|
26
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
70.7
|
|
|
$ |
61.9
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
78.3
|
|
|
|
74.1
|
|
Other
non-cash adjustments to net income
|
|
|
4.1
|
|
|
|
(7.9 |
) |
Changes
in working capital
|
|
|
(58.0 |
) |
|
|
(22.7 |
) |
Net
cash provided by operating activities
|
|
|
95.1
|
|
|
|
105.4
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(88.9 |
) |
|
|
(88.6 |
) |
Purchase
of short-term investments
|
|
|
(790.5 |
) |
|
|
(346.8 |
) |
Proceeds
from sales of short-term investments
|
|
|
868.3
|
|
|
|
489.3
|
|
Purchase
of Deal$ assets, net of cash acquired of $0.3
|
|
|
-
|
|
|
|
(54.1 |
) |
Acquisition
of favorable lease rights
|
|
|
(4.8 |
) |
|
|
(1.1 |
) |
Net
cash used in investing activities
|
|
|
(15.9 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal
payments under capital lease obligations
|
|
|
(0.4 |
) |
|
|
(0.5 |
) |
Payments
for share repurchases
|
|
|
(198.0 |
) |
|
|
(136.4 |
) |
Proceeds
from stock issued pursuant to stock-based
|
|
|
|
|
|
|
|
|
compensation
plans
|
|
|
65.3
|
|
|
|
14.7
|
|
Tax
benefit of stock options exercised
|
|
|
12.4
|
|
|
|
1.3
|
|
Net
cash used in financing activities
|
|
|
(120.7 |
) |
|
|
(120.9 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(41.5 |
) |
|
|
(16.8 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
85.0
|
|
|
|
65.8
|
|
Cash
and cash equivalents at end of period
|
|
$ |
43.5
|
|
|
$ |
49.0
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
9.3
|
|
|
$ |
5.9
|
|
Income
taxes
|
|
$ |
66.3
|
|
|
$ |
86.5
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 February 3, 2007 contained
in the
Company’s Annual Report on Form 10-K (Form 10-K) filed April 4,
2007. The results of operations for the 13 and 26 weeks
ended August 4, 2007 are not necessarily indicative of the results to be
expected for the entire fiscal year ending February 2, 2008.
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 August 4, 2007 and July 29, 2006 and the results of its
operations and cash flows for the periods presented. The February 3,
2007 balance sheet information was derived from the audited consolidated
financial statements as of that date. The balance sheet at February
3, 2007 presented herein reflects an immaterial correction which increased
other
current assets and accounts payable by $8.9 million.
2.
INCOME TAXES
In
June
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes” (FIN 48). This
Interpretation clarifies accounting for income tax uncertainties recognized
in
an enterprise’s financial statements in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a recognition threshold and measurement attribute for a tax
position
taken or expected to be taken in a tax return. Under the guidelines
of FIN 48, an entity should recognize a financial statement benefit for
a tax
position if it determines that it is more likely than not that the position
will
be sustained upon examination.
The
Company adopted the provisions of FIN 48 on February 4, 2007. As a
result, the Company recognized a $0.6 million decrease to retained
earnings. The balance for unrecognized tax benefits at February 4,
2007, was $20.4 million. The total amount of unrecognized tax
benefits at February 4, 2007, that, if recognized, would affect the effective
tax rate was $14.1 million (net of the federal tax benefit). The
Company does not expect a significant change in its unrecognized tax benefits
between now and the end of fiscal year 2007.
The
Company recognizes potential interest and penalties related to unrecognized
tax
benefits in “Provision for income taxes.” At February 4, 2007, the
balance of interest accrued on unrecognized tax benefits and penalties
related
to tax matters was $3.3 million and $0.1 million, respectively.
The
Internal Revenue Service completed its examination of the 1999 to 2003
consolidated federal income tax returns during 2006. Several states
are auditing the Company’s prior years’ tax returns. In general,
fiscal years 2004 and forward are within the statute of limitations for
federal
and state tax purposes. The statute of limitations is still open
prior to 2004 for several states.
3.
