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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 September 30, 2002
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes (X) No ( )
As of November 8, 2002, there were 114,173,864 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001....................... 3
Condensed Consolidated Income Statements Three months
and nine months ended September 30, 2002 and 2001.............. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001.................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 17
Item 4. Controls and Procedures.......................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures................................................... 21
Certifications............................................... 21
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 81,433 $ 236,653
Short-term investments (Note 2).............................................. 5,500 --
Merchandise inventories (Note 5)............................................. 533,871 296,473
Deferred tax asset........................................................... 10,687 8,877
Prepaid expenses and other current assets.................................... 12,601 18,776
--------- -------
Total current assets..................................................... 644,092 560,779
Property and equipment, net....................................................... 330,742 279,011
Deferred tax asset................................................................ 8,796 7,436
Goodwill (Note 5)................................................................. 38,358 38,358
Other assets (Note 5)............................................................. 17,576 16,464
--------- -------
TOTAL ASSETS............................................................. $ 1,039,564 $ 902,048
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 25,000 $ 25,000
Accounts payable............................................................. 133,751 68,653
Income taxes payable......................................................... 7,595 38,848
Other current liabilities.................................................... 49,634 63,656
Current installments of obligations under
capital leases............................................................. 4,025 3,865
--------- -------
Total current liabilities................................................ 220,005 200,022
Long-term debt, excluding current portion......................................... 6,000 12,000
Obligations under capital leases, excluding current
installments.................................................................... 18,361 21,506
Other liabilities ................................................................ 28,070 16,784
--------- -------
Total liabilities........................................................ 272,436 250,312
--------- -------
Shareholders' equity (Note 6):
Common stock, par value $0.01. Authorized
300,000,000 shares, 114,116,643 shares
issued and outstanding at September 30, 2002
and 112,505,658 shares issued and
outstanding at December 31, 2001........................................... 1,141 1,125
Additional paid-in capital................................................... 215,966 167,151
Accumulated other comprehensive loss......................................... (1,355) (378)
Unearned compensation........................................................ (129) --
Retained earnings............................................................ 551,505 483,838
--------- -------
Total shareholders' equity............................................... 767,128 651,736
Commitments (Note 3).............................................................. -- --
--------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 1,039,564 $ 902,048
========= =======
See accompanying Notes to Condensed Consolidated Financial Statements
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales ......................................... $ 513,504 $ 444,745 $ 1,501,707 $ 1,272,425
Cost of sales (Note 5)................................. 330,921 290,450 965,768 829,582
------- ------- --------- ---------
Gross profit.................................. 182,583 154,295 535,939 442,843
------- ------- --------- ---------
Selling, general and administrative
expenses (Note 5).................................... 148,487 128,475 423,600 363,839
------- ------- --------- ---------
Operating income............................... 34,096 25,820 112,339 79,004
------- ------- --------- ---------
Other income (expense):
Interest income................................... 680 513 2,736 3,345
Interest expense.................................. (1,072) (1,276) (3,437) (3,925)
Changes in fair value of non-hedging
interest rate swaps............................. (1,382) (1,379) (1,611) (1,974)
------- ------- --------- ---------
Total other income (expense).................. (1,774) (2,142) (2,312) (2,554)
------- ------- --------- ---------
Income before income taxes.................... 32,322 23,678 110,027 76,450
Provision for income taxes............................. 12,444 9,126 42,360 29,457
------- ------- --------- ---------
Net income (Note 6)........................... $ 19,878 $ 14,552 $ 67,667 $ 46,993
======= ======= ========= =========
Net income per share (Notes 4 and 5):
Basic ...................................... $ 0.17 $ 0.13 $ 0.60 $ 0.42
Diluted.......................................... $ 0.17 $ 0.13 $ 0.59 $ 0.42
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income................................................................... $ 67,667 $ 46,993
Adjustments to reconcile net income to net cash..............................
