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, Inc. and its direct and indirect subsidiaries on a consolidated basis.
Cautionary Note Regarding 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 can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding:
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The potential effect of general business or economic conditions, including inflation, consumer spending levels, rates of population, employment and job growth and/or losses in our markets, the cost of COVID-19 initiatives, changes in prevailing wage rates and our plans to address these changes, shipping and trucking rates, freight and other distribution costs, fuel costs and wage and benefit costs;
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The uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations, including uncertainties surrounding the physical and financial health of our customers, the ability of government assistance programs to individuals, households and businesses to support consumer spending, levels of foot traffic in our stores, changes in customer demand for our consumable and essential products as well as our discretionary products, possible disruptions in our supply chain or sources of supply, and whether we will have the governmental approvals, personnel and sources of supply to be able to keep our stores open;
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Our plans and expectations in response to the COVID-19 pandemic, including increased expenses for higher wages and bonuses paid to associates and the cost of personal protective equipment and additional cleaning supplies and protocols for the safety of our associates, and expected delays in new store openings;
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The impact of trade relations and the ongoing trade dispute between the United States and China, including the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative, some of which were suspended or reduced in January and February 2020, and other potential impediments to imports;
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Our growth plans, including our plans to add, renovate, re-banner, expand, remodel, relocate or close stores and any related costs or charges, our anticipated square footage increase, our leasing strategy for future expansion, and our ability to renew leases at existing store locations;
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The ability to retain key personnel and attract new personnel at Family Dollar and Dollar Tree and the performance of those personnel;
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Our anticipated sales, comparable store net sales, net sales growth, gross profit margin, costs of goods sold (including product mix), shrink rates, earnings and earnings growth, inventory levels, selling, general and administrative and other fixed costs, and our ability to leverage those costs;
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The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations, including the proceeding by the FDA;
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The effect of changes in labor laws, and the effect of the Fair Labor Standards Act as it relates to the qualification of our managers for exempt status, minimum wage and health care law;
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The average size and productivity of our stores, including those to be added in 2020 and beyond;
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The effect of our initiatives to renovate Family Dollar stores to the H2 store format and the performance of that format, the sales mix of lower margin consumable and higher margin discretionary merchandise in Dollar Tree and Family Dollar stores, including an increase in the number of stores with freezers and coolers, and the roll-out of adult beverages at Family Dollar and Snack Zone and Crafter’s Square at Dollar Tree, on our results of operations;
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The net sales per square foot, net sales and operating income of our stores;
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The benefits, results and effects of the Family Dollar acquisition and integration and the combined company’s plans, objectives, strategies and expectations (financial or otherwise), including synergies, the cost to achieve synergies, and the effect on earnings per share;
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The effect of changes in tax laws and rates and regulatory interpretations of such laws;
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Our seasonal sales patterns and customer demand including those relating to the important holiday selling seasons and party merchandise;
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The capabilities of our inventory supply chain technology and other systems;
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The reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China and domestic goods which are in higher demand as a result of the COVID-19 pandemic;
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The capacity, performance and cost of our distribution centers and distribution network (including shipping and transportation), including future automation, and our expectations regarding the construction of new distribution centers;
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Our expectations regarding compliance with debt covenants, our dividend policy and our stock repurchase program;
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Our cash needs, including our ability to fund our future capital expenditures, working capital requirements and repurchases of common stock under our repurchase program, and our ability to service our debt obligations, including our expected annual interest expense;
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Our expectations regarding competition, growth in our retail sector and our potential for long-term growth;
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Our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the Financial Accounting Standards Board;
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Our assessment of the impact on us of certain actions by activist shareholders and our potential responses to these actions;
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Management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes and uncertain tax positions; and
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Management’s estimates associated with our critical accounting policies, including inventory valuation, self-insurance liabilities and valuations for our goodwill and indefinite-lived intangible assets impairment analyses.
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A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and in this Quarterly Report on Form 10-Q.
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The COVID-19 pandemic is a serious threat to the health and economic wellbeing of our customers, our associates and our sources of supply, and the impact of the COVID-19 pandemic and the measures implemented to contain or mitigate the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.