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
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
32.6
|
|
|
$ |
29.0
|
|
|
$ |
70.7
|
|
|
$ |
61.9
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
98.2
|
|
|
|
103.7
|
|
|
|
98.7
|
|
|
|
105.0
|
|
Basic
net income per share
|
|
$ |
0.33
|
|
|
$ |
0.28
|
|
|
$ |
0.72
|
|
|
$ |
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
32.6
|
|
|
$ |
29.0
|
|
|
$ |
70.7
|
|
|
$ |
61.9
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
98.2
|
|
|
|
103.7
|
|
|
|
98.7
|
|
|
|
105.0
|
|
Dilutive
effect of stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock units (as determined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
applying the treasury stock method)
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
0.4
|
|
Weighted
average number of shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive
potential shares outstanding
|
|
|
98.7
|
|
|
|
104.1
|
|
|
|
99.4
|
|
|
|
105.4
|
|
Diluted
net income per share
|
|
$ |
0.33
|
|
|
$ |
0.28
|
|
|
$ |
0.71
|
|
|
$ |
0.59
|
|
For
the
13 weeks ended August 4, 2007, substantially all of the stock options
outstanding are included in the calculation of the weighted average number
of
shares. For the 13 weeks ended July 29, 2006, approximately 2.0
million stock options 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 August 4, 2007
and July 29, 2006, approximately 0.2 million and 1.8 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.
4.
STOCK-BASED COMPENSATION
Stock-based
compensation expense was $2.8 million and $5.8 million, respectively, during
the
13 and 26 weeks ended August 4, 2007. Total stock-based compensation
expense was $2.5 million and $3.5 million, respectively, during the 13
and 26
weeks ended July 29, 2006.
Stock
Options
In
the 26
weeks ended August 4, 2007, the Company granted a total of 0.4 million
stock
options from the Equity Incentive Plan (EIP), Executive Officer Equity
Plan
(EOEP) and the Deferred Directors Compensation Plan (DDCP). The fair
value of the 2007 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
|
|
28.4%
|
Annual
dividend yield
|
|
-
|
Risk
free interest rate
|
|
4.5%
|
The
estimated fair value of these stock options granted approximated $4.8 million,
net of expected forfeitures and is being recognized over their three-year
vesting period, or a shorter period based on the retirement eligibility
of
certain grantees. During the 13 and 26
weeks
ended August 4, 2007, the Company recognized $0.4 million and $0.9 million,
respectively, of expense related to these options. During the 13 and
26 weeks ended August 4, 2007, the Company recognized $0.2 million and
$0.5
million, of expense related to options granted prior to 2007. 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.
During
the 13 and 26 weeks ended August 4, 2007, approximately 1.0 million and
2.5
million stock options were exercised yielding $26.7 million and $63.5 million
of
cash proceeds and $5.9 million and $12.4 million of tax benefits recognized
as
additional paid in capital, respectively. During the 13 and 26 weeks
ended July 29, 2006, approximately 0.1 million and 0.6 million stock options
were exercised yielding $3.5 million and $13.2 million of cash proceeds
and $0.2
million and $1.3 million of tax benefits recognized as additional paid
in
capital, respectively. The intrinsic value of options exercised
during the 13 and 26 weeks ended August 4, 2007 was approximately $13.0
million
and $30.4 million, respectively. The intrinsic value of options
exercised during the 13 and 26 weeks ended July 29, 2006 was approximately
$0.6
million and $3.4 million, respectively.
Restricted
Stock Units (RSU)
The
Company granted approximately 0.3 million RSUs, net of forfeitures in the
26
weeks ended August 4, 2007 from the EIP and the EOEP to employees and
officers. The estimated $12.8 million fair value of these RSUs is
being expensed ratably over the three-year vesting periods, or a shorter
period
based on the retirement eligibility of certain grantees. The fair
value was determined using the Company’s closing stock price on the date of
grant. The Company recognized $1.0 million and $1.8 million,
respectively, of expense related to these RSUs for the 13 and 26 weeks
ended
August 4, 2007. During the 13 and 26 weeks ended August 4, 2007, the
Company recognized $1.0 million and $2.1 million, respectively, of expense
related to RSUs granted prior to 2007.