used in operating activities:
Depreciation and amortization............................................ 51,779 38,781
Loss on disposal of property and equipment............................... 1,585 1,222
Change in fair value of non-hedging interest
rate swaps............................................................. 1,611 1,974
Provision for deferred income taxes...................................... (2,548) (3,547)
Tax benefit of stock option exercises.................................... 10,569 1,418
Other non-cash adjustments to net income................................. 219 11
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories................................................ (237,398) (179,696)
Prepaid expenses and other current assets.............................. 6,200 8,143
Other assets........................................................... (816) (982)
Accounts payable....................................................... 65,098 60,316
Income taxes payable................................................... (31,253) (4,626)
Other current liabilities.............................................. (14,022) (7,397)
Other liabilities...................................................... 8,059 5,995
------- -------
Net cash used in operating activities............................... (73,250) (31,395)
------- -------
Cash flows from investing activities:
Capital expenditures......................................................... (104,780) (98,064)
Purchase of short-term investments........................................... (16,500) --
Proceeds from maturities of short-term investments........................... 11,000 --
Settlement of merger-related contingencies................................... 6,688 --
Acquisition of favorable lease rights........................................ (813) --
Proceeds from sale of property and equipment................................. 14 48
------- -------
Net cash used in investing activities............................... (104,391) (98,016)
------- -------
Cash flows from financing activities:
Repayment of long-term debt and facility fees................................ (6,025) (6,239)
Principal payments under capital lease obligations........................... (2,853) (2,661)
Proceeds from stock issued pursuant to stock-based
compensation plans......................................................... 31,299 5,764
Repurchase of common stock................................................... -- (3,775)
------- -------
Net cash provided by (used in) financing
activities........................................................ 22,421 (6,911)
------- -------
Net decrease in cash and cash equivalents......................................... (155,220) (136,322)
Cash and cash equivalents at beginning of period.................................. 236,653 181,166
------- -------
Cash and cash equivalents at end of period........................................ $ 81,433 $ 44,844
======= =======
Supplemental disclosure of cash flow information: Cash paid for:
Interest................................................................. $ 2,599 $ 3,513
Income taxes............................................................. $ 66,314 $ 36,216
See accompanying Notes to Condensed Consolidated Financial Statements
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at September 30, 2002, and
for the three- and nine-month periods then ended, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The December 31, 2001
balance sheet information was derived from the audited consolidated financial
statements for the year ended December 31, 2001.
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, 2001, contained in the
Company's Annual Report on Form 10-K filed March 14, 2002. The results of
operations for the three- and nine-month periods ended September 30, 2002 are
not necessarily indicative of the results to be expected for the entire year
ending December 31, 2002.
Certain 2001 amounts have been reclassified for comparability with the 2002
financial statement presentation.
2. SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of
government-sponsored commercial paper with remaining maturities of more than 90
days at the time of purchase. These investments are classified as
held-to-maturity and carried at amortized cost, which approximates fair value.
3. OPERATING LEASE AGREEMENT
The Company has a Lease Facility that provides for, among other things:
(1) a $165.0 million operating lease facility, bearing interest at the agent
bank's prime interest rate or LIBOR, plus a spread, at the option of the
Company; and (2) an annual facilities fee, calculated as a percentage of the
amount available under the facility and an annual administrative fee payable
quarterly. The Lease Facility, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new indebtedness.
Approximately $113.5 million is committed to the Savannah, Briar Creek and
Stockton distribution centers. This Lease Facility expires in March 2006.
Generally, under this type of agreement, an unrelated third party in the
form of a special purpose entity borrows funds under a construction agreement,
purchases the property, pays for the construction costs and subsequently leases
the facility to the Company. The lease requires the Company to provide a
residual value guarantee and includes a purchase option based on the outstanding
property costs plus any unpaid interest and rents under the lease agreement.
These agreements are typically referred to as synthetic leases. Each reporting
period, the Company estimates its liability under the residual value guarantee
and, if necessary, records additional rent expense on a straight-line basis over
the remaining lease term. No liability was recorded as of September 30, 2002 and
December 31, 2001.
