please refer to our consolidated financial statements, included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, which present the results of operations for the fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017. In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal year 2018 compared to fiscal year 2017 and for fiscal year 2017 compared to fiscal year 2016. We also provide information regarding the performance of each of our operating segments. Unless otherwise indicated, references to “we,” “our” or “us” refer to Dollar Tree, Inc. and its direct and indirect subsidiaries on a consolidated basis.
Key Events and Recent Developments
Several key events have had or are expected to have a significant effect on our operations. They are listed below:
| |
• | Integration of Family Dollar |
| |
◦ | In the third quarter of 2018, we announced that we plan to consolidate our store support centers in Matthews, North Carolina and Chesapeake, Virginia to our newly-completed office tower in the Summit Pointe development in Chesapeake, Virginia. |
| |
◦ | Based on our strategic and operational reassessment of the Family Dollar segment, following challenges that the business has experienced that have impacted our ability to grow the business at the originally estimated rate when we acquired Family Dollar in 2015, management determined there were indicators that the goodwill of the business may be impaired. Accordingly, a goodwill impairment test was performed in the fourth quarter of fiscal 2018. The results of the impairment test showed that the fair value of the Family Dollar business was lower than the carrying value resulting in a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge. |
| |
◦ | On March 6, 2019, we announced plans for a store optimization program for Family Dollar. For fiscal 2019, this program includes rolling out a new model for both new and renovated Family Dollar stores, internally known as H2, to at least 1,000 stores, closing as many as 390 under-performing stores, re-bannering 200 Family Dollar stores to the Dollar Tree brand, installing adult beverages in approximately 1,000 stores and expanding freezers and coolers in approximately 400 stores. |
| |
◦ | In the second quarter of 2016, we completed construction of a new 1.5 million square foot distribution center in Cherokee County, South Carolina. |
| |
◦ | In the third quarter of 2016, we completed a 0.3 million square foot expansion of our distribution center in Stockton, California. |
| |
◦ | In the second quarter of 2018, we completed construction of a new 1.2 million square foot distribution center in Warrensburg, Missouri. |
| |
◦ | During fiscal 2018, we began construction of a new 1.2 million square foot distribution center in Morrow County, Ohio which is expected to be operational in the third quarter of 2019. |
| |
◦ | In fiscal 2019, we announced tentative plans to construct a new 1.2 million square foot distribution center in Rosenberg, Texas which is expected to be operational in the summer of 2020. |
| |
◦ | During the first quarter of 2018, we redeemed the $750.0 million 5.25% Acquisition Notes due 2020 and accelerated the amortization of debt-issuance costs associated with the notes of $6.1 million. |
| |
◦ | During the first quarter of 2018, we refinanced our long-term debt obligations as follows: |
| |
▪ | We completed the registered offering of $750.0 million of Senior Floating Rate Notes due 2020, $1.0 billion of 3.70% Senior Notes due 2023, $1.0 billion of 4.00% Senior Notes due 2025 and $1.25 billion of 4.20% Senior Notes due 2028; |
| |
▪ | We entered into a credit agreement for a $782.0 million term loan facility and a $1.25 billion revolving credit facility; |
| |
▪ | We used the proceeds of the above offerings to repay the $2,182.7 million outstanding under our senior secured credit facilities and redeem the remaining $2,500.0 million outstanding under our acquisition debt, resulting in the acceleration of the expensing of $41.2 million of deferred financing costs and the incurrence of $114.3 million in prepayment penalties. |
| |
◦ | During the fourth quarter of 2018, we prepaid the $782.0 million outstanding under the term loan facility and accelerated the expensing of $1.5 million of deferred financing costs. |
| |
• | Taxes - On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law which lowered the statutory U.S. federal income tax rate from 35% to 21% and made numerous other law changes, effective as of January 1, 2018. |
Overview
We are a leading operator of more than 15,200 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price of $1.00. Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores.
Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores or adding new stores through mergers or acquisitions. Second is the performance of stores once they are open. Sales vary at our existing stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. Our acquired Family Dollar stores are included in the comparable store net sales calculation beginning in the fourth quarter of fiscal 2016; however, they are not included in the annual comparable store net sales calculation until fiscal 2017. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand.
At February 2, 2019, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. A breakdown of store counts and square footage by segment for the years ended February 2, 2019 and February 3, 2018 is as follows:
|
| | | | | | | | | | | | | | | | | |
| Year Ended |
| February 2, 2019 | | February 3, 2018 |
| Dollar Tree | | Family Dollar | | Total | | Dollar Tree | | Family Dollar | | Total |
Store Count: | | | | | | | | | | | |
Beginning | 6,650 |
| | 8,185 |
| | 14,835 |
| | 6,360 |
| | 7,974 |
| | 14,334 |
|
New stores | 320 |
| | 226 |
| | 546 |
| | 315 |
| | 288 |
| | 603 |
|
Re-bannered stores | 52 |
| | (53 | ) | | (1 | ) | | — |
| | — |
| | — |
|
Closings | (21 | ) | | (122 | ) | | (143 | ) | | (25 | ) | | (77 | ) | | (102 | ) |
Ending | 7,001 |
| | 8,236 |
| | 15,237 |
| | 6,650 |
| | 8,185 |
| | 14,835 |
|
Relocations | 54 |
| | 13 |
| | 67 |
| | 82 |
| | 31 |
| | 113 |
|
| | | | | | | | | | | |
Selling Square Feet (in millions): | | | | | | | | | | |
Beginning | 57.3 |
| | 59.3 |
| | 116.6 |
| | 54.7 |
| | 57.7 |
| | 112.4 |
|
New stores | 2.7 |
| | 1.7 |
| | 4.4 |
| | 2.6 |
| | 2.1 |
| | 4.7 |
|
Re-bannered stores | 0.4 |
| | (0.4 | ) | | — |
| | — |
| | — |
| | — |
|
Closings | (0.2 | ) | | (0.8 | ) | | (1.0 | ) | | (0.2 | ) | | (0.5 | ) | | (0.7 | ) |
Relocations | 0.1 |
| | — |
| | 0.1 |
| | 0.2 |
| | — |
| | 0.2 |
|
Ending | 60.3 |
| | 59.8 |
| | 120.1 |
| | 57.3 |
| | 59.3 |
| | 116.6 |
|
Stores are included as re-banners when they close or open, respectively. Comparable store net sales for Dollar Tree may be negatively affected when a Family Dollar store is re-bannered near an existing Dollar Tree store.
The average size of stores opened in 2018 was approximately 8,440 selling square feet (or about 10,480 gross square feet) for the Dollar Tree segment and 7,350 selling square feet (or about 9,110 gross square feet) for the Family Dollar segment. For 2019, we continue to plan to open stores that are approximately 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet) for the Dollar Tree segment and approximately 7,000 - 9,000 selling square feet (or about 9,000 - 11,000 gross square feet) for the Family Dollar segment. We believe that these size stores are in the ranges of our optimal sizes operationally and give our customers a shopping environment which invites them to shop longer, buy more and make return visits.
