EX-32.1 CEO 906 CERT
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
(Mark
One)
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(X)
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|
Quarterly
report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of
1934
|
For
the quarterly period ended July 29, 2006
OR
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(
)
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|
Transition
report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of
1934
|
Commission
File Number: 0-25464
DOLLAR
TREE STORES, INC.
(Exact
name of registrant as specified in its charter)
Virginia
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|
54-1387365
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
incorporation
or organization)
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Identification
No.)
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500
Volvo Parkway
Chesapeake,
Virginia 23320
(Address
of principal executive offices)
Telephone
Number (757) 321-5000
(Registrant's
telephone number, including area code)
Indicate
by check mark whether 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer (X)
|
Accelerated
filer ( )
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Non
accelerated filer ( )
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
September 1, 2006, there were 101,979,284 shares of the Registrant’s Common
Stock outstanding.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
PART
I-FINANCIAL INFORMATION
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Page
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Item
1.
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Financial
Statements:
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3
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4
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5
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6
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Item
2.
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13
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Item
3.
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18
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Item
4.
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19
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PART
II-OTHER INFORMATION
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Item
1.
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19
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Item
1A.
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20
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Item
2.
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20
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Item
3.
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20
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Item
4.
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21
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Item
5.
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21
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Item
6.
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21
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22
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DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
|
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13
Weeks Ended
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26
Weeks Ended
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July
29,
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July
30,
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July
29,
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July
30,
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(In
millions, except per share data)
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|
2006
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|
2005
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2006
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2005
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Net
sales
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$
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883.6
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$
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769.0
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$
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1,740.1
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$
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1,518.1
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Cost
of sales
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590.3
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507.6
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1,160.7
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1,002.4
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Gross
profit
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293.3
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261.4
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579.4
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515.7
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Selling,
general and administrative
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expenses
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245.3
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214.9
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478.0
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421.1
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Operating
income
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48.0
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46.5
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101.4
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|
94.6
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|
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Interest
expense, net
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1.7
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2.8
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2.5
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4.1
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Income
before income taxes
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46.3
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43.7
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98.9
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90.5
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Provision
for income taxes
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17.3
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16.4
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37.0
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34.2
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Net
income
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$
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29.0
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$
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27.3
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$
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61.9
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$
|
56.3
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Net
income per share:
|
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|
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Basic
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$
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0.28
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$
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0.25
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$
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0.59
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$
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0.51
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Diluted
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$
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0.28
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$
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0.25
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$
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0.59
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$
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0.51
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See
accompanying Notes to Condensed Consolidated Financial Statements.
Back
to Index
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
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July
29,
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January
28,
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July
30,
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(In
millions)
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2006
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2006
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2005
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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49.0
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$
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65.8
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$
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14.5
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Short-term
investments
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131.4
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274.0
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151.0
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Merchandise
inventories
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671.0
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576.5
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629.8
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Other
current assets
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23.5
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27.4
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33.9
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Total
current assets
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874.9
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943.7
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829.2
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Property,
leaseholds and equipment, net
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710.5
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681.8
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691.6
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Intangibles,
net
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145.6
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129.3
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130.9
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Other
assets, net
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44.3
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43.6
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28.1
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TOTAL
ASSETS
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$
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1,775.3
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$
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1,798.4
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$
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1,679.8
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Current
portion of long-term debt
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$
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18.8
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$
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19.0
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$
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19.0
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Accounts
payable
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211.8
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135.6
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120.4
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Other
current liabilities
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105.3
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99.2
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103.1
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Income
taxes payable
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5.0
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41.7
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5.3
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Total
current liabilities
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340.9
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295.5
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247.8
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Long-term
debt, excluding current portion
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250.0
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250.0
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250.0
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Other
liabilities
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70.6
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80.6
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84.8
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|
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Total
liabilities
|
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661.5
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626.1
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582.6
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Shareholders'
equity
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1,113.8
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1,172.3
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1,097.2
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Commitments
and contingencies
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
1,775.3
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$
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1,798.4
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$
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1,679.8
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Common
shares outstanding
|
|
|
102.0
|
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|
106.5
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|
|
108.5
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|
See
accompanying Notes to Condensed Consolidated Financial Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
|
|
26
Weeks Ended
|
|
|
|
July
29,
|
|
July
30,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
61.9
|
|
$
|
56.3
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
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|
|
|
|
|
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Depreciation
and amortization
|
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|
74.1
|
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|
68.1
|
|
Other
non-cash adjustments to net income
|
|
|
(7.9
|
)
|
|
(8.4
|
)
|
Other
changes in working capital
|
|
|
(22.7
|
)
|
|
(47.0
|
)
|
Net
cash provided by operating activities
|
|
|
105.4
|
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|
69.0
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(88.6
|
)
|
|
(74.5
|
)
|
Purchase
of short-term investments
|
|
|
(346.8
|
)
|
|
(497.7
|
)
|
Proceeds
from maturities of short-term investments
|
|
|
489.3
|
|
|
558.0
|
|
Purchase
of Deal$ assets, net of cash aquired of $0.3
|
|
|
(54.1
|
)
|
|
-
|
|
Purchase
of restricted investments
|
|
|
-
|
|
|
(15.2
|
)
|
Other
|
|
|
(1.1
|
)
|
|
(3.3
|
)
|
Net
cash used in investing activities
|
|
|
(1.3
|
)
|
|
(32.7
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Principal
payments under long-term debt
|
|
|
|
|
|
|
|
and
capital lease obligations
|
|
|
(0.5
|
)
|
|
(3.5
|
)
|
Payments
for share repurchases
|
|
|
(136.4
|
)
|
|
(130.4
|
)
|
Proceeds
from stock issued pursuant to stock-based
|
|
|
|
|
|
|
|
compensation
plans
|
|
|
14.7
|
|
|
5.6
|
|
Tax
benefit of stock options exercised
|
|
|
1.3
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(120.9
|
)
|
|
(128.3
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(16.8
|
)
|
|
(92.0
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
65.8
|
|
|
106.5
|
|
Cash
and cash equivalents at end of period
|
|
|
49.0
|
|
$
|
14.5
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest,
net of amount capitalized
|
|
$
|
5.9
|
|
$
|
5.4
|
|
Income
taxes
|
|
$
|
86.5
|
|
$
|
73.0
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
1. BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Dollar
Tree Stores, Inc. and its wholly-owned subsidiaries (the "Company") have
been
prepared in accordance with U.S. generally accepted accounting principles
for
interim financial information
and are presented in accordance with the requirements of Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The condensed consolidated financial statements should
be
read in conjunction with the consolidated financial statements and notes
thereto
and management's discussion and analysis of financial condition and results
of
operations for the year ended January 28, 2006 contained in the Company’s Annual
Report on Form 10-K (Form 10-K) filed April 12, 2006.
