DOLLAR TREE, INC. - Quarter Report: 2020 May (Form 10-Q)

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The potential effect of general business or economic conditions, including inflation, consumer spending levels, rates of population, employment and job growth and/or losses in our markets, the cost of COVID-19 initiatives, changes in prevailing wage rates and our plans to address these changes, shipping and trucking rates, freight and other distribution costs, fuel costs and wage and benefit costs;

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The uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations, including uncertainties surrounding the physical and financial health of our customers, the ability of government assistance programs to individuals, households and businesses to support consumer spending, levels of foot traffic in our stores, changes in customer demand for our consumable and essential products as well as our discretionary products, possible disruptions in our supply chain or sources of supply, and whether we will have the governmental approvals, personnel and sources of supply to be able to keep our stores open;

•	Our plans and expectations in response to the COVID-19 pandemic, including increased expenses for higher wages and bonuses paid to associates and the cost of personal protective equipment and additional cleaning supplies and protocols for the safety of our associates, and expected delays in new store openings;

•	The impact of trade relations and the ongoing trade dispute between the United States and China, including the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative, some of which were suspended or reduced in January and February 2020, and other potential impediments to imports;

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

•	The ability to retain key personnel and attract new personnel at Family Dollar and Dollar Tree and the performance of those personnel;

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

•	The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations, including the proceeding by the FDA;

•	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 and productivity of our stores, including those to be added in 2020 and beyond;

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The effect of our initiatives to renovate Family Dollar stores to the H2 store format and the performance of that format, the sales mix of lower margin consumable and higher margin discretionary merchandise in Dollar Tree and Family Dollar stores, including an increase in the number of stores with freezers and coolers, and the roll-out of adult beverages at Family Dollar and Snack Zone and Crafter’s Square at Dollar Tree, on our results of operations;

•	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, strategies and expectations (financial or otherwise), including synergies, the cost to achieve synergies, and the effect on earnings per share;

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

•	Our seasonal sales patterns and customer demand including those relating to the important holiday selling seasons and party merchandise;

•	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 and domestic goods which are in higher demand as a result of the COVID-19 pandemic;

•	The capacity, performance and cost of our distribution centers and distribution network (including shipping and transportation), including future automation, and our expectations regarding the construction of new distribution centers;

•	Our expectations regarding compliance with debt covenants, our dividend policy and our stock repurchase program;

•	Our cash needs, including our ability to fund our future capital expenditures, working capital requirements and repurchases of common stock under our repurchase program, and our ability to service our debt obligations, including our expected annual interest expense;

•	Our expectations regarding competition, growth in our retail sector and our potential for long-term growth;

•	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 us of certain actions by activist shareholders and our potential responses to these actions;

•	Management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes and uncertain tax positions; and

•	Management’s estimates associated with our critical accounting policies, including inventory valuation, self-insurance liabilities and valuations for our goodwill and indefinite-lived intangible assets impairment analyses.

•	The COVID-19 pandemic is a serious threat to the health and economic wellbeing of our customers, our associates and our sources of supply, and the impact of the COVID-19 pandemic and the measures implemented to contain or mitigate the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.

•	Our supply chain may be disrupted by changes in United States trade policy with China or as a result of the COVID-19 pandemic, and risks associated with our domestic and foreign suppliers, including tariffs or restrictions on trade or disruptions arising from the outbreak of the COVID-19 pandemic, could adversely affect our financial performance.

•	Our profitability is vulnerable to cost increases, including increased costs associated with responding to the COVID-19 pandemic.

•	We could continue to encounter higher costs and disruptions in our distribution network.

•	The continuing integration of Family Dollar’s operations is not complete and may be more difficult, costly or time consuming than expected.

•	Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.

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

•	Our profitability is affected by the mix of products we sell.

•	We may stop selling or recall certain products for safety-related issues.

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

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If we suffer a data breach and are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business reputation and adversely affect our results of operations or business.

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

•	Our business or the value of our common stock could be negatively affected as a result of actions by activist shareholders.

•	Litigation and arbitration may adversely affect our business, financial condition and results of operations.

•	Pressure from competitors may reduce our sales and profits.

•	A downturn or changes in economic conditions, including those caused by the COVID-19 pandemic, 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 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.

•	Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.