Fiscal 2018 and fiscal 2016 which ended on February 2, 2019 and January 28, 2017, respectively, each included 52 weeks. Fiscal 2017 ended on February 3, 2018 and included 53 weeks, commensurate with the retail calendar. The 53rd week in 2017 added approximately $406.6 million in sales.
In fiscal 2018, comparable store net sales increased by 1.7% on a constant currency basis. This increase is based on a 52-week comparison for both years. Constant currency basis refers to the calculation excluding the impact of currency exchange rate fluctuations. We calculated the constant currency basis increase by translating the current year’s comparable store net sales in Canada using the prior year’s currency exchange rates. We believe that the constant currency basis provides a more accurate measure of comparable store net sales performance. Including the impact of Canadian currency fluctuations, comparable store net sales increased the same 1.7% due to an increase in average ticket. On a constant currency basis, comparable store net sales increased 3.3% in the Dollar Tree segment and increased 0.1% in the Family Dollar segment in fiscal 2018. Including the impact of currency, comparable store net sales in the Dollar Tree segment increased the same 3.3%, as a result of a 1.8% increase in average ticket and a 1.5% increase in customer count. In the Family Dollar segment, a 2.0% increase in average ticket was offset by a 1.9% decline in customer count. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
We believe comparable store net sales continue to be positively affected by a number of our Dollar Tree initiatives. We continued the roll-out of frozen and refrigerated merchandise to more of our Dollar Tree stores in 2018 and as of February 2, 2019, the Dollar Tree segment had frozen and refrigerated merchandise in approximately 5,665 stores compared to approximately 5,205 stores at February 3, 2018. Over the past year, we rolled out a new layout to a number of our Dollar Tree stores, which we call our Snack Zone. This layout highlights our immediate consumption snack offerings in the front of the store near the checkout areas. As of February 2, 2019, we have this layout in approximately 930 Dollar Tree stores and we plan to implement Snack Zone in 1,000 new and existing stores in fiscal 2019. We believe these initiatives have and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers.
We are executing several initiatives in our Family Dollar stores to increase sales. During fiscal 2018, we completed more than 500 Family Dollar renovations, and have completed more than 875 renovations since launching this initiative in the second quarter of fiscal 2017. In March 2019, we announced plans for a store optimization program for Family Dollar. This program consists of the following:
| |
• | A roll-out of a new model for both new and renovated Family Dollar stores internally known as H2. We tested the H2 model in 2018 on a limited basis with positive results. This H2 model has significantly improved merchandise offerings, including Dollar Tree $1.00 merchandise sections and establishing a minimum number of freezer and cooler doors, throughout the store. H2 has increased traffic and provided an average comparable store net sales lift in excess of 10% over control stores. H2 performs well in a variety of locations, and especially in locations where Family Dollar has been most challenged in the past. We started 2019 with approximately 200 H2 stores and plan to renovate at least 1,000 stores to this model in 2019 and expect an accelerated renovation schedule in future years. |
| |
• | We plan to close under-performing stores. In the fourth quarter of 2018, we closed 84 under-performing stores which brought our total closed stores for the year to 37 more than originally planned. In 2019 we will accelerate the pace of closings to as many as 390 stores. The normal cadence of Family Dollar closings on an annual basis is approximately 75 stores. We expect to incur approximately $28.0 million in store closure costs, which does not include the cost of rent and other lease obligation and fixture costs. |
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• | We plan to re-banner approximately 200 Family Dollar stores to the Dollar Tree brand in 2019. We re-bannered 52 stores to the Dollar Tree brand in 2018 and have re-bannered approximately 350 stores since the acquisition of Family Dollar in 2015. |
| |
• | Additionally, we plan to install adult beverage product in approximately 1,000 stores and expand freezers and coolers in approximately 400 stores in 2019. |
In fiscal 2019, in addition to the approximately $28.0 million in store closure costs, we estimate that we will incur approximately $30.0 million of incremental initiative costs based on project count and velocity.
On September 18, 2018, we announced that as part of our continuing integration of Family Dollar’s organization and support functions, we plan to consolidate our store support centers in Matthews, North Carolina and Chesapeake, Virginia to our newly-completed office tower in the Summit Pointe development in Chesapeake, Virginia. Approximately 30 percent of the Matthews associates, including more than 50 percent of the officers and directors, invited to move to Chesapeake have agreed to do so. We are currently hiring to replace the associates who are not moving. We expect the consolidation to be completed by the fall of 2019. We expect to incur total pre-tax expense of approximately $37.0 million in connection with these plans in fiscal 2019 and we incurred approximately $7.3 million in 2018.
Additionally, the following items have already impacted or could impact our business or results of operations during 2019 or in the future:
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• | We have experienced disruptions and higher than anticipated freight costs primarily due to the truck driver shortage in the United States. We expect that this will result in higher costs in future periods as merchandise is sold and could result in lower sales if product is not received in our stores on a timely basis. |
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• | The United States Trade Representative (USTR) has implemented Section 301 tariffs against $250 billion in Chinese goods. Although the tariff rate on $200 billion of those goods was originally expected to rise from 10 percent to 25 percent on March 2, 2019, President Trump announced on February 24, 2019 that he would be postponing the increase. The duration of the postponement is unknown, and the final tariffs are subject to the outcome of trade discussions between the United States and China. However, we do not expect that the tariffs will be material to our business or results of operations in 2019. When the tariffs were implemented, approximately nine percent of our products, measured by sales volume, would have been affected. To mitigate the potential adverse effect of the tariffs, we negotiated price concessions from vendors on certain products, canceled orders, changed product sizes and specifications, changed our product mix and changed vendors. As a result of our mitigation efforts, we believe that we have reduced most of the potential adverse effects of the tariffs on the Dollar Tree and Family Dollar segments in 2019. However, we can give no assurances as to the final scope, duration, or impact of any existing or future tariffs and such tariffs could have a material adverse effect on our business and results of operations if we do not continue to mitigate their impact. |
We must continue to control our merchandise costs, inventory levels and our general and administrative expenses as increases in these items could negatively impact our operating results.
