form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Fiscal Year Ended February 2, 2008
Commission
File No.0-25464
DOLLAR
TREE, INC.
(Exact
name of registrant as specified in its charter)
Virginia
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26-2018846
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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500
Volvo Parkway, Chesapeake, VA 23320
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (757) 321-5000
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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None
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None
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Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock (par value $.01 per share)
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (X)
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Accelerated
filer ( )
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Non-accelerated filer ( )
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Smaller
reporting company ( )
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
aggregate market value of Common Stock held by non-affiliates of the Registrant
on August 3, 2007, was $3,664,182,086 based on a $39.28 average of the high and
low sales prices for the Common Stock on such date. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the
Registrant.
On March
28, 2008, there were 89,808,123 shares of the Registrant’s Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information regarding securities authorized for issuance under equity
compensation plans called for in Item 5 of Part II and the information called
for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held June 19, 2008, which will be filed with the Securities and
Exchange Commission not later than May 30, 2008.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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BUSINESS
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6
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Item
1A.
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RISK
FACTORS
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10
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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12
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Item
2.
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PROPERTIES
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13
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Item
3.
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LEGAL
PROCEEDINGS
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14
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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15
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PART
II
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Item
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED
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STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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16
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Item
6.
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SELECTED
FINANCIAL DATA
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17
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Item
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION
AND RESULTS OF OPERATIONS
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19
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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29
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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31
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
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ACCOUNTING
AND FINANCIAL DISCLOSURE
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57
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Item
9A.
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CONTROLS
AND PROCEDURES
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57
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Item
9B.
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OTHER
INFORMATION
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58
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PART
III
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Item
10.
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DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
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58
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Item
11.
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EXECUTIVE
COMPENSATION
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58
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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58
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Item
13.
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CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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59
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Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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59
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PART
IV
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Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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59
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SIGNATURES
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60
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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 and results. They include statements preceded by,
followed by or including words such as "believe," "anticipate," "expect,"
"intend," "plan," "view," “target” or "estimate." For example, our
forward-looking statements include statements regarding:
·
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our
anticipated sales, including comparable store net sales, net sales growth
and earnings growth;
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·
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our
growth plans, including our plans to add, expand or relocate stores, our
anticipated square footage increase, and our ability to renew leases at
existing store locations;
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·
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the
average size of our stores to be added in 2008 and
beyond;
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·
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the
effect of a slight shift in merchandise mix to consumables and the
increase in freezers and coolers on gross profit margin and
sales;
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·
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the
effect that expanding tender types accepted by our stores will have on
sales;
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·
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the
net sales per square foot, net sales and operating income attributable to
smaller and larger stores and store-level cash payback
metrics;
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·
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the
possible effect of inflation and other economic changes on our costs and
profitability, including the possible effect of future changes in minimum
wage rates, shipping rates, domestic and foreign freight costs, fuel costs
and wage and benefit costs;
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·
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our
cash needs, including our ability to fund our future capital expenditures
and working capital requirements;
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·
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our
gross profit margin, earnings, inventory levels and ability to leverage
selling, general and administrative and other fixed
costs;
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·
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our
seasonal sales patterns including those relating to the length of the
holiday selling seasons and the effect of an earlier Easter in
2008;
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·
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the
capabilities of our inventory supply chain technology and other new
systems;
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·
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the
future reliability of, and cost associated with, our sources of supply,
particularly imported goods such as those sourced from
China;
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·
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the
capacity, performance and cost of our distribution centers, including
opening and expansion schedules;
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·
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our
expectations regarding competition and growth in our retail
sector;
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·
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costs
of pending and possible future legal claims;
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·
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management's
estimates associated with our critical accounting policies, including
inventory valuation, accrued expenses, and income
taxes;
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You
should assume that the information appearing in this annual report is accurate
only as of the date it was issued. Our business, financial condition,
results of operations and prospects may have changed since that
date.
For a
discussion of the risks, uncertainties and assumptions that could affect our
future events, developments or results, you should carefully review the risk
factors described in Item 1A “Risk Factors” beginning on page 10, as well as
Item 7 "Management’s Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 19 of this Form 10-K.
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 annual 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, we do not, by policy, 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 securities analyst regardless of the content
of the statement or report. We generally do not issue financial
forecasts or projections and we do not, by policy, confirm those issued by
others. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
our responsibility.
INTRODUCTORY
NOTE: Unless otherwise
stated, references to "we," "our" and "Dollar Tree" generally refer to Dollar
Tree, Inc. and its direct and indirect subsidiaries on a consolidated
basis. Unless specifically indicated otherwise, any references to
“2008” or “fiscal 2008”, “2007” or “fiscal 2007”, “2006” or “fiscal 2006,” and
“2005” or “fiscal 2005,” relate to as of or for the years ended January 31,
2009, February 2, 2008, February 3, 2007 and January 28, 2006,
respectively.
On March
2, 2008, we reorganized by creating a new holding company structure. The new
parent company is Dollar Tree, Inc., replacing Dollar Tree Stores, Inc., which
is now an operating subsidiary. The primary purpose of the
reorganization was to create a more efficient corporate
structure. Outstanding shares of the capital stock of Dollar Tree
Stores, Inc., were automatically converted, on a share for share basis, into
identical shares of common stock of the new holding company. The
articles of incorporation, the bylaws, the executive officers and the board of
directors of our new holding company are the same as those of the former Dollar
Tree Stores, Inc. in effect immediately prior to the
reorganization. The common stock of our new holding company will
continue to be listed on the NASDAQ Global Select Market under the symbol
“DLTR”. The rights, privileges and interests of our stockholders will
remain the same with respect to our new holding company.
AVAILABLE
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act are available free of charge on
our website at www.dollartree.com as soon as reasonably practicable after
electronic filing of such reports with the SEC.
PART
I
Item
1. BUSINESS
Overview
Since our
founding in 1986, we have become the leading operator of discount variety stores
offering merchandise at the fixed price of $1.00. We believe the
variety and quality of products we sell for $1.00 sets us apart from our
competitors. At February 2, 2008, we operated 3,411 discount variety
retail stores. Approximately 3,300 of these stores sell substantially
all items for $1.00 or less. The remaining stores, operating as
Deal$, which were acquired in March 2006, sell most items for $1.00 or less but
also sell items at prices greater than $1.00. Our stores operate
under the names of Dollar Tree, Deal$ and Dollar Bills. On March 2, 2008, Dollar
Tree, Inc. became the new parent holding company for Dollar Tree Stores, Inc.,
which is now an operating subsidiary.
In the
past five years, we have modified our average store size to reflect what we
believe is our optimal store size of between 10,000 and 12,500 square
feet. At February 2, 2008, approximately 14% of our stores are less
than 6,000 square feet, which is down from approximately 40% of our stores at
January 31, 2004. These smaller stores are comprised of mall and
older strip shopping center locations and are candidates for relocation as their
leases expire. Our current store size reflects our expanded
merchandise offerings and improved service to our customers. As we
have been expanding our merchandise offerings, we have added freezers and
coolers to approximately 1,100 stores during the past three years to increase
traffic and transaction size. At January 31, 2004, we operated 2,513
stores in 47 states. At February 2, 2008, we operated 3,411 stores in
48 states. Our selling square footage increased from approximately
16.9 million square feet in January 2004 to 28.4 million square feet in February
2008. Our store growth since 2003 has resulted from opening new
stores and completing mergers and acquisitions. We centrally manage
our store and distribution operations from our corporate headquarters in
Chesapeake, Virginia.
Business
Strategy
Value Merchandise
Offering. We strive to exceed our customers' expectations of
the variety and quality of products that they can purchase for $1.00 by offering
items that we believe typically sell for higher prices elsewhere. We
buy approximately 55% to 60% of our merchandise domestically and import the
remaining 40% to 45%. Our domestic purchases include
closeouts. We believe our mix of imported and domestic merchandise
affords our buyers flexibility that allows them to consistently exceed the
customer's expectations. In addition, direct relationships with
manufacturers permit us to select from a broad range of products and customize
packaging, product sizes and package quantities that meet our customers'
needs.
Mix of Basic Variety and Seasonal
Merchandise. We maintain a balanced selection of products
within traditional variety store categories. We offer a wide
selection of everyday basic products and we supplement these basic, everyday
items with seasonal and closeout merchandise. We attempt to keep
certain basic consumable merchandise in our stores continuously to establish our
stores as a destination and we increased slightly the mix of consumable
merchandise in order to increase the traffic in our stores. Closeout
merchandise is purchased opportunistically and represents less than 10% of our
purchases. National, regional and corporate brands have become a
bigger part of our merchandise mix.
Our
merchandise mix consists of:
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·
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consumable
merchandise, which includes candy and food, basic health and beauty care,
and household consumables such as paper, plastics and household chemicals
and in select stores, frozen and refrigerated food;
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·
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variety
merchandise, which includes toys, durable housewares, gifts, fashion
health and beauty care, party goods, greeting cards, apparel, and other
items; and
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·
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seasonal
goods, which include Easter, Halloween and Christmas merchandise, along
with summer toys and lawn and garden
merchandise.
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We have
added freezers and coolers to certain stores which has increased the consumable
merchandise carried by those stores. We believe this initiative helps
us drive additional transactions and allows us to appeal to a broader
demographic mix, and these stores will carry more consumable merchandise than
stores without freezers. We have added freezers and coolers to
approximately 360 more stores in 2007. Therefore, as of February 2,
2008, we have freezers and coolers in approximately 1,100 of our
stores. We plan to add them to approximately 150 more stores in
2008. As a result of the installation of freezers and coolers in
select stores, consumable merchandise has grown as a percentage of purchases and
sales and we expect this trend to continue. The following table shows
the percentage of purchases of each major product group for the years ended
February 2, 2008 and February 3, 2007:
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February
2,
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February
3,
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Merchandise Type
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2008
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2007
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Variety
categories
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48.1%
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48.9%
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Consumable
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46.0%
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45.3%
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Seasonal
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5.9%
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5.8%
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Customer Payment
Methods. All of our stores accept cash, checks, debit cards
and VISA credit cards and approximately 1,000 stores accept MasterCard credit
cards. Prior to May
2005, approximately 900 of our stores accepted debit cards. By the
end of 2005, approximately 2,300 of our stores accepted debit cards and as of
the end of 2006, all of our stores accepted debit cards. We began
accepting VISA credit cards at all of our stores in the fourth quarter of
2007. Along with the shift to more consumables, the rollout of
freezers and coolers, and the acceptance of pin-based debit and VISA credit
transactions, we increased the number of stores accepting Electronic Benefits
Transfer cards and food stamps at qualified stores in the current
year. We believe that expanding our tender types has helped increase
both the traffic and the average size of transactions at our stores in the
current year.
Convenient Locations and Store
Size. We primarily focus on opening new stores in strip
shopping centers anchored by mass merchandisers, whose target customers we
believe to be similar to ours. Our stores have proven successful in metropolitan
areas, mid-sized cities and small towns. The range of our store sizes
allows us to target a particular location with a store that best suits that
market and takes advantage of available real estate
opportunities. Our stores are attractively designed and create an
inviting atmosphere for shoppers by using bright lighting, vibrant colors,
decorative signs and background music. We enhance the store design
with attractive merchandise displays. We believe this design attracts
new and repeat customers and enhances our image as both a destination and
impulse purchase store.
For more
information on retail locations and retail store leases, see Item 2 "Properties”
beginning on page 13 of this Form 10-K.
Profitable Stores with Strong Cash
Flow. We maintain a disciplined, cost-sensitive approach to
store site selection in order to minimize the initial capital investment
required and maximize our potential to generate high operating margins and
strong cash flows. We believe that our stores have a relatively small
shopping radius, which allows us to profitably concentrate multiple stores
within a single market. Our ability to open new stores is dependent
upon, among other factors, locating suitable sites and negotiating favorable
lease terms.
Our
older, smaller stores continue to generate significant store-level operating
income and operating cash flows and have some of the highest operating margin
rates among our stores; however, the increased size of our newer stores allows
us to offer a wider selection of products, including more basic consumable
merchandise, thereby making them more attractive as a destination
store.
The
strong cash flows generated by our stores allow us to self-fund infrastructure
investment and new stores. Over the past five years, cash flows from
operating activities have exceeded capital expenditures.
For more
information on our results of operations and seasonality of sales, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 19 of this Form 10-K.
Cost Control. We
believe that substantial buying power at the $1.00 price point and our
flexibility in making sourcing decisions contributes to our successful
purchasing strategy, which includes disciplined, targeted merchandise margin
goals by category. We believe our disciplined buying and quality
merchandise help to minimize markdowns. We buy products on an
order-by-order basis and have no material long-term purchase contracts or other
assurances of continued product supply or guaranteed product cost. No
vendor accounted for more than 10% of total merchandise purchased in any of the
past five years.
Our
supply chain systems continue to provide us with valuable sales information to
assist our buyers and improve merchandise allocation to our
stores. Controlling our inventory levels has resulted in more
efficient distribution and store operations.
Information
Systems. We believe that investments in technology help us to
increase sales and control costs. Our inventory management system has
allowed us to improve the efficiency of our supply chain, improve merchandise
flow and control distribution and store operating costs. Our
automatic replenishment system automatically reorders key items, based on actual
store level sales and inventory. At the end of 2007, we had over
1,000 basic, everyday items on automatic replenishment.
Point-of-sale
data allows us to track sales by merchandise category at the store level and
assists us in planning for future purchases of inventory. We believe
that this information allows us to ship the appropriate product to stores at the
quantities commensurate with selling patterns. Using this
point-of-sale data for planning purchases of inventory has helped us maintain
our inventory levels on a per store basis in 2007 compared to 2006 despite lower
than planned fourth quarter 2007 sales and increased merchandise flow resulting
from the earlier Easter season in 2008. Our inventory turns also
increased 25 basis points in 2007.
Corporate Culture and
Values. We believe that honesty and integrity, doing the right
things for the right reasons, and treating people fairly and with respect are
core values within our corporate culture. We believe that running a
business, and certainly a public company, carries with it a responsibility to be
above reproach when making operational and financial decisions. Our
management team visits and shops our stores like every customer; we have an open
door policy for all our associates; and ideas and individual creativity are
encouraged. We have standards for store displays, merchandise
presentation, and store operations. Our distribution centers are
operated based on objective measures of performance and virtually everyone in
our store support center is available to assist associates in the stores and
distribution centers.
Our
disclosure committee meets at least quarterly and monitors our internal controls
over financial reporting and ensures that our public filings contain discussions
about the risks our business faces. We believe that we have the
controls in place to be able to certify our financial
statements. Additionally, we have complied with the updated listing
requirements for the Nasdaq Stock Market.
Growth
Strategy
Store Openings and Square Footage
Growth. The primary factors contributing to our net sales
growth have been new store openings, an active store expansion and remodel
program, and selective mergers and acquisitions. From 2003 to 2007,
net sales increased at a compound annual growth rate of 10.9%. We
expect that the substantial majority of our future sales growth will come
primarily from new store openings and from our store expansion and relocation
program.
The
following table shows the total selling square footage of our stores and the
selling square footage per new store opened over the last five
years. Our growth and productivity statistics are reported based on
selling square footage because our management believes the use of selling square
footage yields a more accurate measure of store
productivity. The selling square footage statistics for 2003 through
2007 are estimates based on the relationship of selling to gross square
footage.
Year
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Number
of Stores
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Average
Selling Square Footage Per Store
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Average
Selling Square Footage Per New Store Opened
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2003
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2,513
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6,716
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9,948
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2004
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2,735
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7,475
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10,947
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2005
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2,914
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7,900
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9,756
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2006
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3,219
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8,160
|
8,780
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2007
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3,411
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8,300
|
8,480
|
We expect
to increase our selling square footage in the future by opening new stores in
underserved markets and strategically increasing our presence in our existing
markets via new store openings and store expansions (expansions include store
relocations). In fiscal 2008 and beyond, we plan to predominantly
open stores that are approximately 8,500 - 9,000 selling square feet and we
believe this size allows us to achieve our objectives in the markets in which we
plan to expand. At February 2, 2008, 1,370 of our stores, totaling
55.6% of our selling square footage, were 8,500 selling square feet or
larger.
In
addition to new store openings, we plan to continue our store expansion program
to increase our net sales per store and take advantage of market
opportunities. We target stores for expansion based on the current
sales per selling square foot and changes in market
opportunities. Stores targeted for expansion are generally less than
6,000 selling square feet in size. Store expansions generally
increase the existing store size by approximately 4,000 selling square
feet.
Since
1995, we have added a total of 609 stores through four mergers and several small
acquisitions. Our acquisition strategy has been to target companies
with a similar single-price point concept that have shown success in operations
or provide a strategic advantage. We evaluate potential acquisition
opportunities in our retail sector as they become available.
On March
25, 2006, we completed our acquisition of 138 Deal$ stores and paid $32.0
million for store-related and other assets and $22.1 million for
inventory. 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 included a few “combo” stores that
offer an expanded assortment of merchandise including items that sell for more
than $1. Substantially all Deal$ stores acquired 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.
In 2007,
we also acquired the rights to 32 store leases through bankruptcy proceedings of
certain discount retailers. We will take advantage of these
opportunities as they arise in the future.
Merchandising and
Distribution. Expanding our customer base is important to our
growth plans. We plan to continue to stock our new stores with the
ever-changing merchandise that our current customers have come to
appreciate. In addition, we are opening larger stores that contain
more basic consumable merchandise to attract new
customers. Consumable merchandise typically leads to more frequent
return trips to our stores resulting in increased sales. The
presentation and display of merchandise in our stores are critical to
communicating value to our customers and creating a more exciting shopping
experience. We believe our approach to visual merchandising results
in higher store traffic, higher sales volume and an environment that encourages
impulse purchases.
A strong
and efficient distribution network is critical to our ability to grow and to
maintain a low-cost operating structure. We expect to continue to add
distribution capacity to support our store opening plans, with the aim of
remaining approximately one year ahead of our distribution needs. In
2007, we added capacity to our Briar Creek distribution center which services
the northeast part of the country. We believe these distribution
centers, including the expanded Briar Creek, Pennsylvania distribution center,
in total are capable of supporting approximately $6.7 billion in annual
sales. New distribution sites are strategically located to reduce
stem miles, maintain flexibility and improve efficiency in our store service
areas.
Our
stores receive approximately 90% of their inventory from our distribution
centers via contract carriers. The remaining store inventory,
primarily perishable consumable items and other vendor-maintained display items,
are delivered directly to our stores from vendors. For more
information on our distribution center network, see Item 2 “Properties”
beginning on page 13 of this Form 10-K.
Competition
The
retail industry is highly competitive and we expect competition to increase in
the future. The principal methods of competition include closeout
merchandise, convenience and the quality of merchandise offered to the
customer. Our competitors include single-price dollar stores,
multi-price dollar stores, mass merchandisers, discount retailers and variety
retailers. In addition, several mass merchandisers and grocery store
chains carry "dollar store" or “dollar zone” concepts in their stores, which
increases competition. Our sales and profits could be reduced by
increases in competition, especially because there are no significant economic
barriers for others to enter our retail sector.
