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
March 31, 1998
( ) 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
(Registrants 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 May 8, 1998, there were 39,319,559 shares of the Registrant's Common Stock
outstanding.
<PAGE>
DOLLAR TREE STORES, INC.
and subsidiaries
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997........................... 3
Condensed Consolidated Income Statements
Three months ended March 31, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997..................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 9
Item 5. Other Information.............................................. 10
Item 6. Exhibits and Reports on Form 8-K............................... 10
Signatures............................................... 11
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 4,214 $ 43,695
Accounts receivable........................... 444 1,406
Merchandise inventories....................... 128,776 89,066
Deferred tax asset............................ 5,347 5,093
Prepaid expenses and other current assets..... 4,826 3,762
------- -------
Total current assets....................... 143,607 143,022
Property and equipment, net.......................... 87,662 82,071
Deferred tax asset................................... 2,092 2,029
Goodwill, net........................................ 43,996 44,478
Other assets, net.................................... 943 976
------- -------
TOTAL ASSETS............................... $278,300 $272,576
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 43,860 $ 44,058
Accrued liabilities........................... 19,400 19,526
Income taxes payable.......................... 3,898 18,908
Current installments of obligations
under capital leases....................... 294 317
------- -------
Total current liabilities.................. 67,452 82,809
Long-term debt . . . . . . . . . . . ................ 40,000 30,000
Obligations under capital leases,
excluding current installments.................... 732 804
Other liabilities.................................... 4,402 4,037
------- -------
Total liabilities.......................... 112,586 117,650
------- -------
Subsequent event (note 2)
Shareholders' equity:
Common stock, par value $0.01. Authorized
100,000,000 shares, 39,278,971 shares
issued and outstanding at March 31, 1998
and 39,139,965 shares issued and
outstanding at December 31, 1997........... 393 391
Additional paid-in capital.................... 40,013 36,185
Retained earnings............................. 125,308 118,350
------- -------
Total shareholders' equity................. 165,714 154,926
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. $278,300 $272,576
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Net sales......................................... $150,834 $117,746
Cost of sales..................................... 95,866 76,455
------- -------
Gross profit............................... 54,968 41,291
------- -------
Selling, general, and administrative expenses:
Operating expenses............................. 39,131 32,116
Depreciation and amortization.................. 4,009 2,932
------- -------
Total selling, general
and administrative expenses............. 43,140 35,048
------- -------
Operating income.................................. 11,828 6,243
Interest expense.................................. 515 450
------- -------
Income before income taxes........................ 11,313 5,793
Provision for income taxes........................ 4,355 2,230
------- -------
Net income................................. $ 6,958 $ 3,563
======= =======
Net income per share (note 2):
Basic net income per share..................... $ 0.18 $ 0.09
======= =======
Weighted average number of common
shares outstanding:.......................... 39,170 38,904
======= =======
Diluted net income per share .................. $ 0.16 $ 0.08
======= =======
Weighted average number of common
shares and common share equivalents
outstanding.................................. 43,315 42,894
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
DOLLAR TREE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 6,958 $ 3,563
------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization....................... 4,009 2,932
Loss on disposal of property and equipment ......... 328 25
Provision for deferred income taxes................. (317) (166)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Accounts receivable.............................. 962 927
Merchandise inventories.......................... (39,710) (14,886)
Prepaid expenses and other current assets........ (1,064) 534
Other assets .................................... 33 452
Accounts payable................................. (198) (2,483)
Accrued liabilities.............................. (126) (2,024)
Income taxes payable............................. (13,263) (10,246)
Other liabilities................................ 365 665
------- -------
Total adjustments............................... (48,981) (24,270)
------- -------
Net cash used in operating activities .......... (42,023) (20,707)
------- -------
Cash flows from investing activities:
Capital expenditures .................................. (9,582) (9,229)
Proceeds from sale of property and equipment........... 136 0
------- -------
Net cash used in investing activities........... (9,446) (9,229)
------- -------
Cash flows from financing activities:
Proceeds from long term debt........................... 22,200 68,200
Repayment of long term debt and facility fees......... (12,200) (37,147)
Principal payments under capital lease obligations..... (95) (77)
Proceeds from options exercised and purchase
of shares under ESPP.................................. 2,083 327
------- -------
Net cash provided by financing activities....... 11,988 31,303
------- -------
Net increase (decrease) in cash
and cash equivalents................................... (39,481) 1,367
Cash and cash equivalents at beginning of period........ 43,695 2,987
------- -------
Cash and cash equivalents at end of period.............. $ 4,214 $ 4,354
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Dollar Tree Stores, Inc.