Results of Operations
|
| | | | | | | | | |
| | Year Ended |
| | February 2, 2019 | | February 3, 2018 | | January 28, 2017 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | 69.6 | % | | 68.4 | % | | 69.2 | % |
Gross profit | | 30.4 | % | | 31.6 | % | | 30.8 | % |
Selling, general and administrative expenses, excluding Goodwill impairment and Receivable impairment | | 22.6 | % | | 22.5 | % | | 22.6 | % |
Goodwill impairment | | 11.9 | % | | — | % | | — | % |
Receivable impairment | | — | % | | 0.1 | % | | — | % |
Selling, general and administrative expenses | | 34.5 | % | | 22.6 | % | | 22.6 | % |
Operating income (loss) | | (4.1 | )% | | 9.0 | % | | 8.2 | % |
Interest expense, net | | 1.6 | % | | 1.3 | % | | 1.8 | % |
Other income, net | | — | % | | — | % | | — | % |
Income (loss) before income taxes | | (5.7 | )% | | 7.7 | % | | 6.4 | % |
Provision for income taxes | | 1.3 | % | | — | % | | 2.1 | % |
Net income (loss) | | (7.0 | )% | | 7.7 | % | | 4.3 | % |
Fiscal year ended February 2, 2019 compared to fiscal year ended February 3, 2018
Net Sales. Net sales increased 2.6%, or $577.8 million, in 2018 compared to 2017. Excluding the 53rd week in 2017, which accounted for approximately $406.6 million of sales, net sales increased 4.5%, or $984.4 million, resulting from sales of $618.5 million in new Dollar Tree and Family Dollar stores and increased comparable store net sales. Comparable store net sales increased 1.7% on a constant currency basis as a result of an increase in average ticket. This increase is based on a 52-week comparison for both periods. Comparable store net sales increased the same 1.7% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 3.3% in the Dollar Tree segment and increased 0.1% in the Family Dollar segment. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
Gross profit. Gross profit decreased by $74.4 million or 1.1%, to $6,947.5 million in 2018 compared to $7,021.9 million in 2017. Gross profit margin decreased to 30.4% in 2018 from 31.6% in 2017. Our gross profit margin decrease was due to the following:
| |
• | Markdown expense increased approximately 30 basis points resulting primarily from expense related to sku rationalization and planned liquidations and higher promotional markdowns in the Family Dollar segment. |
| |
• | Merchandise cost, including freight, increased approximately 25 basis points resulting from higher domestic freight costs, partially offset by improvements in initial mark-on. |
| |
• | Shrink costs increased approximately 20 basis points due to unfavorable inventory results in the current year. |
| |
• | Occupancy costs increased approximately 20 basis points resulting from the de-leveraging from one fewer week of sales in the current year. |
| |
• | Distribution costs increased approximately 15 basis points resulting primarily from higher distribution center payroll costs. |
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $7,887.0 million in 2018 from $5,022.8 million in 2017, an increase of $2,864.2 million or 57.0%. This increase is due primarily to a $2.73 billion non-cash goodwill impairment charge recorded in fiscal 2018 related to the Family Dollar reporting unit, as further discussed in “Note 3 - Goodwill and Nonamortizing Intangible Assets” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K. Excluding the goodwill impairment charge, selling, general and administrative expenses increased $137.2 million or 2.7% from the prior year. Fiscal 2017 included an $18.5 million receivable impairment related to our divestiture of certain Family Dollar stores, as further discussed in “Note 1 - Summary of Significant Accounting Policies” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K, and a $12.6 million increase to the Dollar Tree workers’ compensation reserves to record these on an undiscounted basis. Excluding the goodwill impairment in 2018 and the receivable impairment and workers’ compensation reserve increase in 2017, selling, general and administrative expenses increased to 22.6% from 22.4%, as a percentage of net sales, due to the loss of leverage from the 53rd week of sales in 2017 and an increase of approximately 20 basis points in payroll costs. Store hourly payroll costs were higher as a result of the planned reinvestment of income tax savings, partially offset by decreased incentive compensation costs resulting from lower earnings compared to targets in 2018.
Operating income (loss). An operating loss of $939.5 million was incurred in 2018 compared to operating income of $1,999.1 million in 2017. Excluding the $2.73 billion non-cash goodwill impairment charge in 2018, operating income decreased to $1,787.5 million in 2018 compared with $1,999.1 million in 2017 and operating income margin decreased to 7.8% in 2018 from 9.0% in 2017 due to the reasons noted above.
Interest expense, net. Interest expense, net was $370.0 million in 2018 compared to $301.8 million in 2017. The increase is due to the prepayment premiums paid during the first quarter of 2018 of $107.8 million and $6.5 million related to our redemption of the 5.75% Acquisition Notes due 2023 and Term Loan B-2, respectively. Also, in connection with our debt refinancing, we accelerated the expensing of approximately $41.2 million of amortizable non-cash deferred financing costs to the first quarter of 2018. These increases were partially offset by lower interest expense for the remainder of the year subsequent to the refinancing. See “Note 6 - Long-Term Debt,” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K, for additional detail on the refinancing of our long-term debt. A $782.0 million term loan facility was included with the refinancing and it was scheduled to mature on April 19, 2020. We repaid this entire amount in January 2019 and accelerated the expensing of approximately $1.5 million of amortizable non-cash deferred financing costs.
Income taxes. Our effective tax rate in 2018 was expense of 21.5% compared to a benefit of 0.6% in 2017. The rate in 2018 is the result of the goodwill impairment charge not being tax deductible. The 2018 effective tax rate includes an additional benefit
of $16.2 million related to the completion of our analysis of the tax effects of the Tax Cuts and Jobs Act (“TCJA”). The tax benefit in 2017 is the result of the TCJA that was signed into law on December 22, 2017, which lowered the statutory U.S. federal income tax rate from 35% to 21% effective as of January 1, 2018. The 2017 effective tax rate included the effect of a $562.0 million benefit resulting from the re-measurement of our net deferred tax liabilities to reflect the lower statutory federal rate of 21%. The 2017 tax rate was also lower as a result of a reduction to the North Carolina statutory tax rate and a reduction in the reserve for uncertain tax positions resulting from statute expirations and the reduction of interest accrued on method changes.
Fiscal year ended February 3, 2018 compared to fiscal year ended January 28, 2017
Net Sales. Net sales increased 7.4%, or $1,526.3 million, in 2017 compared to 2016, resulting from sales in new Dollar Tree and Family Dollar stores, increased comparable store net sales and the 53rd week in 2017, which accounted for $406.6 million of the increase. Comparable store net sales increased 1.9% on a constant currency basis as a result of increases in average ticket and customer count. This increase is based on a 53-week comparison for both periods. Comparable store net sales also increased 1.9% when adjusted for the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 3.4% in the Dollar Tree segment and increased 0.4% in the Family Dollar segment. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
Gross profit. Gross profit increased by $627.2 million or 9.8%, to $7,021.9 million in 2017 compared to $6,394.7 million in 2016. Gross profit margin increased to 31.6% in 2017 from 30.8% in 2016. Our gross profit margin improvement was primarily the result of the following:
| |
• | Merchandise cost, including freight, decreased approximately 50 basis points primarily resulting from improved mark-on in 2017. |
| |
• | Markdowns decreased approximately 20 basis points resulting from fewer promotional markdowns in 2017. |
| |
• | Occupancy costs decreased approximately 10 basis points primarily resulting from the leverage from the sales in the 53rd week. |
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $5,022.8 million in 2017 from $4,689.9 million in 2016, an increase of $332.9 million or 7.1%. As a percentage of net sales, selling, general and administrative expenses were 22.6% in 2017 and 2016. Fiscal 2017 includes an $18.5 million receivable impairment related to our divestiture of certain Family Dollar stores, as further discussed in “Note 1 - Summary of Significant Accounting Policies” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K, and a $12.6 million increase to the Dollar Tree workers’ compensation reserves to record these on an undiscounted basis. Excluding the receivable impairment and the workers’ compensation reserve increase, selling, general and administrative expenses decreased to 22.4%, as a percentage of net sales, due to the leverage from the 53rd week and the net of the following:
| |
• | Depreciation costs decreased approximately 25 basis points as a result of assets becoming fully depreciated on the Family Dollar segment and leverage from the comparable store net sales increase for the Dollar Tree segment. |
| |
• | Store operating costs decreased approximately 15 basis points due to the leverage from the comparable store net sales increase. |
| |
• | Payroll expenses increased approximately 10 basis points, excluding the $12.6 million increase to the workers’ compensation reserve, resulting from higher incentive compensation costs and higher store hourly payroll costs. |
| |
• | Operating and corporate expenses increased approximately 15 basis points, excluding the receivable impairment, primarily resulting from higher advertising costs. |
Operating income. Operating income for 2017 increased to $1,999.1 million compared with $1,704.8 million in 2016 and operating income margin increased to 9.0% in 2017 from 8.2% in 2016 due to the reasons noted above.
