FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
( ) Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes (X) No ( )
As of August 8, 2001, there were 112,348,677 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000.............................. 3
Condensed Consolidated Income Statements
Three months and six months ended June 30, 2001 and 2000......... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000.......................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 19
Item 6. Exhibits and Reports on Form 8-K................................... 19
Signatures....................................................... 20
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 90,672 $181,166
Merchandise inventories...................................................... 334,614 258,687
Deferred tax asset........................................................... 9,763 8,291
Prepaid expenses and other current assets.................................... 29,350 29,370
------- -------
Total current assets..................................................... 464,399 477,514
------- -------
Property and equipment, net....................................................... 250,001 211,632
Deferred tax asset................................................................ 2,061 1,566
Goodwill, net .................................................................... 39,367 40,376
Other assets, net (Notes 5 and 6)................................................. 16,446 15,771
------- -------
TOTAL ASSETS............................................................. $772,274 $746,859
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 94,692 $ 75,404
Income taxes payable......................................................... 10,661 23,448
Other current liabilities.................................................... 34,715 46,906
Current portion of long-term debt............................................ 25,000 25,000
Current installments of obligations under
capital leases........................................................... 3,676 3,547
------- -------
Total current liabilities................................................ 168,744 174,305
------- -------
Long-term debt, excluding current portion......................................... 12,000 18,000
Obligations under capital leases, excluding current
installments................................................................. 23,299 25,183
Other liabilities (Note 5)........................................................ 13,958 10,713
------- -------
Total liabilities........................................................ 218,001 228,201
------- -------
Shareholders' equity (Notes 5 and 7):
Common stock, par value $0.01. Authorized
300,000,000 shares, 112,206,662 shares
issued and outstanding at June 30, 2001
and 112,046,201 shares issued and
outstanding at December 31, 2000......................................... 1,122 1,121
Additional paid-in capital................................................... 159,742 156,780
Accumulated other comprehensive income....................................... 211 --
Retained earnings............................................................ 393,198 360,757
------- -------
Total shareholders' equity............................................... 554,273 518,658
------- -------
Contingencies and subsequent events (Note 8)...................................... -- --
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $772,274 $746,859
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales..................................................... $440,361 $384,503 $827,680 $711,614
Cost of sales ................................................ 283,274 246,458 539,132 459,996
Merger related costs.......................................... -- 1,100 -- 1,100
------- ------- ------- -------
Gross profit......................................... 157,087 136,945 288,548 250,518
------- ------- ------- -------
Selling, general and administrative expenses:
Operating expenses....................................... 108,854 87,697 210,545 169,358
Merger related expenses.................................. -- 3,266 -- 3,266
Depreciation and amortization............................ 12,988 9,556 24,819 18,249
------- ------- ------- -------
Total selling, general
and administrative expenses........................ 121,842 100,519 235,364 190,873
------- ------- ------- -------
Operating income..................................... 35,245 36,426 53,184 59,645
Other income (expense):
Interest income.......................................... 1,151 1,319 2,832 3,097
Interest expense......................................... (1,355) (1,937) (2,649) (4,215)
Other, net (Note 5)...................................... 197 -- (595) --
------- ------- ------- -------
Total other expense.................................. (7) (618) (412) (1,118)
------- ------- ------- -------
Income before income taxes........................... 35,238 35,808 52,772 58,527
Provision for income taxes.................................... 13,580 14,273 20,331 23,040
------- ------- ------- -------
Income before extraordinary item..................... 21,658 21,535 32,441 35,487
Loss on debt extinguishment, net of
tax benefit of $242........................................ -- 387 -- 387
------- ------- ------- -------
Net income........................................... 21,658 21,148 32,441 35,100
Less: Preferred stock dividends and
accretion.................................................. -- 337 -- 1,413