6
During the first quarter of 2002, the Company committed an additional $41.0
million to the Company's new Marietta, Oklahoma distribution center under its
existing Lease Facility. As a result, the total commitment under the Lease
Facility is approximately $154.5 million. The Marietta distribution center is
being constructed to the Company's specifications by an unrelated third party,
who is serving as the developer, subject to the terms and conditions of a
development agreement with the Company. The special purpose entity provided the
developer a $41.0 million construction loan, of which the Company guaranteed
approximately 89.9% of the amount outstanding under the loan as defined in the
development agreement. At September 30, 2002, the Company had guaranteed $13.9
million under this agreement. The construction loan will be satisfied by the
developer no later than March 2003, at which time the Company has the option to
lease the distribution center under the Lease Facility or purchase the
distribution center outright.
4. NET INCOME PER COMMON SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
Three months ended Nine months ended
September 30, September 30,
--------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Basic net income per share:
Net income .................................... $ 19,878 $ 14,552 $ 67,667 $ 46,993
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 114,108 112,363 113,459 112,214
======= ======= ======= =======
Basic net income per share.......................... $ 0.17 $ 0.13 $ 0.60 $ 0.42
======= ======= ======= =======
Diluted net income per share:
Net income .................................... $ 19,878 $ 14,552 $ 67,667 $ 46,993
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 114,108 112,363 113,459 112,214
Dilutive effect of stock options and
restricted stock (as determined by
applying the treasury stock method)................... 640 874 1,058 737
------- ------ ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................. 114,748 113,237 114,517 112,951
======= ======= ======= =======
Diluted net income per share....................... $ 0.17 $ 0.13 $ 0.59 $ 0.42
======= ======= ======= =======
At September 30, 2002 and 2001, 1,787,660 and 721,049, respectively, stock
options are not included in the calculation of the weighted average number of
common shares and dilutive potential common shares outstanding because their
effect would be anti-dilutive.
On March 11, 2002, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,613,300 shares of the
Company's common stock at an exercise price of $31.62 per share. In addition, on
May 29, 2002, options to purchase 30,000 and 6,000 shares of common stock at an
exercise price of $37.28 per share were granted to five non-employee directors
and the Chairman Emeritus, respectively. The exercise price of both grants
represents the fair market value of the Company's stock at the dates of the
respective grants.
7
5. ACCOUNTING CHANGES
Inventory
During the second quarter of 2002, the Company changed its method of
accounting for its merchandise inventories from the first-in, first-out method
to the weighted-average cost method following the implementation of its new
inventory management system. The Company believes this change is preferable
because it more accurately measures the cost of the Company's merchandise
inventories and more accurately matches revenues and costs. In accordance with
generally accepted accounting principles, the Company implemented this change
retroactively to January 1, 2002. The cumulative effect of the accounting change
at January 1, 2002 was not material. In addition, there was no material impact
to the first and second quarter 2002 financial statements as a result of this
change in accounting principle. Additional pro forma disclosures of the impact
of the change on prior periods as required under Accounting Principles Board
Opinion No. 20, "Accounting Changes" are not provided since weighted-average
cost information was not available from the prior inventory management system;
however, the Company does not believe the effects would have been material.
Intangible Assets and Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which establishes accounting and reporting standards for intangible assets and
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually. SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company performed the required
transition impairment tests of goodwill and other intangibles as of January 1,
2002, and determined that no impairment existed.
Intangible Assets
At January 1, 2002, the Company's intangible assets consisted of
non-compete agreements with former shareholders of a company acquired by the
Company in 1998. These assets are being amortized over the legal terms of the
individual agreements, which is generally a ten-year period. At September 30,
2002 and December 31, 2001, the carrying value of these agreements was $2.6
million and $3.0 million, respectively, which is net of $1.8 million and $1.4
million, respectively, of accumulated amortization.
In March 2002, the Company acquired favorable lease rights for operating
leases for retail locations from a third party. The fair market value of the
lease rights was approximately $0.8 million and will be amortized on a
straight-line basis to rent expense over the remaining initial lease terms,
which expire at various dates through 2007.
These intangible assets are included in "other assets" in the accompanying
condensed consolidated balance sheets. Estimated annual amortization expense for
the next five years follows: 2002 - $0.7 million; 2003 - $0.7 million; 2004 -
$0.6 million; 2005 - $0.5 million; and 2006 - $0.5 million.