Interest expense, net. Interest expense, net was $301.8 million in 2017 compared to $375.5 million in 2016. The decrease is due to lower debt outstanding in 2017 as a result of $990.1 million in prepayments in the third and fourth quarters of 2016 as well as the $500.0 million prepayment in the second quarter of 2017. Fiscal 2016 also includes the expensing of $26.6 million of amortizable non-cash deferred financing costs and $2.6 million in fees associated with the refinancing of the New Senior Secured Credit Facilities. On January 30, 2018, we provided an irrevocable notice to the 2020 Notes holders to call the $750.0 million 2020 Notes on March 1, 2018. In connection with the early redemption of the 2020 Notes, we recorded a make-whole premium of $9.8 million which was payable on the call date of March 1, 2018.
Income taxes. Our effective tax rate in 2017 was a benefit of 0.6% compared to expense of 32.6% in 2016. The decrease is due to the TCJA that was signed into law on December 22, 2017, which lowered the statutory U.S. federal income tax rate from 35% to 21% and made numerous other law changes, effective as of January 1, 2018. Our fiscal 2017 includes 34 days in calendar year 2018, therefore our overall 2017 statutory federal corporate tax rate is 33.7%. The effective tax rate also includes a $562.0 million benefit resulting from the re-measurement of our net deferred tax liabilities to reflect the lower statutory federal rate of 21%. The 2017 tax rate was also lower as a result of a reduction to the North Carolina statutory tax rate which resulted in a decrease in the deferred tax liability related to the trade name intangible asset and a $9.9 million decrease in tax expense. The 2017 rate also includes a reduction of approximately $5.6 million in the reserve for uncertain tax positions resulting from statute expirations and the reduction of interest accrued on method changes. The tax rate in fiscal 2016 includes benefits resulting from a one-time election allowing the Family Dollar acquisition to be treated as an asset purchase for certain state tax purposes and a 1.0% decrease in North Carolina’s state tax rate which resulted in a reduction in the deferred tax liability related to the trade name intangible asset.
Segment Information
We operate a chain of more than 15,200 retail discount stores in 48 states and five Canadian provinces. Our operations are conducted in two reporting business segments: Dollar Tree and Family Dollar. We define our segments as those operations whose results our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.
We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income. We may revise the measurement of each segment’s operating income, including the allocation of distribution center and store support center costs, as determined by the information regularly reviewed by the CODM. If the measurement of a segment changes, prior period amounts and balances are reclassified to be comparable to the current period’s presentation.
Dollar Tree
The following table summarizes the operating results of the Dollar Tree segment:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | February 2, 2019 | | February 3, 2018 | | January 28, 2017 |
(in millions) | | $ | | % of Net Sales | | $ | | % of Net Sales | | $ | | % of Net Sales |
Net sales | | $ | 11,712.1 |
| | | | $ | 11,164.4 |
| | | | $ | 10,138.7 |
| | |
Gross profit | | 4,137.5 |
| | 35.3 | % | | 3,998.5 |
| | 35.8 | % | | 3,584.7 |
| | 35.4 | % |
Operating income | | 1,502.5 |
| | 12.8 | % | | 1,481.9 |
| | 13.3 | % | | 1,305.3 |
| | 12.9 | % |
Fiscal year ended February 2, 2019 compared to fiscal year ended February 3, 2018
Net sales for the Dollar Tree segment increased 4.9%, or $547.7 million in 2018 compared to 2017. Excluding the 53rd week in 2017, which accounted for approximately $199.2 million of sales, net sales increased 6.8%, or $746.9 million, due to sales from new stores of $388.6 million and a comparable store net sales increase of 3.3% on a constant currency basis resulting from increases in average ticket and customer count of 1.8% and 1.5%, respectively.
Gross profit margin for the Dollar Tree segment decreased to 35.3% in 2018 from 35.8% in 2017. The decrease is due to the following:
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• | Merchandise cost, including freight, increased approximately 15 basis points primarily due to higher domestic freight costs, partially offset by increased initial mark-on and a greater percentage of sales of higher margin general merchandise. |
| |
• | Shrink costs increased approximately 15 basis points resulting from unfavorable physical inventory results in the current year. |
| |
• | Distribution costs increased approximately 10 basis points primarily resulting from higher distribution center payroll costs. |
| |
• | Occupancy costs increased approximately 10 basis points resulting from the de-leveraging from one fewer week of sales in the current year. Excluding the de-leveraging effect, occupancy costs decreased approximately 5 basis points resulting from the leverage from the comparable store net sales increase in 2018. |
Operating income margin for the Dollar Tree segment decreased to 12.8% in 2018 compared to 13.3% in 2017. The decrease in operating income margin in 2018 was the result of lower gross profit margin as noted above. Selling, general and administrative expenses, as a percentage of net sales were 22.5% for both 2018 and 2017. Store hourly payroll costs increased approximately 25 basis points as a result of the planned tax reinvestment in 2018 and were offset by decreases in incentive compensation and retirement plan contributions as a result of lower earnings compared to target in 2018.
Fiscal year ended February 3, 2018 compared to fiscal year ended January 28, 2017
Net sales for Dollar Tree increased 10.1%, or $1,025.7 million in 2017 compared to 2016 due to sales from new stores, the 53rd week in 2017, which accounted for $199.2 million of the increase, and a comparable store net sales increase of 3.4% on a constant currency basis resulting from increases in customer count and average ticket.