------- ------- ------- -------
Net income available to
common shareholders................................ $ 21,658 $ 20,811 $ 32,441 $ 33,687
======= ======= ======= =======
Basic net income per common share (Note 4):
Income before extraordinary item......................... $ 0.19 $ 0.21 $ 0.29 $ 0.34
Net income............................................... 0.19 0.20 0.29 0.34
Diluted net income per common share (Note 4):
Income before extraordinary item......................... $ 0.19 $ 0.19 $ 0.29 $ 0.31
Net income............................................... 0.19 0.19 0.29 0.31
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income................................................................... $ 32,441 $ 35,100
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization............................................ 24,819 18,249
Loss on disposal of property and equipment............................... 862 467
Extraordinary loss on early extinguishment of debt....................... -- 629
Provision for deferred income taxes...................................... (2,011) (286)
Tax benefit of stock option exercises.................................... 575 8,548
Other non-cash adjustments to net income................................. (458) (283)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories................................................ (75,927) (91,679)
Prepaid expenses and other current assets.............................. 20 (1,217)
Other assets, net ..................................................... (545) 579
Accounts payable....................................................... 19,288 5,096
Income taxes payable................................................... (12,787) (24,425)
Other current liabilities.............................................. (12,012) (10,679)
Other liabilities...................................................... 3,646 852
------- -------
Net cash used in operating activities............................... (22,089) (59,049)
------- -------
Cash flows from investing activities:
Capital expenditures ........................................................ (62,833) (44,532)
Proceeds from sale of property and equipment................................. 34 142
------- -------
Net cash used in investing activities............................... (62,799) (44,390)
------- -------
Cash flows from financing activities:
Proceeds from revolving credit facilities.................................... -- 7,000
Repayment of long-term debt and facility fees................................ (6,239) (27,683)
Repayment of revolving credit facilities..................................... -- (13,500)
Principal payments under capital lease obligations........................... (1,755) (1,567)
Proceeds from stock issued pursuant to
stock-based compensation plans............................................. 2,388 13,019
------- -------
Net cash used in financing activities............................... (5,606) (22,731)
------- -------
Net decrease in cash and cash equivalents......................................... (90,494) (126,170)
Cash and cash equivalents at beginning of period.................................. 181,166 181,587
------- -------
Cash and cash equivalents at end of period........................................ $ 90,672 $ 55,417
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest................................................................. 2,723 4,455
Income taxes............................................................. 34,526 39,098
Non-cash investing activities:
Purchase of equipment under capital lease obligations.................... -- 68
See accompanying Notes to Condensed Consolidated Financial Statements
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at June 30, 2001, and for
the three- and six-month periods then ended, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 2000, contained in the
Company's Annual Report on Form 10-K filed March 30, 2001. The results of
operations for the three- and six-month periods ended June 30, 2001 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 2001.
Certain 2000 amounts have been reclassified for comparability with the 2001
financial statement presentation.
2. REVOLVING CREDIT FACILITY AND LETTERS OF CREDIT
Effective March 12, 2001, the Company entered into a Revolving Credit
Facility with its banks (Revolver Agreement). The Revolver Agreement provides
for, among other things: (1) a $50.0 million revolving line of credit, bearing
interest at the agent bank's prime interest rate or LIBOR, plus a spread, at the
option of the Company; (2) an annual facilities fee, calculated as a percentage,
as defined, of the amount available under the line of credit; and (3) an annual
administrative fee payable quarterly. The Revolver 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 Revolver Agreement matures on March 11, 2002. At
June 30, 2001, no amount was outstanding under the Revolving Credit Facility.
Effective March 12, 2001, the Company entered into a Letter of Credit
Reimbursement and Security Agreement that terminates on March 11, 2002. The
agreement provides $125.0 million for letters of credit, which are generally
issued in relation to routine purchases of imported merchandise. At June 30,
2001, $92.8 million was committed to letters of credit.
The Company's $135.0 million revolving credit facility, which included
provisions for letters of credit, was terminated concurrent with entering into
the new facilities discussed above.