8
Goodwill
At September 30, 2002 and December 31, 2001, the carrying value of goodwill
was $38.4 million. In accordance with SFAS No. 142, goodwill is no longer being
amortized, but is tested at least annually for impairment. In addition, goodwill
will be tested on an interim basis if an event or circumstance indicates that it
is more likely than not that an impairment loss has been incurred.
The following table reconciles reported net income and net income per share
for the three- and nine-month periods ended September 30, 2002 and 2001 to net
income and net income per share that would have been recorded if SFAS No. 142
were effective for each of the periods presented:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Reconciliation of net income:
Net income...................................... $ 19,878 $ 14,552 $ 67,667 $ 46,993
Add back: Goodwill amortization
(net of tax)................................. -- 310 -- 931
------ ------ ------ ------
Adjusted net income............................. $ 19,878 $ 14,862 $ 67,667 $ 47,924
====== ====== ====== ======
Basic net income per share:
Net income...................................... $ 0.17 $ 0.13 $ 0.60 $ 0.42
Goodwill amortization........................... -- -- -- 0.01
------ ------ ------ ------
Adjusted net income............................. $ 0.17 $ 0.13 $ 0.60 $ 0.43
====== ====== ====== ======
Diluted net income per share:
Net income...................................... $ 0.17 $ 0.13 $ 0.59 $ 0.42
Goodwill amortization........................... -- -- -- --
------ ------ ------ ------
Adjusted net income............................. $ 0.17 $ 0.13 $ 0.59 $ 0.42
====== ====== ====== ======
9
6. COMPREHENSIVE INCOME
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Three months ended Nine months ended
September 30, September 30,
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands) (In thousands)
Net income........................................ $ 19,878 $ 14,552 $ 67,667 $ 46,993
------ ------ ------ ------
Cumulative effect of change
in accounting for derivative
financial instruments(net of
$44 tax expense)............................... -- -- -- 70
Fair value adjustment-derivative
cash flow hedging instruments................... (1,105) (2,206) (1,616) (1,989)
Income tax benefit................................ 426 850 628 766
------ ------ ------ ------
Fair value adjustment, net of tax................. (679) (1,356) (988) (1,223)
------ ------ ------ ------
Amortization of SFAS No. 133
cumulative effect.............................. 6 6 18 18
Income tax expense................................ (3) (3) (7) (7)
------ ------ ------ ------
Amortization of SFAS No. 133
cumulative effect, net of tax............... 3 3 11 11
------ ------ ------ ------
Total comprehensive income..................... $ 19,202 $ 13,199 $ 66,690 $ 45,851
====== ====== ====== ======
The cumulative effect recorded in "accumulated other comprehensive income" is
being amortized over the remaining lives of the related interest rate swaps.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as "believe", "anticipate",
"expect", "intend", "plan" or "estimate". For example, our forward-looking
statements include statements regarding:
o our anticipated inventory levels, operating profit margin, and
future net sales results, including comparable store net sales results;
o the effect of west coast port disruptions associated with the
International Longshore and Warehouse Union labor disputes;
o our growth plans, including our plans to add, expand or relocate stores;
10
o the possible effect of inflation and other economic changes on our
future costs and profitability;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements; and
o the possible effect of changes in generally accepted accounting
principles relating to special purpose entities.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the risk factors described below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections in our
Annual Report on Form 10-K filed March 14, 2002, and review "Risk Factors" in
our most recent prospectus:
o Adverse economic conditions, such as reduced consumer confidence
and spending, or bad weather could significantly reduce our sales.
o We could fail to meet our goals for opening, expanding, or relocating
stores on a timely basis, which could cause our sales to suffer. We may
not anticipate all the challenges that our expanding operations will
impose and, as a result, we may not meet our targets for opening new
stores and expanding profitability. In addition, new or expanded stores
will cause sales at nearby existing stores to suffer.
o We could fail to hire or retain key employees, which could cause our
sales and profitability to suffer.
o Our sales may be below expectations during the Christmas selling season,
particularly this year since there are six fewer selling days between
Thanksgiving and Christmas, which may cause our operating results to
suffer materially.