In
the 13
and 26 weeks ended August 4, 2007, approximately 0.1 million and 0.2 million
RSUs vested, respectively and approximately 0.1 million shares net of taxes
were
issued for both periods.
5.
SHAREHOLDERS’ EQUITY
Share
Repurchase Program
On
March
29, 2007, the Company entered into an agreement with Goldman Sachs to repurchase
$150.0 million of the Company’s common shares under an Accelerated Share
Repurchase Agreement (ASR). The entire $150.0 million was executed
under a “collared” agreement. Under this agreement, the Company
initially received 3.6 million shares through April 12, 2007, representing
the
minimum number of shares to be received based on a calculation using the
“cap”
or high-end of the price range of the collar. The maximum number of
shares that could have been received under the agreement was 4.1
million. The number of shares was determined based on the weighted
average market price of the Company’s common stock during the four months after
the initial execution date. The calculated weighted average market
price through July 30, 2007, net of a predetermined discount, as defined
in the
“collared” agreement, was $40.78. Therefore, on July 30, 2007, the
Company received an additional 0.1 million shares under the “collared”
agreement.
During
the 13 weeks ended August 4, 2007, the Company also repurchased an additional
1.6 million shares for approximately $62.0 million. Approximately 0.4
million of these shares totaling $17.2 million had not settled as of August
4,
2007, therefore these amounts have been accrued in the accompanying Condensed
Consolidated Balance Sheet as of August 4, 2007. The Company
purchased another 0.3 million shares during the first week of the third
quarter
of 2007 for approximately $13.0 million.
On
August
30, 2007, the Company entered into an agreement with Merrill Lynch to repurchase
approximately $100.0 million of the Company’s common shares under an
Accelerated
Share
Repurchase Agreement. The entire $100.0 million was executed under a
“collared” agreement. Within two weeks of the August 30, 2007
execution date, the Company will receive the minimum number of shares to
be
received based on a calculation using the “cap” or high-end of the price range
of the collar. Up to four and one-half months after the initial
execution date, the Company will receive additional shares depending on
the
volume weighted average price of the Company’s common shares during that period,
net of a predetermined discount, subject to the maximum share delivery
provisions of the agreement.
Including
the $100.0 million in share repurchases from this agreement, as of August
31,
2007, the Company has approximately $98.4 million remaining under the $500.0
million share repurchase program authorized by the Board of Directors in
November 2006.
6.
LITIGATION MATTERS
In
2003,
the Company was served with a lawsuit in a 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 hour
violations. The suit requested that the California state court
certify the case as a class action. The parties engaged in mediation
and reached an agreement which will be presented to the Court for acceptance
and
certification of a class. The estimated settlement amount has been
accrued in the accompanying condensed consolidated financial statements
as of
August 4, 2007.
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 requested the Court to certify classes for
their various claims and the presiding judge recently did so with respect
to two
classes, one alleging that our Oregon employees, in violation of that state’s
labor laws, were not paid for rest breaks and the other that upon termination
of
employment, employees were not tendered their final pay in a timely
manner. Other claims of the plaintiffs were dismissed by an earlier
Order of the Court and are being appealed by the
plaintiffs. Discovery will ensue on the certified class issues; no
trial is anticipated before the end of 2007.
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 she was not paid
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. The parties
have reached a settlement and executed an Agreement which will be presented
to
the Court for its approval. The estimated settlement amount has been
accrued in the accompanying condensed consolidated financial statements
as of
August 4, 2007 and February 3, 2007.
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. Plaintiff sought and received from the Court an Order
allowing nationwide (except for the state of California) notice to be sent
to
all store managers employed by the Company now or within the past three
years. Such notice has been mailed and each involved person will
determine whether he or she wishes to opt-in to the class as a
plaintiff. The Company intends at the appropriate time to challenge
any effort by the opt-in plaintiffs to be certified as a class.
In
2007,
the Company was served with a lawsuit filed in federal court in the state
of
California by one present and one former store manager. They claim
they should have been classified as non-exempt employees under both the
California Labor Code and the Fair Labor Standards Act. They filed
the case as a class action on behalf of California based store
managers. The Company responded with a motion to dismiss which has
not yet been heard by the court. The Company was thereafter served
with a second suit in a California state court which alleges essentially
the
same claims as those contained in the federal action and which likewise
seeks
class certification of all California store managers. The Company has
removed the case to the same federal court as the first suits, answered
it and
asked the Court to consolidate the two actions.
