DOLLAR TREE, INC. - Quarter Report: 2019 November (Form 10-Q)

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

•

the potential effect of general business or economic conditions (including inflation) on our costs and profitability, including the potential effect of future changes in prevailing wage rates and overtime regulations and our plans to address these changes, shipping rates, freight and other distribution costs (including the effects of potential increases in import freight costs due to low sulphur fuel requirements for ships which become effective in January 2020), fuel costs and wage and benefit costs, consumer spending levels, and population, employment and job growth and/or losses in our markets;

•	the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative;

•	our growth plans, including our plans to add, renovate, re-banner, expand, relocate or close stores and any related costs or charges, our anticipated square footage increase, and our ability to renew leases at existing store locations;

•	the ability to retain key personnel and attract new personnel at Family Dollar and Dollar Tree;

•	our anticipated sales, comparable store net sales, net sales growth, gross profit margin, costs of goods sold (including product mix), earnings and earnings growth, inventory levels, selling, general and administrative and other fixed costs, and our ability to leverage those costs;

•	the expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations (including the recent arbitrations involving thousands of claims filed by one law firm), other legal proceedings or governmental investigations (including the recent allegation by the Food and Drug Administration);

•	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;

•	the average size of our stores to be added in 2019 and beyond;

•	the effect of our consumable merchandise initiatives, including the increase in the number of our stores with freezers and coolers, the increase in the number of freezer and cooler doors in H2 stores and the roll-outs of adult beverage and Snack Zone, on our results of operations;

•	the net sales per square foot, net sales and operating income of our stores;

•	the benefits, results and effects of the Family Dollar acquisition and integration and the combined Company’s plans, objectives, expectations (financial or otherwise), including synergies, the cost to achieve synergies, and the effect on earnings per share;

•	the effect of changes in tax laws and regulatory interpretations of such laws;

•	our seasonal sales patterns including those relating to the length of the holiday selling seasons;

•	the capabilities of our inventory supply chain technology and other systems;

•	the reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China;

•	the capacity, performance and cost of our distribution centers, including future automation;

---

•	our cash needs, including our ability to fund our future capital expenditures and working capital requirements and our ability to service our debt obligations, including our expected annual interest expense;

•	our expectations regarding competition and growth in our retail sector;

•	our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the Financial Accounting Standards Board;

•	our assessment of the impact on the Company of certain actions by activist shareholders and the Company’s potential responses to these actions; and

•	management’s estimates associated with our critical accounting policies, including inventory valuation, self-insurance liabilities and valuations for impairment analyses.

•

Our profitability is vulnerable to cost increases, including changes in the sales mix of lower margin products. Our cost of goods sold has increased because of a variety of factors such as higher freight and distribution costs (including those due to inefficiencies or disruptions), higher sales mix of lower margin products and higher shrink. Higher costs (including those due to a change in sales mix) have adversely affected our profitability and could continue to do so in the future.

•

Risks associated with our domestic and foreign suppliers, including, among others, the protests in Hong Kong (which is a principal site of our buying trips), increased taxes, duties, tariffs or other restrictions on trade (including Section 301 tariffs imposed by the United States Trade Representative on imported Chinese goods), including our ability to mitigate Section 301 tariffs, could adversely affect our profitability.

•	Integrating Family Dollar’s operations with ours may be more difficult, costly or time consuming than expected. We did not retain all associates in connection with the consolidation of the Family Dollar store support center to Virginia. It will take our new personnel some time to gain the experience of their predecessors.

•	Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel. This is more difficult in an economic environment of low unemployment and higher wages.

•	We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate and grow our business and could adversely affect our financial results.

•	If we 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.

•	Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.

•	We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.

•	Litigation, arbitrations and other legal proceedings may adversely affect our business, financial condition and results of operations. For a discussion of current legal proceedings, see “Note 2 - Legal Proceedings,” included in “Part I. Financial Information, Item 1. Financial Statements” of this Form 10-Q.

•	Pressure from competitors may reduce our sales and profits.

•	A downturn or changes in economic conditions could impact our sales or profitability.

---

•	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.

•	The price of our common stock is subject to market and other conditions and may be volatile.

•	Our business or the value of our common stock could be negatively affected as a result of actions by activist shareholders or by organizations seeking to limit the growth of dollar stores or change the mix or price of products we sell.

•	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.

•	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.

•	Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.

•	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.