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Our supply chain may be disrupted by changes in United States trade policy with China or as a result of the COVID-19 pandemic, and risks associated with our domestic and foreign suppliers, including tariffs or restrictions on trade or disruptions arising from the outbreak of the COVID-19 pandemic, could adversely affect our financial performance.
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Our profitability is vulnerable to cost increases, including increased costs associated with responding to the COVID-19 pandemic.
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We could continue to encounter higher costs and disruptions in our distribution network.
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The continuing integration of Family Dollar’s operations is not complete and may be more difficult, costly or time consuming than expected.
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Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.
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Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.
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Our profitability is affected by the mix of products we sell.
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We may stop selling or recall certain products for safety-related issues.
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We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems including because of a cyber-attack could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
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If we suffer a data breach and are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business reputation and adversely affect our results of operations or business.
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We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.
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Our business or the value of our common stock could be negatively affected as a result of actions by activist shareholders.
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Litigation and arbitration may adversely affect our business, financial condition and results of operations.
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Pressure from competitors may reduce our sales and profits.
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A downturn or changes in economic conditions, including those caused by the COVID-19 pandemic, could impact our sales or profitability.
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Changes in federal, state or local law, including regulations and interpretations or guidance thereunder, or our failure to adequately estimate the impact of such changes or comply with such laws, could increase our expenses, expose us to legal risks or otherwise adversely affect us.
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The price of our common stock is subject to market and other conditions and may be volatile.
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Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures.
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The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.
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Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.
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We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements.
We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events, or otherwise.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to 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. Furthermore, we have a policy against confirming projections, forecasts or opinions 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.
The Impact of COVID-19
The COVID-19 pandemic has affected, and likely will continue to affect, our financial condition and results of operations for the foreseeable future. As you review the Management’s Discussion and Analysis of Financial Condition and Results of Operations, please keep in mind the following.
As an essential business, our stores and distribution centers have remained open during the pandemic; however, our business trends and financial results are different than what we expected. We have experienced fewer customer visits and higher average ticket. The mix and profit margin of products being purchased by our customers has been different and has changed during the first quarter of 2020. As demand for essential goods, including cleaning supplies and sanitizer, household products, paper goods, food and over-the-counter medicine, increased to unprecedented levels, both our domestic suppliers and distribution centers were stressed to keep up with the demand. We expect this disruption with certain vendors and SKUs to continue into the summer. The effect of COVID-19-related stimulus
purchases for some other non-essential items may create additional disruptions. The balance of our product, including imports, continues to operate as we planned. including cleaning supplies and sanitizer, household products, paper goods, food and over-the-counter medicine.
We have hired more than 25,000 new associates since early March and we have implemented several changes to support our associates in adhering to Centers for Disease Control and Prevention (CDC) recommendations. We have:
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Activated our Business Response Team to meet daily to communicate, assess and address potential exposure throughout the organization;
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Provided personal protective equipment including masks, gloves and sanitizers for our store and distribution center associates;
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Deployed plexiglass sneeze guards for all registers at all stores;
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Equipped stores, distribution centers and the store support center with necessary supplies for enhanced cleaning protocol;
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Provided a $2 per hour wage premium for all store and distribution center hourly associates, excluding hourly-paid store managers;
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Provided a minimum guaranteed sales bonus of $500 for each store manager in March and a minimum guaranteed target bonus payout for April as well as bonuses for certain salaried associates in our field operations and distribution centers;
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Provided pay continuation for associates who test positive or who are Group 1 associates who have to self-quarantine;
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Created a “store” within each distribution center to allow our associates to shop for needed supplies at work;
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Eliminated all non-essential air travel;
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Utilized technology options for all large group meetings;
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Prohibited external visitors’ access to the store support center;
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Enabled the majority of our store support center teams to work remotely;
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Enabled contactless payments to our POS systems for our customers;
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Followed local municipality, county, and state guidelines and regulations needed to be open as an essential business;
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Encouraged safe social distancing protocols for our customers with signing, graphics and communications;
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Enabled health prescreening questionnaire for all store and distribution associates before entering work; and
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Established temperature check protocols for our associates at all distribution centers.