and subsidiaries (the "Company") at March 31, 1998, and for the three-month
period 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, 1997, contained in the
Company's Annual Report on Form 10-K. The results of operations for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1998.
2. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands, except
per share data)
<S> <C> <C>
Basic net income per share:
Net income..................................... $ 6,958 $ 3,563
------- -------
Weighted average number of common shares
outstanding.................................. 39,170 38,904
------- -------
Basic net income per share........ $ 0.18 $ 0.09
======= =======
Diluted net income per share:
Net income..................................... $ 6,958 $ 3,563
------- -------
Weighted average number of common shares
outstanding.................................. 39,170 38,904
Dilutive effect of stock options and warrants
(as determined by applying
the treasury stock method).................. 4,145 3,990
------- -------
Weighted average number of common shares and
common share equivalents outstanding......... 43,315 42,894
------- -------
Diluted net income per share...... $ 0.16 $ 0.08
======= =======
</TABLE>
On April 21, 1998, the Board of Directors approved the grant to employees
of options to purchase 553,830 shares of the Company's Common Stock.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS. The Company has made in this report, and from time
to time may otherwise make, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 concerning the Company's
operations, economic performance and financial condition. Such statements may be
identified by the use of words such as "believe," "anticipate" and "expect." The
forward-looking statements concern, among other things, the Company's expansion
plans and store openings; sales per square foot and comparable store net sales
trends; the projected capacity and the performance of the Chesapeake and the
proposed Olive Branch distribution centers; the opening date and cost of the
Olive Branch distribution center; the subleasing of the Memphis facility;
increases in shipping or distribution costs; the Dollar Bills litigation; the
potential products liability claims; and adverse economic factors. Such
forward-looking statements are subject to various known and unknown risks and
uncertainties. Actual results, performance or actions of the Company could
differ materially from those currently anticipated due to a number of factors,
including those discussed in the Company's 1997 Annual Report on Form 10-K under
the captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations- Forward Looking Statements" and "Business" and as
detailed in the Company's most recent prospectus, dated March 17, 1998, under
the caption "Risk Factors."
The Three Months Ended March 31, 1998 and 1997
Results of Operations and General Comments
Net sales increased $33.1 million, or 28.1%, to $150.8 million for the
three months ended March 31, 1998, from $117.7 million for the three months
ended March 31, 1997. Of this increase, (i) approximately 81%, or $26.8 million,
was attributable to stores opened in 1997 and 1998 which are not included in the
Company's comparable store net sales calculation, and (ii) approximately 19%, or
$6.3 million, was attributable to comparable store net sales growth, which
represented a 5.4% increase over comparable store net sales in the corresponding
quarter of the prior period. Because substantially all the Company's products
sell for $1.00, the increase in comparable store net sales was a direct result
of increased unit volume. Management believes that a consistent in-stock
inventory position in basic consumable goods throughout the quarter contributed
to the comparable store net sales increase. The Company opened 39 new stores and
closed two stores during the first quarter of 1998, compared to opening 30 new
stores during the first quarter of 1997.