The
results of operations for the 13 and 26 weeks ended July 29, 2006 are not
necessarily indicative of the results to be expected for the entire fiscal
year
ending February 3, 2007.
In
the
Company’s opinion, the unaudited condensed consolidated financial statements
included herein contain all adjustments (consisting of those of a normal
recurring nature) considered necessary for a fair presentation of its financial
position as of July 29, 2006 and July 30, 2005 and the results of its operations
and cash flows for the periods presented. The January 28, 2006 balance sheet
information was derived from the audited consolidated financial statements
as of
that date.
2.
NET INCOME PER SHARE
The
following table sets forth the calculation of basic and diluted net income
per
share:
|
|
13
Weeks Ended
|
|
26
Weeks Ended
|
|
|
|
July
29,
|
|
July
30,
|
|
July
29,
|
|
July
30,
|
|
(In
millions, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
29.0
|
|
$
|
27.3
|
|
$
|
61.9
|
|
$
|
56.3
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
103.7
|
|
|
108.4
|
|
|
105.0
|
|
|
109.8
|
|
Basic
net income per share
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.59
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
29.0
|
|
$
|
27.3
|
|
$
|
61.9
|
|
$
|
56.3
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
103.7
|
|
|
108.4
|
|
|
105.0
|
|
|
109.8
|
|
Dilutive
effect of stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock units (as determined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
applying the treasury stock method)
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
|
0.5
|
|
Weighted
average number of shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive
potential shares outstanding
|
|
|
104.1
|
|
|
108.8
|
|
|
105.4
|
|
|
110.3
|
|
Diluted
net income per share
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.59
|
|
$
|
0.51
|
|
For
the
13 weeks ended July 29, 2006 and July 30, 2005, approximately 2.0 million
and
3.5 million stock options, respectively, are not included in the calculation
of
the weighted average number of shares and dilutive potential shares outstanding
because their effect would be anti-dilutive. For the 26 weeks ended July
29,
2006 and July 30, 2005, approximately 1.8 million and 1.9 million stock options,
respectively, are not included in the calculation of the weighted average
number
of shares and dilutive potential shares outstanding because their effect
would
be anti-dilutive.
3.
STOCK-BASED COMPENSATION
Effective,
January 29, 2006, the Company adopted Statement of Financial Accounting
Standards, No. 123(R), “Share-Based Payment,” (SFAS 123R). This statement is a
revision of SFAS 123 and supersedes Accounting Principle Board Opinion No.
25,
“Accounting for Stock Issued to Employees,” (APB Opinion 25). SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. The Company adopted SFAS 123R using the modified prospective method,
which requires application of the standard to all awards granted, modified,
repurchased or cancelled on or after January 29, 2006, and to all awards
granted
to employees that were unvested as of January 29, 2006. In accordance with
the
modified prospective method of implementation, prior period financial statements
have not been restated to reflect the impact of SFAS 123R. During the 13
and 26
weeks ended July 29, 2006, the Company recognized $0.7 million and $1.0 million,
respectively, of stock-based compensation expense as a result of the adoption
of
SFAS 123R. Total stock-based compensation expense for the 13 and 26 weeks
ended
July 29, 2006 was $2.5 million and $3.5 million, respectively. Through January
28, 2006, the Company applied the intrinsic value recognition and measurement
principles of APB Opinion 25 and related Interpretations in accounting for
its
stock-based employee compensation plans. Prior to the adoption of SFAS 123R,
the
Company reported all tax benefits resulting from the exercise of stock options
as operating cash flows in the Consolidated Condensed Statements of Cash
Flows.
SFAS 123R requires cash flows resulting from the tax deductions in excess
of the
tax benefits of the related compensation cost recognized in the financial
statements (excess tax benefits) to be classified as financing cash flows.
In
accordance with SFAS 123R, the Company has classified the $1.3 million of
excess
tax benefits recognized in the 26 weeks ended July 29, 2006 as financing
cash
flows. In the 26 weeks ended July 30, 2005, excess tax benefits of $0.6 million
recognized prior to the adoption of SFAS 123R are classified as operating
cash
flows.
If
the
accounting provisions of SFAS 123R had been applied in the 13 and 26 weeks
ended
July 30, 2005, the Company's net income and net income per share would have
been
reduced to the pro forma amounts indicated in the following table:
|
|
13
Weeks
|
|
26
Weeks
|
|
|
|
Ended
|
|
Ended
|
|
|
|
July
30,
|
|
July
30,
|
|
(In
millions, except per share data)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
27.3
|
|
$
|
56.3
|
|
Add:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
included
in net income, net of related tax effects
|
|
|
0.4
|
|
|
0.4
|
|
Deduct:
Total stock-based employee compensation determined
|
|
|
|
|
|
|
|
under
fair value-based method, net of related tax effects
|
|
|
(2.7
|
)
|
|
(5.0
|
)
|
Pro
forma net income
|
|
$
|
25.0
|
|
$
|
51.7
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
0.25
|
|
$
|
0.51
|
|
Basic,
pro forma
|
|
$
|
0.23
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
$
|
0.25
|
|
$
|
0.51
|
|
Diluted,
pro forma
|
|
$
|
0.23
|
|
$
|
0.47
|
|
On
December 15, 2005, the Compensation Committee of the Board of Directors
of the
Company approved the acceleration of the vesting date of all previously
issued,
outstanding and unvested options under all current stock option plans,
including
the 1995 Stock Incentive Plan, the 2003 Equity Incentive Plan and the 2004
Executive Officer Equity Plan, effective as of December 15, 2005. At the
effective date, almost all of these options had exercise prices higher
than the
then current market price for the Company’s stock. The Company made the decision
to accelerate vesting of these options to give employees increased performance
incentives and to enhance current retention. This decision also eliminated
non-cash compensation expense that would have been recorded in future periods
following the Company’s adoption of SFAS 123R on January 29, 2006. Future
compensation expense has been reduced by approximately $14.9 million, over
a
period of four years during which the options would have vested, as a result
of
the option acceleration program, including approximately $2.1 million and
$4.3
million that would have been recognized in the 13 and 26 weeks ended July
29,
2006, respectively.