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We also made changes to reduce our exposure to potential short-term liquidity risk in the banking system, including preemptively drawing $750 million under our Revolving Credit Facility and suspending share repurchases under the remaining $800 million of Board authorization. We are in compliance with our debt covenants and, based on a continuation of current operating results, we expect to be in compliance for the remainder of fiscal 2020.
Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on our customers, suppliers and the broader economies in the locations that we operate as well as uncertainty around the future impact on our supply chain, it is challenging to predict our future operations and financial results. Following is a discussion of the impacts that we have seen and the factors which could influence our future performance.
Sales
During March, our Dollar Tree and Family Dollar stores began to experience a significant increase in customer demand and sales related to essential products and comparable store net sales increased significantly. However, beginning the last week of March and continuing into April during the peak of the Easter selling season, comparable store net sales at our Dollar Tree stores decreased. Beginning in mid-April, comparable store net sales at our Dollar Tree stores increased as the comparable Easter period from 2019 had passed. In the 13 weeks ended May 2, 2020, enterprise comparable store net sales increased 7.0% resulting from an increase in average ticket of 15.5%, partially offset by a decrease in traffic of 7.4%.
The future impact of COVID-19 on our customers is difficult to predict as the effectiveness of economic stabilization efforts is uncertain and government assistance payments may not provide enough funding to support current spending. In addition, we cannot predict the impact of the spread of COVID-19 on the health and well-being of our customers and associates.
The demand for essential supplies has increased and we are dependent on our suppliers to replenish the goods in our stores. Disruptions in our supply chain or sources of supply could adversely impact our sales.
Gross Profit
As noted, in the 13 weeks ended May 2, 2020, the demand for essential products, which typically sell at a lower margin than our discretionary products, increased significantly. In addition, Easter sales in our Dollar Tree segment were materially lower than expected resulting in higher merchandise cost, including freight, and higher markdowns to clear the unsold Easter product.
During April, demand for discretionary products increased in our Family Dollar segment. While the favorable mix change has continued into the second quarter of 2020, we cannot predict whether it will continue.
In the 13 weeks ended May 2, 2020, our distribution center payroll costs included $6.2 million of incremental wage premiums in recognition of the team’s extraordinary efforts. The incremental wage premium payments will continue for at least the first six weeks of the second quarter of 2020.
The trade dispute between the United States and China is ongoing and should additional tariffs or other sanctions be imposed on imported goods, our business or results of operations in fiscal 2020 could be adversely affected.
Selling, General and Administrative Expenses
In the 13 weeks ended May 2, 2020, we paid incremental wage premiums to our hourly store associates, minimum guaranteed bonuses to our store managers and other bonuses to certain field operations managers totaling $57.5 million. The incremental wage premium payments and minimum guaranteed store manager bonuses will continue for at least the first six weeks of the second quarter of 2020.
In addition, for the safety of our associates and customers, we installed plexiglass sneeze guards at all registers in our stores and incurred incremental costs for masks, gloves and cleaning supplies. These expenses totaled $8.9 million in the 13 weeks ended May 2, 2020.
Store Openings and Initiatives
During the first quarter of 2020, we opened 67 new Dollar Tree stores and 32 new Family Dollar stores; however, we have experienced construction-related delays due to challenges with the permitting process which has resulted in delays in our planned store openings. We now plan to open 325 Dollar Tree stores and 175 Family Dollar stores in fiscal 2020.
As a result of the complications inherent in operating our stores during the COVID-19 pandemic, we paused the roll-out of our Snack Zone layout to our Dollar Tree stores; however, we still plan to add this assortment to 300 additional Dollar Tree stores in fiscal 2020.
With the increase in customer activity in our Family Dollar stores and COVID-19-related travel restrictions, we paused the roll-out of our H2 stores during the first quarter of 2020. We now expect to renovate approximately 750 stores to this format in fiscal 2020. Also, as a result of permitting delays, we now expect to add adult beverage product to approximately 900 stores in fiscal 2020.
Overview
We are a leading operator of more than 15,300 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price of $1.00. Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores.
Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores or adding new stores through mergers or acquisitions. Second is the performance of stores once they are open. Sales vary at our existing stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the period in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand.
