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DLTR > SEC Filings for DLTR > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for DOLLAR TREE INC


15-Mar-2013

Annual Report


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 2012, 2011
         and 2010;


        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 2012 and 2011 and what we expect them to be in 2013; 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, 2013, January 28, 2012 and January 29, 2011. In Management's Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal year 2012 compared to fiscal year 2011 and for fiscal year 2011 compared to fiscal year 2010. 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:

        In July 2012, we began construction on a new 1.0 million square foot
         distribution center in Windsor, Connecticut. We expect to begin shipping
         product from this building in 2013.


        On June 6, 2012, we entered into a five-year $750.0 million unsecured
         Credit Agreement (the Agreement). The Agreement provides for a $750.0
         million revolving line of credit, including up to $150.0 million in
         available letters of credit. The interest rate on the facility is based,
         at our option, on a LIBOR rate, plus a margin, or an alternate base
         rate, plus a margin. Our February 2008, $550.0 million Credit Agreement
         was terminated concurrent with entering into this Agreement.


        On October 7, 2011, our Board of Directors authorized the repurchase of
         an additional $1.5 billion of our common stock. At February 2, 2013, we
         had $859.8 million remaining under Board authorizations.


        On October 7, 2011, we completed a 410,000 square foot expansion of our
         distribution center in Savannah, Georgia. The Savannah distribution
         center is now a 1,014,000 square foot, fully automated facility.


        On November 15, 2010, we completed our acquisition of 86 Dollar Giant
         stores, located in the Canadian provinces of British Columbia, Ontario,
         Alberta and Saskatchewan and we have since opened stores in
         Manitoba. These stores offer a wide assortment of quality general
         merchandise, contemporary seasonal goods and everyday consumables, all
         priced at $1.25 (CAD) or less. This is our first expansion of retail
         operations outside of the United States.


        We assign cost to store inventories using the retail inventory method,
         determined on a weighted average cost basis. From our inception and
         through fiscal 2009, we used one inventory pool for this
         calculation. Because of our investments over the years in our retail
         technology systems, we were able to refine our estimate of inventory
         cost under the retail method and on January 31, 2010, the first day of
         fiscal 2010, we began using approximately 30 inventory pools in our
         retail inventory calculation. As a result of this change, we recorded a
         non-recurring, non-cash charge to gross profit and a corresponding
         reduction in inventory, at cost, of $26.3 million in the first quarter
         of 2010. This was a prospective change and did not have any effect on
         prior periods.


        On November 2, 2009, we purchased a new distribution center in San
         Bernardino, California. This new distribution center replaced our Salt
         Lake City, Utah leased facility whose lease ended in April 2010.

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, 2013, we operated 4,671 stores in 48 states and the District of Columbia, as well as the Canadian provinces of British Columbia, Ontario, Alberta, Saskatchewan and Manitoba, with 40.5 million selling square feet compared to 4,351 stores with 37.6 million selling square feet at January 28, 2012. During fiscal 2012, we opened 345 stores, expanded 87 stores and closed 25 stores, compared to 278 new stores opened, 91 stores expanded and 28 stores closed during fiscal 2011. In the current year we increased our selling square footage by 7.7%. Of the 345 stores opened in fiscal 2012, 25 were opened in January and five were expanded in January 2013. Excluding these stores, our selling square footage increased by 7.1%. Of the 2.9 million selling square foot increase in 2012, 0.3 million was added by expanding existing stores. The average size of our stores opened in 2012 was approximately 8,060 selling square feet (or about 9,900 gross square feet). For 2013, we continue to plan to open stores that are approximately 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet). We believe that this store size is our optimal size operationally and that this size also gives our customers an ideal shopping environment that invites them to shop longer and buy more. Fiscal 2012 ended on February 2, 2013 and included 53 weeks, commensurate with the retail calendar. The 53rd week in 2012 added approximately $125 million in sales. Fiscal 2011 and Fiscal 2010 which ended on January 28, 2012, and January 29, 2011, respectively, each included 52 weeks.
In fiscal 2012, comparable store net sales increased by 3.4%. This increase was based on the comparable 53 weeks for both years. The comparable store net sales increase was the result of a 2.8% increase in the number of transactions and a 0.6% increase in average ticket. We believe comparable store net sales continued to be positively affected by a number of our initiatives, as debit and credit card penetration continued to increase in 2012, and we continued the roll-out of frozen and refrigerated merchandise to more of our stores. At February 2, 2013 we had frozen and refrigerated merchandise in approximately 2,550 stores compared to approximately 2,220 stores at January 28, 2012. We believe that the addition of frozen and refrigerated product enables us to increase sales and earnings by increasing the number of shopping trips made by our customers. In addition, we accept food stamps (under the Supplemental Nutrition Assistance Program ("SNAP")) in approximately 4,200 qualified stores compared to 3,860 at the end of 2011.
With the pressures of the current economic environment, we have seen continued demand for basic, consumable products in 2012. As a result, we have continued to shift the mix of inventory carried in our stores to more consumer product merchandise which we believe increases the traffic in our stores and has helped to increase our sales even during the current economic downturn. While this shift in mix has impacted our merchandise costs we were able to offset that impact in the current year with decreased costs for merchandise in many of our categories.
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 five years.
We must continue to control our merchandise costs, inventory levels and our general and administrative expenses as increases in these line items could negatively impact our operating results.