3. OPERATING LEASE AGREEMENT
Effective March 12, 2001, the Company entered into an operating lease
facility (Lease Facility) with its banks. The Lease Facility provides for, among
other things: (1) a $165.0 million operating lease facility, bearing interest at
the agent bank's prime interest rate or LIBOR, plus a spread, at the option of
the Company; (2) an annual facilities fee, calculated as a percentage of the
amount available under the facility; and (3) an annual administrative fee
payable quarterly. The Lease Facility, among other things, requires the
6
maintenance of certain specified financial ratios, restricts the payment of
certain distributions and prohibits the incurrence of certain new indebtedness.
Approximately $93.0 million is committed to the Stockton, Savannah and Briar
Creek distribution centers. In addition, approximately $20.0 million is
committed for expansion of the Stockton distribution center. This facility
replaced the operating lease facilities for the Stockton, Savannah and Briar
Creek distribution centers and expires in March 2006.
Under this type of agreement, the lessor purchases the property, pays for
the construction costs and subsequently leases the facility to the Company. The
lease provides for a residual value guarantee and includes a purchase option
based on the outstanding property costs plus any unpaid interest and rents under
the lease agreement. Each reporting period, the Company estimates its liability
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term.
4. NET INCOME PER COMMON SHARE
The following table sets forth the calculation of basic and diluted income
before extraordinary item per common share:
Three months ended Six months ended
June 30, June 30,
------------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except per share data)
Basic income before extraordinary item per common share:
Income before extraordinary item......................... $ 21,658 $ 21,535 $ 32,441 $ 35,487
Less: Preferred stock dividends and
accretion ............................................ -- 337 -- 1,413
------- ------- ------- -------
Income before extraordinary item
available to common shareholders...................... 21,658 21,198 32,441 34,074
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 112,182 101,615 112,140 100,323
======= ======= ======= =======
Basic income before
extraordinary item per common
share.......................................... $ 0.19 $ 0.21 $ 0.29 $ 0.34
======= ======= ======= =======
Diluted income before extraordinary item per common share:
Income before extraordinary
item available to common
shareholders.......................................... $ 21,658 $ 21,198 $ 32,441 $ 34,074
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 112,182 101,615 112,140 100,323
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)............................ 670 10,133 668 9,874
------- ------- ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................. 112,852 111,748 112,808 110,197
======= ======= ======= =======
Diluted income before
extraordinary item per common
share.......................................... $ 0.19 $ 0.19 $ 0.29 $ 0.31
======= ======= ======= =======
7
At June 30, 2001, 790,539 stock options are not included in the calculation of
the weighted average number of common shares and dilutive potential common
shares outstanding because their effect would be anti-dilutive.
On March 20, 2001, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,403,000 shares of the
Company's common stock.
5. ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement, as amended by SFAS No. 138, establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The Company's interest rate swaps in effect at January 1, 2001 did not qualify
for hedge accounting pursuant to the provisions of SFAS No. 133. As a result,
the interest rate swaps were recorded at their fair values in the consolidated
balance sheet on January 1, 2001 as a component of "accumulated other
comprehensive income" (see Note 7). The $595,000 net decrease in their fair
values during the first six months of 2001 was recorded currently in earnings as
a component of "other, net."
6. DERIVATIVE FINANCIAL INSTRUMENTS
On April 12, 2001, the Company entered into a $25.0 million interest rate
swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of its $165.0 million operating lease facility. The
swap creates the economic equivalent of a fixed rate lease by converting the
variable interest rate to a fixed rate. Under this agreement, the Company pays
interest to a financial institution at a fixed rate of 5.43%. In exchange, the
financial institution pays the Company at a variable interest rate, which
approximates the floating rate on the lease agreement, excluding the credit
spread. The interest rate on the swap is subject to adjustment monthly
consistent with the interest rate adjustment on the operating lease facility.
The swap is effective through March 2006. This interest rate swap qualifies for
hedge accounting treatment in accordance with SFAS No. 133. Accordingly, changes
in the fair value of the interest rate swap will be reported in the consolidated
balance sheets as a component of "accumulated other comprehensive income." These
amounts will be subsequently reclassified into rent expense as a yield
adjustment in the period in which the related interest on the variable rate
obligations affects earnings.