Trademarks
We are
the owners of federal service mark registrations for "Dollar Tree," the "Dollar
Tree" logo, "1 Dollar Tree" together with the related design, and "One
Price...One Dollar." We also own a concurrent use registration for
"Dollar Bill$" and the related logo. During 1997, we acquired the
rights to use trade names previously owned by Everything's A Dollar, a former
competitor in the $1.00 price point industry. Several trade names
were included in the purchase, including the marks "Everything's $1.00 We Mean
Everything," and "Everything's $1.00," the registration of which is
pending. With the acquisition of Dollar Express, we became the owner
of the service marks "Dollar Express" and "Dollar Expres$." We became the owners of
the "Greenbacks All A Dollar" and "All A Dollar" service marks, with the
acquisition of Greenbacks. We also became the owners of “Deal$” and
“Deal$ Nothing Over A Dollar” trademarks, with the acquisition of Deal$. We have
applied for federal trademark registrations for various private labels that we
use to market some of our product lines.
Employees
We
employed approximately 13,300 full-time and 29,300 part-time associates on
February 2, 2008. Part-time associates work 35 hours per week or
less. The number of part-time associates fluctuates depending on seasonal
needs. We consider our relationship with our associates to be good,
and we have not experienced significant interruptions of operations due to labor
disagreements. None of our employees are subject to collective
bargaining agreements.
Item
1A. RISK FACTORS
An
investment in our common stock involves a high degree of risk. You
should carefully consider the specific risk factors listed below together with
all other information included or incorporated in this report. Any of
the following risks may materialize, and additional risks not known to us, or
that we now deem immaterial, may arise. In such event, our business,
financial condition, results of operations or prospects could be materially
adversely affected. If that occurs, the market price of our common
stock could fall, and you could lose all or part of your
investment.
Our
profitability is especially vulnerable to cost increases.
Future
increase in costs such as the cost of merchandise, wage levels, shipping rates,
freight costs, fuel costs and store occupancy costs may reduce our
profitability. As a fixed price retailer, we cannot raise the sales
price of our merchandise to offset cost increases. Unlike multi-price
retailers, we are primarily dependent on our ability to operate more efficiently
or effectively or increase our comparable store net sales in order to offset
inflation. We can give you no assurance that we will be able to operate
more efficiently or increase our comparable store net sales in the
future. Please see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," beginning on page 19 of this
Form 10-K for further discussion of the effect of Inflation and Other Economic
Factors on our operations.
We
could encounter disruptions or additional costs in receiving and distributing
merchandise.
Our
success depends on our ability to transport merchandise from our suppliers to
our distribution centers and then ship it to our stores in a timely and
cost-effective manner. We may not anticipate, respond to or control
all of the challenges of operating our receiving and distribution
systems. Some of the factors that could have an adverse effect on our
shipping and receiving systems or costs are:
§ Shipping. Our
oceanic shipping schedules may be disrupted or delayed from time to
time. We also have experienced shipping rate increases over the
last several years imposed by the trans-Pacific ocean
carriers.
|
§ Diesel fuel
costs. We have experienced increases in diesel fuel
costs over the past few years and expect increases in
2008.
|
§ Vulnerability to natural or
man-made disasters. A fire, explosion or natural
disaster at any of our distribution facilities could result in a loss of
merchandise and impair our ability to adequately stock our
stores. Some of our facilities are especially vulnerable to
earthquakes, hurricanes or tornadoes.
|
§ Labor
disagreement. Labor disagreements or disruptions may
result in delays in the delivery of merchandise to our stores and increase
costs.
|
§ War, terrorism and other
events. War and acts of terrorism in the United States,
or in China or other parts of Asia where we buy a significant amount of
our imported merchandise, could disrupt our supply
chain.
|
A
downturn in economic conditions could adversely affect our sales.
Economic
conditions, such as those caused by recession, inflation, cost increases,
adverse weather conditions, or terrorism, could reduce consumer spending or
cause customers to shift their spending to products we either do not sell
or do not sell as profitably. Adverse economic conditions could
disrupt consumer spending and significantly reduce our sales.
Sales
below our expectations during peak seasons may cause our operating results to
suffer materially.
Our
highest sales periods are the Christmas and Easter seasons. We
generally realize a disproportionate amount of our net sales and a substantial
majority of our operating and net income during the fourth
quarter. In anticipation, we stock extra inventory and hire many
temporary employees to supplement our stores. An economic downturn
during these periods could adversely affect our operating results, particularly
operating and net income, to a greater extent than if a downturn occurred at
other times of the year. Untimely merchandise delays due to receiving
or distribution problems could have a similar effect. Sales during
the Easter selling season are materially affected by the timing of the Easter
holiday. Easter in fiscal 2007 was on April 8th, while
in fiscal 2008, it will be two weeks earlier on March 23rd. We
believe that the earlier Easter in 2008 could potentially result in $25.0
million of lost sales when compared to the first quarter of 2007. In
fiscal 2008, there is one fewer weekend between Thanksgiving and Christmas
compared to fiscal 2007. We believe this could potentially
reduce the total foot traffic in our stores for the Christmas holiday in fiscal
2008 compared to fiscal 2007.
Our
sales and profits rely on imported merchandise, which may increase in cost or
become unavailable.
Merchandise
imported directly from overseas accounts for approximately 40% to 45% of our
total purchases at retail. In addition, we believe that a small
portion of our goods purchased from domestic vendors is
imported. China is the source of a substantial majority of our
imports. Imported goods are generally less expensive than domestic
goods and increase our profit margins. A disruption in the flow of
our imported merchandise or an increase in the cost of those goods may
significantly decrease our profits. Risks associated with our
reliance on imported goods include:
§ disruptions
in the flow of imported goods because of factors such
as:
|
o raw
material shortages, work stoppages, strikes and political
unrest;
|
o problems
with oceanic shipping, including shipping container shortages;
and
|
o economic
crises and international disputes.
|
|
§ increases
in the cost of purchasing or shipping foreign merchandise, resulting
from:
|
o increases
in shipping rates imposed by the trans-Pacific ocean
carriers;
|
o changes
in currency exchange rates and local economic conditions, including
inflation in the country of origin;
|
o failure
of the United States to maintain normal trade relations with China;
and
|
o import
duties, import quotas and other trade
sanctions.
|
We
may be unable to expand our square footage as profitably
as planned.
We plan
to expand our selling square footage by approximately 9% in 2008 to increase our
sales and profits. Expanding our square footage profitably
depends on a number of uncertainties, including our ability to locate,
lease, build out and open or expand stores in suitable locations on a
timely basis under favorable economic terms. We must also open or
expand stores within our established geographic markets, where new or
expanded stores may draw sales away from our existing stores. We
may not manage our expansion effectively, and our failure to achieve our
expansion plans could materially and adversely affect our business,
financial condition and results of operations.
Our
profitability is affected by the mix of products we sell.
Our gross
profit could decrease if we increase the proportion of higher cost goods we sell
in the future. In recent years, the percentage of our sales from
higher cost consumable products has increased and is likely to
increase slightly in 2008. Our gross profit will decrease, unless we
are able to maintain our current merchandise cost sufficiently to offset
any decrease in our product margin percentage. We can give you no
assurance that we will be able to do so.
Pressure
from competitors may reduce our sales and profits.
The
retail industry is highly competitive. The marketplace is highly
fragmented as many different retailers compete for market share by utilizing a
variety of store formats and merchandising strategies. We expect
competition to increase in the future because there are no significant economic
barriers for others to enter our retail sector. Many of our current
or potential competitors have greater financial resources than we
do. We cannot guarantee that we will continue to be able to compete
successfully against existing or future competitors. Please see Item
1, “Business,” beginning on page 6 of this Form 10-K for further discussion of
the effect of competition on our operations.
The
resolution of certain legal matters could have a material adverse effect on our
results of operations, accrued liabilities and cash.
For a
discussion of current legal matters, please see Item 3. “Legal Proceedings”
beginning on page 14 of this Form 10-K. Resolution of certain matters
described in that item, if decided against the Company, could have a material
adverse effect on our results of operations, accrued liabilities or cash
flows.
Certain
provisions in our articles of incorporation and bylaws could delay or discourage
a takeover attempt that may be in a shareholder's best interest.
Our
articles of incorporation and bylaws contain provisions that may delay or
discourage a takeover attempt that a shareholder might consider in his best
interest. These provisions, among other things:
· classify
our board of directors into three classes, each of which serves for
different three-year periods;
|
· provide
that only the board of directors, chairman or president may call special
meetings of the shareholders;
|
· establish
certain advance notice procedures for nominations of candidates for
election as directors and for shareholder proposals to be considered at
shareholders' meetings;
|
· require
a vote of the holders of more than two-thirds of the shares entitled to
vote in order to remove a director, change the number of directors, or
amend the foregoing and certain other provisions of the articles of
incorporation and bylaws; and
|
· permit
the board of directors, without further action of the shareholders, to
issue and fix the terms of preferred stock, which may have rights senior
to those of the common stock.
|
However,
we believe that these provisions allow our Board of Directors to negotiate a
higher price in the event of a takeover attempt which would be in the best
interest of our shareholders.
Item
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. PROPERTIES
Stores
As of
February 2, 2008, we operated 3,411 stores in 48 states as detailed
below:
Alabama
|
82
|
|
Maine
|
17
|
|
Ohio
|
157
|
Arizona
|
58
|
|
Maryland
|
79
|
|
Oklahoma
|
51
|
Arkansas
|
45
|
|
Massachusetts
|
47
|
|
Oregon
|
70
|
California
|
241
|
|
Michigan
|
123
|
|
Pennsylvania
|
186
|
Colorado
|
46
|
|
Minnesota
|
51
|
|
Rhode
Island
|
12
|
Connecticut
|
29
|
|
Mississippi
|
47
|
|
South
Carolina
|
70
|
Delaware
|
20
|
|
Missouri
|
79
|
|
South
Dakota
|
6
|
Florida
|
206
|
|
Montana
|
8
|
|
Tennessee
|
86
|
Georgia
|
135
|
|
Nebraska
|
14
|
|
Texas
|
212
|
Idaho
|
23
|
|
Nevada
|
28
|
|
Utah
|
33
|
Illinois
|
145
|
|
New
Hampshire
|
16
|
|
Vermont
|
6
|
Indiana
|
97
|
|
New
Jersey
|
79
|
|
Virginia
|
131
|
Iowa
|
26
|
|
New
Mexico
|
25
|
|
Washington
|
61
|
Kansas
|
30
|
|
New
York
|
154
|
|
West
Virginia
|
31
|
Kentucky
|
65
|
|
North
Carolina
|
149
|
|
Wisconsin
|
66
|
Louisiana
|
56
|
|
North
Dakota
|
5
|
|
Wyoming
|
8
|
We
currently lease our stores and expect to continue to lease new stores as we
expand. Our leases typically provide for a short initial lease term,
generally five years, with options to extend, however in some cases we have
initial lease terms of seven to ten years. We believe this leasing
strategy enhances our flexibility to pursue various expansion opportunities
resulting from changing market conditions. As current leases expire,
we believe that we will be able to obtain lease renewals, if desired, for
present store locations, or to obtain leases for equivalent or better locations
in the same general area.
Distribution
Centers
The
following table includes information about the distribution centers that we
currently operate. We expanded the Briar Creek distribution center in
2007. We believe our distribution center network, including this
expansion, is capable of supporting approximately $6.7 billion in annual
sales.
Location
|
Own/Lease
|
Lease
Expires
|
Size
in
Square
Feet
|
|
|
|
|
Chesapeake,
Virginia
|
Own
|
N/A
|
400,000
|
Olive
Branch, Mississippi
|
Own
|
N/A
|
425,000
|
Joliet,
Illinois
|
Own
|
N/A
|
1,200,000
|
Stockton,
California
|
Own
|
N/A
|
525,000
|
Briar
Creek, Pennsylvania
|
Own
|
N/A
|
1,003,000
|
Savannah,
Georgia
|
Own
|
N/A
|
603,000
|
Marietta,
Oklahoma
|
Own
|
N/A
|
603,000
|
Salt
Lake City, Utah
|
Lease
|
April
2010
|
252,000
|
Ridgefield,
Washington
|
Own
|
N/A
|
665,000
|
In
addition to our distribution centers noted above, during the past several years,
we have used off-site facilities to accommodate limited quantities of seasonal
merchandise.
Each of
our distribution centers contains advanced materials handling technologies,
including radio-frequency inventory tracking equipment and specialized
information systems. With the exception of our Salt Lake City and
Ridgefield facilities each of our distribution centers also contains automated
conveyor and sorting systems.
For more
information on financing of our distribution centers, see Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Funding Requirements" Beginning on page 25 of this Form 10-K.
Item
3. LEGAL PROCEEDINGS
From time
to time, we are defendants in ordinary, routine litigation or proceedings
incidental to our business, including allegations regarding:
|
|
·
|
employment
related matters;
|
|
|
·
|
infringement
of intellectual property rights;
|
|
|
·
|
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 Court certify the case as a
class action. The parties engaged in mediation and reached an
agreement which upon presentation to the Court, received preliminary approval
and the certification of a settlement class. Notices have been mailed
to the class members and the final fairness hearing is expected to occur on May
22, 2008. The settlement amount has been accrued in the accompanying
consolidated balance sheet as of February 2, 2008.
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, and that
terminated employees were not paid in a timely manner. The plaintiffs requested
the Court to certify classes for their various claims and the presiding judge
did so with respect to two classes, but denied others. After a partly
successful appeal by the plaintiffs, one additional class has been
certified. The certified classes now include two for
alleged violations of that state’s labor laws concerning rest breaks and
one related to untimely payments upon termination. Discovery is now on-going and
no trial is anticipated before the latter part of 2008.
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 and those claims as a class
action. The parties have reached a settlement and executed an
Agreement by which the named plaintiff individually settled her Equal Pay Act
and late payment claims. The Court accepted the proposed settlement
and certified a class for the check claim. Notices have been mailed
to class members and a hearing for final approval of the settlement has been
scheduled for April 22, 2008. The estimated settlement amount has
been accrued in the accompanying consolidated balance sheet as of February 2,
2008.
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 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. We intend at the appropriate time to challenge the
anticipated 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 the Court granted with respect to allegations of
fraud. The plaintiff then filed an amended complaint which has been
answered by us. 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 the two cases have been
consolidated. We will defend plaintiffs’ anticipated effort to seek
class certification.
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 of our
former employees in the state of California. We responded with a
motion to dismiss which the Court denied. We answered and a motion
for summary judgment on our part is presently pending before the
Court.
We were
recently served in federal court in California with a Complaint, on behalf of a
former employee, alleging meal and rest break violations among other causes of
action, and seeking class action status. The settlement Order entered
by the Court in the 2003 case referenced above included an injunction against
meal and rest break claims on the part of class members which we believe include
this plaintiff. We will seek to stay this litigation in accordance
with that injunction.
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
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of our 2007 fiscal year.
PART
II
Item
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock has been traded on The Nasdaq Stock Market® under the symbol "DLTR"
since our initial public offering on March 6, 1995. The following
table gives the high and low sales prices of our common stock as reported by
Nasdaq for the periods indicated.
|
|
High
|
|
|
Low
|
|
Fiscal
year ended February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
28.68 |
|
|
$ |
24.34 |
|
Second
Quarter
|
|
|
27.89 |
|
|
|
23.90 |
|
Third
Quarter
|
|
|
32.00 |
|
|
|
25.62 |
|
Fourth
Quarter
|
|
|
32.78 |
|
|
|
29.34 |
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
40.31 |
|
|
$ |
31.24 |
|
Second
Quarter
|
|
|
45.98 |
|
|
|
37.93 |
|
Third
Quarter
|
|
|
44.13 |
|
|
|
33.69 |
|
Fourth
Quarter
|
|
|
36.17 |
|
|
|
20.72 |
|
On March
28, 2008, the last reported sale price for our common stock, as quoted by
Nasdaq, was $27.00 per share. As of March 28, 2008, we had
approximately 519
shareholders of record.
The
following table presents our share repurchase activity for the 13 weeks ended
February 2, 2008.
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
November
4, 2007 to December 1, 2007
|
|
|
358,953 |
|
|
$ |
28.50 |
|
|
|
358,953 |
|
|
$ |
538.2 |
|
December
2, 2007 to January 5, 2008
|
|
|
3,018,093 |
|
|
|
27.98 |
|
|
|
3,018,093 |
|
|
|
453.7 |
|
January
6, 2008 to February 2, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
453.7 |
|
Total
|
|
|
3,377,046 |
|
|
$ |
28.03 |
|
|
|
3,377,046 |
|
|
$ |
453.7 |
|
In
October 2007, our Board of Directors authorized the repurchase of an additional
$500.0 million of our common stock. This authorization was in addition to the
November 2006 authorization which had approximately $98.4 million remaining. As
of February 2, 2008 we have approximately $453.7 million remaining under Board
authorization.
We
anticipate that substantially all of our cash flow from operations in the
foreseeable future will be retained for the development and expansion of our
business, the repayment of indebtedness and, as authorized by our Board of
Directors, the repurchase of stock. Management does not anticipate
paying dividends on our common stock in the foreseeable future.
Stock
Performance Graph
The
following graph sets forth the yearly percentage change in the cumulative total
shareholder return on our common stock during the five fiscal years ended
February 2, 2008, compared with the cumulative total returns of the NASDAQ
Composite Index and the S&P Retailing Index. The comparison assumes that
$100 was invested in our common stock on December 31, 2002, and, in each of the
foregoing indices on December 31, 2002, and that dividends were
reinvested.
Item
6. SELECTED FINANCIAL DATA
The
following table presents a summary of our selected financial data for the fiscal
years ended February 2, 2008, February 3, 2007, January 28, 2006, January 29,
2005, and January 31, 2004. Fiscal 2006 included 53 weeks,
commensurate with the retail calendar, while all other fiscal years reported in
the table contain 52 weeks. The selected income statement and balance sheet data
have been derived from our consolidated financial statements that have been
audited by our independent registered public accounting firm. This
information should be read in conjunction with the consolidated financial
statements and related notes, "Management’s Discussion and Analysis of Financial
Condition and Results of Operations" and our financial information found
elsewhere in this report.
Comparable
store net sales compare net sales for stores open throughout each of the two
periods being compared, including expanded stores. Net sales per
store and net sales per selling square foot are calculated for stores open
throughout the period presented.