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•	Activated our Business Response Team to meet daily to communicate, assess and address potential exposure throughout the organization;

•	Provided personal protective equipment including masks, gloves and sanitizers for our store and distribution center associates;

•	Deployed plexiglass sneeze guards for all registers at all stores;

•	Equipped stores, distribution centers and the store support center with necessary supplies for enhanced cleaning protocol;

•	Provided a $2 per hour wage premium for all store and distribution center hourly associates, excluding hourly-paid store managers;

•	Provided a minimum guaranteed sales bonus of $500 for each store manager in March and a minimum guaranteed target bonus payout for April as well as bonuses for certain salaried associates in our field operations and distribution centers;

•	Provided pay continuation for associates who test positive or who are Group 1 associates who have to self-quarantine;

•	Created a “store” within each distribution center to allow our associates to shop for needed supplies at work;

•	Eliminated all non-essential air travel;

•	Utilized technology options for all large group meetings;

•	Prohibited external visitors’ access to the store support center;

•	Enabled the majority of our store support center teams to work remotely;

•	Enabled contactless payments to our POS systems for our customers;

•	Followed local municipality, county, and state guidelines and regulations needed to be open as an essential business;

•	Encouraged safe social distancing protocols for our customers with signing, graphics and communications;

•	Enabled health prescreening questionnaire for all store and distribution associates before entering work; and

•	Established temperature check protocols for our associates at all distribution centers.

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•	Merchandise cost, including freight, increased approximately 115 basis points resulting from higher sales of lower margin consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $23.0 million and higher freight costs, partially offset by improved initial mark-on.

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•	Markdown costs increased approximately 25 basis points resulting primarily from the higher seasonal markdowns in the Dollar Tree segment due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic.

•	Distribution costs increased approximately 25 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a $2 per hour premium for all hours worked beginning March 8, 2020. Total distribution center COVID-19 related payroll expenses were approximately $6.2 million, or 10 basis points of this increase.

•	Occupancy costs decreased approximately 40 basis points as a result of the leverage from the increase in comparable store net sales.

•	Operating and corporate expenses decreased approximately 35 basis points as a result of the leverage from the comparable store net sales increase in the Family Dollar segment and the following:

◦	Corporate costs decreased approximately 15 basis points resulting from the prior year including costs related to the consolidation of our store support centers and higher legal fees due to shareholder activism.

◦	Advertising costs decreased 10 basis points resulting from lower promotional advertising during the COVID-19 pandemic.

◦	Travel costs decreased approximately 10 basis points as a result of COVID-19 travel restrictions.

◦	Inventory service expense decreased approximately 5 basis points as a result of the postponement of inventories from March 15, 2020 through the end of the quarter due to the COVID-19 pandemic.

◦	Store supplies expense increased approximately 5 basis resulting primarily from the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.

•	Repairs and maintenance and utility costs decreased 30 basis points due to leverage from the comparable store net sales increase and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.

•	Payroll expenses increased approximately 25 basis points due to the following:

◦	Store hourly payroll increased approximately 55 basis points due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020, partially offset by the leverage from the increase in comparable store net sales in the Family Dollar segment. Total COVID-19-related pay was approximately $52.3 million or 85 basis points.

◦	Store sales bonus expenses increased approximately 10 basis points as a result of the higher comparable store net sales in the Family Dollar segment and approximately $3.5 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

◦	Field management payroll decreased 15 basis points due to leverage from the comparable store net sales increase and the lower store count in the Family Dollar segment. We also paid $1.7 million of bonuses to certain field management associates related to the COVID-19 pandemic.

◦	Office payroll decreased approximately 10 basis points as a result of the store support center consolidation and other leadership changes made in the fourth quarter of fiscal 2019.

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◦	Other payroll expenses decreased approximately 10 basis points resulting from lower temporary help expenses due to fewer H2 conversions in the current year as a result of the COVID-19 pandemic.

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•	Merchandise cost, including freight, increased approximately 140 basis points primarily due to increased sales of higher cost consumable merchandise and lower Easter sales as a result of the COVID-19 pandemic, incremental tariffs of approximately $18.0 million and higher freight costs, partially offset by increased initial mark-on.

•	Markdown costs increased 40 basis points resulting from higher seasonal markdowns due to the lower Easter sell-through as a result of the COVID-19 pandemic.

•	Distribution costs increased 30 basis points resulting from higher distribution center payroll and depreciation costs. Distribution center payroll costs include approximately $3.5 million or 10 basis points of a $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 and guaranteed bonuses resulting from the COVID-19 pandemic.