8
7. COMPREHENSIVE INCOME
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands) (In thousands)
Net income........................................ $ 21,658 $ 21,148 $ 32,441 $ 35,100
Cumulative effect of change
in accounting for derivative
financial instruments(net of
$44 tax expense)............................... -- -- 70 --
Fair value adjustment - derivative
hedging instruments............................. 133 -- 133 --
Other comprehensive income........................ 4 -- 8 --
------ ------ ------ ------
Total comprehensive income..................... $ 21,795 $ 21,148 $ 32,652 $ 35,100
====== ====== ====== ======
The cumulative effect recorded in accumulated other comprehensive income
is being amortized over the remaining lives of the related interest rate swaps
and is included in "other comprehensive income" above.
8. SUBSEQUENT EVENT
On July 19, 2001, the Company was sued by a salaried California store
manager who alleges that he should have been classified as a non-exempt
employee and, therefore, should have received overtime compensation. The suit
also requests that the California state court certify the case as a class action
on behalf of the management employees in all of the Company's California stores.
The Company will vigorously defend itself in this matter. At this stage of the
litigation, it is too early for the Company to predict its ultimate liability
related to these allegations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as believe, anticipate,
expect, intend, plan or estimate. For example, our forward-looking statements
include statements regarding:
o comparable store net sales in future periods, including the effect on
sales at existing stores from opening and expanding stores;
o our growth plans, including our plans to add, expand or relocate stores;
9
o the timing and potential costs associated with moving to our new Briar
Creek distribution center and our move from the Philadelphia
distribution center;
o a possible increase in shrink resulting from an increase in the
percentage of larger stores that we operate;
o the possible effect of inflation and other economic changes on our future
costs and profitability; and
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements.
These forward-looking statements are subject to numerous risks and
uncertainties that may affect us including:
o adverse weather and economic conditions, such as consumer confidence;
o possible difficulties in meeting our sales and other expansion goals and
anticipated comparable store net sales results, which may result in loss
of leverage of increasing selling, general and administrative expenses;
o the difficulties and uncertainties in adding and operating larger stores,
with which we have less experience;
o the seasonality of our sales and the importance of our fourth quarter
operating results;
o increases in the cost of or disruption of the flow of our imported goods,
especially from China;
o the difficulties relating to our aggressive growth plans, including
opening stores on a timely basis and the impact of new and expanded
stores on sales at our existing stores nearby;
o possible delays, costs and other difficulties in opening our Briar Creek
distribution center;
o possible increases in merchandise costs, shipping rates, freight costs,
fuel costs, wage levels, inflation, competition and other adverse
economic factors; and
o the capacity and performance of our distribution system and our ability
to expand its capacity in time to support our sales growth.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections in our Annual Report on Form 10-K filed
March 30, 2001. Also, carefully review "Risk Factors" in our most recent
prospectuses filed November 15, 2000 and August 3, 2000.
10
In light of these risks, uncertainties and assumptions, the future events,
developments or results described by our forward-looking statements in this
document could turn out to be materially different from those we discuss or
imply. We have no obligation to publicly update or revise our forward-looking
statements after the date of this quarterly report and you should not expect us
to do so.
Results of Operations
The Three Months Ended June 30, 2001 Compared To The Three Months Ended
June 30, 2000
Net Sales. Net sales increased 14.5% in the second quarter of 2001 compared
to the same period in 2000. The $55.9 million increase in net sales resulted
from sales at stores that are not included in our comparable store net sales
calculation partially offset by a 2.7% decrease in our comparable store net
sales.
We believe our comparable store net sales decreased for the following
reasons:
o The Easter holiday shifted to one week earlier in the second quarter
in 2001 as compared to 2000, decreasing the amount of Easter sales
in the second quarter of 2001 compared to 2000. We experienced a 14.3%
comparable store net sales increase in the second quarter of 2000.
o Customer traffic was down slightly throughout the quarter.