Amounts
in the following tables are in millions, except per share data, number of stores
data, net sales per selling square foot data and inventory
turns.
|
|
Years
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
January
29,
|
|
|
January
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
4,242.6 |
|
|
$ |
3,969.4 |
|
|
$ |
3,393.9 |
|
|
$ |
3,126.0 |
|
|
$ |
2,799.9 |
|
Gross
profit
|
|
|
1,461.1 |
|
|
|
1,357.2 |
|
|
|
1,172.4 |
|
|
|
1,112.5 |
|
|
|
1,018.4 |
|
Selling,
general and administrative expenses
|
|
|
1,130.8 |
|
|
|
1,046.4 |
|
|
|
888.5 |
|
|
|
819.0 |
|
|
|
724.8 |
|
Operating
income
|
|
|
330.3 |
|
|
|
310.8 |
|
|
|
283.9 |
|
|
|
293.5 |
|
|
|
293.6 |
|
Net
income
|
|
|
201.3 |
|
|
|
192.0 |
|
|
|
173.9 |
|
|
|
180.3 |
|
|
|
177.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin
Data (as a percentage of net sales):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
34.4 |
% |
|
|
34.2 |
% |
|
|
34.5 |
% |
|
|
35.6 |
% |
|
|
36.4 |
% |
Selling,
general and administrative expenses
|
|
|
26.6 |
% |
|
|
26.4 |
% |
|
|
26.2 |
% |
|
|
26.2 |
% |
|
|
25.9 |
% |
Operating
income
|
|
|
7.8 |
% |
|
|
7.8 |
% |
|
|
8.3 |
% |
|
|
9.4 |
% |
|
|
10.5 |
% |
Net
income
|
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
5.1 |
% |
|
|
5.8 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$ |
2.09 |
|
|
$ |
1.85 |
|
|
$ |
1.60 |
|
|
$ |
1.58 |
|
|
$ |
1.54 |
|
Diluted
net income per share increase
|
|
|
13.0 |
% |
|
|
15.6 |
% |
|
|
1.3 |
% |
|
|
2.6 |
% |
|
|
14.1 |
% |
|
|
As
of
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
January
29,
|
|
|
January
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
short-term investments
|
|
$ |
81.1 |
|
|
$ |
306.8 |
|
|
$ |
339.8 |
|
|
$ |
317.8 |
|
|
$ |
168.7 |
|
Working
capital
|
|
|
382.9 |
|
|
|
575.7 |
|
|
|
648.2 |
|
|
|
675.5 |
|
|
|
450.3 |
|
Total
assets
|
|
|
1,787.7 |
|
|
|
1,882.2 |
|
|
|
1,798.4 |
|
|
|
1,792.7 |
|
|
|
1,501.5 |
|
Total
debt, including capital lease obligations
|
|
|
269.4 |
|
|
|
269.5 |
|
|
|
269.9 |
|
|
|
281.7 |
|
|
|
185.1 |
|
Shareholders'
equity
|
|
|
988.4 |
|
|
|
1,167.7 |
|
|
|
1,172.3 |
|
|
|
1,164.2 |
|
|
|
1,014.5 |
|
|
|
Years
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
January
29,
|
|
|
January
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores open at end of period
|
|
|
3,411 |
|
|
|
3,219 |
|
|
|
2,914 |
|
|
|
2,735 |
|
|
|
2,513 |
|
Gross
square footage at end of period
|
|
|
36.1 |
|
|
|
33.3 |
|
|
|
29.2 |
|
|
|
25.9 |
|
|
|
21.4 |
|
Selling
square footage at end of period
|
|
|
28.4 |
|
|
|
26.3 |
|
|
|
23.0 |
|
|
|
20.4 |
|
|
|
16.9 |
|
Selling
square footage annual growth
|
|
|
8.0 |
% |
|
|
14.3 |
% |
|
|
12.6 |
% |
|
|
21.1 |
% |
|
|
27.5 |
% |
Net
sales annual growth
|
|
|
6.9 |
% |
|
|
16.9 |
% |
|
|
8.6 |
% |
|
|
11.6 |
% |
|
|
18.7 |
% |
Comparable
store net sales increase (decrease)
|
|
|
2.7 |
% |
|
|
4.6 |
% |
|
|
(0.8 |
%) |
|
|
0.5 |
% |
|
|
2.9 |
% |
Net
sales per selling square foot
|
|
$ |
155 |
|
|
$ |
161 |
|
|
$ |
156 |
|
|
$ |
168 |
|
|
$ |
187 |
|
Net
sales per store
|
|
$ |
1.3 |
|
|
$ |
1.3 |
|
|
$ |
1.2 |
|
|
$ |
1.2 |
|
|
$ |
1.2 |
|
Selected
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on assets
|
|
|
11.0 |
% |
|
|
10.4 |
% |
|
|
9.7 |
% |
|
|
10.9 |
% |
|
|
13.7 |
% |
Return
on equity
|
|
|
18.7 |
% |
|
|
16.4 |
% |
|
|
14.9 |
% |
|
|
16.5 |
% |
|
|
19.0 |
% |
Inventory
turns
|
|
|
3.7 |
|
|
|
3.5 |
|
|
|
3.1 |
|
|
|
2.9 |
|
|
|
2.9 |
|
Item
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In
Management’s Discussion and Analysis, we explain the general financial condition
and the results of operations for our company, including:
|
|
·
|
what
factors affect our business;
|
|
|
·
|
what
our net sales, earnings, gross margins and costs were in 2007, 2006 and
2005;
|
|
|
·
|
why
those net sales, earnings, gross margins and costs were different from the
year before;
|
|
|
·
|
how
all of this affects our overall financial condition;
|
|
|
·
|
what
our expenditures for capital projects were in 2007 and what we expect them
to be in 2008; and
|
|
|
·
|
where
funds will come from to pay for future
expenditures.
|
As you
read Management’s Discussion and Analysis, please refer to our consolidated
financial statements, included in Item 8 of this Form 10-K, which present the
results of operations for the fiscal years ended February 2, 2008, February 3,
2007 and January 28, 2006. In Management’s Discussion and Analysis,
we analyze and explain the annual changes in some specific line items in the
consolidated financial statements for the fiscal year 2007 compared to the
comparable fiscal year 2006 and the fiscal year 2006 compared to the comparable
fiscal year 2005.
Key
Events and Recent Developments
Several
key events have had or are expected to have a significant effect on our
operations. You should keep in mind that:
·
|
On
March 2, 2008, we reorganized by creating a new holding company structure.
The new parent company is Dollar Tree, Inc., replacing Dollar Tree Stores,
Inc., which is now an operating subsidiary. Outstanding shares of the
capital stock of Dollar Tree Stores, Inc., were automatically converted,
on a share for share basis, into identical shares of common stock of the
new holding company. The articles of incorporation, the bylaws, the
executive officers and the board of directors of our new holding company
are the same as those of the former Dollar Tree Stores, Inc. in effect
immediately prior to the reorganization. The common stock of
our new holding company will continue to be listed on the NASDAQ Global
Select Market under the symbol “DLTR”. The rights, privileges
and interests of our stockholders will remain the same with respect to our
new holding company.
|
·
|
On
February 20, 2008, we entered into a five-year $550.0 million Credit
Agreement (the Agreement). The Agreement provides for a $300.0
million revolving line of credit, including up to $150.0 million in
available letters of credit, and a $250.0 million term
loan. The interest rate on the facility will be based, at our
option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a
margin. Our March 2004, $450.0 million unsecured revolving
credit facility was terminated concurrent with entering into the
Agreement.
|
·
|
In
November 2007, we completed the 400,000 square foot expansion of our Briar
Creek distribution center. Including this expansion, we believe
that our nine distribution centers will support approximately $6.7 billion
in sales annually.
|
·
|
In
October 2007, our Board of Directors authorized the repurchase of an
additional $500.0 million of our common stock. This authorization was in
addition to the November 2006 authorization which had approximately $98.4
million remaining. At February 2, 2008, we had approximately $453.7
million remaining under Board authorization.
|
·
|
In
March 2006, we completed our acquisition of 138 Deal$ stores and related
assets. We paid approximately $32.0 million for store related
assets and $22.1 million for inventory.
|
·
|
On
December 15, 2005, the Compensation Committee of our Board of Directors
approved the acceleration of the vesting date of all previously issued,
outstanding and unvested options under all current stock option plans,
effective as of December 15, 2005. This decision eliminated
non-cash compensation expense that would have been recorded in future
periods following our adoption of Statement of Financial Accounting
Standards No. 123, Share-Based Payment (revised
2004) (FAS 123R), on January 29, 2006. Compensation
expense has been reduced by approximately $14.9 million over a period of
four years during which the options would have vested, as a result of the
option acceleration program.
|
Overview
Our net
sales are derived from the sale of merchandise. Two major factors
tend to affect our net sales trends. First is our success at opening
new stores or adding new stores through acquisitions. Second, sales
vary at our existing stores from one year to the next. We refer to
this change as a change in comparable store net sales, because we compare only
those stores that are open throughout both of the periods being
compared. We include sales from stores expanded during the year in
the calculation of comparable store net sales, which has the effect of
increasing our comparable store net sales. The term 'expanded' also
includes stores that are relocated.
At
February 2, 2008, we operated 3,411 stores in 48 states, with 28.4 million
selling square feet compared to 3,219 stores with 26.3 million selling square
feet at February 3, 2007. During fiscal 2007, we opened 240 stores,
expanded 102 stores and closed 48 stores, compared to 211 new stores opened, 85
stores expanded and 44 stores closed during fiscal 2006. In addition
to the new stores opened in 2006, we acquired 138 Deal$ stores on March 25,
2006. In the current year we achieved 8% selling square footage
growth. Of the 2.1 million selling square foot increase in 2007, 0.4
million was added by expanding existing stores. The average size of
our stores opened in 2007 was approximately 8,500 selling square feet (or about
10,800 gross square feet). The average new store size decreased
slightly in 2007 from approximately 9,000 selling square feet (or about 11,000
gross square feet) for new stores in 2006. For 2008, we continue to
plan to open stores that are approximately 8,500 - 9,000 selling square feet (or
about 10,000 - 12,500 gross square feet). We believe that this store
size is our optimal size operationally and that this size also gives our
customers an improved shopping environment that invites them to shop longer and
buy more. We expect the substantial majority of our future net sales
growth to come from the square footage growth resulting from new store openings
and expansion of existing stores.
Fiscal
2006 ended on February 3, 2007 and included 53 weeks, commensurate with the
retail calendar. The 53rd week in
2006 added approximately $70 million in sales. Fiscal 2007 and 2005 ended on
February 2, 2008 and January 28, 2006, respectively, and both years included 52
weeks.
In fiscal
2007, comparable store net sales increased by 2.7%. This increase was
based on the comparable 52 weeks for both years. 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 freezers and coolers 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 enabled us to accept Electronic
Benefit Transfer cards and we now accept food stamps in approximately 1,100
qualified stores. We believe the expansion of forms of payment
accepted by our stores has helped increase the average transaction size in our
stores. On October 31, 2007, all of our stores began accepting VISA
credit as well, which we expect to have a positive impact on future
sales.
We
continued to experience a slight shift in the mix of merchandise sold to more
consumables which we believe increases the traffic in our stores; however, this
merchandise has lower margins. The negative impact from the planned
shift toward more consumables was smaller in 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 2007 and
2006. At February 2, 2008 we had frozen and refrigerated merchandise
in approximately 1,100 stores compared to approximately 700 stores at February
3, 2007. We believe that this will continue to enable us to increase sales and
earnings by increasing the number of shopping trips made by our customers and
increasing the average transaction size.
Our
point-of-sale technology provides us with valuable sales and inventory
information to assist our buyers and improve our merchandise allocation to our
stores. We believe that this has enabled us to better manage our
inventory flow resulting in more efficient distribution and store operations and
increased inventory turnover for each of the last two
years. Inventory turnover improved by approximately 25 basis points
in 2007 compared to 2006 and by approximately 45 basis points in 2006
compared to 2005. Inventory per store has also remained
constant at February 2, 2008 compared to February 3, 2007 despite slightly lower
than expected fourth-quarter 2007 sales and the increased merchandise flow due
to the earlier Easter season in 2008.
We must
continue to control our merchandise costs, inventory levels and our general and
administrative expenses. Increases in these line items could
negatively impact our operating results.
Our plans
for fiscal 2008 anticipate net sales in the $4.49 billion to $4.62 billion range
and diluted earnings per share of $2.17 to $2.35. This guidance for
2008 is predicated on selling square footage growth of approximately 9%. The
earnings per share guidance for 2008 is exclusive of any share repurchase
activity in 2008.
On March
25, 2006, we completed our acquisition of 138 Deal$ 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
included a few “combo” stores that offer an expanded assortment of merchandise
including items that sell for more than $1. Substantially all Deal$
stores acquired 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. At February 2,
2008, 131 of these stores were selling items priced over $1.00, compared to 121
stores at February 3, 2007.
We paid
approximately $32.0 million for store-related and other assets and $22.1 million
for inventory. The results of Deal$ store operations are included in our
financial statements since the acquisition date and did not have a significant
impact on our operating results in fiscal 2007 or fiscal 2006.
Results
of Operations
The
following table expresses items from our consolidated statements of operations,
as a percentage of net sales:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
65.6 |
% |
|
|
65.8 |
% |
|
|
65.5 |
% |
Gross
profit
|
|
|
34.4 |
% |
|
|
34.2 |
% |
|
|
34.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
26.6 |
% |
|
|
26.4 |
% |
|
|
26.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7.8 |
% |
|
|
7.8 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Interest
expense
|
|
|
(0.4 |
%) |
|
|
(0.4 |
%) |
|
|
(0.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
7.5 |
% |
|
|
7.6 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(2.8 |
%) |
|
|
(2.8 |
%) |
|
|
(3.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
5.1 |
% |
Fiscal
year ended February 2, 2008 compared to fiscal year ended February 3,
2007
Net Sales. Net
sales increased 6.9%, or $273.2 million, in 2007 compared to 2006, resulting
primarily from sales in our new and expanded stores. Our sales increase was also
impacted by a 2.7% increase in comparable store net sales for the
year. This increase is based on the comparable 52-weeks for both
years. These increases were partially offset by an extra week of sales in 2006
due to the 53-week retail calendar for 2006. On a comparative 52-week
basis, sales increased approximately 8.8% in 2007 compared to 2006. Comparable
store net sales are positively affected by our expanded and relocated stores,
which we include in the calculation, and, to a lesser extent, are negatively
affected when we open new stores or expand stores near existing
ones.
The
following table summarizes the components of the changes in our store count for
fiscal years ended February 2, 2008 and February 3, 2007.
|
February 2, 2008
|
February 3, 2007
|
|
|
|
New
stores
|
208
|
190
|
Deal$
acquisition
|
--
|
138
|
Acquired
leases
|
32
|
21
|
Expanded
or relocated stores
|
102
|
85
|
Closed
stores
|
(48)
|
(44)
|
Of the
2.1 million selling square foot increase in 2007 approximately 0.4 million was
added by expanding existing stores.
Gross
Profit. Gross profit margin increased to 34.4% in 2007
compared to 34.2% in 2006. The increase was primarily due to a 50
basis point decrease in merchandise cost, including inbound freight, due to
improved initial mark-up in many categories in the current year. This
decrease was partially offset by a 40 basis point increase in occupancy costs
due to the loss of leverage from the extra week of sales in the prior year and
the lower comparable store net sales in the current year.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses, as a
percentage of net sales, increased to 26.6% for 2007 compared to 26.4% for
2006. The increase is primarily due to the following:
· |
Operating
and corporate expenses increased approximately 25 basis points due to
increased debit and credit fees resulting from increased debit
transactions in the current year and the rollout of VISA credit at October
31, 2007. Also, in 2006, we had approximately 10 basis points of
income related to early lease terminations. |
·
|
Occupancy
costs increased 15 basis points primarily due to increased repairs and
maintenance costs in the current year.
|
·
|
Partially
offsetting these increases was an approximate 15 basis point decrease in
depreciation expense due to the expiration of the depreciable life on
much of the supply chain hardware and software placed in service in
2002.
|
Operating
Income. Due to the reasons discussed above, operating income
margin was 7.8% in 2007 and 2006.
Income Taxes. Our
effective tax rate was 37.1% in 2007 compared to 36.6% in 2006. The
increase in the rate for 2007 reflects a reduction of tax-exempt interest income
in the current year due to lower investment levels resulting from increased
share repurchase activity and an increase in tax reserves in accordance with the
Financial Accounting Standards Board’s Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. These increases more than offset a slight decrease in
our net state tax rate.
Fiscal
year ended February 3, 2007 compared to fiscal year ended January 28,
2006
Net Sales. Net
sales increased 16.9%, or $575.5 million, in 2006 compared to 2005, resulting
from sales in our new and expanded stores, including 138 Deal$ stores acquired
in March 2006 and the 53 weeks of sales in 2006 versus 52 weeks in 2005, which
accounted for approximately $70 million of the increase. Our sales
increase was also impacted by a 4.6% increase in comparable store net sales for
the year. This increase is based on a 53-week comparison for both
periods. Comparable store net sales are positively affected by our
expanded and relocated stores, which we include in the calculation, and, to a
lesser extent, are negatively affected when we open new stores or expand stores
near existing ones.
The
following table summarizes the components of the changes in our store count for
fiscal years ended February 3, 2007 and January 28, 2006.
|
February 3, 2007
|
January 28, 2006
|
|
|
|
New
stores
|
190
|
197
|
Deal$
acquisition
|
138
|
--
|
Acquired
leases
|
21
|
35
|
Expanded
or relocated stores
|
85
|
93
|
Closed
stores
|
(44)
|
(53)
|
Of the
3.3 million selling square foot increase in 2006, approximately 1.2 million
resulted from the acquisition of the Deal$ stores and 0.4 million was added by
expanding existing stores.
Gross
Profit. Gross profit margin decreased to 34.2% in 2006
compared to 34.5% in 2005. The decrease was primarily due to a 35
basis point increase in merchandise cost, including inbound
freight. This increase in merchandise cost was due to a slight shift
in mix to more consumables, which have a lower margin, higher cost merchandise
at our Deal$ stores and increased inbound domestic freight costs.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses, as a
percentage of net sales, increased to 26.4% for 2006 as compared to 26.2% for
2005. The increase is primarily due to the following:
·
|
Payroll
and benefit related costs increased 35 basis points due to increased
incentive compensation costs resulting from better overall company
performance in 2006 as compared to 2005 and increased stock compensation
expense, partially offset by lower workers’ compensation costs in
2006.
|
·
|
Operating
and corporate expenses decreased 10 basis points primarily as the result
of payments received for early lease terminations in
2006.
|
Operating
Income. Due to the reasons discussed above, operating income
margin decreased to 7.8% in 2006 compared to 8.3% in 2005.
Income Taxes. Our
effective tax rate was 36.6% in 2006 compared to 36.8% in 2005. The
decreased tax rate for 2006 was due primarily to increased tax-exempt interest
on certain of our investments in 2006.
Liquidity
and Capital Resources
Our
business requires capital to build and open new stores, expand our distribution
network and operate existing stores. Our working capital requirements
for existing stores are seasonal and usually reach their peak in September and
October. Historically, we have satisfied our seasonal working capital
requirements for existing stores and have funded our store opening and
distribution network expansion programs from internally generated funds and
borrowings under our credit facilities.
The
following table compares cash-related information for the years ended February
2, 2008, February 3, 2007, and January 28, 2006:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
367.3 |
|
|
$ |
412.8 |
|
|
$ |
365.1 |
|
Investing
activities
|
|
|
(22.7 |
) |
|
|
(190.7 |
) |
|
|
(235.5 |
) |
Financing
activities
|
|
|
(389.0 |
) |
|
|
(202.9 |
) |
|
|
(170.3 |
) |
Net cash
provided by operating activities decreased $45.5 million compared to last year
due to increased working capital requirements in the current year and increases
in the provision for deferred taxes, partially offset by improved earnings
before depreciation and amortization in the current year.
Net cash
used in investing activities decreased $168.0 million compared to last
year. This decrease is due to $129.1 million of increased proceeds
from short-term investment activity in the current year to fund increased
capital stock repurchases and $54.1 million used in the prior year to acquire
Deal$ assets. These were partially offset by increased capital
expenditures in the current year resulting from the Briar Creek distribution
center and the corporate headquarters expansions.
Net cash
used in financing activities increased $186.1 million due primarily to increased
stock repurchases in the current year partially offset by increased proceeds
from stock option exercises in the current year resulting from the Company’s
higher stock price earlier in the year.
The $47.7
million increase in cash provided by operating activities in 2006 as compared to
2005 was primarily due to increased earnings before depreciation and better
payables
management in 2006, partially offset by approximately $28.9 million of rent
payments for February 2007 made prior to the end of fiscal 2006.