In
2007,
the Company was served with a lawsuit filed in federal court in California
by
two former employees who allege they were not paid all wages due and owing
for
time worked, that they were not paid in a timely manner upon termination
of
their employment and that they did not receive accurate itemized wage
statements. They filed the suit as a class action and seek to include
in the class all former company employees in the state of
California. The Company responded with a motion to dismiss which has
not yet been argued.
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.
Item
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
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
2007 and their
performance compared with other store
sizes;
|
·
|
the
effect of a slight shift in merchandise mix to consumables
and the
roll-out of frozen and refrigerated merchandise on gross profit
margin and
sales;
|
·
|
the
effect of the increase in import purchases in the current year
on profit
margin;
|
·
|
the
possible effect of inflation and other economic changes on
our future
costs and profitability, including future changes in minimum
wage rates,
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;
|
·
|
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 and tax
claims.
|
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 4,
2007. Also see section 1A. “Risk Factors” in Part II of this
Quarterly Report on Form 10-Q.
·
|
Our
profitability is especially vulnerable to cost
increases.
|
·
|
Our
profitability is affected by the mix of products we
sell.
|
·
|
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 directly and indirectly imported
merchandise
which may increase in cost, become unavailable, or not meet
U.S. product
safety standards.
|
·
|
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, including competition for merchandise, may
reduce our
sales and profits.
|
·
|
The
resolution of certain legal and tax matters could have a material
adverse
effect on our results of operations, accrued liabilities and
cash.
|
·
|
Certain
provisions in our articles of incorporation and bylaws could
delay or
discourage a takeover attempt that may be in shareholders’ best
interests.
|
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,
substantially all of which is at the point of sale. 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 fifteen 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
August
4, 2007 we operated 3,334 stores in 48 states, with 27.5 million selling
square
feet compared to 3,156 stores with 25.4 million selling square feet at
July 29,
2006. During the 26 weeks ended August 4, 2007, we opened 134 stores,
expanded 53 stores and closed 19 stores, compared to 121 stores opened,
48
stores expanded and 13 stores closed during the 26 weeks ended July 29,
2006. In addition, we acquired 138 Deal$ stores on March 25,
2006. As of the end of the second quarter, we are behind our internal
plans for new store openings for the year, however we expect to make
up this
deficit during the year and are still expecting to achieve our approximate
10%
square footage growth target for fiscal 2007. In the 13
and
26
weeks
ended August 4, 2007, we added approximately 0.6 million and 1.3 million
selling
square feet, respectively, of which approximately 0.1 million and 0.3
million,
respectively, was added through expanding existing stores. The
average size of stores opened during the 26 weeks ended August 4, 2007
was
approximately 8,400 selling square feet (or about 10,600 gross square
feet). For the remainder of 2007, we continue to plan to open stores
around 9,000 selling square feet (or about 11,000 gross square
feet). We believe that this 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 August 4 2007, comparable store net sales increased
4.4%
and 5.2%. For the 13 weeks ended August 4, 2007, the comparable store
net sales increase was the result of increases of 3.3% in the number
of
transactions and 1.1% in transaction size, compared to the 13 weeks ended
July
29, 2006. The number of transactions and transaction size increased
3.0% and 2.2%, respectively, in the 26 weeks ended August 4, 2007, as
compared
to the same period last year. We believe comparable store net sales
were positively affected by a number of our initiatives over the past
year,
including expansion of forms of payment accepted by our stores and the
roll-out
of frozen and refrigerated merchandise to more of our stores. During
2006 we completed the roll-out of pin-capture debit card acceptance to
all of
our stores, which has also enabled us to accept Electronic Benefit Transfer
cards. We now accept food stamps in approximately 820 qualified
stores. We believe the expansion of forms of payment accepted by our
stores has helped increase the average transaction size in our
stores.