o Our profitability is vulnerable to future increases in competition, and
operating and merchandise costs including shipping rates, freight
costs, wage levels, inflation, and other adverse economic factors
because we sell goods at the fixed $1.00 price point.
o Our sales and profits could be reduced by increases in competition,
especially because there are no significant economic barriers for
others to enter our retail segment. For example, Wal-Mart is operating
an in-store "dollar store" concept in some of its stores.
o Unforeseen disruptions or costs in operating and expanding our systems,
including our receiving and distribution systems, could harm our sales
and profitability.
o Our merchandise mix relies heavily on imported goods. An increase in the
cost or disruption of the flow of these goods may significantly decrease
our sales and profits because any transition to alternative sources may
not occur in time to meet our demands. For example, we could experience
future increased costs or delays in receiving shipments due to work
disruptions or slowdowns by the International Longshore and Warehouse
Union or subsequent container shortages overseas. In addition, products
11
and alternative sources may also be of lesser quality and more
expensive than those we currently import.
o Disruptions in the availability of quality, low-cost merchandise
in sufficient quantities to maintain our growth may reduce sales and
profits.
Our forward-looking statements could be wrong in light of these and other
risks, uncertainties and assumptions. The future events, developments or results
described in this report or our most recent prospectus could turn out to be
materially different. We have no obligation to publicly update or revise our
forward-looking statements after the date of this quarterly report and you
should not expect us to do so.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts and others, we do not, by policy,
selectively disclose to them any material nonpublic information or other
confidential commercial information. Accordingly, shareholders should not assume
that we agree with any statement or report issued by any analyst regardless of
the content of the statement or report. We generally do not issue financial
forecasts or projections, and we do not, by policy, confirm those issued by
others. Thus, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not our responsibility.
Results of Operations
The Three Months Ended September 30, 2002 Compared To The Three Months Ended
September 30, 2001
Net Sales. Net sales increased 15.5% in the third quarter of 2002 compared
to the same period in 2001. This $68.8 million increase in net sales resulted
primarily from increased sales at our new stores and a 0.2% increase in our
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 stores.
At September 30, 2002, we operated 2,179 stores with 12.2 million selling
square feet compared to 1,935 stores with 9.7 million selling square feet for
the same period in 2001. We opened 83 stores, expanded 32 stores and closed 9
stores in the third quarter of 2002, compared to 79 stores opened, 41 stores
expanded, and 7 stores closed in the third quarter of 2001. In the third quarter
of 2002, we added approximately 0.8 million selling square feet, of which
approximately 0.2 million selling square feet was added through expanding
existing stores.
Gross Profit. Our gross profit as a percentage of net sales is called
our gross profit margin. Gross profit margin increased to 35.6% in the third
quarter of 2002 compared to 34.7% in the third quarter of 2001. The increase in
gross profit margin is primarily attributed to the following:
o lower distribution costs, as a percentage of net sales, resulting
primarily from increased inventory levels, which caused a higher
percentage of these costs to be capitalized. Improved efficiencies
and productivity also contributed to our lower distribution costs.
o improved shrink results particularly in our Dollar Express stores.
12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 15.6% in the third quarter of 2002 compared to
the same period in 2001. Expressed as a percentage of net sales, selling,
general and administrative expenses remained unchanged at 28.9% for the third
quarter of 2002 compared to the third quarter of 2001. Selling, general and
administrative expenses for the third quarter of 2002 compared to the third
quarter of 2001 reflect lower expenses attributed to:
o improvements in payroll-related costs due in part to the results of our
continued focus on and better management of labor costs;
o the absence of a one-time charge of $1.7 million, that was recorded
during the third quarter of 2001, related to a terminated distribution
center lease; and
o our cessation of amortization of goodwill, effective January 1, 2002,
in accordance with the provisions of SFAS No. 142. During the third
quarter of 2001, we recorded approximately $0.5 million of goodwill
amortization.
The benefits of these lower expenses were offset by increased store
operating expenses and increased depreciation costs. The increased depreciation
costs were associated with our new supply chain technology, our store relocation
and expansion program, and the opening of larger stores.