Gross profit margin for Dollar Tree increased to 35.8% in 2017 compared to 35.4% in 2016. The increase is due to the following:
| |
• | Merchandise cost, including freight, decreased approximately 15 basis points due primarily to improved mark-on. |
| |
• | Occupancy costs decreased approximately 20 basis points resulting primarily from the leverage from the increase in comparable store net sales and the 53rd week sales. |
| |
• | Shrink expense decreased approximately 15 basis points resulting from improved physical inventory results in the current year. |
Operating income margin for Dollar Tree increased to 13.3% in 2017 compared to 12.9% in 2016. The increase in operating income margin in 2017 was the result of higher gross profit margin. Selling, general and administrative expenses, as a percentage of net sales were 22.5% for both 2017 and 2016. The fluctuations in selling, general and administrative expenses as a percentage of net sales were as follows:
| |
• | Payroll costs increased approximately 25 basis points resulting primarily from higher store hourly wages and higher incentive compensation expense. |
| |
• | Depreciation costs and utility costs decreased 10 basis points each resulting from the leverage from the comparable store net sales increase and sales in the 53rd week. |
Family Dollar
The following table summarizes the operating results of the Family Dollar segment:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | February 2, 2019 | | February 3, 2018 | | January 28, 2017 |
(in millions) | | $ | | % of Net Sales | | $ | | % of Net Sales | | $ | | % of Net Sales |
Net sales | | $ | 11,111.2 |
| | | | $ | 11,081.1 |
| | | | $ | 10,580.5 |
| | |
Gross profit | | 2,810.0 |
| | 25.3 | % | | 3,023.4 |
| | 27.3 | % | | 2,810.0 |
| | 26.6 | % |
Operating income (loss) | | (2,442.0 | ) | | (22.0 | )% | | 517.2 |
| | 4.7 | % | | 399.5 |
| | 3.8 | % |
Fiscal year ended February 2, 2019 compared to fiscal year ended February 3, 2018
Net sales for the Family Dollar segment increased $30.1 million or 0.3% in 2018 compared to 2017. Excluding the 53rd week in 2017, which accounted for approximately $207.4 million of sales, net sales increased $237.5 million or 2.2%, due to sales from new stores of $230.0 million and a comparable store net sales increase of 0.1%, resulting from an increase in average ticket, partially offset by a decrease in customer count.
Gross profit for the Family Dollar segment decreased $213.4 million or 7.1% in 2018 compared to 2017. The gross profit margin for Family Dollar decreased to 25.3% in 2018 compared to 27.3% in 2017. The decrease is due to the following:
| |
• | Markdown expense increased approximately 60 basis points resulting from expense related to sku rationalization and planned liquidations and higher promotional markdowns and seasonal markdowns. |
| |
• | Merchandise cost, including freight, increased approximately 50 basis points, primarily due to higher domestic freight costs, partially offset by increased initial mark-on. |
| |
• | Occupancy costs increased approximately 35 basis points resulting from the de-leveraging effect of the sales from the 53rd week in the prior year and the minimal increase in comparable store net sales. |
| |
• | Shrink costs increased approximately 30 basis points resulting from unfavorable physical inventory results in the current year. |
| |
• | Distribution costs increased approximately 25 basis points resulting primarily from higher merchandising and distribution payroll-related costs. |
The Family Dollar segment incurred an operating loss in 2018 due to the $2.73 billion non-cash goodwill impairment charge. In 2017, operating income was reduced by the $18.5 million receivable impairment related to our divestiture. Excluding the goodwill impairment in 2018 and the receivable impairment in 2017, operating income margin for the Family Dollar segment decreased to 2.6% in 2018 from 4.8% in 2017, due to the gross profit margin decrease noted above and increased selling, general and administrative expenses, as a percentage of net sales. Excluding the goodwill and receivable impairments, selling, general and administrative expenses, as a percentage of net sales, were 22.7% in 2018, compared to 22.5% in 2017. The increase in selling, general and administrative expenses, as a percentage of net sales, was due to the net of the following:
| |
• | Payroll expenses increased approximately 40 basis points primarily due to higher store hourly payroll expenses as a result of the planned reinvestment of income tax savings, partially offset by decreased incentive compensation costs resulting from lower earnings compared to target in 2018. |
| |
• | Depreciation and amortization expense decreased approximately 10 basis points as a result of certain assets that were revalued upon the 2015 acquisition becoming fully depreciated and/or amortized. |
Fiscal year ended February 3, 2018 compared to fiscal year ended January 28, 2017
Net sales for Family Dollar increased $500.6 million or 4.7% in 2017 compared to 2016 due to sales from new stores, the 53rd week in 2017 which accounted for $207.4 million of the increase and a comparable store net sales increase of 0.4% resulting primarily from increases in average ticket, partially offset by a slight decrease in customer count.
Gross profit for Family Dollar increased $213.4 million or 7.6% in 2017 compared to 2016. The gross profit margin for Family Dollar increased to 27.3% in 2017 compared to 26.6% in 2016. The increase is due to the net of the following:
| |
• | Merchandise cost, including freight, decreased 65 basis points resulting primarily from higher initial mark-on. |
| |
• | Markdown expense decreased approximately 30 basis points resulting from lower promotional markdowns due to the improved sales performance. |
| |
• | Shrink expense increased approximately 15 basis points primarily due to unfavorable physical inventory results in 2017. |
Operating income margin for Family Dollar increased to 4.7% in 2017 compared to 3.8% in 2016. Operating income was reduced by the $18.5 million receivable impairment in 2017. Operating income margin excluding the receivable impairment increased to 4.8% for 2017. The increase, excluding the receivable impairment is due to the gross profit margin increase noted above and decreased selling, general and administrative expenses, as a percentage of net sales. Selling, general and administrative expenses, as a percentage of net sales, were 22.5% in 2017, excluding the receivable impairment compared to 22.8% in 2016. The decrease in selling, general and administrative expenses as a percentage of net sales, excluding the receivable impairment was due to the leverage from the sales in the 53rd week and the net of the following:
| |
• | Depreciation costs decreased approximately 40 basis points as a result of certain assets that were revalued upon the 2015 acquisition becoming fully depreciated and/or amortized. |
| |
• | Store occupancy costs decreased approximately 25 basis points resulting primarily from lower repairs and maintenance and utility costs as a percentage of net sales. |
| |
• | Operating and corporate expenses increased approximately 35 basis points resulting from higher advertising and store supply costs. |
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our distribution network and operate and expand our 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 have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.
The following table compares cash-flow related information for the years ended February 2, 2019, February 3, 2018 and January 28, 2017:
|
| | | | | | | | | | | | |
| | Year Ended |
| | February 2, | | February 3, | | January 28, |
(in millions) | | 2019 | | 2018 | | 2017 |
Net cash provided by (used in): | | | | | | |
Operating activities | | $ | 1,766.0 |
| | $ | 1,510.2 |
| | $ | 1,673.3 |
|
Investing activities | | (816.7 | ) | | (627.9 | ) | | (483.6 | ) |
Financing activities | | (1,599.9 | ) | | (651.5 | ) | | (1,060.5 | ) |
Operating Activities
Net cash provided by operating activities increased $255.8 million in 2018 compared to 2017 primarily due to the revaluation of deferred income tax liabilities in 2017 and increased payable balances.