The
Company grants stock based compensation awards from the plans described
below.
Under
the
Company’s 2003 Equity Incentive Plan (EIP), the Company may grant up to 6.0
million shares of its Common Stock, plus any shares available for future
awards
under the Company’s Stock Incentive Plan, to the Company’s employees, including
executive officers and independent contractors. The EIP permits the Company
to
grant equity awards in the form of stock options, stock appreciation rights
and
restricted stock. The exercise price of each stock option granted equals
the
market price of the Company’s stock at the date of grant. The options generally
vest over a three-year period and have a maximum term of 10 years.
Any
restricted stock or restricted stock units (RSUs) awarded are subject to
certain
general restrictions. The restricted stock shares may not be sold, transferred,
pledged or disposed of until the restrictions on the shares have lapsed
or have
been removed under the provisions of the plan. In addition, if a holder
of the
restricted shares ceases to be employed by the Company, any shares in which
the
restrictions have not lapsed will be forfeited, unless the holder meets
certain
retirement criteria.
The
2004
Executive Officer Equity Plan (EOEP) is available only to the Chief Executive
Officer and certain other executive officers. These officers no longer
receive
awards under the EIP. The EOEP allows the Company to grant the same type
of
equity awards as does the EIP. These awards generally vest over a three-year
period, with a maximum term of 10 years.
The
2003
Director Deferred Compensation Plan (DDCP) permits any of the Company's
directors who receive a retainer or other fees for Board or committee service
to
defer all or a portion of such fees until a future date, at which time
they may
be paid in cash or shares of the Company's common stock, or to receive
all or a
portion of such fees in non-statutory stock options. Deferred fees that
are paid
out in cash will earn interest at the 30-year Treasury Bond Rate. If a
director
elects to be paid in common stock, the number of shares will be determined
by
dividing the deferred fee amount by the current market price of a share
of the
Company's common stock at the beginning of each calendar quarter. The number
of
options issued to a director will equal the deferred fee amount divided
by 33%
of the price of a share of the Company's common stock. The exercise price
will
equal the fair market value of the Company's common stock at the date the
option
was issued. The options are fully vested when issued and have a term of
10
years.
Stock
Options
In
the 26
weeks ended July 29, 2006, the Company granted a total of 335,019 stock
options
from the EIP, EOEP and the DDCP. The fair value of the 2006 options was
estimated on the date of grant using the Black-Scholes option-pricing model
with
the following weighted average assumptions:
Expected
term in years
|
|
6.0
|
Expected
volatility
|
|
30.2%
|
Annual
dividend yield
|
|
-
|
Risk
free interest rate
|
|
4.8%
|
The
fair
value of these stock options granted of $3.3 million, net of expected
forfeitures, is being recognized over the three-year vesting period of these
options, or a shorter period based on the retirement eligibility of the grantee.
During the 13 and 26 weeks ended July 29, 2006, the Company recognized $0.6
million and $0.7 million, respectively, of expense related to these option
grants. The expected term of the awards granted was calculated using the
“simplified method” in accordance with Staff Accounting Bulletin No. 107.
Expected volatility is derived from an analysis of the historical and implied
volatility of the Company’s publicly traded stock. The risk free rate is based
on the U.S. Treasury rates on the grant date with maturity dates approximating
the expected life of the option on the grant date.
The
following tables summarize the Company's various option plans as of July 29,
2006 and information about fixed options outstanding at July 29, 2006.
|
|
July
29, 2006
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
Aggregate
|
|
|
|
|
|
Per
Share
|
|
Average
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Value
(in
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 29, 2006
|
|
|
5,990,757
|
|
$
|
24.71
|
|
|
|
|
|
|
|
Granted
|
|
|
335,019
|
|
|
27.64
|
|
|
|
|
|
|
|
Exercised
|
|
|
(603,185
|
)
|
|
21.67
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(58,011
|
)
|
|
29.41
|
|
|
|
|
|
|
|
Outstanding
at July 29, 2006
|
|
|
5,664,580
|
|
|
25.16
|
|
|
6.0
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and expected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
vest at July 29, 2006
|
|
|
5,630,517
|
|
|
25.15
|
|
|
6.0
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of period
|
|
|
5,322,080
|
|
|
25.01
|
|
|
5.8
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
during the period
|
|
|
|
|
$
|
10.93
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Options
|
|
|
|
|
|
Options
|
|
|
|
Range
of
|
|
Outstanding
|
|
Weighted
Avg.
|
|
Weighted
Avg.
|
|
Exercisable
|
|
Weighted
Avg.
|
|
Exercise
|
|
at
July 29,
|
|
Remaining
|
|
Exercise
|
|
at
July 29,
|
|
Exercise
|
|
Prices
|
|
2006
|
|
Contractual
Life
|
|
Price
|
|
2006
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.86
|
|
|
7,478
|
|
|
N/A
|
|
|
0.86
|
|
|
7,478
|
|
|
0.86
|
|
$2.95
to $10.98
|
|
|
28,054
|
|
|
0.9
|
|
|
10.06
|
|
|
28,054
|
|
|
10.06
|
|
$10.99
to $21.28
|
|
|
1,380,781
|
|
|
5.7
|
|
|
19.24
|
|
|
1,380,781
|
|
|
19.24
|
|
$21.29
to $29.79
|
|
|
3,020,441
|
|
|
6.3
|
|
|
25.19
|
|
|
2,677,941
|
|
|
24.89
|
|
$29.80
to $42.56
|
|
|
1,227,826
|
|
|
5.3
|
|
|
32.25
|
|
|
1,227,826
|
|
|
32.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.86
to $42.56
|
|
|
5,664,580
|
|
|
|
|
|
|
|
|
5,322,080
|
|
|
|
|
The
intrinsic value of options exercised during the 26 weeks ended July 29, 2006
was
approximately $2.9 million.