We
continued to experience a slight shift in the mix of merchandise sold
to more
consumables which we believe increases the traffic and the efficiency
in our
stores; however, this merchandise has lower margins. The negative impact
from
the planned shift toward more consumables was smaller in the second quarter
2007
than in 2006. The planned shift in mix to more consumables is
partially the result of the roll-out of frozen and refrigerated merchandise
to
more stores in 2006 and 2007. At August 4, 2007 we had frozen and
refrigerated merchandise in approximately 870 stores compared to approximately
360 at July 29, 2006. We plan to add frozen and refrigerated
merchandise to approximately 60 more stores during 2007, which will continue
to
pressure margins 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 and increasing
the
average transaction size.
Even
with
the higher amount of basic, consumable products in the current year,
we
experienced a margin improvement in the second quarter of 2007 compared
to the
same period of 2006. We expected some margin improvement as we cycled
through our planned shift to more basic, consumable
products. However, we are seeing this margin improvement slightly
ahead of schedule due to an increase in the product mix of higher margin
import
merchandise compared with last year. Import purchases in the prior
year were approximately 36% of total purchases compared to almost 40%
this year
through August 4, 2007. We expect this level of import purchases to continue
for
the remainder of the year.
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 and increased inventory
turnover. Using the data captured at the point of sale has enabled us
to better plan and allocate our inventory purchases and helped us reduce
our
inventory investment per store by approximately 8.0% at August 4, 2007
compared
to July 29, 2006.
On
May
25, 2007, the President signed legislation that increased the Federal
Minimum
Wage from $5.15 an hour to $7.25 an hour over the next two years. We
do not expect this legislation to have a material effect on our operations
for
fiscal 2007.
We
estimate that sales for the third quarter of 2007 will be in the range
of $1.00
billion to $1.02 billion and earnings per diluted share will be in the
range of
$0.35 to $0.38. For fiscal 2007, we estimate sales will be in the
range of $4.28 billion to $4.35 billion and diluted earnings per share
will be
in the range of $2.04 to $2.14. Guidance for the third quarter of
2007 and full year fiscal 2007 is based on low to low-mid single digit
comparable store net sales growth. The guidance for earnings per
share for fiscal 2007 reflects the impact of approximately $228 million
of share
repurchases, which includes share repurchases through the first week
of the
third quarter of 2007.
Results
of Operations
13
Weeks Ended August 4, 2007 Compared to the 13 Weeks Ended July 29,
2006
Net
sales. Net sales increased 9.9%, or $87.6 million, over last
year’s second quarter resulting from sales in our new and expanded stores
and a
4.4% 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. For the 13 weeks ended August 4, 2007 the gross profit
margin was 33.6% compared to the gross profit margin of 33.2% for the 13 weeks
ended July 29, 2006. This increase can be attributed to the
following:
·
|
Merchandise
costs, including inbound freight, decreased 50 basis points
due to higher
initial mark-up in many categories in the current year. Import
purchases are up approximately 10% compared to last year, which
has helped
to increase merchandise margin in the current
year.
|
·
|
Buying
and distribution costs decreased 10 basis points as a result
of the
leverage associated with the positive comparable store net
sales during
the quarter.
|
·
|
The
aforementioned improvement was partially offset by a 20 basis
point
increase in markdown expense due to markdowns accrued in the
current
quarter for the planned promotion of slower moving inventory
items.
|
Selling,
General and Administrative Expenses. Selling, general, and
administrative expenses for the current quarter increased to 28.1%, as
a
percentage of net sales, compared to 27.7% for the same period last
year. This increase was primarily due to the following:
·
|
A
30 basis point increase resulting from a $2.5 million charge
incurred to
settle certain employment related litigation, accompanied by
related
attorney fees.
|
·
|
A
10 basis point increase in debit and credit fees due to increased
debit
transactions per store in the current
year.
|
·
|
A
10 basis point increase in advertising in the current year
quarter due to
reaching more markets with greater frequency using printed
media.
|
·
|
A
15 basis point increase in the selling, general and administrative
component of occupancy costs due to higher utility costs resulting
form
higher rates and consumption in the current
year.
|
·
|
A
15 basis point decrease in the selling, general and administrative
component of depreciation expense resulting from the leverage
associated
with the increase in comparable store net sales in the current
quarter.
|
Operating
Income. Operating income was 5.5% as a percentage of sales in
both periods as a result of increased gross profit being offset by increased
selling, general and administrative expenses.