Net cash provided by operating activities decreased $163.1 million in 2017 compared to 2016 primarily due to increases in inventories and other current assets, partially offset by higher net income, net of depreciation and amortization, the revaluation of deferred income tax liabilities and increased payables balances.
Investing Activities
Net cash used in investing activities increased $188.8 million in 2018 compared with 2017 due to increased capital expenditures. The increase in capital expenditures primarily relates to a new Dollar Tree distribution center that opened in the second quarter of 2018 and the expansion of the Dollar Tree store support center.
Net cash used in investing activities increased $144.3 million in 2017 compared with 2016 due to net restricted investment proceeds in 2016 and increased capital expenditures in 2017.
Financing Activities
In 2018, net cash used in financing activities increased $948.4 million compared to 2017 primarily due to the prepayment of the $782.0 million term loan facility in January 2019 and our debt refinancing in the first quarter of 2018, which resulted in the payment of $155.3 million of debt-issuance and extinguishment costs.
In 2017, net cash used in financing activities decreased $409.0 million compared to 2016 primarily due to lower principal payments compared to the prior year.
At February 2, 2019, our long-term borrowings were $4.3 billion and we had $1.25 billion available under our revolving credit facility, less amounts outstanding for standby letters of credit totaling $182.9 million. For additional detail on our long-term borrowings and other commitments, refer to the discussion of Funding Requirements below, as well as “Note 5 - Commitments and Contingencies” and “Note 6 - Long-Term Debt” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Share Repurchases
Historically we have used cash to repurchase shares but we did not repurchase any shares in fiscal 2018, 2017 or 2016. At February 2, 2019, we have $1.0 billion remaining under Board repurchase authorization.
Funding Requirements
Overview, Including Off-Balance Sheet Arrangements
We expect our cash needs for opening new stores and expanding existing stores in fiscal 2019 to total approximately $352.0 million, which includes capital expenditures, initial inventory and pre-opening costs.
Our estimated capital expenditures for fiscal 2019 are approximately $1.0 billion, including planned expenditures for our new, expanded and re-bannered stores, more than 1,000 planned H2 renovations of Family Dollar segment stores, the addition of
freezers and coolers to approximately 500 new and existing Dollar Tree segment stores, the expansion of freezers and coolers in 400 Family Dollar segment stores, the construction of two new distribution centers and the development of additional parcels on our Summit Pointe property, located in Chesapeake, Virginia, for mixed-use purposes. We believe that we can adequately fund our working capital requirements and planned capital expenditures for the foreseeable future from net cash provided by operations and potential borrowings under our revolving credit facility.
The following tables summarize our material contractual obligations at February 2, 2019, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
Contractual Obligations | Total | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter |
Lease Financing | | | | | | | |
Operating lease obligations | $ | 7,307.6 |
| $ | 1,435.9 |
| $ | 1,176.7 |
| $ | 1,100.0 |
| $ | 899.6 |
| $ | 729.1 |
| $ | 1,966.3 |
|
Long-term Borrowings | |
| |
| |
| |
| |
| |
| |
|
Principal | 4,300.0 |
| — |
| 750.0 |
| 300.0 |
| — |
| 1,000.0 |
| 2,250.0 |
|
Interest | 960.2 |
| 171.1 |
| 149.8 |
| 129.2 |
| 129.7 |
| 104.2 |
| 276.2 |
|
Total obligations | $ | 12,567.8 |
| $ | 1,607.0 |
| $ | 2,076.5 |
| $ | 1,529.2 |
| $ | 1,029.3 |
| $ | 1,833.3 |
| $ | 4,492.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
Commitments | Total | Expiring in 2019 | Expiring in 2020 | Expiring in 2021 | Expiring in 2022 | Expiring in 2023 | Thereafter |
Letters of credit and surety bonds | $ | 415.5 |
| $ | 413.1 |
| $ | 2.2 |
| $ | 0.2 |
| $ | — |
| $ | — |
| $ | — |
|
Purchase obligations | 176.1 |
| 75.4 |
| 32.6 |
| 27.6 |
| 20.6 |
| 14.5 |
| 5.4 |
|
Total commitments | $ | 591.6 |
| $ | 488.5 |
| $ | 34.8 |
| $ | 27.8 |
| $ | 20.6 |
| $ | 14.5 |
| $ | 5.4 |
|
Lease Financing
Operating lease obligations. Our operating lease obligations are primarily for payments under noncancelable store leases. The commitment includes amounts for leases that were signed prior to February 2, 2019 for stores that were not yet open on February 2, 2019.
Long-term Borrowings
In the first quarter of 2018, we redeemed our $750.0 million aggregate principal amount of 5.25% Acquisition Notes due 2020 and accelerated the amortization of debt-issuance costs associated with the notes of $6.1 million.
Additionally, in the first quarter of 2018, we completed the registered offering of $750.0 million aggregate principal amount of Senior Floating Rate Notes due 2020, $1.0 billion aggregate principal amount of 3.70% Senior Notes due 2023, $1.0 billion aggregate principal amount of 4.00% Senior Notes due 2025 and $1.25 billion aggregate principal amount of 4.20% Senior Notes due 2028. We also entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, providing for $2.03 billion in senior credit facilities, consisting of a $1.25 billion revolving credit facility and a $782.0 million term loan facility. We used the proceeds of these borrowings and cash on hand to repay all of the outstanding loans under our then-existing senior secured credit facilities, including our Term Loan A-1 and Term Loan B-2, and redeemed all of our outstanding 5.75% Acquisition Notes due 2023. In connection with the foregoing transactions, we accelerated the expensing of approximately $41.2 million of amortizable non-cash deferred financing costs, expensed approximately $0.4 million in transaction-related costs and capitalized approximately $36.9 million of deferred financing costs and original issue discount, which are being amortized over the terms of the new borrowings. We also paid prepayment premiums of $6.5 million and $107.8 million related to our redemption of the Term Loan B-2 and 5.75% Acquisition Notes due 2023, respectively. In January 2019, we prepaid in full the $782.0 million term loan facility.
In addition, upon the acquisition of Family Dollar in 2015, we assumed the liability for $300.0 million of 5.00% senior notes due February 1, 2021.
The interest on our long-term borrowings represents the interest payments on the foregoing long-term borrowings that were outstanding at February 2, 2019 using the interest rates for each at February 2, 2019.
For complete terms of our long-term borrowings, please refer to “Note 6 - Long-Term Debt” within “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K.
Commitments
Letters of credit and surety bonds. We are a party to three Letter of Credit Reimbursement and Security Agreements providing $125.0 million, $120.0 million and $110.0 million, respectively, for letters of credit. Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $166.4 million of purchases committed under these letters of credit at February 2, 2019.