At May 2, 2020, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. A breakdown of store counts and square footage by segment for the 13 weeks ended May 2, 2020 and May 4, 2019 is as follows:
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13 Weeks Ended
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May 2, 2020
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May 4, 2019
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Dollar Tree
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Family Dollar
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Total
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Dollar Tree
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Family Dollar
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Total
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Store Count:
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Beginning
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7,505
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7,783
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15,288
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7,001
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8,236
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15,237
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New stores
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67
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32
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99
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65
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26
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91
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Re-bannered stores
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(3
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—
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(3
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)
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45
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(84
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(39
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Closings
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(7
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(7
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(14
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(9
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(16
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)
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(25
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)
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Ending
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7,562
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7,808
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15,370
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7,102
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8,162
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15,264
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Relocations
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15
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6
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21
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6
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5
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11
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Selling Square Feet (in millions):
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Beginning
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64.6
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56.7
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121.3
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60.3
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59.8
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120.1
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New stores
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0.6
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0.2
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0.8
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0.6
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0.2
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0.8
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Re-bannered stores
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—
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—
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—
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0.4
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(0.7
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)
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(0.3
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)
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Closings
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(0.1
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)
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—
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(0.1
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)
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(0.1
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)
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(0.1
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)
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(0.2
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)
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Relocations
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0.1
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—
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0.1
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—
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—
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—
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Ending
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65.2
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56.9
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122.1
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61.2
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59.2
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120.4
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Stores are included as re-banners when they close or open, respectively. Comparable store net sales for Dollar Tree may be negatively affected when a Family Dollar store is re-bannered near an existing Dollar Tree store.
The average size of stores opened during the 13 weeks ended May 2, 2020 was approximately 8,490 selling square feet for the Dollar Tree segment and 7,990 selling square feet for the Family Dollar segment. We believe that these size stores are in the ranges of our optimal sizes operationally and give our customers a shopping environment which invites them to shop longer, buy more and make return visits.
The percentage change in comparable store net sales on a constant currency basis for the 13 weeks ended May 2, 2020, as compared with the preceding year, is as follows:
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13 Weeks Ended May 2, 2020
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Sales Growth
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Change in
Customer Traffic
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Change in
Average Ticket
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Consolidated
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7.0
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%
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(7.4
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)%
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15.5
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%
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Dollar Tree Segment
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(0.9
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)%
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(11.7
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)%
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12.2
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%
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Family Dollar Segment
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15.5
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%
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(1.4
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)%
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17.1
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%
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Constant currency basis refers to the calculation excluding the impact of currency exchange rate fluctuations. We calculated the constant currency basis change by translating the current year quarter’s comparable store net sales in Canada using the prior year first quarter’s currency exchange rates. We believe that the constant currency basis provides a more accurate measure of comparable store net sales performance. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
Dollar Tree Initiatives
We believe comparable store net sales continue to be positively affected by a number of our Dollar Tree initiatives. We continued the roll-out of frozen and refrigerated merchandise to more of our Dollar Tree stores in the first quarter of 2020 and as of May 2, 2020, the Dollar Tree segment had frozen and refrigerated merchandise in approximately 6,210 stores compared to approximately 5,765 stores at May 4, 2019. Beginning in fiscal 2018, we rolled out a new layout to a number of our Dollar Tree stores, which we call our Snack Zone. This layout highlights our immediate consumption snack offerings in the front of the store near the checkout areas. As of May 2, 2020, we have Snack Zone in approximately 2,290 Dollar Tree stores. In fiscal 2019, we introduced our Crafter’s Square initiative in
more than 650 stores. This section includes a new expanded assortment of arts and crafts supplies. We have begun expanding this program and have rolled it out to more than 3,000 stores as of May 2, 2020. We plan to include Crafter’s Square in additional stores in the future. We believe these initiatives have and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers.
Family Dollar Initiatives
In fiscal 2019, we executed a store optimization program for our Family Dollar stores to improve performance. Included in that program was a roll-out of a new model for both new and renovated Family Dollar stores internally known as H2. This H2 model has significantly improved merchandise offerings, including approximately 20 Dollar Tree $1.00 merchandise sections and establishing a minimum number of freezer and cooler doors, throughout the store. H2 stores have higher customer traffic and provide an average comparable store net sales lift in excess of 10% in the first year following renovation. H2 stores perform well in a variety of locations and especially in locations where our Family Dollar stores have been most challenged in the past. As of May 2, 2020, we have approximately 1,700 H2 stores. We plan to renovate approximately 750 stores to the H2 format in fiscal 2020. In addition, we installed adult beverage product in approximately 80 stores in the first quarter of 2020 and plan to add it to approximately 800 more stores in 2020. We believe the addition of adult beverage to our assortment will drive traffic to our stores.