Results of Operations
The following table expresses items from our consolidated statements of operations, as a percentage of net sales. On January 31, 2010, the first day of fiscal 2010, we began using approximately 30 inventory pools in our retail inventory calculation, rather than one inventory pool as we had used since our inception. As a result of this change, we recorded a non-recurring, non-cash charge to gross profit and a corresponding reduction in inventory, at cost, of $26.3 million in the first quarter of 2010.

                                                                   Year Ended
                                                February 2,      January 28,      January 29,
                                                   2013             2012             2011
Net sales                                             100.0  %         100.0  %         100.0  %
Cost of sales, excluding non-cash beginning
inventory adjustment                                   64.1  %          64.1  %          64.1  %
Non-cash beginning inventory adjustment                   -  %             -  %           0.4  %
Gross profit                                           35.9  %          35.9  %          35.5  %
Selling, general and administrative
expenses                                               23.5  %          24.1  %          24.8  %
Operating income                                       12.4  %          11.8  %          10.7  %
Interest expense,net                                      -                -  %          (0.1 )%
Other income, net                                      (0.8 )%             -  %             -
Income before income taxes                             13.2  %          11.8  %          10.7  %
Provision for income taxes                             (4.8 )%          (4.4 )%          (3.9 )%
Net income                                              8.4  %           7.4  %           6.8  %

Fiscal year ended February 2, 2013 compared to fiscal year ended January 28, 2012
Net Sales. Net sales increased 11.5%, or $764.0 million, in 2012 compared to 2011, resulting from sales in our new stores and the 53rd week in 2012, which accounted for approximately $125 million of the increase. Our sales increase was also impacted by a 3.4% 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 2, 2013 and January 28, 2012.

                             February 2, 2013    January 28, 2012
New stores                            345                 278
Expanded or relocated stores           87                  91
Closed stores                         (25 )               (28 )

Of the 345 new stores added in 2012, 25 stores were opened in January 2013. Of the 2.9 million selling square foot increase in 2012 approximately 0.3 million was added by expanding existing stores.
Gross profit margin was 35.9% in 2012 and 2011. Improvement in initial mark-up in many categories and occupancy and distribution cost leverage were offset by an increase in the mix of higher cost consumer product merchandise and higher freight costs in fiscal 2012 than in fiscal 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, as a percentage of net sales, decreased to 23.5% for 2012 compared to 24.1% for 2011. The decrease is primarily due to the following:
Payroll expenses decreased 25 basis points due to lower incentive compensation achievement.

Store operating costs decreased 15 basis points due to lower utility costs and reduced repairs and maintenance expenses.

Operating and corporate expenses decreased 15 basis points due to a favorable legal settlement and lower debit and credit fees.


Depreciation decreased 10 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year and sales in the 53rd week of 2012.

Operating Income. Operating income margin was 12.4% in 2012 compared to 11.8% in 2011. Due to the reasons noted above, operating income margin improved 60 basis points.
Other Income, net. Other income, net in 2012 includes a $60.8 million gain on the sale of our investment in Ollie's Holdings, Inc. Income Taxes. Our effective tax rate was 36.7% in 2012 compared to 37.4% in 2011. This decrease is the result of statute expirations and the settlement of state tax audits.
Fiscal year ended January 28, 2012 compared to fiscal year ended January 29, 2011
Net Sales. Net sales increased 12.7%, or $748.0 million, in 2011 compared to 2010, resulting from sales in our new stores and a 6.0% increase in comparable store net sales. 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 January 28, 2012 and January 29, 2011.