Restricted
Stock
The
Company granted 284,247 RSUs, net of forfeitures in the 26 weeks ended July
29,
2006. In all of 2005, the Company granted 252,936 RSUs, net of forfeitures.
These were granted from the EIP and the EOEP to the Company’s employees and
officers. The fair value of all of these RSUs of $14.3 million is being expensed
ratably over the three-year vesting periods, or a shorter period based on the
retirement eligibility of the grantee. The fair value was determined using
the
Company’s closing stock price on the date of grant. The Company recognized $1.7
million and $2.3 million, respectively, of expense related to the RSUs for
the
13 and 26 weeks ended July 29, 2006. As of July 29, 2006 there was approximately
$10.3 million of total unrecognized compensation expense related to these RSUs
which is expected to be recognized over a weighted average period of 29 months.
For the 13 and 26 weeks ended July 30, 2005, the Company recognized
approximately $0.4 million of expense for the RSUs granted in 2005.
In
2005,
the Company granted 40,000 RSUs from the 2004 EOEP to certain officers of the
Company, contingent on the Company meeting certain performance targets in 2005
and future service of these officers through various points through July 2007.
The Company met these performance targets in fiscal 2005; therefore, the fair
value of these RSUs of $1.0 million is being expensed over the service period.
The fair value of these RSUs was determined using the Company’s closing stock
price January 28, 2006 (the last day of fiscal 2005), when the performance
targets were satisfied. The Company has recognized $0.1 million of expense
related to these RSUs in the 13 and 26 weeks ended July 29, 2006. The remaining
$0.2 million will be recognized over the vesting periods through 2007. For
the
13 and 26 weeks ended July 30, 2005, the Company recognized $0.1 million and
$0.2 million, respectively, for these RSUs.
The
following table summarizes the status of RSUs as of July 29, 2006, and changes
during the 26 weeks then ended.
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Date
Fair
|
|
|
|
Shares
|
|
Value
|
|
|
|
|
|
|
|
Nonvested
at January 28, 2006
|
|
|
295,507
|
|
$
|
25.00
|
|
Granted
|
|
|
290,697
|
|
|
27.66
|
|
Vested
|
|
|
(100,683
|
)
|
|
25.01
|
|
Forfeited
|
|
|
(11,007
|
)
|
|
26.54
|
|
Nonvested
at July 29, 2006
|
|
|
474,514
|
|
|
26.30
|
|
Employee
Stock Purchase Plan
Under
the
Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP), the Company
is
authorized to issue up to 1,040,780 shares
of
common stock to eligible employees. Under the terms of the ESPP, employees
can
choose to have up to 10% of their annual base earnings withheld to purchase
the
Company's common stock up to an annual maximum of $25,000 of the Company’s
common stock measured using the common stock price at the beginning of
each
quarter. The purchase price of the stock is 85% of the lower of the price
at the
beginning or the end of the quarterly offering period. The fair value of
the
employees' purchase rights granted in the 13 weeks ended April 29, 2006
and July
29, 2006 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
|
|
13
weeks
|
|
13
weeks
|
|
|
ended
|
|
ended
|
|
|
July
29, 2006
|
|
April
29, 2006
|
Expected
term
|
|
3
months
|
|
3
months
|
Expected
volatility
|
|
12.9%
|
|
14.3%
|
Annual
dividend yield
|
|
-
|
|
-
|
Risk
free interest rate
|
|
5.2%
|
|
4.4%
|
The
weighted average per share fair value of those purchase rights granted in the
13
weeks ended July 30, 2006 and April 29, 2006 was $4.59 and $4.20, respectively.
The Company recognized $0.1 million and $0.3 million of compensation expense
in
the 13 and 26 weeks ended July 29, 2006, respectively, for the purchase rights
granted during 2006.
4. DEAL$
ACQUISITION
On
March
25, 2006, the Company completed its acquisition of 138 Deal$ stores. These
stores are located primarily in the Midwest part of the United States and the
Company has existing logistics capacity to service these stores. This
acquisition also includes a few “combo” stores that offer an expanded assortment
of merchandise including items that sell for more than $1. Substantially all
Deal$ stores acquired will continue to operate under the Deal$ banner while
providing the Company an opportunity to leverage its Dollar Tree infrastructure
in the testing of new merchandise concepts, including higher price points,
without disrupting the single-price point model in its Dollar Tree
stores.
The
Company paid approximately $32.0 million for store-related and other assets
and
$22.1 million for store and distribution center inventory. This amount includes
approximately $0.6 million of direct costs associated with the acquisition.
The
results of Deal$ store operations are included in the Company’s financial
statements since the acquisition date and did not have a significant impact
on
the Company's operating results through July 29, 2006. This acquisition is
immaterial to the Company's operations as a whole and therefore no proforma
disclosure of financial information has been presented. The following table
summarizes the allocation of the purchase price to the fair value of the assets
acquired.
(In
millions)
|
|
|
|
Inventory
|
|
$
|
22.1
|
|
Other
current assets
|
|
|
0.1
|
|
Property
and equipment
|
|
|
15.1
|
|
Goodwill
|
|
|
14.7
|
|
Other
intangibles
|
|
|
2.1
|
|
|
|
$
|
54.1
|
|
The
goodwill resulting from this acquisition will not be amortized but will
be
tested annually for impairment. Included in other intangibles is approximately
$2.1 million related to net favorable lease rights for operating leases
for
retail locations. This amount is being amortized on a straight-line basis
to
rent expense over 35 months, the weighted average remaining initial lease
term
of the locations purchased.
5.
SHAREHOLDERS’ EQUITY
Comprehensive
Income
The
Company's comprehensive income reflects the effect of recording derivative
financial instruments pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The following table provides a
reconciliation of net income to total comprehensive income:
|
|
13
Weeks Ended
|
|
26
Weeks Ended
|
|
|
|
July
29,
|
|
July
30,
|
|
July
29,
|
|
July
30,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
29.0
|
|
$
|
27.3
|
|
$
|
61.9
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value adjustment-derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
flow hedging instrument
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
0.4
|
|
Income
tax expense
|
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
|
(0.2
|
)
|
Fair
value adjustment, net of tax
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
for amounts included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Reclassification
for amounts included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net income, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
29.0
|
|
$
|
27.4
|
|
$
|
61.9
|
|
$
|
56.5
|
|
The
transition adjustment resulting from the adoption of SFAS No. 133 was recorded
in "accumulated other comprehensive income" and is being amortized to expense
over the remaining life of the related interest rate swap.