The $44.8
million decrease in cash used in investing activities in 2006 compared to 2005
was the result of a $114.9 million increase in net proceeds from short-term
investments which were used to help fund stock repurchases and the Deal$
acquisition in 2006. In 2006, we purchased an additional $9.3
million, net, of investments in a restricted account to collateralize
certain long-term insurance obligations. Additional uses of cash for
investing activities consisted of $54.1 million for the Deal$ acquisition in
2006 and an increase of $36.1 million in capital expenditures due primarily to
new store growth and the installation of freezers and coolers to certain stores
in 2006.
The $32.6
million increase in cash used in financing activities in 2006 compared to 2005
primarily resulted from $248.2 million in stock repurchases in 2006 compared to
$180.4 million in 2005. This increase was partially offset by
increased proceeds from stock option exercises in 2006 resulting from our higher
stock prices in 2006 as compared to 2005.
At
February 2, 2008, our long-term borrowings were $268.5 million and our capital
lease commitments were $0.9 million. We also have $125.0 million and
$50.0 million Letter of Credit Reimbursement and Security Agreements, under
which approximately $88.9 million were committed to letters of credit issued for
routine purchases of imported merchandise at February 2, 2008.
On
February 20, 2008, we entered into a five-year $550.0 million Credit Agreement
(the Agreement). The Agreement provides for a $300.0 million
revolving line of credit, including up to $150.0 million in available letters of
credit, and a $250.0 million term loan. Our March 2004, $450.0
million unsecured revolving credit facility was terminated concurrent with
entering into the Agreement.
In March
2005, our Board of Directors authorized the repurchase of up to $300.0 million
of our common stock through March 2008. In November 2006, our Board
of Directors authorized the repurchase of up to $500.0 million of our common
stock. This amount was in addition to the $27.0 million remaining on
the March 2005 authorization. Then, in October 2007, our Board of
Directors authorized the repurchase of an additional $500.0 million of our
common stock. This authorization was in addition to the November 2006
authorization which had approximately $98.4 million remaining at the
time.
In
December 2006, we entered into two agreements with a third party to repurchase
approximately $100.0 million of our common shares under an Accelerated Share
Repurchase Agreement.
The first
$50.0 million was executed in an “uncollared” agreement. In this
transaction we initially received 1.7 million shares based on the market price
of our stock of $30.19 as of the trade date (December 8, 2006). A
weighted average price of $32.17 was calculated using stock prices from December
16, 2006 – March 8, 2007. This represented the calculation period for
the weighted average price. Based on this weighted
average price, we paid the third party an additional $3.3 million on March 8,
2007 for the 1.7 million shares delivered under this agreement.
The
remaining $50.0 million was executed under a “collared”
agreement. Under this agreement, we initially received 1.5 million
shares through December 15, 2006, 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 number of shares received under the
agreement was determined based on the weighted average market price of our
common stock, net of a predetermined discount, during the time after the initial
execution date through March 8, 2007. The calculated weighted average market
price through March 8, 2007, net of a predetermined discount, as defined in the
“collared” agreement, was $31.97. Therefore, on March 8, 2007, we
received an additional 0.1 million shares under the “collared” agreement
resulting in 1.6 million total shares being repurchased under this
agreement.
On March
29, 2007, we entered into an agreement with a third party to repurchase $150.0
million of our common shares under an Accelerated Share Repurchase
Agreement. 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 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 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, we
received an additional 0.1 million shares under the “collared” agreement
resulting in 3.7 million total shares being repurchased under this
agreement.
On August
30, 2007, we entered into an agreement with a third party to repurchase $100.0
million of our common shares under an Accelerated Share Repurchase
Agreement. The entire $100.0 million was executed under a “collared”
agreement. Under this agreement, we initially received 2.1 million
shares through September 10, 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 number of shares received under the
agreement was determined based on the weighted average market price of our
common stock, net of a predetermined discount, during the time after the initial
execution date through a period of up to four and one half
months. The contract terminated on October 22, 2007 and the weighted
average price through that date was $41.16. Therefore, on October 22,
2007, we received an additional 0.3 million shares resulting in 2.4 million
total shares repurchased under this agreement.
We
repurchased approximately 12.8 million shares for approximately $473.0 million
in fiscal 2007, approximately 8.8 million shares for approximately $248.2
million in fiscal 2006 and approximately 7.0 million shares for approximately
180.4 million in fiscal 2005. At February 2, 2008, the Company had
approximately $453.7 remaining under Board authorization.
Funding
Requirements
Overview
We expect
our cash needs for opening new stores and expanding existing stores in fiscal
2008 to total approximately $176.0 million, which includes
capital expenditures, initial inventory and pre-opening costs. Our
estimated capital expenditures for fiscal 2008 are between $155.0 and $165.0
million, including planned expenditures for our new and expanded stores, the
addition of freezers and coolers to approximately 150 stores and completion of
the expansion to our home office and data center in Chesapeake,
Va. We believe that we can adequately fund our working capital
requirements and planned capital expenditures for the next few years from net
cash provided by operations and potential borrowings under our existing credit
facility.
The
following tables summarize our material contractual obligations at February 2,
2008, including both on- and off-balance sheet arrangements, and our
commitments, excluding interest on long-term borrowings (in
millions):
Contractual
Obligations
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Lease
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
$ |
1,363.2 |
|
$ |
319.0 |
|
$ |
284.3 |
|
$ |
238.4 |
|
$ |
185.8 |
|
$ |
129.9 |
|
$ |
205.8 |
|
Capital
lease obligations
|
|
|
0.9 |
|
|
0.3 |
|
|
0.3 |
|
|
0.2 |
|
|
0.1 |
|
|
-- |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
|
250.0 |
|
|
-- |
|
|
250.0 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Revenue
bond financing
|
|
|
18.5 |
|
|
18.5 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Interest
on long-term borrowings
|
|
|
13.7 |
|
|
11.8 |
|
|
1.9 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Total
obligations
|
|
$ |
1,646.3 |
|
$ |
349.6 |
|
$ |
536.5 |
|
$ |
238.6 |
|
$ |
185.9 |
|
$ |
129.9 |
|
$ |
205.8 |
|
Commitments
|
|
Total
|
|
Expiring
in 2008
|
|
Expiring
in 2009
|
|
Expiring
in 2010
|
|
Expiring
in 2011
|
|
Expiring
in 2012
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit and surety bonds
|
|
$ |
108.7 |
|
$ |
108.1 |
|
$ |
0.6 |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
Freight
contracts
|
|
|
191.2 |
|
|
85.0 |
|
|
83.7 |
|
|
14.5 |
|
|
4.5 |
|
|
3.5 |
|
|
-- |
|
Technology
assets
|
|
|
5.1 |
|
|
5.1 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Total
commitments
|
|
$ |
305.0 |
|
$ |
198.2 |
|
$ |
84.3 |
|
$ |
14.5 |
|
$ |
4.5 |
|
$ |
3.5 |
|
$ |
-- |
|
Lease
Financing
Operating Lease
Obligations. Our operating lease obligations are primarily for
payments under noncancelable store leases. The commitment includes
amounts for leases that were signed prior to February 2, 2008 for stores that
were not yet open on February 2, 2008.
Capital Lease
Obligations. Our capital lease obligations are primarily for
distribution center equipment and computer equipment at the store support
center.
Revolving Credit
Facility. In March 2004, we entered into a five-year Revolving
Credit Facility (the Facility). The Facility provides for a $450.0
million line of credit, including up to $50.0 million in available letters of
credit. Interest is assessed under the line based on matrix pricing
which currently approximates LIBOR, plus 0.475%. This rate was 4.47%
at February 2, 2008. The Facility also bears a facilities fee,
calculated as a percentage, as defined, of the amount available under the
facility, payable quarterly. The Facility, among other things,
requires the maintenance of certain specified financial ratios, restricts the
payment of certain distributions and prohibits the incurrence of certain new
indebtedness. The Facility also bears an administrative fee payable
annually. We used availability under this Facility to repay the
$142.6 million of variable-rate debt and to purchase short-term
investments. As of February 2, 2008, we had $250.0 million
outstanding on this Facility.
On
February 20, 2008, we entered into a five-year $550.0 million Credit Agreement
(the Agreement). The Agreement provides for a $300.0 million
revolving line of credit, including up to $150.0 million in available letters of
credit, and a $250.0 million term loan. The interest rate on the
facility will be based, at our option, on a LIBOR rate, plus a margin, or an
alternate base rate, plus a margin. The revolving line of credit also
bears a facilities fee, calculated as a percentage, as defined, of the amount
available under the line of credit, payable quarterly. The term loan
is due and payable in full at the five year maturity date of the
Agreement. The Agreement also bears an administrative fee payable
annually. The Agreement, among other things, requires the maintenance
of certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new
indebtedness. Our March 2004, $450.0 million unsecured revolving
credit facility was terminated concurrent with entering into the
Agreement.
Revenue Bond
Financing. In May 1998, we entered into an agreement with the
Mississippi Business Finance Corporation under which it issued $19.0 million of
variable-rate demand revenue bonds. We used the proceeds from the
bonds to finance the acquisition, construction and installation of land,
buildings, machinery and equipment for our distribution facility in Olive
Branch, Mississippi. At February 2, 2008, the balance outstanding on
the bonds was $18.5 million. These bonds are due to be fully repaid
in June 2018. The bonds do not have a prepayment penalty as long as
the interest rate remains variable. The bonds contain a demand
provision and, therefore, outstanding amounts are classified as current
liabilities. We pay interest monthly based on a variable interest
rate, which was 3.38% at February 2, 2008.
Interest on Long-term Borrowings.
This amount represents interest payments on the revolving credit facility
and the revenue bond financing using the interest rates for each at February 2,
2008.
Commitments
Letters of Credit and Surety
Bonds. In March 2001, we entered into a Letter of Credit
Reimbursement and Security Agreement, which provides $125.0 million for letters
of credit. In December 2004, we entered into an additional Letter of Credit
Reimbursement and Security Agreement, which provides $50.0 million for letters
of credit. Letters of credit are generally issued for the routine
purchase of imported merchandise and we had approximately $88.9 million of
purchases committed under these letters of credit at February 2,
2008.
We also
have approximately $19.8 million of letters of credit or surety bonds
outstanding for our self-insurance programs and certain utility payment
obligations at some of our stores.
Freight
Contracts. We have contracted outbound freight services from
various carriers with contracts expiring through February 2013. The
total amount of these commitments is approximately $191.2 million.
Technology
Assets. We have commitments totaling approximately $5.1
million to primarily purchase store technology assets for our stores during
2008.
Derivative
Financial Instruments
We are
party to one interest rate swap, which allows us to manage the risk associated
with interest rate fluctuations on the demand revenue bonds. The swap is based
on a notional amount of $18.5 million. Under the $18.5 million agreement, as
amended, we pay interest to the bank that provided the swap at a fixed
rate. In exchange, the financial institution pays us at a
variable-interest rate, which is similar to the rate on the demand revenue
bonds. The variable-interest rate on the interest rate swap is set
monthly. No payments are made by either party under the swap for
monthly periods with an established interest rate greater than a predetermined
rate (the knock-out rate). The swap may be canceled by the bank or us
and settled for the fair value of the swap as determined by market rates and
expires in 2009.
Because
of the knock-out provision in the $18.5 million swap, changes in the fair value
of that swap are recorded in earnings. For more information on the
interest rate swaps, see Item 7A "Quantitative and Qualitative Disclosures About
Market Risk – Interest Rate Risk” beginning on page 29 of this Form
10-K.
On March
20, 2008, we entered into two $75.0 million interest rate swap
agreements. These interest rate swaps are used to manage the
risk associated with interest rate fluctuations on a portion of our $250.0
million variable rate term note. Under these agreements, we pay
interest to financial institutions at a fixed rate of 2.8%. In
exchange, the financial institutions pay us at a variable rate, which
approximates the variable rate on the debt, excluding the credit
spread. We believe these swaps are highly effective as the interest
reset dates and the underlying interest rate indices are identical for the swaps
and the debt. These swaps qualify for hedge accounting treatment
pursuant to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. These swaps expire in
March 2011.
Critical
Accounting Policies
The
preparation of financial statements requires the use of
estimates. Certain of our estimates require a high level of judgment
and have the potential to have a material effect on the financial statements if
actual results vary significantly from those
estimates. Following is a discussion of the estimates that we
consider critical.
Inventory
Valuation
As
discussed in Note 1 to the Consolidated Financial Statements, inventories at the
distribution centers are stated at the lower of cost or market with cost
determined on a weighted-average basis. Cost is assigned to store
inventories using the retail inventory method on a weighted-average
basis. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are computed by applying a
calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averaging method that
has been widely used in the retail industry and results in valuing inventories
at lower of cost or market when markdowns are taken as a reduction of the retail
value of inventories on a timely basis.
Inventory
valuation methods require certain significant management estimates and
judgments, including estimates of future merchandise markdowns and shrink, which
significantly affect the ending inventory valuation at cost as well as the
resulting gross margins. The averaging required in applying the
retail inventory method and the estimates of shrink and markdowns could, under
certain circumstances, result in costs not being recorded in the proper
period.
We
estimate our markdown reserve based on the consideration of a variety of
factors, including, but not limited to, quantities of slow moving or seasonal,
carryover merchandise on hand, historical markdown statistics and future
merchandising plans. The accuracy of our estimates can be affected by
many factors, some of which are outside of our control, including changes in
economic conditions and consumer buying trends. Historically, we have
not experienced significant differences in our estimated reserve for markdowns
compared with actual results.
Our
accrual for shrink is based on the actual, historical shrink results of our most
recent physical inventories adjusted, if necessary, for current economic
conditions. These estimates are compared to actual results as
physical inventory counts are taken and reconciled to the general
ledger. Our physical inventory counts are generally taken between
January and September of each year; therefore, the shrink accrual recorded at
February 2, 2008 is based on estimated shrink for most of 2007, including the
fourth quarter. We have not experienced significant fluctuations in
historical shrink rates beyond approximately 10 basis points in our Dollar Tree
stores for the last two years. However, we have sometimes experienced
higher than typical shrink in acquired stores in the year following an
acquisition. We periodically adjust our shrink estimates to address
these factors as they become apparent.
Our
management believes that our application of the retail inventory method results
in an inventory valuation that reasonably approximates cost and results in
carrying inventory at the lower of cost or market each year on a consistent
basis.
Accrued
Expenses
On a
monthly basis, we estimate certain expenses in an effort to record those
expenses in the period incurred. Our most material estimates include
domestic freight expenses, self-insurance programs, store-level operating
expenses, such as property taxes and utilities, and certain other
expenses. Our freight and store-level operating expenses are
estimated based on current activity and historical trends and
results. Our workers' compensation and general liability insurance
accruals are recorded based on actuarial valuations which are adjusted annually
based on a review performed by a third-party actuary. These actuarial
valuations are estimates based on historical loss development
factors. Certain other expenses are estimated and recorded in the
periods that management becomes aware of them. The related accruals
are adjusted as management’s estimates change. Differences in
management's estimates and assumptions could result in an accrual materially
different from the calculated accrual. Our experience has been that
some of our estimates are too high and others are too
low. Historically, the net total of these differences has not had a
material effect on our financial condition or results of
operations.
Income
Taxes
On a
quarterly basis, we estimate our required income tax liability and assess the
recoverability of our deferred tax assets. Our income taxes payable
are estimated based on enacted tax rates, including estimated tax rates in
states where our store base is growing, applied to the income expected to be
taxed currently. Management assesses the recoverability of deferred
tax assets based on the availability of carrybacks of future deductible amounts
and management’s projections for future taxable income. We cannot
guarantee that we will generate taxable income in future
years. Historically, we have not experienced significant differences
in our estimates of our tax accrual.
In
addition, we have a recorded liability for our estimate of uncertain tax
positions taken or expected to be taken in a tax return. Judgment is
required in evaluating the application of federal and state tax laws, including
relevant case law, and assessing whether it is more likely than not that a tax
position will be sustained on examination and, if so, judgment is also required
as to the measurement of the amount of tax benefit that will be realized upon
settlement with the taxing authority. Income tax expense is adjusted
in the period in which new information about a tax position becomes available or
the final outcome differs from the amounts recorded. We believe that our
liability for uncertain tax positions is adequate. For further discussion of our
changes in reserves during 2007, see Item 8 “Financial Statements and
Supplementary Data - Note 3 to the Consolidated Financial Statements” beginning
on page 42 of this Form 10-K.
Seasonality
and Quarterly Fluctuations
We
experience seasonal fluctuations in our net sales, comparable store net sales,
operating income and net income and expect this trend to
continue. Our results of operations may also fluctuate significantly
as a result of a variety of factors, including:
|
|
·
|
Shifts
in the timing of certain holidays, especially Easter;
|
|
|
·
|
The
timing of new store openings;
|
|
|
·
|
The
net sales contributed by new stores;
|
|
|
·
|
changes
in our merchandise mix; and
|
|
|
·
|
competition.
|
Our
highest sales periods are the Christmas and Easter seasons. Easter
was observed on April 16, 2006, April 8, 2007, and will be observed on March 23,
2008. We believe that the earlier Easter in 2008 could potentially result in $25
million of lost sales when compared to the first quarter of 2007. We
generally realize a disproportionate amount of our net sales and of our
operating and net income during the fourth quarter. In anticipation
of increased sales activity during these months, we purchase substantial amounts
of inventory and hire a significant number of temporary employees to supplement
our continuing store staff. Our operating results, particularly
operating and net income, could suffer if our net sales were below seasonal
norms during the fourth quarter or during the Easter season for any reason,
including merchandise delivery delays due to receiving or distribution problems,
consumer sentiment or inclement weather. Fiscal 2006 consisted of 53
weeks, commensurate with the retail calendar. This extra week
contributed approximately $70 million of sales in 2006 compared to
2007. Fiscal 2007 consisted of 52 weeks. In fiscal 2008, there is one
fewer weekend between Thanksgiving and Christmas compared to fiscal
2007. We believe this could potentially reduce the total foot
traffic in our stores for the Christmas holiday in fiscal 2008 compared to
fiscal 2007.
Our
unaudited results of operations for the eight most recent quarters are shown
in a
table in Footnote 12 of the Consolidated Financial Statements in Item 8 of this
Form 10-K.
Inflation
and Other Economic Factors
Our
ability to provide quality merchandise at a fixed price and on a profitable
basis may be subject to economic factors and influences that we cannot
control. Consumer spending could decline because of economic
pressures, including rising fuel prices. Reductions in consumer
confidence and spending could have an adverse effect on our
sales. National or international events, including war or terrorism,
could lead to disruptions in economies in the United States or in foreign
countries where we purchase some of our merchandise. These and other
factors could increase our merchandise costs and other costs that are critical
to our operations, such as shipping and wage rates.
Shipping
Costs. Currently, trans-Pacific shipping rates are negotiated
with individual freight lines and are subject to fluctuation based on supply and
demand for containers and current fuel costs. As a result, our trans-Pacific
shipping costs in fiscal 2008 may increase compared with fiscal 2007 when we
renegotiate our import shipping rates effective May 2008. We can give
no assurances as to the amount of the increase, as we are in the early stages of
our negotiations.
Minimum Wage. On
May 25, 2007, the President signed legislation that increased the Federal
Minimum Wage from $5.15 an hour to $7.25 an hour by June 2009. We do
not expect this legislation to have a material effect on our operations in
fiscal 2008.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS
No. 157). SFAS No. 157, effective for interim or annual reporting
periods beginning after November 15, 2007, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. We will adopt this statement in the first
quarter of 2008 and we do not expect it to have a material effect on our
consolidated financial statements.