We also have approximately $182.9 million of letters of credit outstanding that serve as collateral for our large-deductible insurance programs and $66.2 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores and self-insured insurance programs.
Purchase obligations. We have commitments totaling approximately $176.1 million related to legally binding agreements for software licenses and support, telecommunication services and store technology assets and maintenance for our stores.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates. Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates. Following is a discussion of the policies that we consider critical.
Inventory Valuation
As discussed in “Note 1 - Summary of Significant Accounting Policies” under the caption “Merchandise Inventories” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K, inventories at the distribution centers are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Cost is assigned to store inventories using the retail inventory method on a weighted-average basis. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry and results in valuing inventories at lower of cost or net realizable value when markdowns are taken as a reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain management estimates and judgments, including estimates of future merchandise markdowns and shrink, which significantly affect the ending inventory valuation at cost as well as the resulting gross margins. The averaging required in applying the retail inventory method and the estimates of shrink and markdowns could, under certain circumstances, result in costs not being recorded in the proper period.
We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal carryover merchandise on hand, historical markdown statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends. Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.
Our accrual for shrink is based on the actual, historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Our physical inventory counts are generally taken between January and October of each year; therefore, the shrink accrual recorded at February 2, 2019 is based on estimated shrink for most of 2018, including the fourth quarter. We have not experienced significant fluctuations in historical shrink. The amounts recorded in the current year reflect the Dollar Tree and Family Dollar segments’ historical results. We periodically adjust our shrink estimates to reflect our best estimates based on the factors described.
Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or net realizable value each year on a consistent basis.
Self-Insurance Liabilities
The liabilities related to our self-insurance programs for workers’ compensation and general liability are estimates that require judgment and the use of assumptions. At least annually, we obtain third-party actuarial valuations to aid in valuing the liabilities and in determining the amount to accrue during the year. These actuarial valuations are estimates based on our historical loss development factors and the related accruals are adjusted as management’s estimates change.
Management’s estimate for self-insurance liabilities could vary from the ultimate loss sustained given the difficulty in predicting future events; however, historically, the net total of these differences has not had a material effect on our financial condition or results of operations.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are initially recorded at their fair values. These assets are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, significant negative industry or economic trends, unanticipated changes in the competitive environment and a significant sustained decline in the market price of our stock.
For purposes of our goodwill impairment evaluation, the reporting units are Family Dollar, Dollar Tree and Dollar Tree Canada. Goodwill has been assigned to the reporting units based on prior business combinations related to the brands. In the event a qualitative assessment of the fair value of a reporting unit indicates it is more likely than not that the fair value is less than the carrying amount, we then estimate the fair value using a combination of a market multiple method and a discounted cash flow method. Under the market multiple approach, we estimate a fair value based on comparable companies’ market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted for a control premium. Under the discounted cash flow approach, we project future cash flows which are discounted using a weighted-average cost of capital analysis that reflects current market conditions, adjusted for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.
The Family Dollar goodwill and trade name comprise a substantial portion of our goodwill and indefinite-lived intangible assets and management’s judgment utilized in the Family Dollar goodwill and trade name impairment evaluations is critical. The computations require management to make estimates and assumptions and actual results may differ significantly, particularly if there are significant adverse changes in the operating environment. Critical assumptions that are used as part of the Family Dollar goodwill evaluation include:
| |
• | The potential future revenue, EBITDA and cash flows of the reporting unit. The projections use management’s assumptions about economic and market conditions over the projected period as well as our estimates of future performance and reporting unit revenue, gross margin, expenses and other factors. The resulting revenue, EBITDA and cash flow estimates are based on our most recent business operating plans, and various growth rates have been assumed for years beyond the current business plan period. We believe that the assumptions, estimates and rates used in our fiscal 2018 impairment evaluations are reasonable; however, variations in the assumptions, estimates and rates could result in significantly different estimates of fair value. |
| |
• | Selection of an appropriate discount rate. Calculating the present value of future cash flows requires the selection of an appropriate discount rate, which is based on a weighted-average cost of capital analysis. The discount rate is affected by changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants. Given current economic conditions, it is possible that the discount rate will fluctuate in the near term. We engaged third party experts to assist in the determination of the weighted-average cost of capital used to discount the cash flows for our Family Dollar reporting unit. The weighted-average cost of capital used to discount the cash flows for our evaluation was 8.0% for our fiscal 2018 analysis. |
Indefinite-lived intangible assets, such as the Family Dollar trade name, are not subject to amortization but are reviewed at least annually for impairment. The indefinite-lived intangible asset impairment evaluations are performed by comparing the fair value of the indefinite-lived intangible assets to their carrying values. We estimate the fair value of trade name intangible asset based on an income approach using the relief-from-royalty method. This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are inherently uncertain. The discount rate includes a premium compared to the discount used for the Family Dollar goodwill impairment evaluation due to the inherently higher risk profile of intangible assets compared to the overall reporting unit.
Our impairment evaluation of goodwill resulted in a $2.73 billion non-cash impairment charge in fiscal 2018 related to the Family Dollar reporting unit. No goodwill impairment charges were recorded in fiscal 2017 or 2016. Our evaluation of the Family Dollar trade name did not result in impairment charges during fiscal 2018, 2017 or 2016. The fair value of the Family Dollar trade name was within 1% of its carrying value.
For additional information on goodwill and indefinite-lived intangible assets, including the related impairment evaluations, refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K. For additional information on uncertainties associated with the key assumptions and any
potential events and/or circumstances that could have a negative effect on the key assumptions, please refer to “Item 1A. Risk Factors” beginning on page 12 of this Form 10-K, and elsewhere within this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If our assumptions and related estimates change in the future, we may be required to record impairment charges against earnings in future periods. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.