                             January 28, 2012    January 29, 2011
New stores                            278                 235
Acquired stores                         -                  86
Expanded or relocated stores           91                  95
Closed stores                         (28 )               (26 )

Of the 2.4 million selling square foot increase in 2011 approximately 0.3 million was added by expanding existing stores.
Gross profit margin was 35.9% in 2011 compared to 35.5% in 2010. Excluding the effect of the $26.3 million non-cash beginning inventory adjustment, gross profit margin remained at 35.9%. Improvement in initial mark-up in many categories and occupancy and distribution cost leverage were offset by an increase in the mix of higher cost consumer product merchandise and a smaller reduction in the shrink accrual rate in fiscal 2011 than in fiscal 2010. Selling, General and Administrative Expenses. Selling, general and administrative expenses, as a percentage of net sales, decreased to 24.1% for 2011 compared to 24.8% for 2010. The decrease is primarily due to the following:
Payroll expenses decreased 45 basis points due to leveraging associated with the increase in comparable store net sales in the current year, lower store hourly payroll and lower incentive compensation achievement.

Depreciation decreased 25 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year.

Operating Income. Operating income margin was 11.8% in 2011 compared to 10.7% in 2010. Excluding the $26.3 million non-cash adjustment to beginning inventory, operating income margin was 11.1% in 2010. Due to the reasons noted above, operating income margin excluding this charge, improved 70 basis points. Income Taxes. Our effective tax rate was 37.4% in 2011 and 36.9% in 2010. Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our distribution network and operate and expand 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-flow related information for the years ended February 2, 2013, January 28, 2012 and January 29, 2011:

                                                   Year Ended
                                   February 2,     January 28,     January 29,
(in millions)                         2013            2012            2011
Net cash provided by (used in):
Operating activities              $     677.7     $     686.5     $     518.7
Investing activities                   (261.3 )         (86.1 )        (374.1 )
Financing activities                   (303.4 )        (623.2 )        (404.3 )

Net cash provided by operating activities decreased $8.8 million in 2012 compared to 2011 due to an increase in cash used to purchase merchandise inventory and cash used for prepaid rent as a result of February 1st falling in the last week of the fiscal year partially offset by increased earnings before income taxes, depreciation and amortization in 2012 and increases in income taxes payable.
Net cash provided by operating activities increased $167.8 million in 2011 compared to 2010 due to increased earnings before income taxes, depreciation and amortization in 2011, a decrease in cash used to purchase merchandise inventories and an increase in other current liabilities due to increases in sales tax collected and accrued expenses.
Net cash used in investing activities increased $175.2 million in 2012 primarily due to the sale of $180.8 million of short-term investments in 2011 versus none in 2012 and a $62.1 million increase in capital expenditures in 2012 due to the higher number of stores opened compared to 2011 and the construction of our distribution center in Connecticut. The $62.3 million in proceeds from the sale of the investment in Ollie's Holdings, Inc. provided cash for investing activities in 2012.
Net cash used in investing activities decreased $288.0 million in 2011 compared with 2010 primarily due to an additional $170.0 million of proceeds from the sale of short-term investments with minimal purchases of short-term investments compared to $157.8 million of purchases in 2010. The proceeds were used to fund the share repurchases in 2011. In addition, in 2010 we used $49.4 million to acquire Dollar Giant. These increased sources of cash were partially offset by a $71.4 million increase in capital expenditures in 2011 due to funds for new store projects and the expansion of our distribution center in Savannah, Georgia.
In 2012, net cash used in financing activities decreased $319.8 million as a result of reduced share repurchases in 2012.
In 2011, net cash used in financing activities increased $218.9 million as a result of increased share repurchases in 2011 compared with 2010.
At February 2, 2013, our long-term borrowings were $271.3 million. We also have $110.0 million and $100.0 million Letter of Credit Reimbursement and Security Agreements, under which approximately $147.0 million were committed to letters of credit issued for routine purchases of imported merchandise at February 2, 2013.
In June 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement). The Agreement provides for a $750.0 million revolving line of credit, including up to $150.0 million in available letters of credit. The interest rate on the Agreement is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The Agreement also bears a facilities fee, calculated as a percentage, as defined, of the amount available under the line of credit, payable quarterly. 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 February 2008, $550.0 million Credit Agreement was terminated concurrent with entering into this Agreement. As of February 2, 2013, $250.0 million was outstanding under the $750.0 million revolving line of credit. We repurchased 8.1 million shares for $340.2 million in fiscal 2012. We repurchased 8.7 million shares for $645.9 million in fiscal 2011. We repurchased 9.3 million shares for $414.7 million in fiscal 2010. At February 2, 2013, we have $859.8 million remaining under Board authorization. Funding Requirements
Overview, Including Off-Balance Sheet Arrangements We expect our cash needs for opening new stores and expanding existing stores in fiscal 2013 to total approximately $200.6 million, which includes capital expenditures, initial inventory and pre-opening costs.