Results of Operations
Our results of operations as a percentage of net sales and period-over-period changes are discussed in the following section.
Net Sales
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13 Weeks Ended
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May 2,
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May 4,
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Percentage
Change
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(dollars in millions)
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2020
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2019
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Net sales
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$
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6,286.8
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$
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5,808.7
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8.2
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%
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Comparable store net sales change
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7.0
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%
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2.2
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%
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|
The increase in net sales in the 13 weeks ended May 2, 2020 was a result of a comparable store net sales increase in the Family Dollar segment and sales of $234.6 million at new stores. These sales increases were partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our Family Dollar segment store optimization program and a decrease in comparable store net sales in the Dollar Tree segment. Lower traffic resulting from the COVID-19 pandemic negatively affected Easter sales in the Dollar Tree segment.
Enterprise comparable store net sales increased 7.0% on a constant currency basis as a result of a 15.5% increase in average ticket and a 7.4% decrease in customer traffic. Comparable store net sales increased the same 7.0% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 15.5% in the Family Dollar segment and decreased 0.9% in the Dollar Tree segment. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
May 2,
|
|
May 4,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
Gross profit
|
|
$
|
1,794.9
|
|
|
$
|
1,727.2
|
|
|
3.9
|
%
|
Gross profit margin
|
|
28.5
|
%
|
|
29.7
|
%
|
|
(1.2
|
)%
|
The decrease in gross profit margin in the 13 weeks ended May 2, 2020 was a result of the following:
|
|
•
|
Merchandise cost, including freight, increased approximately 115 basis points resulting from higher sales of lower margin consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $23.0 million and higher freight costs, partially offset by improved initial mark-on.
|
|
|
•
|
Markdown costs increased approximately 25 basis points resulting primarily from the higher seasonal markdowns in the Dollar Tree segment due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic.
|
|
|
•
|
Distribution costs increased approximately 25 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a $2 per hour premium for all hours worked beginning March 8, 2020. Total distribution center COVID-19 related payroll expenses were approximately $6.2 million, or 10 basis points of this increase.
|
|
|
•
|
Occupancy costs decreased approximately 40 basis points as a result of the leverage from the increase in comparable store net sales.
|
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
May 2,
|
|
May 4,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
Selling, general and administrative
expenses
|
|
$
|
1,429.0
|
|
|
$
|
1,341.7
|
|
|
6.5
|
%
|
As a percentage of Net sales
|
|
22.7
|
%
|
|
23.1
|
%
|
|
(0.4
|
)%
|
The decrease in selling, general and administrative expenses, as a percentage of net sales, in the 13 weeks ended May 2, 2020 was a result of the following:
|
|
•
|
Operating and corporate expenses decreased approximately 35 basis points as a result of the leverage from the comparable store net sales increase in the Family Dollar segment and the following:
|
|
|
◦
|
Corporate costs decreased approximately 15 basis points resulting from the prior year including costs related to the consolidation of our store support centers and higher legal fees due to shareholder activism.
|
|
|
◦
|
Advertising costs decreased 10 basis points resulting from lower promotional advertising during the COVID-19 pandemic.
|
|
|
◦
|
Travel costs decreased approximately 10 basis points as a result of COVID-19 travel restrictions.
|
|
|
◦
|
Inventory service expense decreased approximately 5 basis points as a result of the postponement of inventories from March 15, 2020 through the end of the quarter due to the COVID-19 pandemic.
|
|
|
◦
|
Store supplies expense increased approximately 5 basis resulting primarily from the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.
|
|
|
•
|
Repairs and maintenance and utility costs decreased 30 basis points due to leverage from the comparable store net sales increase and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.