Operating Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 6.6% in the third quarter of 2002
compared to 5.8% in the same period of 2001.
Interest Income/Expense. Interest income increased $0.2 million to $0.7
million in the third quarter of 2002 over the third quarter of 2001. This
increase resulted primarily from increases in our cash and cash equivalent
balances partially offset by a decrease in interest rates earned on our
investments. Interest expense decreased to $1.1 million for the third quarter of
2002 compared to $1.3 million for the same period in 2001 due to repayments of
long-term debt and a decrease in interest on capitalized leases.
Changes in Fair Value of Non-hedging Interest Rate Swaps. The $1.4 million
expense for the third quarters of 2002 and 2001 is the result of reflecting our
non-hedging interest rate swaps at their fair values in accordance with SFAS No.
133. The expense realized in the third quarter of 2002 is primarily due to the
downward adjustment to the forward interest rate yield curve. Due to many
variables, our management is not able to predict changes in the fair values of
our interest rate swaps.
The Nine Months Ended September 30, 2002 Compared To The Nine Months Ended
September 30, 2001
Net Sales. Net sales increased 18.0% for the first nine months of 2002
compared to the same period in 2001. We attribute this $229.3 million increase
in net sales to increased sales at our new and expanded stores in addition to a
1.5% increase in our comparable store net sales year-to-date 2002. 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 stores.
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For the first nine months of 2002, we opened 231 stores, expanded 83 stores
and closed 27 stores, compared to 228 stores opened, 94 stores expanded, and 22
stores closed for the first nine months of 2001. During 2002, we opened larger
stores than originally planned, which required us to shift our store openings to
later in the third quarter and shift some store openings into the fourth
quarter. In the first three quarters of 2002, we added approximately 2.1 million
selling square feet, of which approximately 0.4 million selling square feet was
added through expanding existing stores. Larger stores take longer to negotiate,
build out and open compared to our smaller square footage stores and generally
have lower net sales per square foot than our smaller stores. Our square footage
growth in the future will come primarily from larger stores.
In the fourth quarter of 2002, we expect net sales to increase
approximately 15-16% compared to the fourth quarter of 2001 to $825-$830
million. Our expectations are based on flat comparable store net sales and our
projected store-opening plans for the remainder of 2002. In addition, because we
have received substantially all of our Christmas merchandise, we do not expect
any material impact in the fourth quarter of 2002 from the west coast port
disruptions associated with the International Longshore and Warehouse Union
labor disputes.
Gross Profit. Our year-to-date gross profit margin increased to 35.7% in
2002 compared to 34.8% in 2001. The increase in gross profit margin for the
first nine months of 2002 is primarily due to improved inventory shrink. This
improvement is primarily attributed to lower shrink in our Dollar Express stores
and our Philadelphia distribution network and adjustments to our distribution
center shrink in connection with our supply chain management system
implementation.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.4% in the first nine months of 2002
compared to the same period in 2001. Expressed as a percentage of net sales,
selling, general and administrative expenses decreased to 28.2% for the first
nine months of 2002 compared to 28.6% for the same period in 2001. The
improvement in selling, general and administrative expenses, as a percentage of
net sales, is primarily due to savings achieved from our implementation of
various expense-management initiatives, particularly with regard to
payroll-related expenses, partially offset by an increase in depreciation and
amortization expense. The increase in depreciation and amortization expense
resulted primarily from depreciation costs associated with our new supply chain
technology, our store relocation and expansion program, and the opening of new
larger stores. In addition, effective January 1, 2002, we ceased amortization of
goodwill in accordance with the provisions of SFAS No. 142. We recorded
approximately $1.5 million of goodwill amortization for the first nine months of
2001.
Operating Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 7.5% for the first nine months of 2002
from 6.2% for the same period in 2001.
We expect fourth quarter 2002 operating profit margin to be consistent with
the prior year, which was approximately 17.5%, given our sales guidance
discussed above.