In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No.
109. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. We adopted FIN 48 in
the first quarter of 2007. For further discussion of the effect of
the adoption of FIN 48, see Item 8 “Financial Statements and Supplementary Data”
- Notes 1 and 3 of the Consolidated Financial Statements beginning on page 37 of
this Form 10-K.
Item
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to various types of market risk in the normal course of our business,
including the impact of interest rate changes and foreign currency rate
fluctuations. We may enter into interest rate swaps to manage
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 and we do not hold derivative
instruments for trading purposes.
Interest
Rate Risk
We use
variable-rate debt to finance certain of our operations and capital
improvements. These obligations expose us to variability in interest
payments due to changes in interest rates. If interest rates
increase, interest expense increases. Conversely, if interest rates decrease,
interest expense also decreases. We believe it is beneficial to limit
the variability of our interest payments.
To meet
this objective, we entered into a derivative instrument in the form of an
interest rate swap to manage fluctuations in cash flows resulting from changes
in the variable-interest rates on the Demand Revenue Bonds. The
interest rate swap reduces the interest rate exposure on this variable-rate
obligation. Under the interest rate swap, we pay the bank at a
fixed-rate and receive variable-interest at a rate approximating the
variable-rate on the obligation, thereby creating the economic equivalent of a
fixed-rate obligation. Under the swap, no payments are made by
parties under the swap for monthly periods in which the variable-interest rate
is greater than the predetermined knock-out rate.
The
following table summarizes the financial terms of our interest rate swap
agreement and the fair value of the interest rate swap at February 2,
2008:
Hedging
Instrument
|
Receive
Variable
|
Pay
Fixed
|
Knock-out
Rate
|
Expiration
|
Fair
Value
|
$18.5
million
interest
rate swap
|
LIBOR
|
4.88%
|
7.75%
|
4/1/09
|
$0.5
million
|
Hypothetically,
a 1% change in interest rates results in approximately a $0.2 million change in
the amount paid or received under the terms of the interest rate swap agreement
on an annual basis. Due to many factors, management is not able to
predict the changes in fair value of our interest rate swap. These fair values
are obtained from an outside financial institution.
On March
20, 2008, we entered into two $75.0 million interest rate swap
agreements. These interest rate swaps are used to manage the
risk associated with interest rate fluctuations on a portion of our $250.0
million variable rate term note. Under these agreements, we pay
interest to financial institutions at a fixed rate of 2.8%. In
exchange, the financial institutions pay us at a variable rate, which
approximates the variable rate on the debt, excluding the credit
spread. We believe these swaps are highly effective as the interest
reset dates and the underlying interest rate indices are identical for the swaps
and the debt. These swaps qualify for hedge accounting treatment
pursuant to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and expire in March
2011.
Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
32
|
|
|
Consolidated
Statements of Operations for the years ended
|
|
February
2, 2008, February 3, 2007 and January 28, 2006
|
33
|
|
|
Consolidated
Balance Sheets as of February 2, 2008 and
|
|
February
3, 2007
|
34
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
|
for
the years ended February 2, 2008, February 3, 2007 and
|
|
January
28, 2006
|
35
|
|
|
Consolidated
Statements of Cash Flows for the years ended
|
|
February
2, 2008, February 3, 2007 and January 28, 2006
|
36
|
|
|
Notes
to Consolidated Financial Statements
|
37
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Dollar
Tree, Inc. (formerly Dollar Tree Stores, Inc.):
We have
audited the accompanying consolidated balance sheets of Dollar Tree, Inc.
(formerly Dollar Tree Stores, Inc.) and subsidiaries (the Company) as of
February 2, 2008 and February 3, 2007, and the related consolidated statements
of operations, shareholders’ equity and comprehensive income, and cash flows for
each of the fiscal years in the three-year period ended February 2,
2008. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of February
2, 2008 and February 3, 2007, and the results of their operations and their cash
flows for each of the fiscal years in the three-year period ended February 2,
2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, effective February 4, 2007, and Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment,
effective January 29, 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Dollar Tree, Inc.’s (formerly Dollar Tree
Stores, Inc.) internal control over financial reporting as of February 2, 2008,
based on criteria
established in Internal
Control - Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated April 1,
2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Norfolk,
Virginia
April 1,
2008
DOLLAR
TREE, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
(In
millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
4,242.6 |
|
|
$ |
3,969.4 |
|
|
$ |
3,393.9 |
|
Cost
of sales (Note 4)
|
|
|
2,781.5 |
|
|
|
2,612.2 |
|
|
|
2,221.5 |
|
Gross
profit
|
|
|
1,461.1 |
|
|
|
1,357.2 |
|
|
|
1,172.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
(Notes 8 and 9)
|
|
|
1,130.8 |
|
|
|
1,046.4 |
|
|
|
888.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
330.3 |
|
|
|
310.8 |
|
|
|
283.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6.7 |
|
|
|
8.6 |
|
|
|
6.8 |
|
Interest
expense (Notes 5 and 6)
|
|
|
(17.2 |
) |
|
|
(16.5 |
) |
|
|
(15.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
319.8 |
|
|
|
302.9 |
|
|
|
275.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (Note 3)
|
|
|
118.5 |
|
|
|
110.9 |
|
|
|
101.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
201.3 |
|
|
$ |
192.0 |
|
|
$ |
173.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share (Note 7)
|
|
$ |
2.10 |
|
|
$ |
1.86 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share (Note 7)
|
|
$ |
2.09 |
|
|
$ |
1.85 |
|
|
$ |
1.60 |
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions, except share data)
|
|
February
2, 2008
|
|
|
February
3, 2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
40.6 |
|
|
$ |
85.0 |
|
Short-term
investments
|
|
|
40.5 |
|
|
|
221.8 |
|
Merchandise
inventories
|
|
|
641.2 |
|
|
|
605.0 |
|
Deferred
tax assets (Note 3)
|
|
|
17.3 |
|
|
|
10.7 |
|
Prepaid
expenses and other current assets
|
|
|
49.2 |
|
|
|
45.4 |
|
Total
current assets
|
|
|
788.8 |
|
|
|
967.9 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (Note 2)
|
|
|
743.6 |
|
|
|
715.3 |
|
Goodwill
(Note 10)
|
|
|
133.3 |
|
|
|
133.3 |
|
Other
intangibles, net (Notes 2 and 10)
|
|
|
14.5 |
|
|
|
13.3 |
|
Deferred
tax assets (Note 3)
|
|
|
38.7 |
|
|
|
- |
|
Other
assets, net (Notes 2, 8 and 11)
|
|
|
68.8 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
1,787.7 |
|
|
$ |
1,882.2 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt (Note 5)
|
|
$ |
18.5 |
|
|
$ |
18.8 |
|
Accounts
payable
|
|
|
200.4 |
|
|
|
198.1 |
|
Other
current liabilities (Note 2)
|
|
|
143.6 |
|
|
|
132.0 |
|
Income
taxes payable
|
|
|
43.4 |
|
|
|
43.3 |
|
Total
current liabilities
|
|
|
405.9 |
|
|
|
392.2 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion (Note 5)
|
|
|
250.0 |
|
|
|
250.0 |
|
Income
taxes payable, long-term (Note 3)
|
|
|
55.0 |
|
|
|
- |
|
Deferred
tax liabilities (Note 3)
|
|
|
- |
|
|
|
1.5 |
|
Other
liabilities (Notes 6 and 8)
|
|
|
88.4 |
|
|
|
70.8 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
799.3 |
|
|
|
714.5 |
|
|
|
|
|
|
|
|
|
|
Commitments,
contingencies and
|
|
|
|
|
|
|
|
|
subsequent
events (Notes 1,4,5 and 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity (Notes 6, 7 and 9):
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.01. 300,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
89,784,776 and 99,663,580 shares
|
|
|
|
|
|
|
|
|
issued
and outstanding at February 2, 2008
|
|
|
|
|
|
|
|
|
and
February 3, 2007, respectively
|
|
|
0.9 |
|
|
|
1.0 |
|
Additional
paid-in capital
|
|
|
- |
|
|
|
- |
|
Accumulated
other comprehensive income (loss)
|
|
|
0.1 |
|
|
|
0.1 |
|
Retained
earnings
|
|
|
987.4 |
|
|
|
1,166.6 |
|
Total
shareholders' equity
|
|
|
988.4 |
|
|
|
1,167.7 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
1,787.7 |
|
|
$ |
1,882.2 |
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
YEARS
ENDED FEBRUARY 2, 2008, FEBRUARY 3, 2007, AND JANUARY 28, 2006
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Additional
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
Stock
|
|
Common
|
|
Paid-in
|
|
Comprehensive
|
|
Unearned
|
|
Retained
|
|
holders'
|
|
(in
millions)
|
|
Shares
|
|
Stock
|
|
Capital
|
|
Income
(Loss)
|
|
Compensation
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 29, 2005
|
|
|
113.0 |
|
$ |
1.1 |
|
$ |
177.7 |
|
$ |
(0.3 |
) |
$ |
(0.1 |
) |
$ |
985.8 |
|
$ |
1,164.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
28, 2006
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
173.9 |
|
|
173.9 |
|
Other
comprehensive income (Note 7)
|
|
|
- |
|
|
- |
|
|
- |
|
|
0.4 |
|
|
- |
|
|
- |
|
|
0.4 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174.3 |
|
Issuance
of stock under Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Purchase Plan (Note 9)
|
|
|
0.1 |
|
|
- |
|
|
3.0 |
|
|
- |
|
|
- |
|
|
- |
|
|
3.0 |
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $1.2 (Note 9)
|
|
|
0.4 |
|
|
- |
|
|
8.8 |
|
|
- |
|
|
- |
|
|
- |
|
|
8.8 |
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(7.0 |
) |
|
- |
|
|
(180.3 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(180.3 |
) |
Stock-based
compensation (Notes 1 and 9)
|
|
|
- |
|
|
- |
|
|
2.2 |
|
|
- |
|
|
0.1 |
|
|
- |
|
|
2.3 |
|
Balance
at January 28, 2006
|
|
|
106.5 |
|
|
1.1 |
|
|
11.4 |
|
|
0.1 |
|
|
- |
|
|
1,159.7 |
|
|
1,172.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
3, 2007
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
192.0 |
|
|
192.0 |
|
Other
comprehensive income (Note 7)
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192.0 |
|
Issuance
of stock under Employee Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Plan (Note 9)
|
|
|
0.1 |
|
|
- |
|
|
2.8 |
|
|
- |
|
|
- |
|
|
- |
|
|
2.8 |
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $5.6 (Note 9)
|
|
|
1.7 |
|
|
- |
|
|
43.1 |
|
|
- |
|
|
- |
|
|
- |
|
|
43.1 |
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(8.8 |
) |
|
(0.1 |
) |
|
(63.0 |
) |
|
|
|
|
- |
|
|
(185.1 |
) |
|
(248.2 |
) |
Stock-based
compensation, net (Notes 1 and 9)
|
|
|
0.1 |
|
|
- |
|
|
5.7 |
|
|
- |
|
|
- |
|
|
- |
|
|
5.7 |
|
Balance
at February 3, 2007
|
|
|
99.6 |
|
|
1.0 |
|
|
- |
|
|
0.1 |
|
|
- |
|
|
1,166.6 |
|
|
1,167.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
2, 2008
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
201.3 |
|
|
201.3 |
|
Other
comprehensive income (Note 7)
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201.3 |
|
Adoption
of FIN 48 (Note 3)
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(0.6 |
) |
|
(0.6 |
) |
Issuance
of stock under Employee Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Plan (Note 9)
|
|
|
0.1 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
3.5 |
|
|
3.5 |
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $13.0 (Note 9)
|
|
|
2.7 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
81.1 |
|
|
81.1 |
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(12.8 |
) |
|
(0.1 |
) |
|
- |
|
|
|
|
|
- |
|
|
(472.9 |
) |
|
(473.0 |
) |
Stock-based
compensation, net (Notes 1 and 9)
|
|
|
0.2 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
8.4 |
|
|
8.4 |
|
Balance
at February 2,2008
|
|
|
89.8 |
|
$ |
0.9 |
|
$ |
- |
|
$ |
0.1 |
|
$ |
- |
|
$ |
987.4 |
|
$ |
988.4 |
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
201.3 |
|
|
$ |
192.0 |
|
|
$ |
173.9 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
159.3 |
|
|
|
159.0 |
|
|
|
140.7 |
|
Provision
for deferred income taxes
|
|
|
(46.8 |
) |
|
|
(21.9 |
) |
|
|
(21.5 |
) |
Tax
benefit of stock option exercises
|
|
|
- |
|
|
|
- |
|
|
|
1.2 |
|
Stock
based compensation expense
|
|
|
11.3 |
|
|
|
6.7 |
|
|
|
2.4 |
|
Other
non-cash adjustments to net income
|
|
|
8.0 |
|
|
|
5.1 |
|
|
|
5.6 |
|
Changes
in assets and liabilities increasing
|
|
|
|
|
|
|
|
|
|
|
|
|
(decreasing)
cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
(36.2 |
) |
|
|
(6.2 |
) |
|
|
38.9 |
|
Other
assets
|
|
|
(4.4 |
) |
|
|
(19.8 |
) |
|
|
(5.5 |
) |
Accounts
payable
|
|
|
2.3 |
|
|
|
53.7 |
|
|
|
11.4 |
|
Income
taxes payable
|
|
|
46.9 |
|
|
|
1.6 |
|
|
|
8.0 |
|
Other
current liabilities
|
|
|
8.7 |
|
|
|
31.8 |
|
|
|
(6.4 |
) |
Other
liabilities
|
|
|
16.9 |
|
|
|
10.8 |
|
|
|
16.4 |
|
Net
cash provided by operating activities
|
|
|
367.3 |
|
|
|
412.8 |
|
|
|
365.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(189.0 |
) |
|
|
(175.3 |
) |
|
|
(139.2 |
) |
Purchase
of short-term investments
|
|
|
(1,119.2 |
) |
|
|
(1,044.4 |
) |
|
|
(885.5 |
) |
Proceeds
from maturities of short-term investments
|
|
|
1,300.5 |
|
|
|
1,096.6 |
|
|
|
822.8 |
|
Purchase
of restricted investments
|
|
|
(99.3 |
) |
|
|
(84.5 |
) |
|
|
(69.4 |
) |
Proceeds
from maturities of restricted investments
|
|
|
90.9 |
|
|
|
75.2 |
|
|
|
39.5 |
|
Purchase
of Deal$ assets, net of cash acquired of $0.3
|
|
|
- |
|
|
|
(54.1 |
) |
|
|
- |
|
Acquisition
of favorable lease rights
|
|
|
(6.6 |
) |
|
|
(4.2 |
) |
|
|
(3.7 |
) |
Net
cash used in investing activities
|
|
|
(22.7 |
) |
|
|
(190.7 |
) |
|
|
(235.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments under long-term debt and capital lease
obligations
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
Borrowings
from revolving credit facility
|
|
|
362.4 |
|
|
|
- |
|
|
|
- |
|
Repayments
of revolving credit facility
|
|
|
(362.4 |
) |
|
|
- |
|
|
|
- |
|
Payments
for share repurchases
|
|
|
(473.0 |
) |
|
|
(248.2 |
) |
|
|
(180.4 |
) |
Proceeds
from stock issued pursuant to stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
plans
|
|
|
71.6 |
|
|
|
40.3 |
|
|
|
10.7 |
|
Tax
benefit of stock options exercised
|
|
|
13.0 |
|
|
|
5.6 |
|
|
|
- |
|
Net
cash used in financing activities
|
|
|
(389.0 |
) |
|
|
(202.9 |
) |
|
|
(170.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(44.4 |
) |
|
|
19.2 |
|
|
|
(40.7 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
85.0 |
|
|
|
65.8 |
|
|
|
106.5 |
|
Cash
and cash equivalents at end of year
|
|
$ |
40.6 |
|
|
$ |
85.0 |
|
|
$ |
65.8 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
18.7 |
|
|
$ |
14.9 |
|
|
$ |
11.8 |
|
Income
taxes
|
|
$ |
109.5 |
|
|
$ |
125.5 |
|
|
$ |
113.9 |
|
Supplemental
disclosure of non-cash investing and financing activities:
The
Company purchased equipment under capital lease obligations amounting to $0.5
million, $0.1 million and $0.4 million in the years ended February 2, 2008,
February 3, 2007, and January 28, 2006, respectively.
See accompanying Notes to Consolidated
Financial Statements
DOLLAR
TREE, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
On March
2, 2008, the Company reorganized by creating a new holding company
structure. The primary purpose of the reorganization was to create a
more efficient corporate structure. The business operations of the
Company and its subsidiaries will not change as a result of this
reorganization. As a part of the holding company reorganization, a
new parent company, Dollar Tree, Inc., was formed. Outstanding shares
of the capital stock of Dollar Tree Stores, Inc., were automatically converted,
on a share for share basis, into identical shares of common stock of the new
holding company. The articles of incorporation, the bylaws, the
executive officers and the board of directors of the new holding company are the
same as those of the former Dollar Tree Stores, Inc. in effect immediately prior
to the reorganization. The common stock of the new holding company
will continue to be listed on the NASDAQ Global Select Market under the symbol
“DLTR”. The rights, privileges and interests of the Company’s
stockholders will remain the same with respect to the new holding
company.
At
February 2, 2008, Dollar Tree, Inc. (the Company), formerly Dollar Tree Stores,
Inc., owned and operated 3,411 discount variety retail
stores. Approximately 3,300 of these stores sell substantially all
items for $1.00 or less. The remaining stores were acquired as apart
of the Deal$ acquisition and these stores sell most items for $1.00 or less but
also sell items at prices greater than $1.00. The Company's stores
operate under the names of Dollar Tree, Deal$ and Dollar Bills. The
Company’s stores average approximately 8,300 selling square feet.
The
Company's headquarters and one of its distribution centers are located in
Chesapeake, Virginia. The Company also operates distribution centers
in Mississippi, Illinois, California, Pennsylvania, Georgia, Oklahoma, Utah and
Washington. The Company's stores are located in all 48 contiguous
states. The Company's merchandise includes food, health and beauty
care, party goods, candy, toys, stationery, seasonal goods, gifts and other
consumer items. Approximately 40% to 45% of the Company's merchandise
is imported, primarily from China.
Principles
of Consolidation
The
consolidated financial statements include the financial statements of Dollar
Tree, Inc., and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Fiscal
Year
The
Company's fiscal year ends on the Saturday closest to January 31. Any
reference herein to “2007” or “Fiscal 2007,” “2006” or “Fiscal 2006,” and “2005”
or “Fiscal 2005,” relates to as of or for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006, respectively. Fiscal year
2006 consisted of 53 weeks, while 2007 and 2005 both consisted of 52
weeks.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
2006 and 2005 amounts have been reclassified for comparability with the current
period presentation. 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. The gross amount of purchases
of restricted investments and proceeds from the maturities of restricted
investments have been included in 2006 and 2005. These amounts were
previously reported on a net basis.
Cash
and Cash Equivalents
Cash and
cash equivalents at February 2, 2008 and February 3, 2007 includes $12.8 million
and $40.3 million, respectively, of investments in money market securities and
bank participation agreements which are valued at cost, which approximates fair
value. The underlying assets of these short-term participation
agreements are primarily commercial notes. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents. The majority of payments due from financial institutions
for the settlement of debit card and credit card transactions process within
three business days, and therefore are classified as cash and cash
equivalents.