Share
Repurchase Program
In
March
2005, the Company’s Board of Directors authorized the repurchase of up to $300.0
million of the Company’s stock through March 2008. During the 13 and 26 weeks
ended July 29, 2006, the Company repurchased approximately 3.4 million shares
and 5.3 million shares for approximately $88.7 million and $138.9 million,
respectively under the March 2005 authorization. As of July 29, 2006, we have
approximately $36.0 million remaining under this authorization.
6.
LITIGATION MATTERS
In
2003,
the Company was served with a lawsuit in California state court by a former
employee who alleged that employees did not properly receive sufficient meal
breaks and paid rest periods along with other alleged wage and hourly
violations. The suit requested that the California state court certify the
case
as a class action. This suit was dismissed with prejudice in May 2005, and
the
dismissal has been appealed. In May 2005, a new suit alleging similar claims
was
filed in California by another plaintiff.
In
2005,
the Company was served with a lawsuit by former employees in Oregon who allege
that they did not properly receive sufficient meal breaks and paid rest periods.
They also allege other wage and hour violations. The plaintiffs have requested
the Oregon state court to certify the case as a class action.
In
2006,
the Company was served with a lawsuit by former employees in Washington State
who allege that they did not properly receive sufficient meal breaks and paid
rest periods. They also allege other wage and hour violations. The plaintiffs
have requested the federal court to certify the case as a class action.
In
2006,
the Company was served with a lawsuit by a former employee in a California
state
court alleging that she was paid for wages with a check drawn on a bank which
did not have any branches in the state, an alleged violation of the state's
labor code; that she was paid less for her work than other similar employees
with the same job title based on her gender; and that the Company did not pay
her final wages in a timely manner, also an alleged violation of the labor
code.
The plaintiff requested the court to certify the case as a class action. The
Company has been successful in removing the case from the state to the federal
court level.
In
2006,
the Company was served with a lawsuit filed in federal court in the state of
Alabama by a former store manager. She claims that she should have been
classified as a non-exempt employee under the Fair Labor Standards Act and,
therefore should have received overtime compensation and other benefits. She
filed the case as a collective action on behalf of herself and all other
employees (store managers) similarly situated.
The
Company will vigorously defend itself in these lawsuits. The Company does not
believe that any of these matters will, individually or in the aggregate, have
a
material adverse effect on its business or financial condition. The Company
cannot give assurance, however, that one or more of these lawsuits will not
have
a material adverse effect on its results of operations for the period in which
they are resolved.
INTRODUCTORY
NOTE: Unless
otherwise stated, references to "we," "our" and "us" generally refer to Dollar
Tree Stores, Inc. and its direct and indirect subsidiaries on a consolidated
basis.
A
WARNING ABOUT FORWARD-LOOKING STATEMENTS:
This
document contains "forward-looking statements" as that term is used in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
address future events, developments or results and typically use words such
as
"believe," "anticipate," "expect," "intend," "plan," “view,” “target” or
"estimate." For example, our forward-looking statements include statements
regarding:
· |
our
anticipated sales, including comparable store net sales, net sales
growth,
earnings growth and new store
growth;
|
· |
the
average size of our stores to be added for the remainder of 2006
and their
performance compared with other store
sizes;
|
· |
the
effect of a slight shift in merchandise mix to consumables and of
the
roll-out of freezers and coolers on gross profit margin and
sales;
|
· |
the
impact that the acceptance of additional tender types and the roll-out
of
freezers and coolers will have on comparable store net
sales;
|
· |
the
possible effect of inflation and other economic changes on our future
costs and profitability, including the possible effect of future
changes
in shipping rates and fuel costs;
|
· |
our
cash needs, including our ability to fund our future capital expenditures
and working capital requirements;
|
· |
the
impact, capacity, performance and cost of our existing distribution
centers;
|
· |
our
integration and future operations of the recently acquired Deal$
stores;
|
· |
the
future reliability of, and cost associated with, our sources of supply,
particularly imported goods such as those sourced from China and
Hong
Kong;
|
· |
costs
of pending and possible future legal
claims;
|
· |
the
adequacy of our internal controls over financial
reporting;
|
For
a
discussion of the risks, uncertainties and assumptions that could affect our
future events, developments or results, you should carefully review the risk
factors summarized below and the more detailed discussions in the "Risk Factors”
and “Business” sections in our Annual Report on Form 10-K filed April 12, 2006.
Also see section 1A. “Risk Factors” in Part II of this Quarterly Report on Form
10-Q.
· |
Our
profitability is affected by the mix of products we
sell.
|
· |
Our
profitability is especially vulnerable to cost
increases.
|
· |
We
may be unable to expand our square footage as profitably as
planned.
|
· |
A
downturn in economic conditions could adversely affect our
sales.
|
· |
Our
sales and profits rely on imported merchandise, which may increase
in cost
or become unavailable.
|
· |
We
could encounter disruptions or additional costs in receiving and
distributing merchandise.
|
· |
Sales
below our expectations during peak seasons may cause our operating
results
to suffer materially.
|
· |
Pressure
from competitors may reduce our sales and
profits.
|
Our
forward-looking statements could be wrong in light of these and other risks,
uncertainties and assumptions. The future events, developments or results
described in this report could turn out to be materially different. We have
no
obligation to publicly update or revise our forward-looking statements after
the
date of this quarterly report and you should not expect us to do
so.
Investors
should also be aware that while we do, from time to time, communicate with
securities analysts and others, it is against our policy to selectively disclose
to them any material nonpublic information or other confidential commercial
information. Accordingly, shareholders should not assume that we agree with
any
statement or report issued by any analyst regardless of the content of the
statement or report, as we have a policy against confirming information issued
by others. Thus, to the extent that reports issued by securities analysts
contain any financial projections, forecasts or opinions, such reports are
not
our responsibility.
Overview
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 change 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 fourteen months of operation. We include sales from
stores expanded during the period 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.