We include expanded and relocated stores in the calculation of our
comparable store net sales. Sales at these expanded and relocated stores
positively affect our reported comparable store net sales results.
The following table summarizes our store openings and closings and our
relocations and expansions for the second quarters of 2001 and 2000:
Average Square
Gross Footage
Total Square Relocations Increase
Store Feet Per Store and Since
Period Openings New Store Closings Expansions 3/31
------ -------- --------- -------- ---------- ----
Second
Quarter 2001 89 9,700 7 22 9.1%
Second
Quarter 2000 73 8,100 4 31 8.8%
At June 30, 2001, we operate 1,863 stores with 11.5 million total gross
square feet. Approximately 526, or 28.2%, of our stores at June 30, 2001
are at least 7,000 gross square feet.
We expect to increase our total gross square footage approximately 27% to
29% in 2001. Our management anticipates that net sales growth during the next
twelve months will come mostly from square footage growth related to new store
openings and expansion of existing stores. We believe our comparable store net
sales may decrease by up to 3% in the third quarter and we anticipate an
increase of approximately 2% in the fourth quarter.
11
Gross Profit. Our gross profit as a percentage of sales is called our gross
profit margin. Excluding merger related costs in 2000, our gross profit margin
decreased to 35.7% in the second quarter of 2001 compared to 35.9% in the same
period in 2000. The decrease in gross profit margin for the quarter is primarily
due to:
o inventory shrink primarily related to continuing challenges in operating
our Philadelphia distribution network;
o loss of leverage on occupancy costs; and
o markdowns primarily resulting from special promotions in select stores.
The above decreases in gross profit margin were partially offset by
improved merchandise costs, which include freight costs. The improved
merchandise costs are primarily the result of improved pricing from vendors and
selling a higher percentage of import merchandise compared to last year. In
addition, we terminated a purchase agreement previously entered into by Dollar
Express and recorded a $1.6 million gain. The gain related to the unamortized
portion of a payment received upon commencement of the contract.
We believe that our overall shrink may increase as a percentage of net
sales as we continue to open larger stores and they become a higher percentage
of our store base. We believe the increased shrink in our larger stores results
from the increased visibility of the store and from carrying a higher percentage
of needs-based consumable merchandise.
During the third quarter, we expect to buy more consumable products to meet
customer demand because of the lack of seasonal merchandise sales. In addition,
we expect to buy more consumable products to supply our increasing population of
larger stores. Consumable products are generally domestically produced and carry
a higher cost than our other domestic items.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased
19.7% in the second quarter of 2001 compared to the same period in 2000.
Excluding merger related expenses in 2000, selling, general and administrative
expenses, excluding depreciation and amortization, increased as a percentage of
net sales to 24.7% in the second quarter of 2001 compared to 22.8% in the second
quarter of 2000. The increase in selling, general and administrative expenses
resulted from:
o loss of leverage caused by the 2.7% decrease in comparable store net
sales; and
o an increase in payroll-related costs, including workers' compensation.
Depreciation and amortization increased to 2.9% as a percentage of net
sales for the three months ended June 30, 2001 compared to 2.5% in the same
period in 2000. The increase as a percentage of net sales is primarily due to
loss of leverage and increased depreciation expense associated with expanded
and relocated stores.
12
During the third quarter, we expect to incur approximately $1.0 million to
$2.0 million of expenses in connection with the move to our new Briar Creek
distribution facility. These estimated costs include the lease loss charge and
other expenses associated with the move to Briar Creek.
Operating Income. Due to the reasons discussed above, our operating income,
excluding merger related items in 2000, decreased as a percentage of net sales
to 8.0% in the second quarter of 2001 from 10.6% in the same period in 2000.
Interest Income/Expense. Interest income decreased $0.1 million in the
second quarter of 2001 compared to the second quarter of 2000. This decrease
resulted from lower levels of cash and cash equivalents throughout the three
months ended June 30, 2001 compared with the three months ended June 30, 2000.