Management anticipates that the primary source of future net sales growth
will be new store openings and, to a lesser degree, sales increases from
expanded and relocated stores and comparable store net sales increases. Although
the Company has experienced significant increases in comparable store net sales
historically, management expects that any increases in comparable store net
sales in the future will be smaller than those experienced historically.
7
<PAGE>
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $13.7 million, or 33.1%, to
$55.0 million in the first quarter of 1998 from $41.3 million in the first
quarter of 1997. As a percentage of net sales, gross profit increased to 36.4%
from 35.1%, primarily due to improved merchandise costs (including freight) and
improved markdown costs as a percentage of net sales. The improvement in
merchandise costs is primarily due to favorable pricing and the earlier receipt
of higher margin items. Because of the earlier receipt of selected items,
management does not expect this rate of improvement to continue for the balance
of the year. Management also expects that shipping costs from Asia may increase
in 1998 as a result of the announcement by a trans-Pacific ocean- shipping
cartel that it will try to force a rate increase in 1998. Management believes
the annualized increase in shipping costs to be approximately $1.2 million.
Selling, general and administrative expenses ("SGA"), which include
operating expenses and depreciation and amortization, increased $8.1 million, or
23.1%, to $43.1 million in the first quarter of 1998 from $35.0 million in the
first quarter of 1997, and decreased as a percentage of net sales to 28.6% from
29.8% during the same period. This decrease in SGA expense, as a percentage of
net sales, resulted primarily from the leveraging of fixed costs, due to the
strong comparable store sales increases, and from on-going cost control
initiatives.
Operating income increased $5.6 million, or 89.5%, to $11.8 million for the
first quarter of 1998 from $6.2 million for the comparable period in 1997, and
increased as a percentage of net sales to 7.8% from 5.3% during the same period
for the reasons noted above.
Liquidity and Capital Resources
The Company's on-going capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's working capital requirements
for existing stores are seasonal in nature and typically reach their peak near
the end of the third and the beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
its existing stores and funded its store expansion program from internally
generated funds and borrowings under its credit facilities.
In March 1998, the Company purchased approximately 43 acres of land in
Olive Branch, Mississippi, for the purpose of building a new distribution center
to replace the existing facility located in Memphis, Tennessee. The new facility
will be modeled after the recently completed Chesapeake distribution center and
will contain similar advanced materials handling technologies. The Olive Branch
facility will be approximately 425,000 square feet and is expected to require an
investment of approximately $20 million. Management believes that, upon
completion of this facility, the Company's capacity to service stores will
increase to approximately 2,000 stores. The Company believes that the facility
will be operational in early 1999. There can be no assurance that delays will
not be experienced in the opening of the Olive Branch distribution center, that
complications will not occur in its operation or in the transition from the
Memphis facility or that cost overruns will not
8
<PAGE>
be experienced in building the facility. Any such delays or complications could
interrupt the receipt and distribution of merchandise to the stores, which could
in turn materially adversely affect the Company's business and results of
operation.
During the first three months of 1998 and 1997, net cash used in operations
was $42.0 million and $20.7 million, respectively, primarily used to build
inventory levels. The increase in 1997 reflects higher inventory levels in
preparation for Easter sales and to stock upcoming store openings, in addition
to the earlier receipt of merchandise mentioned above. During the first three
months of 1998 and 1997, net cash used in investing activities was $9.4 million
and $9.2 million, respectively, primarily in payment of capital expenditures.
Net cash provided by financing activities was $12.0 million and $31.3 million
during the first three months of 1998 and 1997, respectively, primarily used to
fund seasonal working capital needs. In 1998, net cash provided by financing
activities was significantly lower than in the prior year period due primarily
to the Company's strong cash position at the beginning of the year, which
enabled it to delay its borrowings under its credit facilities.