Recent Accounting Pronouncements
See “Note 1 - Summary of Significant Accounting Policies” in “Item 8. Financial Statements and Supplementary Data” beginning on page 42 of this Form 10-K for a detailed description of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and diesel fuel cost changes. We may enter into interest rate or diesel fuel swaps to manage exposure to interest rate and diesel fuel price changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Interest Rate Risk
At February 2, 2019, our variable rate debt consists of our $750.0 million Senior Floating Rate Notes due 2020 (the “Floating Rate Notes”), which represents approximately 17% of our total debt. Borrowings under the Floating Rate Notes bear interest at a floating rate, reset quarterly, equal to LIBOR plus 70 basis points. A 1.0% increase in LIBOR would result in an annual increase in interest expense related to our Floating Rate Notes of $7.5 million.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Dollar Tree, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Dollar Tree, Inc. (the Company) as of February 2, 2019 and February 3, 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended February 2, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended February 2, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 27, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Norfolk, Virginia
March 27, 2019
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | |
| | Year Ended |
| | February 2, | | February 3, | | January 28, |
(in millions, except per share data) | | 2019 | | 2018 | | 2017 |
Net sales | | $ | 22,823.3 |
| | $ | 22,245.5 |
| | $ | 20,719.2 |
|
Cost of sales | | 15,875.8 |
| | 15,223.6 |
| | 14,324.5 |
|
Gross profit | | 6,947.5 |
| | 7,021.9 |
| | 6,394.7 |
|
Selling, general and administrative expenses, excluding Goodwill impairment and Receivable impairment | | 5,160.0 |
| | 5,004.3 |
| | 4,689.9 |
|
Goodwill impairment | | 2,727.0 |
| | — |
| | — |
|
Receivable impairment | | — |
| | 18.5 |
| | — |
|
Selling, general and administrative expenses | | 7,887.0 |
| | 5,022.8 |
| | 4,689.9 |
|
Operating income (loss) | | (939.5 | ) | | 1,999.1 |
| | 1,704.8 |
|
Interest expense, net | | 370.0 |
| | 301.8 |
| | 375.5 |
|
Other income, net | | (0.5 | ) | | (6.7 | ) | | (0.1 | ) |
Income (loss) before income taxes | | (1,309.0 | ) | | 1,704.0 |
| | 1,329.4 |
|
Provision for income taxes | | 281.8 |
| | (10.3 | ) | | 433.2 |
|
Net income (loss) | | $ | (1,590.8 | ) | | $ | 1,714.3 |
| | $ | 896.2 |
|
Basic net income (loss) per share | | $ | (6.69 | ) | | $ | 7.24 |
| | $ | 3.80 |
|
Diluted net income (loss) per share | | $ | (6.66 | ) | | $ | 7.21 |
| | $ | 3.78 |
|
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | |
| | Year Ended |
| | February 2, | | February 3, | | January 28, |
(in millions) | | 2019 | | 2018 | | 2017 |
Net income (loss) | | $ | (1,590.8 | ) | | $ | 1,714.3 |
| | $ | 896.2 |
|
| | | | | | |
Foreign currency translation adjustments | | (6.0 | ) | | 5.3 |
| | 5.5 |
|
| | | | | | |
Total comprehensive income (loss) | | $ | (1,596.8 | ) | | $ | 1,719.6 |
| | $ | 901.7 |
|
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
(in millions, except share and per share data) | | February 2, 2019 | | February 3, 2018 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 422.1 |
| | $ | 1,097.8 |
|
Merchandise inventories | | 3,536.0 |
| | 3,169.3 |
|
Other current assets | | 335.2 |
| | 309.2 |
|
Total current assets | | 4,293.3 |
| | 4,576.3 |
|
Property, plant and equipment, net of accumulated depreciation of $3,690.6 and $3,192.1, respectively | | 3,445.3 |
| | 3,200.7 |
|
Restricted cash | | 24.6 |
| | — |
|
Goodwill | | 2,296.6 |
| | 5,025.2 |
|
Favorable lease rights, net of accumulated amortization of $287.8 and $230.9, respectively | | 288.7 |
| | 375.3 |
|
Trade name intangible asset | | 3,100.0 |
| | 3,100.0 |
|
Other assets | | 52.7 |
| | 55.3 |
|
Total assets | | $ | 13,501.2 |
| | $ | 16,332.8 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
|
Current liabilities: | | |
| | |
|
Current portion of long-term debt | | $ | — |
| | $ | 915.9 |
|
Accounts payable | | 1,416.4 |
| | 1,174.8 |
|
Income taxes payable | | 60.0 |
| | 31.5 |
|
Other current liabilities | | 619.3 |
| | 736.9 |
|
Total current liabilities | | 2,095.7 |
| | 2,859.1 |
|
Long-term debt, net, excluding current portion | | 4,265.3 |
| | 4,762.1 |
|
Unfavorable lease rights, net of accumulated amortization of $76.9 and $61.1, respectively | | 78.8 |
| | 100.0 |
|
Deferred income taxes, net | | 973.2 |
| | 985.2 |
|
Income taxes payable, long-term | | 35.4 |
| | 43.8 |
|
Other liabilities | | 409.9 |
| | 400.3 |
|
Total liabilities | | 7,858.3 |
| | 9,150.5 |
|
Commitments and contingencies | |
|
| |
|
|
Shareholders’ equity: | | |
| | |
|
Common stock, par value $0.01; 600,000,000 shares authorized, 238,081,664 and 237,325,963 shares issued and outstanding at February 2, 2019 and February 3, 2018, respectively | | 2.4 |
| | 2.4 |
|
Additional paid-in capital | | 2,602.7 |
| | 2,545.3 |
|
Accumulated other comprehensive loss | | (38.3 | ) | | (32.3 | ) |
Retained earnings | | 3,076.1 |
| | 4,666.9 |
|
Total shareholders’ equity | | 5,642.9 |
| | 7,182.3 |
|
Total liabilities and shareholders’ equity | | $ | 13,501.2 |
| | $ | 16,332.8 |
|
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED FEBRUARY 2, 2019, FEBRUARY 3, 2018, AND JANUARY 28, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Common Stock Shares | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Share- holders’ Equity |
Balance at January 30, 2016 | | 235.0 |
| | $ | 2.4 |
| | $ | 2,391.2 |
| | $ | (43.1 | ) | | $ | 2,056.4 |
| | $ | 4,406.9 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 896.2 |
| | 896.2 |
|
Total other comprehensive income | | — |
| | — |
| | — |
| | 5.5 |
| | — |
| | 5.5 |
|
Issuance of stock under Employee Stock Purchase Plan | | 0.1 |
| | — |
| | 8.0 |
| | — |
| | — |
| | 8.0 |
|
Exercise of stock options | | 0.6 |
| | — |
| | 33.5 |
| | — |
| | — |
| | 33.5 |
|
Stock-based compensation, net | | 0.4 |
| | — |
| | 39.4 |
| | — |
| | — |
| | 39.4 |
|
Balance at January 28, 2017 | | 236.1 |
| | 2.4 |
| | 2,472.1 |
| | (37.6 | ) | | 2,952.6 |
| | 5,389.5 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 1,714.3 |
| | 1,714.3 |
|
Total other comprehensive income | | — |
| | — |
| | — |
| | 5.3 |
| | — |
| | 5.3 |
|
Issuance of stock under Employee Stock Purchase Plan | | 0.2 |
| | — |
| | 8.4 |
| | — |
| | — |
| | 8.4 |
|
Exercise of stock options | | 0.5 |
| | — |
| | 26.6 |
| | — |
| | — |
| | 26.6 |
|
Stock-based compensation, net | | 0.5 |
| | — |
| | 38.2 |
| | — |
| | — |
| | 38.2 |
|
Balance at February 3, 2018 | | 237.3 |
| | 2.4 |
| | 2,545.3 |
| | (32.3 | ) | | 4,666.9 |
| | 7,182.3 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | (1,590.8 | ) | | (1,590.8 | ) |
Total other comprehensive loss | | — |
| | — |
| | — |
| | (6.0 | ) | | — |
| |