Short-Term
Investments
The
Company’s short-term investments at February 2, 2008, consist primarily of
government-sponsored municipal bonds. These investments are
classified as available for sale and are recorded at fair value, which
approximates cost. The government-sponsored municipal bonds can be
converted into cash depending on terms of the underlying
agreement. Short-term investments at February 3, 2007 also included
auction rate securities. The auction rate securities have stated
interest rates, which typically reset to prevailing market rates every 35 days
or less. The securities underlying both the government-sponsored
municipal bonds and the auction rate securities have longer legal maturity
dates.
Merchandise
Inventories
Merchandise
inventories at the distribution centers are stated at the lower of cost or
market, determined on a weighted average cost basis. Cost is assigned
to store inventories using the retail inventory method, determined on a weighted
average cost basis.
Costs
directly associated with warehousing and distribution are capitalized as
merchandise inventories. Total warehousing and distribution costs
capitalized into inventory amounted to $26.3 million and $25.6 million at
February 2, 2008 and February 3, 2007, respectively.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets as
follows:
Buildings
|
39
to 40 years
|
Furniture,
fixtures and equipment
|
3
to 15 years
|
Transportation
vehicles
|
4
to 6 years
|
Leasehold
improvements and assets held under capital leases are amortized over the
estimated useful lives of the respective assets or the committed terms of the
related leases, whichever is shorter. Amortization is included in
"selling, general and administrative expenses" on the accompanying consolidated
statements of operations.
Costs
incurred related to software developed for internal use are capitalized and
amortized over three years. Costs capitalized include those incurred
in the application development stage as defined in Statement of Position 98-1,
Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets with indefinite useful lives are not amortized, but
rather tested for impairment at least annually. In accordance with
SFAS No. 142, goodwill is no longer being amortized, but is tested annually for
impairment. In addition, goodwill will be tested on an interim basis
if an event or circumstance indicates that it is more likely than not that an
impairment loss has been incurred. The Company performed its annual
impairment testing in November 2007 and determined that no impairment loss
existed. Intangible assets with finite useful lives are amortized over their
respective estimated useful lives and reviewed for impairment in accordance with
SFAS No. 144. The Company performs its annual assessment of
impairment following the finalization of each November’s financial
statements.
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The
Company reviews its long-lived assets and certain identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, in accordance with Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Recoverability of assets to be
held and used is measured by comparing the carrying amount of an asset to future
net undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets based on discounted cash flows or other readily
available evidence of fair value, if any. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell. In fiscal 2007, 2006 and 2005, the Company recorded charges of
$0.8 million, $0.5 million and $0.2 million, respectively, to write down certain
assets. These charges are recorded as a component of "selling,
general and administrative expenses" in the accompanying consolidated statements
of operations.
Financial
Instruments
The
Company utilizes derivative financial instruments to reduce its exposure to
market risks from changes in interest rates. By entering into
receive-variable, pay-fixed interest rate swaps, the Company limits its exposure
to changes in variable interest rates. The Company is exposed to
credit-related losses in the event of non-performance by the counterparty to the
interest rate swaps; however, the counterparties are major financial
institutions, and the risk of loss due to non-performance is considered
remote. Interest rate differentials paid or received on the swaps are
recognized as adjustments to expense in the period earned or
incurred. The Company formally documents all hedging relationships,
if applicable, and assesses hedge effectiveness both at inception and on an
ongoing basis.
The
Company’s remaining interest rate swap does not qualify for hedge accounting
treatment pursuant to the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS133). This interest
rate swap is recorded at fair value in the accompanying consolidated balance
sheets as a component of “other liabilities” (see Note 6). Changes in
the fair value of this interest rate swap are recorded as "interest
expense” in the accompanying consolidated statements of
operations. The fair value of this interest rate swap at February 2,
2008 was $0.5 million. The fair value at February 3, 2007 was less
than $0.1 million.
Lease
Accounting
The Company leases all of its retail
locations under operating leases. The Company recognizes minimum rent
expense starting when possession of the property is taken from the landlord,
which normally includes a construction period prior to store
opening. When a lease contains a predetermined fixed escalation of
the minimum rent, the Company recognizes the related rent expense on a
straight-line basis and records the difference between the recognized rental
expense and the amounts payable under the lease as deferred rent. The
Company also receives tenant allowances, which are recorded in deferred rent and
are amortized as a reduction of rent expense over the term of the
lease.
Revenue
Recognition
The
Company recognizes sales revenue at the time a sale is made to its
customer.
Taxes
Collected
The
Company reports taxes assessed by a governmental authority that are directly
imposed on revenue-producing transactions (i.e., sales tax) on a net (excluded
from revenues) basis.
Cost
of Sales
The
Company includes the cost of merchandise, warehousing and distribution costs,
and certain occupancy costs in cost of sales.
Pre-Opening
Costs
The
Company expenses pre-opening costs for new, expanded and relocated stores, as
incurred.
Advertising
Costs
The
Company expenses advertising costs as they are incurred. Advertising
costs approximated $8.4 million, $10.6 million and $11.8 million for the years
ended February 2, 2008, February 3, 2007, and January 28, 2006,
respectively.
Income
Taxes
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date of such
change.
On
February 4, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which clarified the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with SFAS No. 109,
Accounting for Income
Taxes. With the adoption of FIN 48, the Company includes
interest and penalties in the provision for income tax expense and income taxes
payable. The Company does not provide for any penalties associated
with tax contingencies unless they are considered probable of
assessment. Refer to Note 3 for further discussion of income taxes
and the impact of adopting FIN 48.
Stock-Based
Compensation
Effective,
January 29, 2006, the Company adopted Statement of Financial Accounting
Standards, No. 123 (revised 2004), 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, 2005 financial statements have not been restated to reflect the
impact of SFAS 123R. During 2006, the Company recognized $1.8 million
of stock-based compensation expense as a result of the adoption of SFAS
123R. Total stock-based compensation expense for 2007, 2006 and 2005
was $11.3 million, $6.7 million and $2.4 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 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. Thus, the Company has classified the $13.0 million and
$5.6 million of excess tax benefits recognized in 2007 and 2006, respectively,
as financing cash flows. Excess tax benefits of $1.2 million
recognized in 2005 prior to the adoption of SFAS 123R, are classified as
operating cash flows.
If the
accounting provisions of SFAS 123 had been applied to 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:
|
|
Year
Ended
|
|
|
|
January
28,
|
|
(in
millions, except per share data)
|
|
2006
|
|
|
|
|
|
Net
income as reported
|
|
$ |
173.9 |
|
Add:
Total stock-based employee
|
|
|
|
|
compensation
expense included in net
|
|
|
|
|
income,
net of related tax effects
|
|
|
1.5 |
|
Deduct:
Total stock-based employee
|
|
|
|
|
compensation
expense determined under
|
|
|
|
|
fair
value based method,
|
|
|
|
|
net
of related tax effects
|
|
|
(18.2 |
) |
|
|
|
|
|
|
|
$ |
157.2 |
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
Basic,
as reported
|
|
$ |
1.61 |
|
Basic,
pro forma under FAS 123
|
|
|
1.45 |
|
|
|
|
|
|
Diluted,
as reported
|
|
$ |
1.60 |
|
Diluted,
pro forma under FAS 123
|
|
|
1.44 |
|
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 Incentive Plan (EOEP), effective as of December 15,
2005. At the effective date, almost all of these options had exercise
prices higher than the actual stock price. 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. Compensation expense, as determined at the time of
the accelerated vesting, has been reduced by $14.9 million, over a period of
four years during which the options would have vested, as a result of the option
acceleration program. This amount is net of compensation expense of
$0.1 million recognized in fiscal 2005 for estimated forfeiture of certain (in
the money) options.
The
Company recognizes expense related to the fair value of restricted stock units
(RSUs) over the requisite service period. The fair value of the RSUs
is determined using the closing price of the Company’s common stock on the date
of grant.
On March
14, 2008, the Board of Directors granted approximately 0.3 million restricted
stock units and options to purchase 0.4 million shares of the Company’s common
stock under the Company’s Equity Incentive Plan and the EOEP.
Net
Income Per Share
Basic net
income per share has been computed by dividing net income by the weighted
average number of shares outstanding. Diluted net income per share
reflects the potential dilution that could occur assuming the inclusion of
dilutive potential shares and has been computed by dividing net income by the
weighted average number of shares and dilutive potential shares
outstanding. Dilutive potential shares include all outstanding stock
options and unvested restricted stock, excluding certain performance based
restricted stock grants, after applying the treasury stock
method.
NOTE
2 - BALANCE SHEET COMPONENTS
Other
Intangibles, Net
Intangibles,
net, as of February 2, 2008 and February 3, 2007 consist of the
following:
|
|
February
2,
|
|
|
February
3,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Non-competition
agreements
|
|
$ |
6.4 |
|
|
$ |
6.4 |
|
Accumulated
amortization
|
|
|
(5.9 |
) |
|
|
(5.1 |
) |
Non-competition
agreements, net
|
|
|
0.5 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
Favorable
lease rights
|
|
|
25.1 |
|
|
|
19.0 |
|
Accumulated
amortization
|
|
|
(11.1 |
) |
|
|
(7.0 |
) |
Favorable
lease rights, net
|
|
|
14.0 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
Total
other intangibles, net
|
|
$ |
14.5 |
|
|
$ |
13.3 |
|
Non-Competition
Agreements
The
Company has entered into non-competition agreements with certain former
executives of certain acquired entities. These assets are being
amortized over the legal term of the individual agreements, ranging from five to
ten years.
Favorable
Lease Rights
In 2007
and 2006, the Company acquired favorable lease rights for operating leases for
retail locations from third parties, including the acquired favorable lease
rights in its acquisition of 138 Deal$ stores (see Note 10). The
Company’s favorable lease rights are amortized on a straight-line basis to rent
expense over the remaining initial lease terms, which expire at various dates
through 2016. The weighted average life remaining on the favorable
lease rights at February 2, 2008 is 50 months.
Amortization
expense related to the non-competition agreements and favorable lease rights was
$5.4 million, $4.4 million and $3.3 million for the years ended February 2,
2008, February 3, 2007 and January 28, 2006, respectively. Estimated
annual amortization expense for the next five years follows: 2008 - $4.9
million; 2009 - $3.2 million; 2010 - $2.5 million, 2011 - $1.9 million, and 2012
- $1.1 million.
Property,
Plant and Equipment, Net
Property, plant and equipment, net, as
of February 2, 2008 and February 3, 2007 consists of the
following:
|
|
February
2,
|
|
|
February
3,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
29.4 |
|
|
$ |
29.4 |
|
Buildings
|
|
|
172.7 |
|
|
|
154.7 |
|
Improvements
|
|
|
535.1 |
|
|
|
482.3 |
|
Furniture,
fixtures and equipment
|
|
|
785.0 |
|
|
|
708.6 |
|
Construction
in progress
|
|
|
52.9 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment
|
|
|
1,575.1 |
|
|
|
1,413.3 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated
depreciation and amortization
|
|
|
831.5 |
|
|
|
698.0 |
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$ |
743.6 |
|
|
$ |
715.3 |
|
Other
Assets, Net
Other
assets, net includes $47.6 million and $39.2 million at February 2, 2008 and
February 3, 2007, respectively of restricted investments. The Company
purchased these restricted investments to collateralize long-term insurance
obligations. These investments replaced higher cost stand by letters
of credit and surety bonds. These investments consist primarily of
government-sponsored municipal bonds, similar to our short-term
investments. These investments are classified as available for sale
and are recorded at fair value, which approximates cost.
Other
Current Liabilities
Other
current liabilities as of February 2, 2008 and February 3, 2007 consist of
accrued expenses for the following:
|
|
February
2,
|
|
|
February
3,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
45.5 |
|
|
$ |
43.5 |
|
Taxes
(other than income taxes)
|
|
|
16.3 |
|
|
|
19.5 |
|
Insurance
|
|
|
27.6 |
|
|
|
26.8 |
|
Other
|
|
|
54.2 |
|
|
|
42.2 |
|
|
|
|
|
|
|
|
|
|
Total
other current liabilities
|
|
$ |
143.6 |
|
|
$ |
132.0 |
|
Fair
Value of Financial Instruments
The
carrying values of cash and cash equivalents, other current assets, accounts
payable and other current liabilities approximate fair value because of the
short maturity of these instruments. The carrying values of other
long-term financial assets and liabilities, excluding restricted investments,
approximate fair value because they are recorded using discounted future cash
flows or quoted market rates. Short-term investments and restricted
investments are carried at fair value, which approximates cost, in accordance
with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
The
carrying value of the Company's long-term debt approximates its fair value
because the debt’s interest rates vary with market interest rates.
NOTE
3 - INCOME TAXES
Total
income taxes were allocated as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
118.5 |
|
|
$ |
110.9 |
|
|
$ |
101.3 |
|
Accumulated
other comprehensive income,
|
|
|
|
|
|
|
|
|
|
|
|
|
marking
derivative financial
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
to fair value
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
Stockholders'
equity, tax benefit on
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
(13.0 |
) |
|
|
(5.6 |
) |
|
|
(1.2 |
) |
|
|
$ |
105.5 |
|
|
$ |
105.3 |
|
|
$ |
100.3 |
|
The
provision for income taxes consists of the following:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal
- current
|
|
$ |
147.5 |
|
|
$ |
116.2 |
|
|
$ |
108.1 |
|
State
- current
|
|
|
17.8 |
|
|
|
16.6 |
|
|
|
14.7 |
|
Total
current
|
|
|
165.3 |
|
|
|
132.8 |
|
|
|
122.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
- deferred
|
|
|
(39.4 |
) |
|
|
(19.1 |
) |
|
|
(20.6 |
) |
State
- deferred
|
|
|
(7.4 |
) |
|
|
(2.8 |
) |
|
|
(0.9 |
) |
Total
deferred
|
|
|
(46.8 |
) |
|
|
(21.9 |
) |
|
|
(21.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
118.5 |
|
|
$ |
110.9 |
|
|
$ |
101.3 |
|
Included
in current tax expense for the year ended February 2, 2008, are amounts related
to uncertain tax positions associated with temporary differences, in accordance
with FIN 48.
A
reconciliation of the statutory federal income tax rate and the effective rate
follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Effect
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of federal income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
|
|
|
2.9 |
|
|
|
3.3 |
|
|
|
3.4 |
|
Other,
net
|
|
|
(0.8 |
) |
|
|
(1.7 |
) |
|
|
(1.6 |
) |
Effective
tax rate
|
|
|
37.1 |
% |
|
|
36.6 |
% |
|
|
36.8 |
% |
The rate
reduction in “other, net” consists primarily of benefits from the resolution of
tax uncertainties, interest on tax reserves, federal jobs credits and tax exempt
interest.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Deferred tax assets and
liabilities are classified on the accompanying consolidated balance sheets based
on the classification of the underlying asset or
liability. Significant components of the Company's net deferred tax
assets (liabilities) follows:
|
|
February
2,
|
|
|
February
3,
|
|
|
|
2008
|
|
|
2007
|
|
(in
millions) |
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Accrued
expenses
|
|
$ |
38.2 |
|
|
$ |
33.5 |
|
Property
and equipment
|
|
|
22.2 |
|
|
|
- |
|
State
tax net operating losses and credit
|
|
|
|
|
|
|
|
|
carryforwards,
net of federal benefit
|
|
|
2.1 |
|
|
|
1.3 |
|
Accrued
compensation expense
|
|
|
10.7 |
|
|
|
9.3 |
|
Total
deferred tax assets
|
|
|
73.2 |
|
|
|
44.1 |
|
Valuation
allowance
|
|
|
(2.1 |
) |
|
|
(1.3 |
) |
Deferred
tax assets, net
|
|
|
71.1 |
|
|
|
42.8 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(11.0 |
) |
|
|
(9.2 |
) |
Property
and equipment
|
|
|
- |
|
|
|
(14.3 |
) |
Prepaids
|
|
|
(2.2 |
) |
|
|
(9.0 |
) |
Other
|
|
|
(1.9 |
) |
|
|
(1.1 |
) |
Total
deferred tax liabilities
|
|
|
(15.1 |
) |
|
|
(33.6 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$ |
56.0 |
|
|
$ |
9.2 |
|
A
valuation allowance of $2.1 million, net of Federal tax benefits, has been
provided principally for certain state net operating losses and credit
carryforwards. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred taxes will not be realized. Based upon the
availability of carrybacks of future deductible amounts to the past two years’
taxable income and management's projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the remaining existing deductible temporary differences
will reverse during periods in which carrybacks are available or in which the
Company generates net taxable income.
The
Internal Revenue Service completed its examination of the 1999 to 2003
consolidated federal income tax returns during 2006. In addition,
several states completed their examination of fiscal years prior to
2005. 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 some states.
In June
2006, the Financial Accounting Standards Board issued 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 $19.1 million. The total amount of unrecognized tax
benefits at February 4, 2007, that, if recognized, would affect the effective
tax rate was $12.4 million (net of the federal tax benefit). The
following is a reconciliation of Dollar Tree’s total gross unrecognized tax
benefits for the year-to-date period ended February 2, 2008:
|
|
|
(in
millions)
|
|
Balance
at February 4, 2007
|
|
$ |
19.1 |
|
Additions,
based on tax positions related to current year
|
|
|
8.1 |
|
Additions
for tax positions of prior years
|
|
|
29.2 |
|
Reductions
for tax positions of prior years
|
|
|
|
|
settlements
|
|
|
(0.1 |
) |
Lapses
in statute of limitations
|
|
|
(1.3 |
) |
Balance
at February 2, 2008
|
|
$ |
55.0 |
|
The total
amount of unrecognized tax benefits at February 2, 2008, that, if recognized,
would affect the effective tax rate was $15.4 million (net of the federal tax
benefit).
During
fiscal 2007, the Company accrued potential interest of $4.4 million, related to
these unrecognized tax benefits. No potential penalties were accrued
during 2007 related to the unrecognized tax benefits. As of February
2, 2008, the Company has recorded a liability for potential penalties and
interest of $0.1 million and $7.3 million, respectively.
During
the next 12 months, it is reasonably possible the Company’s reserve for
uncertain tax positions will decrease between $34.0 million and $42.0
million. Most of this reduction relates to temporary differences and
the related interest expense for which accounting method changes have been filed
at the beginning of fiscal year 2008 with the Internal Revenue
Service. Voluntarily filing accounting method changes provides audit
protection for the issues involved for the open periods in exchange for agreeing
to pay the tax over a prescribed period of time. In addition, it is
possible that state tax reserves will be reduced for audit settlements and
statute expirations within the next 12 months. At this point it is
not possible to estimate a range associated with these audits.
NOTE
4 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
Future
minimum lease payments under noncancelable stores and distribution center
operating leases are as follows:
|
|
|
(in
millions) |
|
2008
|
|
$ |
319.0 |
|
2009
|
|
|
284.3 |
|
2010
|
|
|
238.4 |
|
2011
|
|
|
185.8 |
|
2012
|
|
|
129.9 |
|
Thereafter
|
|
|
205.8 |
|
|
|
|
|
|
Total
minimum lease payments
|
|
$ |
1,363.2 |
|
The above
future minimum lease payments include amounts for leases that were signed prior
to February 2, 2008 for stores that were not open as of February 2,
2008.
Minimum
rental payments for operating leases do not include contingent rentals that may
be paid under certain store leases based on a percentage of sales in excess of
stipulated amounts. Future minimum lease payments have not been
reduced by expected future minimum sublease rentals of $2.6 million under
operating leases.