---

---

•

A roll-out of a new model for both new and renovated Family Dollar stores internally known as H2. We tested the H2 model in 2018 on a limited basis with positive results. 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 has increased traffic and provided an average comparable store net sales lift in excess of 10% over control stores. H2 performs well in a variety of locations and especially in locations where Family Dollar has been most challenged in the past. We started 2019 with approximately 200 H2 stores and as of November 2, 2019, we have approximately 1,460 H2 stores.

•

We plan to close under-performing stores. The normal cadence of Family Dollar closings on an annual basis is approximately 75 stores. In 2019 we plan to close approximately 420 stores and have closed 342 stores as of November 2, 2019. We expect to incur approximately $25.8 million in store closure costs and through the third quarter of 2019, we have incurred $21.3 million. In addition to these costs, during 2019 we expect to incur approximately $17.0 million of other store closure costs, primarily in connection with the disposal of fixed assets, of which substantially all has been incurred through November 2, 2019.

•	We plan to re-banner as many as 200 Family Dollar stores to the Dollar Tree brand in 2019. As of November 2, 2019, we have re-bannered 190 stores to the Dollar Tree brand.

•	Additionally, we plan to install adult beverage product in approximately 500 stores and continue to plan to expand freezers and coolers in approximately 75 stores in 2019. As of November 2, 2019, we installed adult beverage product in approximately 345 stores and expanded freezers and coolers in approximately 70 stores.

•

The Office of the United States Trade Representative (USTR) previously imposed tariffs under Section 301 against Chinese goods described on Lists 1, 2, and 3 with an annual trade value of $250 billion. When the tariffs were implemented, approximately nine percent of our products, measured by sales volume, were on Lists 1, 2, and 3. To mitigate the potential adverse effect of the tariffs, we negotiated price concessions from vendors on certain products, canceled orders, changed product sizes and specifications, changed our product mix and changed vendors. As a result of our mitigation efforts, we believe that we have reduced most of the potential adverse effects of the tariffs under Lists 1, 2, and 3 on the Dollar Tree and Family Dollar segments through January 2020.

•

Earlier this year, the USTR began a process to impose a tariff on all of the $300 billion in Chinese goods which were not previously subject to a tariff under Section 301, referred to as List 4 goods. The USTR published the final description of products on List 4 and divided the list into two parts. Tariffs at the rate of 15 percent on List 4A goods went into effect September 1, 2019. Tariffs at the rate of 15 percent on List 4B goods are scheduled to go into effect December 15, 2019. We anticipate that more of our products are on List 4 than Lists 1, 2, and 3 combined. However, we also believe that most of our List 4 products are contained on List 4B and not List 4A.

•

We estimate that Section 301 tariffs will increase our cost of goods sold by approximately $19.0 million in the fourth quarter of 2019 if they are fully implemented as now scheduled. Almost all of this cost is due to List 4A because its timing did not allow for significant mitigation. We will continue to assess the future impact of those tariffs. We are not able to accurately predict that impact of mitigation until we can estimate the success of our current efforts. We can give no assurances as to the final scope, duration, or impact of any existing or future tariffs. The tariffs could have a material adverse effect on our business and results of operations next year.

---

•	We anticipate higher import freight costs continuing into the fourth quarter of 2019 and beyond based on our April 2019 rate negotiations, and beginning in January 2020 based on the commencement of low sulphur fuel requirements for ships. We expect that this will result in higher costs in future periods as merchandise is sold.

•	Merchandise cost, including freight, increased approximately 25 basis points resulting primarily from higher freight costs and higher sales of lower margin merchandise primarily in the Family Dollar segment.

•	Distribution costs increased approximately 10 basis points resulting primarily from higher distribution center payroll costs and higher depreciation.

•	Shrink costs increased approximately 10 basis points due to unfavorable inventory results in the current quarter.

•	Operating and corporate expenses increased approximately 30 basis points resulting from costs related to the consolidation of our store support centers and costs related to the disposal of fixed assets resulting from store closures.

•	Depreciation and amortization expense increased approximately 5 basis points resulting from the investments made in H2 stores on the Family Dollar segment.

•	Payroll expenses decreased approximately 10 basis points as lower insurance benefit expenses and retirement plan contributions were partially offset by increased store hourly payroll costs due to average hourly rate increases and additional hours, including increased temporary help expenses, to support store-level initiatives.

---

•	Merchandise cost, including freight, increased approximately 45 basis points resulting from higher freight costs and higher sales of lower margin consumable merchandise, primarily in the Family Dollar segment.

•	Shrink costs increased approximately 15 basis points due to unfavorable inventory results, primarily in the Family Dollar segment, in the current year.