In addition, we earned a lower rate on our investments because of the decrease
in interest rates compared to the comparable period in 2000. Interest expense
decreased to $1.4 million in the second quarter of 2001 from $1.9 million in the
second quarter of 2000. This decrease resulted primarily from the repayment of
approximately $34.5 million of debt during the second quarter of 2000, including
the amounts outstanding on our revolving credit facilities.
Income Taxes. Our effective tax rate decreased to 38.5% for the second
quarter of 2001 from 39.8% for the second quarter of 2000. Our tax rate was
higher in 2000 because of the non-deductible merger related expenses incurred in
the second quarter of 2000.
The Six Months Ended June 30, 2001 Compared To The Six Months Ended June
30, 2000
Net Sales. Net sales increased 16.3% for the first six months of 2001
compared to the same period in 2000. We attribute this $116.1 million increase
in net sales to sales at stores that are not included in our comparable store
net sales calculation partially offset by a 1.3% decrease in our comparable
store net sales in the first half of 2001.
We believe our comparable store net sales decreased during the first half
of 2001 because of:
o decreased traffic patterns throughout 2001 as compared to 2000 as a
result of the weaker U.S. economy during the first half of 2001; and
o the shift in the Easter holiday to one week earlier in April 2001,
which resulted in a shorter Easter selling season.
We include expanded and relocated stores in the calculation of our
comparable store net sales. Sales at these expanded and relocated stores
positively affect our reported comparable store net sales results.
13
The following table summarizes our store openings and closings and our
relocations and expansions for the second quarters of 2001 and 2000:
Average Square
Gross Footage
Total Square Relocations Increase
Store Feet Per Store and Since
Period Openings New Store Closings Expansions 12/31
------ -------- --------- -------- ---------- -----
Year-to-Date 2001 149 9,500 15 53 16.6%
Year-to-Date 2000 132 7,600 5 52 15.2%
Gross Profit. Excluding merger related costs in 2000, our year-to-date
gross profit margin decreased to 34.9% in 2001 compared to 35.4% in 2000. The
decrease in gross profit margin for the quarter is primarily due to:
o inventory shrink and temporary workforce inefficiencies caused by
continuing challenges in operating our Philadelphia distribution
network; and
o loss of leverage on occupancy costs.
The above decreases in gross profit margin were partially offset by
improved merchandise costs, which include freight costs. The improved
merchandise costs are primarily the result of improved pricing from vendors and
selling a higher percentage of import merchandise compared to last year.
Selling, General and Administrative Expenses. Excluding merger related
expenses in 2000, selling, general and administrative expenses, excluding
depreciation and amortization, increased as a percentage of net sales to 25.4%
in the first half of 2001 compared to 23.8% in the first half of 2000. The
increase in selling, general and administrative expenses resulted from:
o loss of leverage caused by the 1.3% decrease in comparable store net
sales; and
o an increase in workers' compensation expense.
In addition, certain expenses, such as store supplies and repairs and
maintenance costs, increased disproportionately with our growth rate primarily
as a result of opening larger stores.
Depreciation and amortization increased to 3.0% as a percentage of net
sales in 2001 compared to 2.6% in 2000. The increase as a percentage of net
sales is primarily due to loss of leverage and increased depreciation expense
associated with expanded and relocated stores.
Operating Income. Due to the reasons discussed above, excluding merger
related items in 2000, operating income decreased as a percentage of net sales
to 6.4% for the first six months of 2001 from 9.0% for the same period in 2000.
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Interest Income/Expense. Interest income decreased $0.3 million in the
first six months of 2001 compared to the first six months of 2000. This decrease
resulted from lower levels of cash and cash equivalents throughout the six
months ended June 30, 2001 compared with the same period in 2000. In addition,
we earned a lower rate on our investments because of the decrease in interest
rates compared to the comparable period in 2000. Interest expense decreased to
$2.6 million in the first half of 2001 from $4.2 million in the first half of
2000. This decrease resulted primarily from the repayment of approximately $34.5
million of debt during the second quarter of 2000, including the amounts
outstanding on our revolving credit facilities.