Income
Taxes. Our effective tax rate was 37.1% in the second quarter of
2007 compared to 37.4% for the same period last year. The decreased
tax rate for 2007 was the result of work opportunity tax credits in the
current
year quarter and the expiration of statutes of limitations resulting
in the
reversal of certain state tax reserves.
26
Weeks Ended August 4, 2007 Compared to the 26 Weeks Ended July 29,
2006
Net
sales. Net sales increased 11.8%, or $206.1 million, for the
first six months of fiscal 2007 resulting from sales in our new and expanded
stores, including 138 Deal$ stores acquired in March 2006, and a 5.2%
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. For the 26 weeks ended August 4, 2007 the gross profit
margin was 33.5% compared to 33.3% for the first six months of
2006. The increase is due to the following:
·
|
Merchandise
costs, including inbound freight, decreased 30 basis points
due to higher
initial mark-up in many categories in the current year. Import
purchases
are up approximately 10% compared to last year, which has helped
to
increase merchandise margin in the current
year.
|
·
|
Buying
and distribution costs decreased 10 basis points as a result
of the
leverage associated with the positive comparable store net
sales in the
current year.
|
·
|
The
aforementioned improvement was offset by a 15 basis point increase
in
markdown expense due to markdowns accrued in the current year
for the
planned promotion of slower moving inventory
items.
|
Selling,
General and Administrative Expenses. Selling, general, and
administrative expenses for the 26 weeks ended August 4, 2007, increased
to
27.6%, as a percentage of net sales, compared to 27.5% for the same period
last
year. This increase was primarily due to the following:
·
|
A
20 basis point increase resulting from a $3.0 million charge
incurred to
settle certain employment related litigation, accompanied by
related
attorney fees.
|
·
|
A
10 basis point increase in debit and credit fees due to increased
debit
transactions in the current year.
|
·
|
A
10 basis point increase in the selling, general and administrative
component of occupancy costs due to higher utility costs resulting
from
higher rates and consumption in the current
year.
|
·
|
A
10 basis point decrease in the selling, general and administrative
component of depreciation expense resulting from the leverage
associated
with the increase in comparable store net sales in the current
quarter.
|
·
|
A
10 basis point decrease in store supplies expense due to lower
material
costs in the current year.
|
·
|
A
10 basis point decrease in advertising costs due to the increased
use of
lower cost print advertising and less high cost radio and television
advertising in the current year.
|
Operating
Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 5.9% during the first six months
of
fiscal 2007 compared to 5.8% in the same period of 2006.
Income
Taxes. Our effective tax rate was 37.2% for the 26 weeks ended
August 4, 2007 compared to 37.4% for the same period last year. The
decreased tax rate for 2007 was the result of work opportunity tax credits
in
the current year and the expiration of statutes of limitations resulting
in the
reversal of certain state tax reserves.
Liquidity
and Capital Resources
Our
business requires capital to open new stores, expand our distribution
network
and operate our existing business. Our working capital requirements
for our existing business 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 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
August 4,
2007 and July 29, 2006:
|
|
26
Weeks ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
95.1
|
|
|
$ |
105.4
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
(15.9 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
(120.7 |
) |
|
|
(120.9 |
) |
The
$10.3
million decrease in cash provided by operating activities was primarily
due to
the increased payout of incentive compensation and profit sharing
accrued at the
end of last year and paid out in the first quarter as compared to
the prior
year. This use of operating cash was partially offset by improved
earnings before depreciation and amortization in the current year.
The
$14.6
million increase in cash used in investing activities was primarily
due to lower
proceeds from short-term investment activity in the current year,
partially
offset by the use of $54.1 million in the prior year to acquire Deal$
assets.
The
$0.2
million decrease in cash used in financing activities resulted primarily
from
increased proceeds from stock option exercises in the current year
resulting
from the Company’s higher stock price, offset by increased stock repurchases in
the current year.