Interest Income/Expense. Interest income decreased $0.6 million in the
first nine months of 2002 compared to the first nine months of 2001. This
decrease resulted from decreases in interest rates earned on our investments
partially offset by increased levels of cash and cash equivalents for the first
nine months of 2002. Interest expense decreased to $3.4 million in the first
nine months of
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2002 from $3.9 million for the same period in 2001 due to repayments of our
long-term debt and a decrease in interest on our capitalized leases.
Liquidity and Capital Resources
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores consist primarily
of inventory purchases, which are seasonal in nature and typically reach their
peak in September and October. Historically, we have satisfied our seasonal
working capital requirements for existing stores and funded our store opening
and expansion programs from internally generated funds and borrowings under our
credit facilities.
The following table compares cash-flow related information for the nine
months ended September 30, 2002 and 2001:
Nine months ended
September 30,
-----------------------
2002 2001
---- ----
(In millions)
Net cash provided by (used in):
Operating activities................................ $ (73.3) $(31.4)
Investing activities................................ (104.4) (98.0)
Financing activities................................ 22.4 (6.9)
The $41.9 million increase in cash used in operating activities is
primarily attributed to:
o increased cash expenditures for inventory associated with our typical
seasonality;
o the timing of income tax payments;
o partially offset by increased net income net of non-cash expense
adjustments.
The $6.4 million increase in cash used in investing activities was
primarily the result of the following:
o increased capital expenditures associated with our new and expanded
stores in 2002 and purchases of short-term fixed-rate
government-sponsored commercial paper;
o partially offset by proceeds from the maturities of our short-term
fixed-rate government-sponsored commercial paper and the cash
proceeds received from the settlement of merger-related
contingencies associated with the Dollar Express merger. We also
received approximately 56,700 shares of common stock in settlement
of these contingencies.
The $29.3 million increase in cash provided by financing activities was
primarily attributed to $27.9 million more cash received pursuant to stock-based
compensation plans in 2002 compared to 2001 because of increased stock option
exercises. In addition, during the third quarter of 2001, we repurchased shares
totaling $3.8 million.
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At September 30, 2002, our long-term borrowings were $31.0 million and our
capitalized lease obligations were $22.4 million. We have $50.0 million
available through our bank facility. We also have $125.0 million available under
our Letter of Credit Reimbursement and Security Agreement, of which
approximately $52.9 million was committed to letters of credit issued for
routine purchases of imported merchandise.
Operating Leases
We have entered into operating leases known as synthetic leases for four of
our distribution centers. Effective March 12, 2001, we entered into an operating
lease facility for $165.0 million, of which approximately $113.5 million is
committed to the Stockton, Briar Creek and Savannah distribution centers. Under
this type of agreement, an unrelated third party, in the form of a special
purpose entity, borrows funds under a construction agreement, purchases the
property, pays for the construction costs and subsequently leases the facility
to us. Because these arrangements are accounted for as operating leases, the
related fixed assets and lease liabilities are not included on our balance
sheets. The termination date of this operating lease facility is March 2006.
We committed an additional $41.0 million during the first quarter of 2002
for our new Marietta distribution center that is scheduled to open in early
2003. As a result, our total commitment under the operating lease facility is
$154.5 million. The Marietta distribution center is being constructed to our
specifications by an unrelated third party, who is serving as the developer,
subject to the terms and conditions of a development agreement between the
developer and us. The special purpose entity provided the developer a $41.0
million construction loan. We guaranteed approximately 89.9% of the amount
outstanding under the loan as defined in the development agreement. At September
30, 2002, we had guaranteed $13.9 million under this agreement. The developer
will satisfy the construction loan no later than March 2003, at which time we
have the option to lease the distribution center under the lease facility or
purchase the distribution center outright.
The lease facility requires, among other things, the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
limits certain types of debt we can incur.
Changes have been proposed to the current accounting standards for special
purpose entities. If these changes were adopted as proposed, we would have three
options regarding the accounting treatment for our special purpose entity and
the associated synthetic leases:
o We could maintain the leases and consolidate the special purpose
entity, which would result in recording the distribution center
assets and the related capital lease on our balance sheet in
addition to recognizing depreciation and interest expense rather
than rent expense.
o We could buy out the leases and record the distribution center assets.
o We expect that we would be able to restructure the leases and
maintain off-balance sheet treatment, which would require initial
costs to change the structure of the facility and possibly, higher
borrowing costs.