•	Occupancy costs increased approximately 30 basis points resulting primarily from the loss of leverage due to the comparable store net sales decrease in the quarter.

•	Shrink costs increased 25 basis points resulting from unfavorable inventory results in the current quarter and an increase in the shrink accrual rate.

•	Payroll expenses increased approximately 145 basis points resulting from the net of the following:

◦	Store hourly payroll increased approximately 120 basis points primarily due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 and the loss of leverage from the decrease in comparable store net sales. Total COVID-19-related pay was $30.1 million or 95 basis points.

◦	Field management payroll increased approximately 15 basis points primarily due to the loss of leverage from the decrease in comparable store net sales. We also paid $0.9 million of bonuses to certain field management associates related to the COVID-19 pandemic.

◦	Store sales bonus expenses increased approximately 10 basis points as a result of $2.7 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

•	Operating expenses increased approximately 5 basis points as a result of the loss of leverage from the comparable store net sales decrease and the net of the following COVID-19-related changes:

◦	Store supplies costs increased approximately 10 basis points as a result of the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies.

◦	Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.

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•	Occupancy costs decreased approximately 105 basis points as a result of the leverage from the comparable store net sales increase and the higher expense in the prior year related to the accelerated amortization of right-of-use assets related to the second quarter 2019 store closures.

•	Shrink expense decreased approximately 30 basis points resulting from an increase in the accrual rate and unfavorable inventory reconciliations in the prior year quarter and improved inventory results in the current year.

•	Merchandise cost, including freight, increased approximately 55 basis points primarily due to increased sales of higher cost consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $5.0 million and higher freight costs, partially offset by improved initial mark-on.

•	Distribution costs increased approximately 15 basis points resulting primarily from higher distribution center payroll costs. These costs include $2.7 million, or 10 basis points, related to the $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 related to the COVID-19 pandemic.

•	Payroll expenses decreased approximately 65 basis points as a result of the leverage from the comparable store net sales increase and the net of the following:

◦	Store hourly payroll was consistent with the prior year quarter as the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 was offset by leverage from the comparable store net sales increase. Total COVID-19-related pay was $22.2 million or 70 basis points.

◦	Field management payroll decreased approximately 50 basis points due to the leverage from the comparable store net sales increase and the lower store count resulting from the 2019 store optimization program. We also paid $0.8 million of bonuses to certain field management associates related to the COVID-19 pandemic.

◦	Other payroll expenses decreased approximately 15 basis points as a result of lower temporary help expenses due to fewer H2 conversions in the current year due to the COVID-19 pandemic.

◦	Store sales bonus expenses increased approximately 15 basis points as a result of higher sales and an incremental $0.8 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

•	Occupancy costs decreased approximately 55 basis points primarily due to the leverage associated with the increase in comparable store net sales in the period and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.

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•	Operating expenses decreased approximately 40 basis points primarily due to leverage from the comparable store net sales increase and the net of the following COVID-19-related changes:

◦	Advertising costs decreased 25 basis points resulting from lower promotional advertising.

◦	Travel decreased approximately 10 basis points resulting from travel restrictions.

◦	Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.

◦	Store supplies costs were consistent with the prior year quarter as the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies were offset by leverage from the comparable store net sales increase.

•	Depreciation and amortization expense decreased 10 basis points as a result of leverage from the comparable store net sales increase.

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•	product safety matters, which may include regulatory matters.

•	Significant increases in the cost of operating our stores and distribution centers, including higher wages and bonuses paid to associates, enhanced cleaning protocols and the cost of personal protection equipment.

•	Disruptions in the patterns of consumer demand, which has led to, among other things, decreased demand for Easter, party, and certain other merchandise, and an increase in demand for online sales (which is an insignificant part of our business) and home or curbside deliveries (which we do not offer).

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•	Widespread changes to, and significant and rapid reductions in, household and business activity and consumer and business spending, as well as economic contraction, the risk of a significant recession, and a record rise in unemployment.

•	Decreasing foot traffic in our stores as a result of the promotion of social distancing, the adoption of shelter-in-place and similar governmental orders and consumer attitudes with respect to in-person shopping.

•	Adverse impacts on the implementation of our business plans, including delays in new store openings, the conversion of Family Dollar stores to the H2 format and the introduction of Snack Zones and alcohol sales in certain of our retail stores.

•	Increased risks of disruptions in our supply chain that could result in lost sales or increase costs.

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