At
July
29, 2006 we operated 3,156 stores in 48 states, with 25.4 million selling square
feet compared to 2,856 stores with 22.2 million selling square feet at July
30,
2005. During the 26 weeks ended July 29, 2006, we opened 121 stores, expanded
48
stores and closed 13 stores, compared to 139 stores opened, 57 stores expanded
and 18 stores closed during the 26 weeks ended July 30, 2005. In addition,
we
acquired 138 Deal$ stores on March 25, 2006. As of the end of the second
quarter, we are still on plan to meet our 12%-14% square footage growth target
for fiscal 2006. In the 13 and 26 weeks ended July 29, 2006, we added
approximately 0.4 million and 2.4 million selling square feet, respectively,
of
which approximately 0.1 million and 0.2 million, respectively, was added through
expanding existing stores. Included in the 2.4 million selling square feet
added
in the 26 weeks ended July 29, 2006 is 1.2 million resulting from the
acquisition of the Deal$ stores. The average size of stores opened during the
13
and 26 weeks ended July 29, 2006 was approximately 9,000 selling square feet
(or
about 11,000 gross square feet). For the remainder of 2006, we continue to
plan
to open stores around 9,300 selling square feet (or about 11,400 gross square
feet). We believe that the 11,000-12,500 square foot size store is our optimal
size operationally and that this size also gives the customer an improved
shopping environment that invites them to shop longer and buy more.
For
the
13 and 26 weeks ended July 29, 2006, we experienced an increase in comparable
store net sales of 4.2%. The comparable store net sales increase for both
periods was the result of increases of 3.4% in transaction size and 0.7% in
the
number of transactions, as compared to the 13 and 26 weeks ended July 30, 2005.
We believe comparable store net sales were positively affected by the
initiatives we began putting in place in 2005, which we believe are also helping
to mitigate the effect that higher fuel costs are having on our customers.
These
initiatives include expansion of forms of payment accepted by our stores and
the
roll-out of freezers and coolers to more of our stores. As of July 29, 2006
we
have completed the roll-out of debit card acceptance to virtually all of our
stores, and we believe this has helped increase the average size of transactions
in our stores.
We
continued to experience a slight shift in the mix of merchandise sold to more
consumables in the first half of 2006, which we believe increase the efficiency
in our stores but have a lower margin. The shift in mix to more consumables
is
the result of the roll-out of freezers and coolers to more stores in 2005 and
2006. At July 29, 2006 we had freezers and coolers in approximately 350 stores
compared to approximately 100 at July 30, 2005. We plan to add freezers and
coolers to 150 additional stores during the remainder of 2006, which will
continue to pressure margins, as a percentage of sales, for the remainder of
the
year. However, we believe that this will enable us to increase sales and
earnings in the future by increasing the number of shopping trips made by our
customers.
Our
point-of-sale technology is now in all of our stores, and this technology
provides us with valuable sales and inventory information to assist our buyers
and improve merchandise allocation to the stores. We believe that it has enabled
us to better control our inventory, resulting in more efficient distribution
and
store operations. Using the data captured at the point of sale has enabled
us to
better plan our inventory purchases and helped us reduce our inventory
investment per store by approximately 4% at July 29, 2006 compared to July
30,
2005 and increase inventory turnover.
We
estimate that sales for the third quarter of 2006 will be in the range of $895.0
million to $915.0 million and earnings per diluted share will be in the range
of
$0.30 to $0.32. For fiscal 2006, we estimate sales will be in the range of
$3.895 billion to $3.955 billion and diluted earnings per share will be in
the
range of $1.74 to $1.82. Guidance for the third quarter of 2006 and full year
fiscal 2006 is based on low single digit comparable store net sales growth.
The
guidance for earnings per share for the third quarter of 2006 and full year
fiscal 2006 reflects the impact of our share repurchase program through July
29,
2006.
On
March
25, 2006, we completed our acquisition of 138 Deal$ stores. These stores are
located primarily in the Midwest part of the United States and we have existing
logistics capacity to service these stores. This acquisition also includes
a few
“combo” stores that offer an expanded assortment of merchandise including items
that sell for more than $1. Substantially all Deal$ stores acquired will
continue to operate under the Deal$ banner while providing us an opportunity
to
leverage our Dollar Tree infrastructure in the testing of new merchandise
concepts, including higher price points, without disrupting the single-price
point model in our Dollar Tree stores.
We
paid
approximately $32.0 million for store-related and other assets and $22.1 million
for store and distribution center inventory. This amount includes approximately
$0.6 million of direct costs associated with the acquisition. The results of
Deal$ store operations are included in our financial statements since the
acquisition date and did not have a significant impact on our operating results
through July 29, 2006. This acquisition is immaterial to our operations as
a whole and therefore no proforma disclosure of financial information has been
presented.
Results
of Operations
13
Weeks Ended July 29, 2006 Compared to the 13 Weeks Ended July 30,
2005
Net
sales. Net
sales
increased 14.9%, or $114.6 million, over last year’s second quarter resulting
from sales in our new and expanded stores, including 138 Deal$ stores acquired
in March 2006. Our sales increase was also impacted by a 4.2% increase in
comparable store net sales in the current quarter. Comparable store net sales
are positively affected by our expanded and relocated stores, which we include
in the calculation, and, to a lesser extent, are negatively affected when we
open new stores or expand stores near existing stores.
Gross
Profit. Gross
profit margin decreased to 33.2% in the current quarter compared to 34.0% in
the
prior year quarter. The decrease was primarily due to the
following:
· |
Merchandise
costs, including inbound freight, increased 40 basis points due primarily
to a slight shift in mix to more consumables, which have a lower
margin,
and increased inbound domestic freight costs. Inbound domestic freight
costs have increased primarily due to higher fuel costs.
|
· |
A
30 basis point increase in occupancy costs due to a higher occupancy
rate
from the newly acquired Deal$ stores and higher rents, common area
maintenance charges and real estate taxes in the current quarter.
|
Selling,
General and Administrative Expenses. Selling,
general, and administrative expenses for the current quarter decreased to 27.8%,
as a percentage of net sales, compared to 27.9% for the same period last year.
This decrease was primarily due to the leveraging associated with positive
comparable store net sales in the period and the following:
· |
A
40 basis point decrease in operating and corporate expenses due primarily
to decreased advertising in the current quarter as a result of more
efficient and targeted spending and a decrease in store supplies
expense.
|
· |
A
30 basis point decrease in depreciation resulting from the leverage
associated with the positive comparable store sales in the
quarter.
|
· |
Partially
offsetting these decreases was a 50 basis point increase in payroll
and
benefits costs due to increased healthcare costs, increased incentive
compensation costs resulting from better overall company performance
in
the current period as compared to the prior year period, and increased
stock-based compensation expense in the current
year.
|
Operating
Income.
Due to
the reasons discussed above, operating income decreased as a percentage of
net
sales to 5.4% in the second quarter of 2006 compared to 6.0% in the same period
of 2005.