Income Taxes. Our effective tax rate decreased to 38.5% for the six months
ended June 30, 2001 from 39.4% for the six months ended June 30, 2000. Our tax
rate was higher in 2000 because of the non-deductible merger related expenses
incurred in the second quarter of 2000.
Liquidity and Capital Resources
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores are seasonal in
nature and typically reach their peak in the months of September and October.
Historically, we have satisfied our seasonal working capital requirements for
existing stores and funded our store opening and relocation and expansion
program from internally generated funds and borrowings under our credit
facilities.
The following table compares cash-related information for the six months
ended June 30, 2001 and 2000:
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
(in millions)
Net cash used in:
Operating activities.................. $(22.1) $(59.0)
Investing activities.................. (62.8) (44.4)
Financing activities.................. (5.6) (22.7)
The $36.9 million decrease in cash used in operating activities was
primarily due to a reduction in inventory purchases in 2001 caused by decreased
sales results and carry over of inventory from 2000. In addition, cash paid for
income taxes decreased primarily due to a reduction in estimated tax payments in
2001 compared to 2000.
Cash used in investing activities is generally expended to open new and
expand existing stores. The $18.4 million increase in capital expenditures for
the six months ended June 30, 2001 compared to the same period in 2000 was
primarily the result of:
o an increase in the number of stores opened and an increase in the
average size of those stores;
o investments made to improve our supply chain processes; and
o conversion of Dollar Express stores.
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The $17.1 million decrease in cash used in financing activities was
primarily the result of the following:
o We made net repayments of approximately $6.2 million in the first
half of 2001 compared to $34.2 million of repayments in the first
half of 2000 for Dollar Express's term loan and revolving credit
facility and the first principal payment on the senior notes.
o We received $10.6 million less cash pursuant to stock-based
compensation plans, which resulted from our decreased stock price
in the first half of 2001 compared to the first half of 2000.
At June 30, 2001, our borrowings under our senior notes and bonds were
$37.0 million and we had $50.0 million available through our bank facility. Of
the $125.0 million available under the Letter of Credit Reimbursement and
Security Agreement, approximately $92.8 million was committed to letters of
credit issued for routine purchases of imported merchandise.
Revolving Credit Facility and Letters of Credit
Effective March 12, 2001, we entered into a new revolving credit facility
with our banks, which provides for a $50.0 million unsecured revolving credit
facility to be used for working capital requirements. The facility bears
interest at the agent bank's prime interest rate or LIBOR plus a spread, at our
option. The facility, among other things, requires the maintenance of specified
ratios, restricts the payment of certain distributions and limits certain types
of debt we can incur. It terminates on March 11, 2002.
Also, effective March 12, 2001, we entered into a Letter of Credit
Reimbursement and Security Agreement that provides $125.0 million for letters of
credit, which are generally issued in relation to routine purchases of imported
merchandise. The agreement terminates on March 11, 2002.
Operating Leases
Effective March 12, 2001, we entered into an operating lease facility for
$165.0 million, of which approximately $93.0 million is committed to the
Stockton, Savannah and Briar Creek distribution centers. In addition,
approximately $20.0 million is committed for expansion of the Stockton
distribution center. This facility replaced the operating lease agreements for
our Stockton, Savannah and Briar Creek distribution centers. The termination
date of this operating lease facility is March 2006. As a result, the lease
expiration date for the Stockton, Savannah and Briar Creek distribution centers
is now March 2006. The lease facility, among other things, requires the
maintenance of certain specified financial ratios, restricts the payment of
certain distributions and limits certain types of debt we can incur.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001.