Minimum
and Contingent Rentals
Rental
expense for store and distribution center operating leases (including payments
to related parties) included in the accompanying consolidated statements of
operations are as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(in
millions) |
|
|
|
|
|
|
|
|
|
Minimum
rentals
|
|
$ |
295.4 |
|
|
$ |
261.8 |
|
|
$ |
225.8 |
|
Contingent
rentals
|
|
|
1.2 |
|
|
|
0.9 |
|
|
|
0.7 |
|
Non-Operating
Facilities
The
Company is responsible for payments under leases for certain closed
stores. The Company was also responsible for payments under leases
for two former distribution centers whose leases expired in June 2005 and
September 2005. The Company accounts for abandoned lease facilities
in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. A facility is considered
abandoned on the date that the Company ceases to use it. On this
date, the Company records an expense for the present value of the total
remaining costs for the abandoned facility reduced by any actual or probable
sublease income. Due to the uncertainty regarding the ultimate
recovery of the future lease and related payments, the Company recorded charges
of $0.1 million, $0.1 million and $0.3 million in 2007, 2006 and 2005,
respectively.
Related
Parties
The
Company also leases properties for six of its stores from partnerships owned by
related parties. The total rental payments related to these leases
were $0.5 million for each of the years ended February 2, 2008, February 3, 2007
and January 28, 2006, respectively. Total future commitments under
related party leases are $0.9 million.
Freight
Services
The
Company has contracted outbound freight services from various contract carriers
with contracts expiring through February 2013. The total amount of
these commitments is approximately $191.2 million, of which approximately $85.0
million is committed in 2008, $83.7 million is committed in 2009, $14.5 million
is committed in 2010, $4.5 million is committed in 2011 and $3.5 is committed in
2012.
Technology
Assets
The
Company has commitments totaling approximately $5.1 million to purchase store
technology assets for its stores during 2008.
Letters
of Credit
In March
2001, the Company entered into a Letter of Credit Reimbursement and Security
Agreement. The agreement provides $125.0 million for letters of
credit. In December 2004, the Company entered into an additional
Letter of Credit Reimbursement and Security Agreement, which provides $50.0
million for letters of credit. Letters of credit under both of these
agreements are generally issued for the routine purchase of imported merchandise
and approximately $88.9 million was committed to these letters of credit at
February 2, 2008.
The
Company also has approximately $17.3 million in stand-by letters of credit that
serve as collateral for its self-insurance programs and expire in fiscal
2008.
Surety
Bonds
The
Company has issued various surety bonds that primarily serve as collateral for
utility payments at the Company’s stores. The total amount of the
commitment is approximately $2.5 million, which is committed through various
dates through fiscal 2009.
Contingencies
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 Court certify the case as a
class action. The parties engaged in mediation and reached an
agreement which upon presentation to the Court, received preliminary approval
and the certification of a settlement class. Notices have been mailed
to the class members and the final fairness hearing is expected to occur on May
22, 2008. The settlement amount has been accrued in the accompanying
consolidated balance sheet as of February 2, 2008.
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,
and that terminated employees were not paid in a timely manner. The
plaintiffs requested the Court to certify classes for their various claims and
the presiding judge did so with respect to two classes, but denied
others. After a partly successful appeal by the plaintiffs, one
additional class has been certified. The certified classes now
include two for alleged violations of that state’s labor laws concerning rest
breaks and one related to untimely payments upon
termination. Discovery is now on-going and no trial is anticipated
before the latter part of 2008.
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 and those
claims as a class action. The parties have reached a settlement and
executed an Agreement by which the named plaintiff individually settled her
Equal Pay Act and late payment claims. The Court accepted the
proposed settlement and certified a class for the check
claim. Notices have been mailed to class members and a hearing for
final approval of the settlement has been scheduled for April 22,
2008. The estimated settlement amount has been accrued in the
accompanying consolidated balance sheet as of February 2, 2008.
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
the anticipated 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 the
Court granted with respect to allegations of fraud. The plaintiff
then filed an amended complaint which has been answered by us. 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 suit, answered it and the two cases have been
consolidated. The Company will defend the plaintiffs’ anticipated
effort to seek class certification.
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 of the Company’s former employees in the state of
California. The Company responded with a motion to dismiss which the
Court denied. The Company answered and a motion for summary judgment
on the part of the Company is presently pending before the Court.
The
Company was recently served in federal court in California with a Complaint, on
behalf of a former employee, alleging meal and rest break violations among other
causes of action, and seeking class action status. The settlement
Order entered by the Court in the 2003 case referenced above included an
injunction against meal and rest break claims on the part of class members which
the Company believe include this plaintiff. The Company will seek to
stay this litigation in accordance with that injunction.
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.
NOTE
5 - LONG-TERM DEBT
Long-term
debt at February 2, 2008 and February 3, 2007 consists of the
following:
|
|
February
2,
|
|
|
February
3,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
$450.0
million Unsecured Revolving Credit Facility,
|
|
|
|
|
|
|
interest
payable monthly at LIBOR,
|
|
|
|
|
|
|
plus
0.475%, which was 4.47% at
|
|
|
|
|
|
|
February
2, 2008, principal payable upon
|
|
|
|
|
|
|
expiration
of the facility in March 2009
|
|
$ |
250.0 |
|
|
$ |
250.0 |
|
|
|
|
|
|
|
|
|
|
Demand
Revenue Bonds, interest payable monthly
|
|
|
|
|
|
|
|
|
at
a variable rate which was 3.38% at
|
|
|
|
|
|
|
|
|
February
2, 2008, principal payable on
|
|
|
|
|
|
|
|
|
demand,
maturing June 2018
|
|
|
18.5 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
268.5 |
|
|
|
268.8 |
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
18.5 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion
|
|
$ |
250.0 |
|
|
$ |
250.0 |
|
Maturities
of long-term debt are as follows: 2008 - $18.5 million and 2009 - $250.0
million.
Unsecured
Revolving Credit Facility
In March
2004, the Company entered into a five-year Unsecured Revolving Credit Facility
(the Facility). The Facility provides for a $450.0 million revolving
line of credit, including up to $50.0 million in available letters of credit,
bearing interest at LIBOR, plus 0.475%. The Facility also bears an
annual facilities fee, calculated as a percentage, as defined, of the amount
available under the line of credit and an annual administrative fee payable
quarterly. The Facility, among other things, requires the maintenance
of certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new
indebtedness.
Demand
Revenue Bonds
On May
20, 1998, the Company entered into an unsecured Loan Agreement with the
Mississippi Business Finance Corporation (MBFC) under which the MBFC issued
Taxable Variable Rate Demand Revenue Bonds (the Bonds) in an aggregate principal
amount of $19.0 million to finance the acquisition, construction, and
installation of land, buildings, machinery and equipment for the Company's
distribution facility in Olive Branch, Mississippi. The Bonds do not
contain a prepayment penalty as long as the interest rate remains
variable. The Bonds contain a demand provision and, therefore, are
classified as current liabilities.
Credit
Agreement
On February 20, 2008, the Company
entered into a five-year $550.0 million Credit Agreement (the
Agreement). The Agreement provides for a $300.0 million revolving
line of credit, including up to $150.0 million in available letters of credit,
and a $250.0 million term loan. The interest rate on the facility
will be based, at the Company’s option, on a LIBOR rate, plus a margin, or an
alternate base rate, plus a margin. The revolving line of credit also
bears a facilities fee, calculated as a percentage, as defined, of the amount
available under the line of credit, payable quarterly. The term loan
is due and payable in full at the five year maturity date of the
Agreement. The Agreement also bears an administrative fee payable
annually. The Agreement, among other things, requires the maintenance
of certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new
indebtedness. The Company’s March 2004, $450.0 million unsecured
revolving credit facility was terminated concurrent with entering into the
Agreement.
NOTE
6 – DERIVATIVE FINANCIAL INSTRUMENTS
Non-Hedging
Derivatives
At
February 2, 2008, the Company was party to a derivative instrument in the form
of an interest rate swap that does not qualify for hedge accounting treatment
pursuant to the provisions of SFAS No. 133 because it contains a knock-out
provision. The swap creates the economic equivalent of a fixed rate
obligation by converting the variable-interest rate to a fixed
rate. Under this interest rate swap, the Company pays interest to a
financial institution at a fixed rate, as defined in the
agreement. In exchange, the financial institution pays the Company at
a variable interest rate, which approximates the floating rate on the
variable-rate obligation, excluding the credit spread. The interest
rate on the swap is subject to adjustment monthly. No payments are
made by either party for months in which the variable-interest rate, as
calculated under the swap agreement, is greater than the "knock-out
rate." The following table summarizes the terms of the interest rate
swap:
Derivative
|
Origination
|
Expiration
|
Pay
Fixed
|
Knock-out
|
Instrument
|
Date
|
Date
|
Rate
|
Rate
|
|
|
|
|
|
$18.5
million swap
|
4/1/99
|
4/1/09
|
4.88%
|
7.75%
|
This swap
reduces the Company's exposure to the variable interest rate related to the
Demand Revenue Bonds (see Note 5).
On March
20, 2008, the Company entered into two $75.0 million interest rate swap
agreements. These interest rate swaps are used to manage the risk
associated with interest rate fluctuations on a portion of the Company’s $250.0
million variable rate term note. Under these agreements, the Company
pays interest to financial institutions at a fixed rate of 2.8%. In
exchange, the financial institutions pay the Company at a variable rate, which
approximates the variable rate on the debt, excluding the credit
spread. The Company believes these swaps are highly effective as the
interest reset dates and the underlying interest rate indices are identical for
the swaps and the debt. These swaps qualify for hedge accounting
treatment pursuant to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and expire in March 2011.
NOTE
7 - SHAREHOLDERS' EQUITY
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of Preferred Stock, $0.01 par
value per share. No preferred shares are issued and outstanding at
February 2, 2008 and February 3, 2007.
Net
Income Per Share
The
following table sets forth the calculation of basic and diluted net income per
share:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
(in millions, except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
201.3 |
|
|
$ |
192.0 |
|
|
$ |
173.9 |
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
95.9 |
|
|
|
103.2 |
|
|
|
108.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
2.10 |
|
|
$ |
1.86 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
201.3 |
|
|
$ |
192.0 |
|
|
$ |
173.9 |
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
95.9 |
|
|
|
103.2 |
|
|
|
108.3 |
|
Dilutive
effect of stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock (as determined by
|
|
|
|
|
|
|
|
|
|
|
|
|
applying
the treasury stock method)
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.4 |
|
Weighted
average number of shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive
potential shares outstanding
|
|
|
96.4 |
|
|
|
103.8 |
|
|
|
108.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$ |
2.09 |
|
|
$ |
1.85 |
|
|
$ |
1.60 |
|
At
February 2, 2008, February 3, 2007, and January 28, 2006, respectively, 0.4
million, 1.5 million, and 3.4 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.
Share
Repurchase Programs
In
December 2006, the Company entered into two agreements with a third party to
repurchase approximately $100.0 million of the Company’s common shares under an
Accelerated Share Repurchase Agreement.
The first
$50.0 million was executed in an “uncollared” agreement. In this
transaction the Company initially received 1.7 million shares based on the
market price of the Company’s stock of $30.19 as of the trade date (December 8,
2006). A weighted average price of $32.17 was calculated using stock
prices from December 16, 2006 – March 8, 2007. This represented the
calculation period for the weighted average price. Based
on this weighted average price, the Company paid the third party an additional
$3.3 million on March 8, 2007 for the 1.7 million shares delivered under this
agreement.
The
remaining $50.0 million was executed under a “collared”
agreement. Under this agreement, the Company initially received 1.5
million shares through December 15, 2006, 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 number of shares received under the
agreement was determined based on the weighted average market price of the
Company’s common stock, net of a predetermined discount, during the time after
the initial execution date through March 8, 2007. The calculated
weighted average market price through March 8, 2007, net of a predetermined
discount, as defined in the “collared” agreement, was
$31.97. Therefore, on March 8, 2007, the Company received an
additional 0.1 million shares under the “collared” agreement resulting in 1.6
million total shares being repurchased under this agreement.
On March
29, 2007, the Company entered into an agreement with a third party to repurchase
$150.0 million of the Company’s common shares under an Accelerated Share
Repurchase Agreement. 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
resulting in 3.7 million total shares being repurchased under this
agreement.
On August
30, 2007, the Company entered into an agreement with a third party to repurchase
$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. Under this agreement, the Company initially
received 2.1 million shares through September 10, 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 number of shares
received under the agreement was determined based on the weighted average market
price of the Company’s common stock, net of a predetermined discount, during the
time after the initial execution date through a period of up to four and one
half months. The contract terminated on October 22, 2007 and the
weighted average price through that date was $41.16. Therefore, on
October 22, 2007, the Company received an additional 0.3 million shares
resulting in 2.4 million total shares repurchased under this
agreement.
In March
2005, the Company’s Board of Directors authorized the repurchase of up to $300.0
million of the Company’s common stock through March 2008. In November
2006, the Company’s Board of Directors authorized the repurchase of up to $500.0
million of the Company’s common stock. This amount was in addition to
the $27.0 million remaining on the March 2005 authorization. In
October 2007, the Company’s Board of Directors authorized the repurchase of an
additional $500.0 million of the Company’s common stock. This
authorization was in addition to the November 2006 authorization which had
approximately $98.4 million remaining.
The
Company repurchased approximately 12.8 million shares for approximately $473.0
million in fiscal 2007, approximately 8.8 million shares for approximately
$248.2 million in fiscal 2006 and approximately 7.0 million shares for
approximately $180.4 million in fiscal 2005. At February 2, 2008, the
Company had approximately $453.7 remaining under Board
authorization.
NOTE
8 – EMPLOYEE BENEFIT PLANS
Profit
Sharing and 401(k) Retirement Plan
The
Company maintains a defined contribution profit sharing and 401(k) plan which is
available to all employees over 21 years of age who have completed one year of
service in which they have worked at least 1,000 hours. Eligible
employees may make elective salary deferrals. The Company may make
contributions at its discretion.
Contributions
to and reimbursements by the Company of expenses of the plan included in the
accompanying consolidated statements of operations were as follows:
Year
Ended February 2, 2008
|
$19.0
million
|
Year
Ended February 3, 2007
|
16.8 million
|
Year
Ended January 28, 2006
|
6.9 million
|
Eligible
employees hired prior to January 1, 2007 are immediately vested in the Company’s
profit sharing contributions. Eligible employees hired subsequent to
January 1, 2007 vest in the Company’s profit sharing contributions based on the
following schedule:
· 25%
after three years of service
|
· 50%
after four years of service
|
· 100%
after five years of service
|
All
eligible employees are immediately vested in any Company match contributions
under the 401(k) portion of the plan.
Deferred
Compensation Plan
The
Company has a deferred compensation plan which provides certain officers and
executives the ability to defer a portion of their base compensation and bonuses
and invest their deferred amounts. The plan is a nonqualified plan
and the Company may make discretionary contributions. The deferred
amounts and earnings thereon are payable to participants, or designated
beneficiaries, at specified future dates, or upon retirement or
death. Total cumulative participant deferrals were approximately $2.5
million and $2.3 million, respectively, at February 2, 2008 and February 3,
2007, and are included in "other liabilities" on the accompanying consolidated
balance sheets. The related assets are included in "other assets,
net" on the accompanying consolidated balance sheets. The Company did
not make any discretionary contributions in the years ended February 2, 2008,
February 3, 2007 or January 28, 2006.
All of
the employee benefit plans noted above were adopted by Dollar Tree, Inc. on
March 2, 2008 as a part of the holding company reorganization. Refer
to Note 1 for a discussion of the holding company reorganization.
NOTE
9 - STOCK-BASED COMPENSATION PLANS
At
February 2, 2008, the Company has eight stock-based compensation
plans. Each plan and the accounting method are described
below.
Fixed
Stock Option Compensation Plans
Under the
Non-Qualified Stock Option Plan (SOP), the Company granted options to its
employees for 1,047,264 shares of Common Stock in 1993 and 1,048,289 shares in
1994. Options granted under the SOP have an exercise price of $0.86
and are fully vested at the date of grant.
Under the
1995 Stock Incentive Plan (SIP), the Company granted options to its employees
for the purchase of up to 12.6 million shares of Common Stock. The
exercise price of each option equaled the market price of the Company's stock at
the date of grant, unless a higher price was established by the Board of
Directors, and an option's maximum term is 10 years. Options granted
under the SIP generally vested over a three-year period. This plan
was terminated on July 1, 2003 and replaced with the Company’s 2003 Equity
Incentive Plan, discussed below.
The Step
Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan) provided for the
issuance of stock options, stock appreciation rights, phantom stock and
restricted stock awards to officers and key employees. Effective with
the merger with 98 Cent Clearance Center in December 1998 and in accordance with
the terms of the SAI Plan, outstanding 98 Cent Clearance Center options were
assumed by the Company and converted, based on 1.6818 Company options for each
98 Cent Clearance Center option, to options to purchase the Company's common
stock. Options issued as a result of this conversion were fully
vested as of the date of the merger.
Under the
1998 Special Stock Option Plan (Special Plan), options to purchase 247,500
shares were granted to five former officers of 98 Cent Clearance Center who were
serving as employees or consultants of the Company following the
merger. The options were granted as consideration for entering into
non-competition agreements and a consulting agreement. The exercise
price of each option equals the market price of the Company's stock at the date
of grant, and the options' maximum term is 10 years. Options granted
under the Special Plan vested over a five-year period. As of February
2, 2008, 135,250 of these options are still outstanding.
The 2003
Equity Incentive Plan (EIP) replaces the Company's SIP discussed
above. Under the EIP, the Company may grant up to 6.0 million shares
of its Common Stock, plus any shares available for future awards under the SIP,
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.
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.
Stock
appreciation rights may be awarded alone or in tandem with stock
options. When the stock appreciation rights are exercisable, the
holder may surrender all or a portion of the unexercised stock appreciation
right and receive in exchange an amount equal to the excess of the fair market
value at the date of exercise over the fair market value at the date of the
grant. No stock appreciation rights have been granted to
date.
Any
restricted stock or RSUs awarded are subject to certain general
restrictions. The restricted stock shares or units may not be sold,
transferred, pledged or disposed of until the restrictions on the shares or
units have lapsed or have been removed under the provisions of the
plan. In addition, if a holder of restricted shares or units ceases
to be employed by the Company, any shares or units in which the restrictions
have not lapsed will be forfeited.
The 2003
Non-Employee Director Stock Option Plan (NEDP) provides non-qualified stock
options to non-employee members of the Company's Board of
Directors. The stock options are functionally equivalent to such
options issued under the EIP discussed above. 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 immediately.
The 2003
Director Deferred Compensation Plan permits any of the Company's directors who
receive a retainer or other fees for Board or Board 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. 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 is issued. The options are fully vested when issued and
have a term of 10 years.
All of
the shareholder approved plans noted above were adopted by Dollar Tree, Inc. on
March 2, 2008 as a part of the holding company reorganization. Refer
to Note 1 for a discussion of the holding company reorganization.