Interest
expense, net.
Interest
expense, net, has decreased in the second quarter of 2006 compared to the same
period last year due primarily to increased interest income arising from higher
rates of return on higher investment balances.
Income
Taxes.
Our
effective tax rate was 37.4% in the second quarter of 2006 compared to 37.5%
for
the same period last year. The decreased tax rate for 2006 was primarily due
to
increased tax-exempt interest income from certain investments in the current
year quarter.
26
Weeks Ended July 29, 2006 Compared to the 26 Weeks Ended July 30,
2005
Net
sales. Net
sales
increased 14.6%, or $222.0 million, for the first six months of fiscal 2006
resulting from sales in our new and expanded stores, including 138 Deal$ stores
acquired in March 2006. Our sales were also impacted by a 4.2% increase in
comparable store net sales in the current year. Comparable store net sales
are
positively affected by our expanded and relocated stores, which we include
in
the calculation, and, to a lesser extent, are negatively affected when we open
new stores or expand stores near existing stores.
Gross
Profit. Gross
profit margin decreased to 33.3% in the current period compared to 34.0% in
the
prior year period. The decrease was primarily due to the following:
· |
Merchandise
costs, including inbound freight, increased 60 basis points due primarily
to a slight shift in mix to more consumables, which have a lower
margin,
and increased inbound domestic freight costs. Inbound domestic freight
costs have increased primarily due to higher fuel costs.
|
· |
A
20 basis point increase in outbound freight costs resulting primarily
from
higher fuel costs.
|
Selling,
General and Administrative Expenses. Selling,
general, and administrative expenses for the 26 weeks ended July 29, 2006
decreased to 27.5%, as a percentage of net sales, compared to 27.7% for the
same
period last year. This decrease was primarily due to the leveraging associated
with positive comparable store net sales in the period and a 30 basis point
decrease in operating and corporate expenses due primarily to decreased
advertising in the current year as a result of more efficient and targeted
spending.
Operating
Income.
Due to
the reasons discussed above, operating income decreased as a percentage of
net
sales to 5.8% in the 26 weeks ended July 29, 2006 compared to 6.2% in the 26
weeks ended July 30, 2005.
Interest
expense, net.
Interest
expense, net, has decreased in the 26 weeks ended July 29, 2006 compared to
the
same period last year due primarily to increased interest income arising from
higher rates of return on higher investment balances.
Income
Taxes.
Our
effective tax rate was 37.4% for the 26 weeks ended July 29, 2006 compared
to
37.8% for the same period last year. The decreased tax rate for 2006 was
primarily due to increased tax-exempt interest on certain of our investments
in
the current year.
Liquidity
and Capital Resources
Our
business requires capital to open new stores, expand our distribution network
and operate existing stores. Our working capital requirements for existing
stores are seasonal in nature and typically reach their peak in the months
of
September and October. Historically, we have satisfied our seasonal working
capital requirements for existing stores and funded our store opening and
expansion programs from internally generated funds and borrowings under our
credit facilities.
The
following table compares cash flow information for the 26 weeks ended July
29,
2006 and July 30, 2005:
|
|
26
Weeks ended
|
|
|
|
July
29,
|
|
July
30,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
105.4
|
|
$
|
69.0
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
(1.3
|
)
|
|
(32.7
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
(120.9
|
)
|
|
(128.3
|
)
|
The
$36.4
million increase in cash provided by operating activities was primarily due
to
better payables leverage with our suppliers and an increase in inventory turns
in the current year.
The
$31.4
million decrease in cash used in investing activities was primarily the result
of an increase in net proceeds from investment activities of $97.4 million
to
help fund stock repurchases, partially offset by the acquisition of $54.1
million of Deal$ assets. Included in the prior year net proceeds from investing
activities is the purchase of $15.2 million of investments that are in a
restricted account to collateralize certain long-term insurance obligations.
In
addition, capital expenditures were approximately $14.1 million higher in the
current year due to our new stores and remodels and capital expenditures for
Deal$ stores.
The
$7.4
million decline in cash used in financing activities resulted primarily from
increased proceeds from stock option exercises in the current year partially
offset by a slight increase in stock repurchases in the current
year.
At
July
29, 2006, our long-term borrowings were $268.8 million and our capital lease
commitments were $0.8 million. As of July 29, 2006, we had $200.0 million
available under our revolving credit facility. We also have $125.0 million
and
$50.0 million Letter of Credit Reimbursement and Security Agreements, under
which approximately $148.9 million was committed to letters of credit issued
for
routine purchases of imported merchandise as of July 29, 2006.
In
March
2005, our Board of Directors authorized the repurchase of up to $300.0 million
of our stock through March 2008. During the 13 and 26 weeks ended July 29,
2006,
we repurchased approximately 3.4 million shares and 5.3 million shares for
approximately $88.7 million and $138.9 million, respectively under the March
2005 authorization. As of July 29, 2006, we have approximately $36.0 million
remaining under this authorization.
New
Accounting Pronouncements
In
March
2006, the Emerging Issues Tax Force (EITF) issued EITF 06-03, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That is, Gross versus Net Presentation).”
This EITF requires disclosure beginning in fiscal 2007 of our accounting
policies for any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction (i.e. sales tax) on a gross (included
in revenues and costs) or net (excluded from revenues) basis. We have
consistently reported these taxes on a net basis and will include such
disclosure in our Annual Report on Form 10-K for the year ending February 3,
2007.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.” This Interpretation clarifies accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with
FASB Statement No. 109, “Accounting for Income Taxes.” We will adopt this
standard in the first quarter of fiscal 2007 and we are currently evaluating
the
impact, if any, on our financial statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based
Payment
(SFAS
123R). This statement is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation,
and
supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on
their fair values. We adopted this standard as required in the first quarter
of
2006 (See Note 3 to the Condensed Consolidated Financial
Statements).
We
are
exposed to various types of market risk in the normal course of our business,
including the impact of interest rate changes and foreign currency rate
fluctuations. We may enter into interest rate swaps to manage our exposure
to
interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes.
Our $25.0 million interest rate swap that qualified for hedge accounting
treatment under SFAS No. 133, as amended by SFAS No. 138, expired during the
first quarter of fiscal 2006. Our remaining interest rate swap does not qualify
for hedge accounting treatment under SFAS No. 133, as amended by SFAS No. 138,
because it contains provisions that "knockout" the swap when the variable
interest rate exceeds a predetermined rate.