•	Markdown expense increased approximately 15 basis points resulting primarily from markdowns related to store closures and higher clearance sales in the Family Dollar segment.

•	Distribution costs increased approximately 10 basis points resulting primarily from higher distribution center payroll costs.

•	Occupancy costs increased approximately 5 basis points resulting from the accelerated amortization of the right-of-use assets for Family Dollar stores we closed during 2019.

•	Operating and corporate expenses increased approximately 40 basis points resulting from increased costs related to the consolidation of our store support centers, costs related to the disposal of fixed assets due to store closures and increased store supplies expense to support the H2 initiative on the Family Dollar segment.

•	Payroll expenses increased approximately 10 basis points primarily due to average hourly rate increases and additional hours, including higher temporary help expenses, to support store-level initiatives. These increases were partially offset by decreased retirement plan contributions.

---

•	Merchandise cost, including freight, increased approximately 55 basis points primarily due to higher freight costs.

•	Distribution costs increased approximately 10 basis points resulting primarily from higher distribution center payroll and depreciation costs.

•	Merchandise cost, including freight, increased approximately 35 basis points primarily due to higher freight costs.

•	Distribution costs increased approximately 10 basis points primarily due to higher distribution center payroll and depreciation costs.

---

•	Operating expenses increased approximately 15 basis points resulting from increased debit and credit fees due to higher debit and credit card penetration and an increase in loss on disposal of assets resulting from an early lease termination in the current quarter.

•	Payroll expenses decreased approximately 5 basis points due to lower retirement plan and insurance benefits expenses, partially offset by higher store hourly payroll costs resulting from average hourly rate increases and additional hours to support store-level initiatives.

•	Payroll expenses increased approximately 10 basis points due to higher store hourly payroll costs resulting from average hourly rate increases and additional hours to support store-level initiatives, partially offset by lower retirement plan expense.

•	Operating expenses increased approximately 5 basis points primarily due to increased debit and credit fees resulting from higher debit and credit card penetration in the current year.

•	Store operating costs decreased approximately 5 basis points resulting from lower utility costs as a percentage of net sales in the current year.

•	Merchandise cost, including freight, increased approximately 30 basis points, primarily due to higher freight costs and higher sales of lower margin consumable merchandise partially offset by improved initial mark-on.

•	Shrink costs increased approximately 15 basis points resulting from unfavorable physical inventory results in the current quarter.

---

•	Distribution costs increased approximately 15 basis points resulting primarily from higher distribution center payroll costs and higher distribution center asset disposals.

•	Occupancy costs increased approximately 10 basis points due to higher store real estate tax expense.

•	Markdown expense increased approximately 5 basis points resulting from higher clearance activity in the current quarter.

•	Merchandise cost, including freight, increased approximately 70 basis points, primarily due to higher sales of lower margin consumable merchandise and higher freight costs.

•	Shrink costs increased approximately 35 basis points resulting from unfavorable physical inventory results in the current year and an increase in the shrink accrual rate.

•	Markdown expense increased approximately 35 basis points resulting from store closure markdowns and higher clearance activity.

•	Distribution costs increased approximately 15 basis points resulting primarily from higher merchandising and distribution payroll-related costs.

•	Occupancy costs increased approximately 10 basis points resulting primarily from the accelerated amortization of the right-of-use assets for stores which were closed during 2019 in connection with the store optimization program.

•	Operating expenses increased approximately 25 basis points resulting primarily from higher costs related to the disposal of fixed assets in connection with the store optimization program.

•	Depreciation and amortization expense increased approximately 10 basis points as a result of depreciation on investments made in H2 stores.

•	Operating expenses increased approximately 40 basis points resulting primarily from higher costs related to the disposal of fixed assets in connection with the store optimization program and higher store supplies expense to support the H2 initiative.

•	Payroll expenses increased approximately 20 basis points primarily due to average hourly rate increases and additional hours, including increased temporary help expenses, to support store-level initiatives.

•	Store operating costs increased approximately 5 basis points due primarily to higher repairs and maintenance costs in the current year.

•	Depreciation and amortization expense decreased approximately 10 basis points as a result of certain assets that were revalued upon the 2015 acquisition becoming fully depreciated and/or amortized, partially offset by increased depreciation on investments made in H2 stores.

---

---

---

•	product safety matters, which may include regulatory matters such as product recalls in cooperation with the Consumer Products Safety Commission or other jurisdictions.

---

---

---