Stock
Options
In 2007
and 2006, the Company granted a total of 386,490 and 342,216 stock options from
the EIP, EOEP and the NEDP, respectively. The fair value of all of
these options is being expensed ratably over the three-year vesting periods, or
a shorter period based on the retirement eligibility of the
grantee. For these options, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing
model. All options granted to directors vest immediately and are
expensed on the grant date. During 2007 and 2006, the Company
recognized $2.7 million and $1.3 million, respectively of expense related to
stock option grants. As of February 2, 2008, there was approximately
$4.3 million of total unrecognized compensation expense related to these stock
options which is expected to be recognized over a weighted average period of 23
months. 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. For pro forma disclosures required under FAS 123, the
fair value of option awards in 2005 were also calculated using the Black-Scholes
option-pricing model. The weighted average assumptions used in the
Black-Scholes option-pricing model for grants in 2007, 2006 and 2005 are as
follows:
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Fiscal
2005
|
|
Expected
term in years
|
|
|
6.0 |
|
|
|
6.0 |
|
|
|
4.7 |
|
Expected
volatility
|
|
|
28.4 |
% |
|
|
30.2 |
% |
|
|
48.7 |
% |
Annual
dividend yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Risk
free interest rate
|
|
|
4.5 |
% |
|
|
4.8 |
% |
|
|
3.7 |
% |
Weighted
average fair value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
during the period
|
|
$ |
14.33 |
|
|
$ |
10.93 |
|
|
$ |
11.27 |
|
Options
granted
|
|
|
386,490 |
|
|
|
342,216 |
|
|
|
320,220 |
|
The
following tables summarize the Company's various option plans and information
about options outstanding at February 2, 2008 and changes during the year then
ended.
Stock
Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Per
Share
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
Value
(in
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
4,466,041 |
|
|
$ |
25.96 |
|
|
|
|
|
|
|
Granted
|
|
|
386,490 |
|
|
|
38.17 |
|
|
|
|
|
|
|
Exercised
|
|
|
(2,674,857 |
) |
|
|
25.46 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(87,760 |
) |
|
|
31.00 |
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
2,089,914 |
|
|
$ |
28.63 |
|
|
|
5.5 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and expected to vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
February 2, 2008
|
|
|
2,061,008 |
|
|
$ |
28.58 |
|
|
|
5.5 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of period
|
|
|
1,557,234 |
|
|
$ |
26.71 |
|
|
|
4.4 |
|
|
$ |
1.7 |
|
|
|
|
Options
Outstanding
|
Options
Exercisable
|
|
|
Options
|
|
|
|
Options
|
|
|
Range
of
|
|
Outstanding
|
Weighted
Avg.
|
Weighted
Avg.
|
Exercisable
|
Weighted
Avg.
|
Exercise
|
|
at
February 2,
|
Remaining
|
Exercise
|
at
February 2,
|
Exercise
|
Prices
|
|
2008
|
Contractual
Life
|
Price
|
|
2008
|
|
Price
|
|
|
|
|
|
|
|
|
|
$0.86
|
|
3,072
|
N/A
|
$ 0.86
|
|
3,072
|
|
$ 0.86
|
$10.99
to $21.28
|
307,534
|
4.3
|
19.43
|
|
307,534
|
|
19.43
|
$21.29
to $29.79
|
935,616
|
5.3
|
25.83
|
|
736,436
|
|
25.35
|
$29.80
to $42.56
|
843,692
|
6.1
|
35.20
|
|
510,192
|
|
33.21
|
|
|
|
|
|
|
|
|
|
$0.86
to $42.56
|
2,089,914
|
5.5
|
28.63
|
|
1,557,234
|
|
26.71
|
The
intrinsic value of options exercised during 2007, 2006 and 2005 was
approximately $32.8 million, $13.1 million and $2.8 million,
respectively.
Restricted
Stock
The
Company granted 323,320, 277,347 and 252,936 RSUs, net of forfeitures in 2007,
2006 and 2005, respectively, from the EIP and the EOEP to the Company’s
employees and officers. The fair value of all of these RSUs 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 $7.7 million, $4.5 million and $1.7
million of expense related to these RSUs during 2007, 2006 and
2005. As of February 2, 2008, there was approximately $11.8 million
of total unrecognized compensation expense related to these RSUs which is
expected to be recognized over a weighted average period of 22
months.
In 2005,
the Company granted 40,000 RSUs from the 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 was 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 recognized
$0.3 million and $0.7 million, of expense related to these RSUs in 2006 and
2005, respectively. The amount recognized in 2007 was less than $0.1
million.
In 2006,
the Company granted 6,000 RSUs from the EOEP and the EIP to certain officers of
the Company, contingent on the Company meeting certain performance targets in
2006 and future service of the these officers through fiscal
2006. The Company met these performance targets in fiscal 2006;
therefore, the Company recognized the fair value of these RSUs of $0.2 million
during fiscal 2006. The fair value of these RSUs was determined using
the Company’s closing stock price on the grant date in accordance with SFAS
123R.
The
following table summarizes the status of RSUs as of February 2, 2008, and
changes during the year then ended:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Date
Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
Nonvested
at February 3, 2007
|
|
|
456,777 |
|
|
$ |
26.57 |
|
Granted
|
|
|
350,470 |
|
|
|
38.12 |
|
Vested
|
|
|
(206,076 |
) |
|
|
26.60 |
|
Forfeited
|
|
|
(45,236 |
) |
|
|
32.96 |
|
Nonvested
at February 2, 2008
|
|
|
555,935 |
|
|
|
26.57 |
|
In
connection with the vesting of RSUs in 2007 and 2006, certain employees elected
to receive shares net of minimum statutory tax withholding amounts which totaled
$2.9 million and $1.0 million, respectively. The total fair value of
the restricted shares vested during the years ended February 2, 2008 and
February 3, 2007 was $8.2 million and $2.8 million, respectively. The
total fair value of restricted shares vested during the year ended January 28,
2006 was less than $0.1 million.
Employee
Stock Purchase Plan
Under the
Dollar Tree, Inc. Employee Stock Purchase Plan (ESPP), the Company is authorized
to issue up to 1,759,375 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. 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. Under the ESPP, the Company has sold 1,074,420 shares as of
February 2, 2008.
The fair
value of the employees' purchase rights is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term
|
|
3
months
|
|
|
3
months
|
|
|
3
months
|
|
Expected
volatility
|
|
|
16.3 |
% |
|
|
13.1 |
% |
|
|
12.0 |
% |
Annual
dividend yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Risk
free interest rate
|
|
|
4.4 |
% |
|
|
4.8 |
% |
|
|
3.9 |
% |
The
weighted average per share fair value of those purchase rights granted in 2007,
2006 and 2005 was $5.74, $4.59 and $4.11, respectively. Total expense
recognized for these purchase rights was $0.9 million and $0.4 million in 2007
and 2006, respectively.
On March
2, 2008, the ESPP was adopted by Dollar Tree, Inc. as a part of the holding
company reorganization. Refer to Note 1 for discussion of the holding
company reorganization.
NOTE
10 – ACQUISITION
On March
25, 2006, the Company completed its acquisition of 138 Deal$
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 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 in 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
|
|
|
14.6 |
|
Other
intangibles
|
|
|
2.2 |
|
|
|
$ |
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.
NOTE
11 - INVESTMENT
The
Company has a $4.0 million investment which represents a 10.5% fully diluted
interest in Ollie's Holdings, Inc. (Ollie's), a multi-price point discount
retailer located in the mid-Atlantic region. In addition, the SKM
Equity Fund III, L.P. (SKM Equity) and SKM Investment Fund (SKM Investment)
acquired a combined fully diluted interest in Ollie's of 53.1%. One
of the Company's current directors, Thomas Saunders and one former director,
John Megrue, are principal members of SKM Partners, L.L.C., which serves as the
general partner of SKM Equity. John Megrue is also a principal member
of Apax Partners, L.P., which serves as the general partner for SKM
Investment. John Megrue, did not stand for re-election to the
Company’s Board of Directors in June 2007. The $4.0 million
investment in Ollie's is accounted for under the cost method and is included in
"other assets" in the accompanying consolidated balance sheets.
NOTE
12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The
following table sets forth certain items from the Company's unaudited
consolidated statements of operations for each quarter of fiscal year 2007 and
2006. The unaudited information has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
report and includes all adjustments, consisting only of normal recurring
adjustments, which management considers necessary for a fair presentation of the
financial data shown. The operating results for any quarter are not
necessarily indicative of results for a full year or for any future
period.
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
(1)
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
975.0 |
|
|
$ |
971.2 |
|
|
$ |
997.8 |
|
|
$ |
1,298.6 |
|
Gross
profit
|
|
$ |
325.3 |
|
|
$ |
326.6 |
|
|
$ |
343.9 |
|
|
$ |
465.3 |
|
Operating
income
|
|
$ |
62.3 |
|
|
$ |
53.4 |
|
|
$ |
60.2 |
|
|
$ |
154.4 |
|
Net
income
|
|
$ |
38.1 |
|
|
$ |
32.6 |
|
|
$ |
35.9 |
|
|
$ |
94.7 |
|
Diluted
net income per share
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
0.38 |
|
|
$ |
1.04 |
|
Stores
open at end of quarter
|
|
|
3,280 |
|
|
|
3,334 |
|
|
|
3,401 |
|
|
|
3,411 |
|
Comparable
store net sales change
|
|
|
5.8 |
% |
|
|
4.4 |
% |
|
|
1.9 |
% |
|
|
(0.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
856.5 |
|
|
$ |
883.6 |
|
|
$ |
910.4 |
|
|
$ |
1,318.9 |
|
Gross
profit
|
|
$ |
286.1 |
|
|
$ |
293.3 |
|
|
$ |
307.5 |
|
|
$ |
470.3 |
|
Operating
income
|
|
$ |
53.5 |
|
|
$ |
48.2 |
|
|
$ |
53.5 |
|
|
$ |
155.6 |
|
Net
income
|
|
$ |
32.9 |
|
|
$ |
29.0 |
|
|
$ |
32.5 |
|
|
$ |
97.6 |
|
Diluted
net income per share
|
|
$ |
0.31 |
|
|
$ |
0.28 |
|
|
$ |
0.32 |
|
|
$ |
0.96 |
|
Stores
open at end of quarter
|
|
|
3,119 |
|
|
|
3,156 |
|
|
|
3,192 |
|
|
|
3,219 |
|
Comparable
store net sales change
|
|
|
4.0 |
% |
|
|
4.2 |
% |
|
|
4.0 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Easter was observed on April 8, 2007 and April 16, 2006
|
|
|
|
|
|
|
|
|
|
(2)
Fiscal 2007 contains 13 weeks ended February 2, 2008 while
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 contains 14 weeks ended February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item
9A. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required
to apply our judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Our
management has carried out, with the participation of the Company’s Chief
Executive Officer and Principal Financial Officer, an evaluation of the
effectiveness of the Company’s disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Exchange Act. Based upon this evaluation,
our chief executive officer and our principal financial officer concluded that,
as of February 2, 2008, the Company’s disclosure controls and procedures are
effective to provide reasonable assurance that material information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). The Company’s management conducted an assessment of the
Company’s internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control-Integrated Framework. Based on this assessment, the
Company’s management has concluded that, as of February 2, 2008, the Company’s
internal control over financial reporting is effective. The Company’s
independent registered public accounting firm, KPMG LLP, has audited the
Company’s consolidated financial statements and has issued an attestation report
on the effectiveness of the Company’s internal control over financial
reporting. Their report appears below.
Changes
in internal controls
There
were no changes in our internal controls over financial reporting that occurred
during our most recently completed fiscal quarter that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Dollar
Tree, Inc. (formerly Dollar Tree Stores, Inc.):
We have
audited Dollar Tree, Inc.’s (formerly Dollar Tree Stores, Inc.) internal control
over financial reporting as of February 2, 2008, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Dollar Tree
Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Dollar Tree, Inc. (formerly Dollar Tree Stores, Inc.) maintained, in
all material respects, effective internal control over financial reporting as of
February 2, 2008, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Dollar Tree,
Inc. (formerly Dollar Tree Stores, Inc.) and subsidiaries as of February 2, 2008
and February 3, 2007, and the related consolidated statements of operations,
shareholders’ equity and comprehensive income, and cash flows for each of the
fiscal years in the three-year period ended February 2, 2008, and our report
dated April 1, 2008 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Norfolk,
Virginia
April 1,
2008
Item
9B. OTHER INFORMATION
None.
PART
III
Item
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information concerning our Directors and Executive Officers required by this
Item is incorporated by reference in Dollar Tree, Inc.'s Proxy Statement
relating to our Annual Meeting of Shareholders to be held on June 19, 2008,
under the caption "Election of Directors."
Information
set forth in the Proxy Statement under the caption "Compliance with Section
16(a) of the Securities and Exchange Act of 1934," with respect to director and
executive officer compliance with Section 16(a), is incorporated herein by
reference.
The
information concerning our code of ethics required by this Item is incorporated
by reference to Dollar Tree, Inc.'s Proxy Statement relating to our Annual
Meeting of Shareholders to be held on June 19, 2008, under the caption "Code of
Business Conduct (Code of Ethics)."
Item
11. EXECUTIVE COMPENSATION
Information
set forth in the Proxy Statement under the caption "Compensation of Executive
Officers," with respect to executive compensation, is incorporated herein by
reference.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information
set forth in the Proxy Statement under the caption "Ownership of Common Stock,"
with respect to security ownership of certain beneficial owners and management,
is incorporated herein by reference.
Item
13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information
set forth in the Proxy Statement under the caption "Certain Relationships,
Related Transactions and Director Independence," is incorporated herein by
reference.
Item
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
set forth in the Proxy Statement under the caption "Principal Accounting Fees
and Services," is incorporated herein by reference.
PART
IV
Item
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
Documents
filed as part of this
report:
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1.
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Financial
Statements. Reference is made to the Index to the Consolidated
Financial Statements set forth under Part II, Item 8, on Page 31 of this
Form 10-K.
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2.
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Financial
Statement Schedules. All schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, are not
applicable, or the information is included in the Consolidated Financial
Statements, and therefore have been omitted.
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3.
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Exhibits. The
exhibits listed on the accompanying Index to Exhibits, on page 61 of this
Form 10-K, are filed as part of, or incorporated by reference into, this
report.
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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.
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DOLLAR
TREE, INC.
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DATE:
April 1, 2008
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By: /s/ Bob
Sasser
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Bob Sasser
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President, Chief Executive
Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
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Title
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Date
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/s/ Macon F. Brock,
Jr.
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Macon
F. Brock, Jr.
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Chairman;
Director
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April
1, 2008
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/s/ Bob
Sasser
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Bob
Sasser
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Director,
President and
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April
1, 2008
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Chief
Executive Officer
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(principal
executive officer)
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/s/ Thomas A.
Saunders, III
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Thomas
A. Saunders, III
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Lead
Director
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April
1, 2008
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/s/ J. Douglas
Perry
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J.
Douglas Perry
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Chairman
Emeritus; Director
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April
1, 2008
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/s/ Arnold S.
Barron
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Arnold
S. Barron
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Director
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April
1, 2008
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/s/ Mary Anne
Citrino
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Mary
Anne Citrino
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Director
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April
1, 2008
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/s/ H. Ray
Compton
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H.
Ray Compton
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Director
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April
1, 2008
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/s/ Richard G.
Lesser
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Richard
G. Lesser
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Director
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April
1, 2008
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/s/ Lemuel E.
Lewis
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Lemuel
E. Lewis
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Director
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April
1, 2008
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/s/ Kathleen E.
Mallas
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Kathleen
E. Mallas
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Vice
President, Controller
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April
1, 2008
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(principal
financial and
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accounting
officer)
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/s/ Eileen R.
Scott
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Eileen
R. Scott
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Director
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April
1, 2008
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/s/ Thomas E.
Whiddon
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Thomas
E. Whiddon
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Director
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April
1, 2008
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/s/ Alan L.
Wurtzel
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Alan
L. Wurtzel
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Director
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April
1, 2008
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/s/ Dr. Carl P.
Zeithaml
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Dr.
Carl P. Zeithaml
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Director
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April
1, 2008
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Index to
Exhibits
3. Articles and
Bylaws
3.1
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Articles
of Incorporation of Dollar Tree, Inc. (Exhibit 3.1 to the Company’s
February 27, 2008 Current Report on Form 8-K, incorporated herein by this
reference)
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3.2
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Bylaws
of Dollar Tree, Inc. (Exhibit 3.2 to the Company’s February 27, 2008
Current Report on Form 8-K, incorporated herein by this
reference)
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10. Material
Contracts
10.1
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Third
Amendment to the Company's 2003 Non-Employee Director Stock Option Plan
and the Sixth Amendment to the Company's Stock Incentive Plan (filed
herewith)
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10.2
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New
policy for director compensation (as described in Item 1.01 of
the Company's January 16, 2008 Current Report on Form 8-K, incorporated
herein by this reference)
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10.3
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Salary
and bonus arrangements for the Company’s executive officers for fiscal
2007 (as described in Item 1.01 of the Company’s March 14, 2007 Current
Report on Form 8-K, incorporated herein by this
reference)
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10.4
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Second
Amendment to the Company's 2004 Executive Officer Equity Plan (Exhibit
10.1 to the Company’s January 16, 2008 Current Report on Form 8-K,
incorporated herein by this reference)
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10.5
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Second
Amendment to the Company's 2003 Equity Incentive Plan (Exhibit 10.2
to the Company’s January 16, 2008 Current Report on Form 8-K, incorporated
herein by this reference)
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10.6
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Second
Amendment to the Company's 2003 Director Deferred Compensation Plan
(Exhibit 10.3 to the Company’s January 16, 2008 Current Report on Form
8-K, incorporated herein by this reference)
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10.7
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Fourth
Amendment to the Company's Stock Incentive Plan (Exhibit 10.4 to the
Company’s January 16, 2008 Current Report on Form 8-K, incorporated herein
by this reference)
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10.8
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Amendments
to the Company's Stock Plans (Exhibit 10.5 to the Company’s January
16, 2008 Current Report on Form 8-K, incorporated herein by this
reference)
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10.9
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Termination
of Change in Control Retention Agreement with Kent A. Kleeberger, Chief
Financial Officer (as described in Item 1.02 of the Company’s October 16,
2007 Report on Form 8-K, incorporated herein by this
reference)
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10.10
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Accelerated
Share Repurchase Program Collared Master Confirmation dated August 30,
2007 (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
fiscal quarter ended August 4, 2007, incorporated herein by this
reference)
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10.11
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Accelerated
Share Repurchase Program Collared Supplemental Confirmation dated August
30, 2007 (Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended August 4, 2007, incorporated herein by this
reference)
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10.12
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Post-Retirement
Benefit Agreement Between the Company and H. Ray Compton dated June 21,
2007 (Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
fiscal quarter ended August 4, 2007, incorporated herein by this
reference)
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10.13
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March
29, 2007 Accelerated Share Repurchase Program (as described in Item 1.01
of the Company’s March 29, 2007 Report on Form 8-K, incorporated herein by
this reference)
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10.14
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Change
in Control Retention Agreements (Exhibit 10.1 to the Company’s March 14,
2007 Report on Form 8-K, incorporated herein by this
reference)
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21. Subsidiaries of the
Registrant
23. Consents of Experts and
Counsel
23.1
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Consent
of Independent Registered Public Accounting
Firm
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31.
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Certifications
required under Section 302 of the Sarbanes-Oxley
Act
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31.1
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Certification
required under Section 302 of the Sarbanes-Oxley Act of Chief Executive
Officer
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31.2
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Certification
required under Section 302 of the Sarbanes-Oxley Act of Principal
Financial Officer
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32.
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Statements under
Section 906 of the Sarbanes-Oxley
Act
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32.1
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Statement
under Section 906 of the Sarbanes-Oxley Act of Chief Executive
Officer
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32.2
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Statement
under Section 906 of the Sarbanes-Oxley Act of Principal Financial
Officer
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