At
August 4, 2007, our long-term borrowings were $268.5 million and
our capital
lease commitments were $0.6 million. As of August 4, 2007, 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 $153.1 million was
committed to
letters of credit issued for routine purchases of imported merchandise
as of
August 4, 2007.
On
March
29, 2007, we entered into an agreement with Goldman Sachs to repurchase
$150.0
million of our common shares under an Accelerated Share Repurchase
Agreement
(ASR).The entire $150.0 million was executed under a “collared”
agreement. Under this agreement, we initially received 3.6 million
shares through April 12, 2007, representing the minimum number of
shares to be
received based on a calculation using the “cap” or high-end of the price range
of the collar. The maximum number of shares that could have been
received under the agreement was 4.1 million. The number of shares
was determined based on the weighted average market price of our
common stock
during the four months after the initial execution date. The weighted
average market price through July 30, 2007, the termination date,
net of a
predetermined discount, as defined in the “collared” agreement was
$40.78. Therefore, we received an additional 0.1 million shares on
July 30, 2007.
In
addition, as of August 4, 2007 we have repurchased an additional
1.6 million
shares for approximately $62.0 million. Approximately 0.4 million of
these shares for approximately $17.2 million had not settled as of
August 4,
2007. Therefore, these amounts have been accrued in our accompanying
Condensed
Consolidated Balance Sheet as of August 4, 2007. During the first
week of the third quarter of 2007, we repurchased an additional 0.3
million
shares for approximately $13.0 million.
On
August
30, 2007, we entered into an agreement with Merrill Lynch to repurchase
approximately $100.0 million of our common shares under an Accelerated
Share
Repurchase Agreement. The entire $100.0 million was executed under a
“collared” agreement. Within two weeks of the August 30, 2007
execution date, we will receive the minimum number of shares to be
received
based on a calculation using the “cap” or high-end of the price range of the
collar. Up to four and one-half months after the initial execution
date, we will receive additional shares from the third party depending
on the
volume weighted average price of our common shares during that period,
subject
to the maximum share delivery provisions of the agreement.
Including
the $100.0 million in share repurchases from this agreement, as of
August 31,
2007, we have approximately $98.4 million remaining under the $500.0
million
share repurchase program authorized by our Board of Directors in
November
2006.
Item
3. 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 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 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. As of
August 4, 2007, the fair value of this interest rate swap is not
material to our
financial position.
Item
4. CONTROLS AND PROCEDURES.
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 the Exchange Act). Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
our
disclosure controls and procedures are effective.
During
the quarter ended August 4, 2007, we upgraded our operating system
used to
perform accounting, payroll and reporting functions such as: Financial
Statement
creation, Accounts Payable, Human Resources, Payroll and Fixed Asset
Accounting. Additionally, the application is now managed, supported
and stored off-site by an application service provider. While the
manual processes and controls that involve this system have not changed
as a
result of the upgrade, the system itself is now accessed via the
internet and
not on an internal network. We have reviewed the System Development
Life Cycle process and tested all application controls associated
with this
operating system and no significant exceptions have been
identified. We have also reviewed the Internal Controls Report
from our third party provider, to ensure that all controls relevant
to our
operating system were addressed and were operating effectively.
There
have been no other material changes in our internal control over
financial
reporting during the quarter ended August 4, 2007 that have materially
affected,
or are reasonably likely to materially affect, our internal control
over
financial reporting.
PART
II. OTHER INFORMATION
Item
1. 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;
|
|
|
·
|
product
safety matters, which may include product recalls in cooperation
with the
Consumer Products Safety Commission or other
jurisdictions;
|
|
|
·
|
personal
injury/wrongful death claims; and
|
|
|
·
|
real
estate matters related to store
leases.
|
In
2003,
we were served with a lawsuit in a 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 hour
violations. The suit requested that the California state court
certify the case as a class action. The parties engaged in mediation
and reached
an agreement which will be present to the Court for acceptance and
certification
of a class. The estimated settlement amount has been accrued in the
accompanying
condensed consolidated financial statements as of August 4, 2007.