Interest
Rate Risk
The
following table summarizes the financial terms and fair values of our interest
rate swap agreement at July 29, 2006:
|
Receive
|
Pay
|
Knockout
|
|
Fair
Value
|
Hedging
Instrument
|
Variable
|
Fixed
|
Rate
|
Expiration
|
Asset
|
$18.8
million interest rate swap
|
LIBOR
|
4.88%
|
7.75%
|
4/1/2009
|
$0.1
million
|
Due
to
the many variables involved in determining the fair value, management is
not
able to predict the changes in fair value of our interest rate swap. The
fair
value is the estimated amount we would pay or receive to terminate the agreement
as of the reporting date. The fair value is obtained from an outside financial
institution.
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the
design and operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e) of Exchange Act). Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures are effective.
There
have been no material changes in our internal control over financial reporting
during the quarter ended July 29, 2006 that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
In
2003,
we were served with a lawsuit in California state court by a former employee
who
alleged that employees did not properly receive sufficient meal breaks and
paid
rest periods, along with other alleged wage and hourly violations. The suit
requested that the California state court certify the case as a class action.
This suit was dismissed with prejudice in May 2005, and the dismissal has
been
appealed. In May 2005, a new suit alleging similar claims was filed in
California.
In
2005,
we were served with a lawsuit by former employees in Oregon who allege that
they
did not properly receive sufficient meal breaks and paid rest periods. They
also
allege other wage and hour violations. The plaintiffs have requested the
Oregon
state court to certify the case as a class action.
In
2006,
we were served with a lawsuit by former employees in Washington State who
allege
that they did not properly receive sufficient meal breaks and paid rest periods.
They also allege other wage and hour violations. The plaintiffs have requested
the federal court to certify the case as a class action.
In
2006,
we were served with a lawsuit by a former employee in a California state
court
alleging that she was paid for wages with a check drawn on a bank which did
not
have any branches in the state, an alleged violation of the state's labor
code;
that she was paid less for her work than other similar employees with the
same
job title based on her gender; and that we did not pay her final wages in
a
timely manner, also an alleged violation of the labor code. The plaintiff
requested the court to certify the case as a class action. We have been
successful in removing the case from state to the federal court
level.
In
2006,
we were served with a lawsuit filed in federal court in the state of Alabama
by
a former store manager. She claims that she should have been classified as
a
non-exempt employee under the Fair Labor Standards Act and, therefore, should
have received overtime compensation and other benefits. She filed the case
as a
collective action on behalf of herself and all other employees (store managers)
similarly situated.
From
time
to time we are defendants in ordinary, routine litigation and proceedings
incidental to our business, including:
· |
employment-related
matters;
|
· |
the
infringement of the intellectual property rights of
others;
|
· |
product
safety matters, including product recalls by the Consumer Products
Safety
Commission;
|
· |
personal
injury claims; and
|
· |
real
estate matters related to store
leases.
|
We
will
vigorously defend ourselves in these lawsuits. We do not believe that any
of
these matters will, individually or in the aggregate, have a material adverse
effect on our business or financial condition. We cannot give assurance,
however, that one or more of these lawsuits will not have a material adverse
effect on our results of operations for the period in which they are resolved.
There
have been no material changes to the risk factors described in Item 1A. “Risk
Factors” in the Company’s Annual Report on Form 10-K, filed with the SEC on
April 12, 2006.
The
following table presents our share repurchase activity for the 13 weeks ended
July 29, 2006.
|
|
|
|
|
|
|
|
|
Dollar
value
|
|
|
|
|
|
|
|
|
Total
number
|
|
of
shares that
|
|
|
|
|
|
|
|
|
of
shares
|
|
may
yet be
|
|
|
|
|
|
|
|
|
purchased
as
|
|
purchased
under
|
|
|
|
Total
number
|
|
|
Average
|
|
part
of publicly
|
|
the
plans or
|
|
|
|
of
shares
|
|
|
price
paid
|
|
announced
plans
|
|
programs
|
|
Period
|
|
purchased
|
|
|
per
share
|
|
or
programs
|
|
(in
millions)
|
|
April
30, 2006 to May 27, 2006
|
|
|
|
263,075
|
|
|
$
|
26.24
|
|
|
|
263,075
|
|
|
$
|
117.8
|
|
May
28, 2006 to July 1, 2006
|
|
|
|
2,305,000
|
|
|
|
25.56
|
|
|
|
2,305,000
|
|
|
|
58.9
|
|
July
2, 2006 to July 29, 2006
|
|
|
|
874,100
|
|
|
|
26.20
|
|
|
|
874,100
|
|
|
|
36.0
|
|
Total
|
|
|
|
3,442,175
|
|
|
$
|
25.78
|
|
|
|
3,442,175
|
|
|
$
|
36.0
|
|
None.
At
our
Annual Meeting of Shareholders held on June 14, 2006, the following individuals
were elected to the Board of Directors:
|
Votes
|
|
Votes
|
|
For
|
|
Withheld
|
J.
Douglas Perry
|
94,558,035
|
|
5,068,320
|
Thomas
A. Saunders, III
|
94,680,165
|
|
4,946,190
|
Eileen
R. Scott
|
98,614,145
|
|
1,012,210
|
Mary
Anne Citrino
|
98,677,580
|
|
948,775
|
Item
5. OTHER INFORMATION.
None.
31.
Certifications required under Section 302 of the Sarbanes-Oxley Act
|
31.1 |
Certification
required under Section 302 of the Sarbanes-Oxley Act of Chief Executive
Officer |
|
|
|
|
31.2 |
Certification required under Section
302 of the Sarbanes-Oxley Act of Chief Financial
Officer |
32.
Certifications required under Section 906 of the Sarbanes-Oxley Act
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32.1 |
Certification
required under Section 906 of the Sarbanes-Oxley Act of Chief Executive
Officer |
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32.2 |
Certification
required under Section 906 of the Sarbanes-Oxley Act of Chief Financial
Officer |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
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DOLLAR
TREE STORES, INC. |
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Date:
September 7, 2006 |
By: |
/s/ Kent
A. Kleeberger |
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Kent
A. Kleeberger |
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Chief
Financial Officer
|
|
(principal
financial and accounting officer) |
22