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Once the proposed accounting standards are finalized, we will decide which
option to implement. As a result, our future results of operations and financial
condition could be materially adversely affected.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Our management does not believe the
implementation of this standard will have a material effect on our financial
condition or results of operations.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
addresses the financial accounting and reporting of costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
The standard requires an entity to record a liability for costs associated with
an exit or disposal activity when that liability is incurred and can be measured
at fair value, and to subsequently adjust the recorded liability for changes in
estimated cash flows. SFAS No. 146 is effective prospectively after December 31,
2002. Our management does not believe the implementation of this standard will
have a material effect on our financial condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage our exposure
to interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging. Certain of
our interest rate swaps do not qualify for hedge accounting treatment under SFAS
No. 133, as amended by SFAS No. 138, because they contain provisions that
"knockout" the swap when the variable interest rate exceeds a predetermined
rate.
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Interest Rate Risk
The following table summarizes the financial terms and fair values of each
of our interest rate swap agreements at September 30, 2002:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
---------- -------- ----- ---- ---------- ----------
$19.0 million LIBOR 4.88% 7.75% 4/1/09 $(2,123,000)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 $ (765,000)
interest rate swap
$5.o million LIBOR 5.83% 7.41% 6/2/04 $ (332,000)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 $(2,361,000)
interest rate swap
Due to many variables, management is not able to predict the changes in fair
value of our interest rate swaps. The fair values are the estimated amounts we
would pay to terminate the agreements as of the reporting date. These fair
values are obtained from an outside financial institution.
There have been no material changes in our interest rate risk exposure
during the first nine months of 2002.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the nine months ended September 30,
2002.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934
(the "Exchange Act"). We appointed a disclosure committee which evaluated and
documented our disclosure controls, formalized certain disclosure control
procedures, and reported to our chief executive officer and chief financial
officer. Based upon that evaluation, our chief executive officer and our chief
financial officer concluded that as of the date of our evaluation, the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
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(b) Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our most recent evaluation.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment and lease related matters;
o product safety matters, including product recalls by the Consumer
Product Safety Commission;
o personal injury claims; and
o the infringement of the intellectual property rights of others.
We have been sued in California by several salaried employees and in
Alabama by a salaried store manager who allege that they should have been
classified as non-exempt employees and, therefore, should have received overtime
compensation. The suits also request that the California state court certify
the case as a class action on behalf of all store managers, assistant managers
and merchandise managers in our California stores and request that the Alabama
Federal Court certify the case as a collective action under the Fair Labor
Standards Act on behalf of all salaried managers in all of our stores. We will
vigorously defend ourselves in this matter.
We do not believe that any of these matters will individually, or in the
aggregate, have a material adverse effect on our financial position or results
of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Statement under Section 906 of the Sarbanes-Oxley Act of Chief
Executive Officer
99.2 Statement under Section 906 of the Sarbanes-Oxley Act of Chief
Financial Officer
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the third quarter of
2002:
1. Report on Form 8-K, filed July 30, 2002, included the earnings results
for the quarter ended June 30, 2002 and an outlook for the remainder of
2002.
2. Report on Form 8-K, filed August 14, 2002, included the statement
under oath of our principal executive officer and chief financial
officer regarding facts and circumstances relating to exchange act
filings.
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Also, in the fourth quarter of 2002, we filed one report on Form 8-K:
1. Report on Form 8-K, filed October 25, 2002, included the earnings
results for the quarter ended September 30, 2002 and an outlook for the
remainder of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: November 14, 2002
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
-----------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATIONS
Chief Executive Officer Certification
I, Macon F. Brock, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dollar Tree
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
21
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Macon F. Brock, Jr.
-----------------------
Macon F. Brock, Jr.
Chairman and Chief Executive Officer
Chief Financial Officer Certification
I, Frederick C. Coble, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dollar Tree
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
22
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Frederick C. Coble
----------------------
Frederick C. Coble
Chief Financial Officer
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