|
|
|
•
|
Payroll expenses increased approximately 25 basis points due to the following:
|
|
|
◦
|
Store hourly payroll increased approximately 55 basis points due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020, partially offset by the leverage from the increase in comparable store net sales in the Family Dollar segment. Total COVID-19-related pay was approximately $52.3 million or 85 basis points.
|
|
|
◦
|
Store sales bonus expenses increased approximately 10 basis points as a result of the higher comparable store net sales in the Family Dollar segment and approximately $3.5 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.
|
|
|
◦
|
Field management payroll decreased 15 basis points due to leverage from the comparable store net sales increase and the lower store count in the Family Dollar segment. We also paid $1.7 million of bonuses to certain field management associates related to the COVID-19 pandemic.
|
|
|
◦
|
Office payroll decreased approximately 10 basis points as a result of the store support center consolidation and other leadership changes made in the fourth quarter of fiscal 2019.
|
|
|
◦
|
Other payroll expenses decreased approximately 10 basis points resulting from lower temporary help expenses due to fewer H2 conversions in the current year as a result of the COVID-19 pandemic.
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
May 2,
|
|
May 4,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
Operating income
|
|
$
|
365.9
|
|
|
$
|
385.5
|
|
|
(5.1
|
)%
|
Operating income margin
|
|
5.8
|
%
|
|
6.6
|
%
|
|
(0.8
|
)%
|
Operating income margin decreased to 5.8% for the 13 weeks ended May 2, 2020 compared to 6.6% for the same period last year as operating income margin in the Dollar Tree segment declined 410 basis points. The decrease was partially offset by a 230 basis point increase in the Family Dollar segment operating income margin. Operating income in the 13 weeks ended May 2, 2020 includes approximately $73.2 million of COVID-19 related expenses.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
May 2,
|
|
May 4,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
Interest expense, net
|
|
$
|
40.2
|
|
|
$
|
41.4
|
|
|
(2.9
|
)%
|
Interest expense decreased $1.2 million resulting from lower average debt outstanding in the current year quarter compared to the same quarter last year partially offset by lower interest income in the current year quarter.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
May 2,
|
|
May 4,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
Provision for income taxes
|
|
$
|
77.6
|
|
|
$
|
76.0
|
|
|
2.1
|
%
|
Effective tax rate
|
|
23.9
|
%
|
|
22.1
|
%
|
|
1.8
|
%
|
The increase in our effective tax rate in the 13 weeks ended May 2, 2020 was primarily the result of additional tax expense for restricted stock vestings in the current quarter due to the stock price for certain grants being lower at the vest date than the grant date.
Segment Information
Our operating results for the Dollar Tree and Family Dollar segments as a percentage of net sales and period-over-period changes are discussed in the following sections.
Dollar Tree
The following table summarizes the operating results of the Dollar Tree segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
May 2, 2020
|
|
May 4, 2019
|
(in millions)
|
|
$
|
|
% of
Net Sales
|
|
$
|
|
% of
Net Sales
|
Net sales
|
|
$
|
3,077.5
|
|
|
|
|
$
|
2,959.3
|
|
|
|
Gross profit
|
|
980.7
|
|
|
31.9
|
%
|
|
1,021.2
|
|
|
34.5
|
%
|
Operating income
|
|
282.0
|
|
|
9.2
|
%
|
|
394.2
|
|
|
13.3
|
%
|
Net sales for the Dollar Tree segment increased $118.2 million, or 4.0%, for the 13 weeks ended May 2, 2020, compared to the same period last year. The increase was due to sales from new stores of $163.1 million, partially offset by a decrease of 0.9% in comparable store net sales. Customer traffic declined 11.7% and average ticket increased 12.2%.
Gross profit margin for the Dollar Tree segment decreased to 31.9% for the 13 weeks ended May 2, 2020 compared to 34.5% for the same period last year as a result of the following:
|
|
•
|
Merchandise cost, including freight, increased approximately 140 basis points primarily due to increased sales of higher cost consumable merchandise and lower Easter sales as a result of the COVID-19 pandemic, incremental tariffs of approximately $18.0 million and higher freight costs, partially offset by increased initial mark-on.
|
|
|
•
|
Markdown costs increased 40 basis points resulting from higher seasonal markdowns due to the lower Easter sell-through as a result of the COVID-19 pandemic.