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 requested the Court to certify classes for
their various claims and the presiding judge did so with respect
to two classes,
one alleging that our Oregon employees, in violation of that state’s labor laws,
were not paid for rest breaks and the other that upon termination
of employment,
employees were not tendered their final pay in a timely manner. Other
claims of the plaintiffs were dismissed by an earlier Order of the
Court and are
being appealed by the plaintiffs. Discovery will ensue on the
certified class issues; no trial is anticipated before the end of
2007.
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 she was not paid 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. The parties have reached a settlement and
executed an Agreement which will be presented to the Court for its
approval. The estimated settlement amount has been accrued in the
accompanying condensed consolidated financial statements as of August
4, 2007
and February 3, 2007.
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. Plaintiff sought and received from the Court an Order
allowing nationwide (except for the state of California) notice to
be sent to
all store managers employed by us now or within the past three
years. Such notice has been mailed and each involved person will
determine whether he or she wishes to opt-in to the class as a
plaintiff. We intend at the appropriate time, to challenge any effort
by the opt-in plaintiffs to be certified as a class.
In
2007,
we were served with a lawsuit filed in federal court in the state
of California
by one present and one former store manager. They claim they should
have been classified as
non-exempt
employees under both the California Labor Code and the Fair Labor
Standards
Act. They filed the case as a class action on behalf of California
based store managers. We responded with a motion to dismiss which has
not yet been heard by the court. We were thereafter served with a
second suit in a California state court which alleges essentially
the same
claims as those contained in the federal action and which likewise
seeks class
certification of all California store managers. We have removed the
case to the same federal court as the first suit, answered it and
asked the
Court to consolidate the two actions.
In
2007,
we were served with a lawsuit filed in federal court in California
by two former
employees who allege they were not paid all wages due and owing for
time worked,
that they were not paid in a timely manner upon termination of their
employment
and that they did not receive accurate itemized wage statements. They
filed the suit as a class action and seek to include in the class
all former
company employees in the state of California. We responded with a
motion to dismiss which has not yet been argued.
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.
Item
1A. RISK FACTORS
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 4, 2007.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
The
following table presents our share repurchase activity for the 13
weeks ended
August 4, 2007.
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
May
6, 2007 to June 2, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
273.4
|
|
June
3, 2007 to July 7, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
273.4
|
|
July
8, 2007 to August 4, 2007
|
|
|
1,694,503
|
|
|
|
39.25
|
|
|
|
1,694,503
|
|
|
|
211.4
|
|
Total
|
|
|
1,694,503
|
|
|
$ |
39.25
|
|
|
|
1,694,503
|
|
|
$ |
211.4
|
|
In
March
2007, we entered into an agreement with a third party to repurchase
approximately $150.0 million of our common shares under an Accelerated
Share
Repurchase Agreement (ASR). Under this agreement, we received an
additional 114,803 shares during the second quarter to settle the
ASR. The
shares are included in the table above. See additional discussion of
the ASR in the Liquidity and Capital Resource section of, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” found
elsewhere in this report.
Item 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At
our
Annual Meeting of Shareholders held on June 21, 2007, the following
individuals
were elected to the Board of Directors:
|
Votes
For
|
|
Votes
Withheld
|
H.
Ray Compton
|
87,326,823
|
|
2,744,778
|
Bob
Sasser
|
87,396,142
|
|
2,675,459
|
Alan
L. Wurtzel
|
87,055,372
|
|
3,016,229
|
In
addition, our proxy contained a non-binding shareholder proposal
that asked us
to remove the supermajority vote requirements. The results were as
follows:
Votes
for
the proposal – 62,579,786
Votes
against the proposal – 18,166,599
Broker
non-votes – 9,066,823
Abstentions
– 258,393
The
non-binding proposal passed, but failed to receive a supermajority
vote.
Item 5.
OTHER INFORMATION.
None.
Item 6.
EXHIBITS.
10.
Material Contracts
31.
Certifications required under Section 302 of the Sarbanes-Oxley Act
32.
Certifications required under Section 906 of the Sarbanes-Oxley Act
SIGNATURES
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.
|
|
|
|
DOLLAR
TREE STORES, INC.
|
|
|
|
Date:
September 12, 2007
|
By:
|
/s/ Kent
A. Kleeberger
|
|
Kent
A. Kleeberger
|
|
Chief
Financial Officer
(principal
financial and accounting
officer)
|