Our estimated capital expenditures for fiscal 2013 are between $320.0 and $330.0 million, including planned expenditures for our new and expanded stores, the addition of freezers and coolers to approximately 475 stores and approximately $61.2 million to expand our distribution center in Marietta, Oklahoma and complete construction on a new distribution center in Windsor, Connecticut. 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, 2013, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):

Contractual Obligations    Total       2013       2014       2015       2016       2017      Thereafter
Lease Financing
Operating lease
obligations             $ 2,149.1   $  493.8   $  408.8   $  376.4   $  293.3   $  207.6   $      369.2
Long-term Borrowings
Credit agreement            250.0          -          -          -                 250.0              -
Demand revenue bonds         14.3       14.3          -          -          -          -              -
Forgivable promissory
note                          7.0          -          -          -          -        0.2            6.8
Interest on long-term
borrowings                   12.6        2.8        2.8        2.8        2.8        0.9            0.5
Total obligations       $ 2,433.0   $  510.9   $  411.6   $  379.2   $  296.1   $  458.7   $      376.5


                                    Expiring in   Expiring in   Expiring in   Expiring in   Expiring in
      Commitments         Total        2013          2014          2015          2016          2017        Thereafter
Letters of credit and
surety bonds            $  177.5   $     177.5   $         -   $         -   $         -   $         -   $           -
Technology assets           10.8          10.8             -             -             -             -               -
Telecommunication
contracts                   26.9           7.5           7.2           5.5           5.2           1.5               -
Total commitments       $  215.2   $     195.8   $       7.2   $       5.5   $       5.2   $       1.5   $           -

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, 2013 for stores that were not yet open on February 2, 2013.
Long-term Borrowings
Credit Agreement. In June 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement). The Agreement provides for a $750.0 million revolving line of credit, including up to $150.0 million in available letters of credit. The interest rate on the facility is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The interest rate on the facility was 1.11% at February 2, 2013. 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 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. As of February 2, 2013, $250.0 million was outstanding under the $750.0 million revolving line of credit. Demand Revenue Bonds. 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, 2013, the balance outstanding on the bonds was $14.3 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 0.23% at February 2, 2013.
Forgivable Promissory Note. In 2012, we entered into a promissory note with the state of Connecticut under which the state loaned us $7.0 million in connection with the Company's acquisition, construction and installation of land, building, machinery and equipment for our distribution facility in Windsor, Connecticut. If certain performance targets are met, the loan and any accrued interest will be forgiven in fiscal 2017. If the performance targets are not met, the loan and accrued interest must be repaid beginning in fiscal 2017.


Interest on Long-term Borrowings. This amount represents interest payments on the Credit Agreement, Demand Revenue Bond and Forgivable Promissory Note using the interest rates for each at February 2, 2013. Commitments
Letters of Credit and Surety Bonds. We are a party to two Letter of Credit Reimbursement and Security Agreements, one which provides $110.0 million for letters of credit and one which provides $100.0 million for letters of credit. Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $147.0 million of purchases committed under these letters of credit at February 2, 2013.
We also have approximately $12.9 million of letters of credit outstanding for our self-insurance programs, $14.5 million of letters of credit outstanding for our Demand Revenue Bonds, and $3.1 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores.
Technology Assets. We have commitments totaling approximately $10.8 million to primarily purchase store technology assets for our stores during 2012. Telecommunication Contracts. We have contracted for telecommunication services with contracts expiring in 2017. The total amount of these commitments is approximately $26.9 million.
Derivative Financial Instruments
In 2012, we were party to fuel derivative contracts with third parties which included approximately 4.8 million gallons of diesel fuel, or approximately 35% . . .

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