The Company's borrowings under its bank facilities and senior notes were
$40.0 million at March 31, 1998, and $34.5 million at March 31, 1997. Borrowings
at December 31, 1997, amounted to $30.0 million. Under the Company's bank
facilities, an additional $125.0 million is available at March 31, 1998,
approximately $33.3 million of which is committed to certain letters of credit
issued in relation to the routine purchase of foreign merchandise.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements No. 130,
Reporting Comprehensive Income (SFAS 130) and No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131). SFAS 130 and
SFAS 131 are effective for the Company beginning January 1998 and for the year
ended December 31, 1998, respectively. SFAS 130 is currently not applicable
for the company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company has previously reported in its 1997 Annual Report on Form 10-K
a dispute involving Michael and Pamela Alper and a corporation they control.
There have been no material developments regarding this matter in 1998.
The Company has recalled certain retractable dog leashes which were alleged
to have caused several personal injuries, as previously reported in its 1997
Annual Report on Form 10-K. There have been no other material developments
regarding this matter in 1998.
9
<PAGE>
Additionally, the Company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the U.S. Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the Company.
Item 5. OTHER INFORMATION.
In March 1998, the Company subleased its Norfolk facility through June 2004
for an annual amount that management expects will at least equal the Company's
annual obligation under the prime lease. In addition, the Company is liable for
rent and pass-through costs under the Memphis lease until September 2005, at a
current annual cost of approximately $702,000. Although the Company expects to
be able to sublease the Memphis facility, no assurance can be given that an
acceptable sublease will be secured.
The Company is in the process of borrowing approximately $19.0 million to
finance the Olive Branch facility.
In April 1998, the Board of Directors approved the promotion of Frederick
C. Coble to Senior Vice President, Chief Financial Officer. He will continue
to report to H. Ray Compton, Executive Vice President.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents, filed as exhibits 10.1 and 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, are
incorporated herein by reference.
10.1 Lease dated March 27, 1998 by and between the Company and Raytheon
Service Company.
10.2 Lease Guarantee dated March 27, 1998 by and between the Company and
Raytheon Company.
(b) Reports on Form 8-K.
The Company filed two Reports on Form 8-K on March 4, 1998, one of which
included the Company's audited consolidated financial statements for the years
ended December 31, 1995, 1996 and 1997. The second Report on Form 8-K filed on
March 4, 1998 included the Company's press release regarding the filing of a
Registration Statement on Form S-3 on the same day.
10
<PAGE>
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: May 13, 1998
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
----------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and
accounting officer)
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,214
<SECURITIES> 0
<RECEIVABLES> 444
<ALLOWANCES> 0
<INVENTORY> 128,776
<CURRENT-ASSETS> 143,607
<PP&E> 125,829
<DEPRECIATION> 38,167
<TOTAL-ASSETS> 278,300
<CURRENT-LIABILITIES> 67,452
<BONDS> 0
0
0
<COMMON> 393
<OTHER-SE> 165,321
<TOTAL-LIABILITY-AND-EQUITY> 278,300
<SALES> 150,834
<TOTAL-REVENUES> 150,834
<CGS> 95,866
<TOTAL-COSTS> 95,866
<OTHER-EXPENSES> 43,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515
<INCOME-PRETAX> 11,313
<INCOME-TAX> 4,355
<INCOME-CONTINUING> 6,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,958
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,354
<SECURITIES> 0
<RECEIVABLES> 928
<ALLOWANCES> 0
<INVENTORY> 89,967
<CURRENT-ASSETS> 100,893
<PP&E> 69,334
<DEPRECIATION> 26,546
<TOTAL-ASSETS> 192,324
<CURRENT-LIABILITIES> 51,346
<BONDS> 0
0
0
<COMMON> 260
<OTHER-SE> 106,079
<TOTAL-LIABILITY-AND-EQUITY> 192,324
<SALES> 117,746
<TOTAL-REVENUES> 117,746
<CGS> 76,455
<TOTAL-COSTS> 76,455
<OTHER-EXPENSES> 35,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 450
<INCOME-PRETAX> 5,793
<INCOME-TAX> 2,230
<INCOME-CONTINUING> 3,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,563
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