|
|
|
•
|
Distribution costs increased 30 basis points resulting from higher distribution center payroll and depreciation costs. Distribution center payroll costs include approximately $3.5 million or 10 basis points of a $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 and guaranteed bonuses resulting from the COVID-19 pandemic.
|
|
|
•
|
Occupancy costs increased approximately 30 basis points resulting primarily from the loss of leverage due to the comparable store net sales decrease in the quarter.
|
|
|
•
|
Shrink costs increased 25 basis points resulting from unfavorable inventory results in the current quarter and an increase in the shrink accrual rate.
|
Operating income margin for the Dollar Tree segment decreased to 9.2% for the 13 weeks ended May 2, 2020 from 13.3% for the same period last year. The decrease in operating income margin in the 13 weeks ended May 2, 2020 was the result of the gross profit margin decrease noted above and higher selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses increased to 22.7% as a percentage of net sales in the 13 weeks ended May 2, 2020 compared to 21.2% for the same period last year as a result of the net of the following:
|
|
•
|
Payroll expenses increased approximately 145 basis points resulting from the net of the following:
|
|
|
◦
|
Store hourly payroll increased approximately 120 basis points primarily due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 and the loss of leverage from the decrease in comparable store net sales. Total COVID-19-related pay was $30.1 million or 95 basis points.
|
|
|
◦
|
Field management payroll increased approximately 15 basis points primarily due to the loss of leverage from the decrease in comparable store net sales. We also paid $0.9 million of bonuses to certain field management associates related to the COVID-19 pandemic.
|
|
|
◦
|
Store sales bonus expenses increased approximately 10 basis points as a result of $2.7 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.
|
|
|
•
|
Operating expenses increased approximately 5 basis points as a result of the loss of leverage from the comparable store net sales decrease and the net of the following COVID-19-related changes:
|
|
|
◦
|
Store supplies costs increased approximately 10 basis points as a result of the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies.
|
|
|
◦
|
Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.
|
Operating income in the 13 weeks ended May 2, 2020 includes approximately $42.2 million of COVID-19 related expenses.
Family Dollar
The following table summarizes the operating results of the Family Dollar segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
May 2, 2020
|
|
May 4, 2019
|
(in millions)
|
|
$
|
|
% of
Net Sales
|
|
$
|
|
% of
Net Sales
|
Net sales
|
|
$
|
3,209.3
|
|
|
|
|
$
|
2,849.4
|
|
|
|
Gross profit
|
|
814.2
|
|
|
25.4
|
%
|
|
706.0
|
|
|
24.8
|
%
|
Operating income
|
|
175.5
|
|
|
5.5
|
%
|
|
91.9
|
|
|
3.2
|
%
|
Net sales for the Family Dollar segment increased $359.9 million or 12.6% for the 13 weeks ended May 2, 2020 compared to the same period last year. The increase was due to a comparable store net sales increase of 15.5% and $71.5 million of new store sales, partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our store optimization program. For the 13 weeks ended May 2, 2020, average ticket increased 17.1%, partially offset by a 1.4% decrease in customer traffic.
Gross profit margin for the Family Dollar segment increased to 25.4% for the 13 weeks ended May 2, 2020 compared to 24.8% for the same period last year. The increase is due to the net of the following:
|
|
•
|
Occupancy costs decreased approximately 105 basis points as a result of the leverage from the comparable store net sales increase and the higher expense in the prior year related to the accelerated amortization of right-of-use assets related to the second quarter 2019 store closures.
|
|
|
•
|
Shrink expense decreased approximately 30 basis points resulting from an increase in the accrual rate and unfavorable inventory reconciliations in the prior year quarter and improved inventory results in the current year.
|
|
|
•
|
Merchandise cost, including freight, increased approximately 55 basis points primarily due to increased sales of higher cost consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $5.0 million and higher freight costs, partially offset by improved initial mark-on.
|
|
|
•
|
Distribution costs increased approximately 15 basis points resulting primarily from higher distribution center payroll costs. These costs include $2.7 million, or 10 basis points, related to the $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 related to the COVID-19 pandemic.