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SFAS No. 142, "Goodwill and Other Intangible Assets," establishes
accounting standards for intangible assets and goodwill and is effective January
1, 2002. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually in accordance with SFAS No. 142. SFAS No. 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." We will evaluate existing
goodwill for impairment upon adoption of SFAS No. 142 and will record any
transition impairment as a cumulative effect of a change in accounting principle
in the consolidated income statements. Because of the extensive effort needed to
comply with adopting SFAS No. 142, it is not possible to reasonably estimate the
impact of adopting this Statement on our financial statements at the date of
this report, including whether any transitional impairment losses will be
required to be recognized.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage our exposure
to interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes.
However, certain of our interest rate swaps do not qualify for hedge accounting
treatment under SFAS No. 133, as amended by SFAS No. 138, because they contain
provisions that "knockout" the swap when the variable interest rate exceeds a
predetermined rate.
Interest Rate Risk
On April 12, 2001, we entered into a $25.0 million interest rate swap
agreement to manage the risk associated with interest rate fluctuations on a
portion of our $165.0 million operating lease facility. The swap creates the
economic equivalent of a fixed rate lease by converting the variable interest
rate to a fixed rate. Under this agreement, we pay interest to a financial
institution at a fixed rate of 5.43%. In exchange, the financial institution
pays us at a variable interest rate, which approximates the floating rate on the
lease agreement, excluding the credit spread. The interest rate on the swap is
subject to adjustment monthly consistent with the interest rate adjustment on
the operating lease facility. The swap is effective through March 2006.
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The following table summarizes the financial terms of our interest rate
swap agreements and their fair values at June 30, 2001:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
---------- -------- ----- ---- ---------- ----------
$19.0
million LIBOR 4.88% 7.75% 4/1/09 $ 78,000
interest rate swap
$10.0
million LIBOR 6.45% 7.41% 6/2/04 ($425,000)
interest rate swap
$5.0
million LIBOR 5.83% 7.41% 6/2/04 ($134,000)
interest rate swap
$25.0
million LIBOR 5.43% N/A 3/12/06 $133,000
interest rate swap
Management cannot predict the changes in fair value of our interest rate swaps.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the six months ended June 30, 2001.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment related matters;
o product safety matters, including product recalls by the Consumer
Products Safety Commission and personal injury claims; and
o the infringement of the intellectual property rights of others.
We do not believe that any of these matters are individually or in the aggregate
material to us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholders held on May 24, 2001, the following
people were re-elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
H. Ray Compton 89,027,100 12,213,246
John F. Megrue 97,252,884 3,987,462
Alan L. Wurtzel 98,195,240 3,045,106
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As Class III directors, Mr. Compton, Mr. Megrue and Mr. Wurtzel will serve
until the Annual Meeting of Shareholders in 2004, or such time as successors are
elected and qualified. Macon F. Brock, Jr., Richard G. Lesser, J. Douglas Perry,
Thomas A. Saunders, III, and Frank Doczi continued as directors after the
meeting and no elections were held with respect to their offices.
Item 5. OTHER INFORMATION.
Grant of Options to Directors
On May 23, 2001, options to purchase 7,500 shares of common stock each were
granted to Messrs. Doczi, Wurtzel and Lesser as continuing outside directors,
under the terms of the Stock Incentive Plan. In addition, the Compensation
Committee of the Board of Directors awarded Mr. Perry 7,500 option shares in his
capacity as Chairman of the Board. These options are immediately exercisable and
have an exercise price of $24.75 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the second quarter of
2001:
1. Report on Form 8-K, filed April 26, 2001, included the earnings results
for the quarter ended March 31, 2001 and an outlook for the remainder
of 2001
2. Report on Form 8-K, filed May 29, 2001, included a press release
regarding the Annual Meeting of Shareholders held May 24, 2001
Also, in July 2001, we filed one Form 8-K.
1. Report on Form 8-K, filed July 26, 2001, included the earnings results
for the three months and six months ended June 30, 2001 and an outlook
for the remainder of 2001
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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.
DATE: August 13, 2001
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
--------------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and
accounting officer)
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