|
Operating income margin for the Family Dollar segment increased to 5.5% for the 13 weeks ended May 2, 2020 from 3.2% for the same period last year resulting from the gross margin increase noted above and a decrease in selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses were 19.9% as a percentage of net sales in the 13 weeks ended May 2, 2020 compared to 21.6% for the same period last year. The current quarter decrease in selling, general and administrative expenses as a percentage of net sales was due to the net of the following:
|
|
•
|
Payroll expenses decreased approximately 65 basis points as a result of the leverage from the comparable store net sales increase and the net of the following:
|
|
|
◦
|
Store hourly payroll was consistent with the prior year quarter as the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 was offset by leverage from the comparable store net sales increase. Total COVID-19-related pay was $22.2 million or 70 basis points.
|
|
|
◦
|
Field management payroll decreased approximately 50 basis points due to the leverage from the comparable store net sales increase and the lower store count resulting from the 2019 store optimization program. We also paid $0.8 million of bonuses to certain field management associates related to the COVID-19 pandemic.
|
|
|
◦
|
Other payroll expenses decreased approximately 15 basis points as a result of lower temporary help expenses due to fewer H2 conversions in the current year due to the COVID-19 pandemic.
|
|
|
◦
|
Store sales bonus expenses increased approximately 15 basis points as a result of higher sales and an incremental $0.8 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.
|
|
|
•
|
Occupancy costs decreased approximately 55 basis points primarily due to the leverage associated with the increase in comparable store net sales in the period and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.
|
|
|
•
|
Operating expenses decreased approximately 40 basis points primarily due to leverage from the comparable store net sales increase and the net of the following COVID-19-related changes:
|
|
|
◦
|
Advertising costs decreased 25 basis points resulting from lower promotional advertising.
|
|
|
◦
|
Travel decreased approximately 10 basis points resulting from travel restrictions.
|
|
|
◦
|
Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.
|
|
|
◦
|
Store supplies costs were consistent with the prior year quarter as the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies were offset by leverage from the comparable store net sales increase.
|
|
|
•
|
Depreciation and amortization expense decreased 10 basis points as a result of leverage from the comparable store net sales increase.
|
Operating income in the 13 weeks ended May 2, 2020 includes approximately $30.4 million of COVID-19 related expenses.
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our distribution network and operate and expand our 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 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 13 weeks ended May 2, 2020 and May 4, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
May 2,
|
|
May 4,
|
(in millions)
|
|
2020
|
|
2019
|
Net cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
959.0
|
|
|
$
|
614.1
|
|
Investing activities
|
|
(235.9
|
)
|
|
(192.4
|
)
|
Financing activities
|
|
493.6
|
|
|
(117.5
|
)
|
Net cash provided by operating activities increased $344.9 million primarily as a result of lower inventory levels at the end of the quarter.
Net cash used in investing activities increased $43.5 million primarily due to increased capital expenditures related to distribution center projects and grant funds received from state and local governments for our Summit Pointe development in the prior year quarter.
For the 13 weeks ended May 2, 2020, cash provided by financing activities was $493.6 million compared to cash used in financing activities of $117.5 million for the 13 weeks ended May 4, 2019. The cash provided by financing activities in the current quarter is the result of the preemptive draw on our Revolving Credit Facility of $750.0 million partially offset by the final $250.0 million payment on the Senior Floating Rate Notes due 2020. The prior year quarter included $100.0 million of cash paid for stock repurchases.
In the first quarter of fiscal 2020, we preemptively drew on our Revolving Credit Facility to reduce our exposure to potential short-term liquidity risk in the banking system as a result of the COVID-19 pandemic. At May 2, 2020, our total borrowings were $4.3 billion and we had $363.4 million available under our Revolving Credit Facility. We also have $290.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which approximately $174.8 million was committed to letters of credit issued for routine purchases of imported merchandise as of May 2, 2020. Subsequent to May 2, 2020, our total Letter of Credit Reimbursement and Security Agreements was increased to $330.0 million.
There were no shares repurchased on the open market during the 13 weeks ended May 2, 2020, and we have temporarily suspended share repurchases under the Board repurchase authorization.
We repurchased 960,683 shares of common stock on the open market for approximately $100.0 million during the 13 weeks ended May 4, 2019. As of May 2, 2020, we had $800.0 million remaining under Board repurchase authorization.