DOLLAR TREE, INC. Introductory Note: Unless otherwise stated, references to "we," "our" and "us" generally refer toDollar Tree, 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 can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as "believe," "anticipate," "expect," "intend," "plan," "view," "target" or "estimate," "may," "will," "should," "predict," "possible," "potential," "continue," "strategy," and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding: • 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 orpotential 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 ofthe 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;
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• 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 accountingpolicies, including inventory valuation, self-insurance liabilities and
valuations for impairment analyses.
A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and elsewhere in our Annual Report on Form 10-K for the year endedFebruary 2, 2019 and in this Quarterly Report on Form 10-Q. • 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 andretain 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.
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• Changes in federal, state or local law, including regulations and
interpretations or guidance thereunder, or our failure to adequately
estimate the impact of such changes or comply with such laws, could
increase our expenses, expose us to legal risks or otherwise adversely
affect us.
• 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.
We cannot assure you that the results, events and circumstances reflected in the
forward-looking statements will be achieved or occur, and actual results, events
or circumstances could differ materially from those described in the
forward-looking statements. Moreover, new risks and uncertainties emerge from
time to time and it is not possible for us to predict all risks and
uncertainties that could have an impact on our forward-looking statements.
We do not undertake to publicly update or revise any forward-looking statements
after the date of this Form 10-Q, whether as a result of new information, future
events, or otherwise.
Investors should also be aware that while we do, from time to time, communicate
with securities analysts and others, it is against our policy to disclose to
them any material, nonpublic information or other confidential commercial
information. Accordingly, shareholders should not assume that we agree with any
statement or report issued by any securities analyst regardless of the content
of the statement or report. Furthermore, we have a policy against confirming
projections, forecasts or opinions issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not our responsibility.
Overview
We are a leading operator of more than 15,200 retail discount stores and we
conduct our operations in two reporting segments. Our Dollar Tree segment is the
leading operator of discount variety stores offering merchandise at the fixed
price of $1.00 . Our Family Dollar segment operates general merchandise retail
discount stores providing consumers with a selection of competitively-priced
merchandise in convenient neighborhood stores.
Our net sales are derived from the sale of merchandise. Two major factors tend
to affect our net sales trends. First is our success at opening new stores or
adding new stores through mergers or acquisitions. Second is the performance of
stores once they are open. Sales vary at our existing stores from one year to
the next. We refer to this as a change in comparable store net sales, because we
include only those stores that are open throughout both of the periods being
compared, beginning after the first fifteen months of operation. We include
sales from stores expanded or remodeled during the period in the calculation of
comparable store net sales, which has the effect of increasing our comparable
store net sales. The term 'expanded' also includes stores that are relocated.
Stores that have been re-bannered are considered to be new stores and are not
included in the calculation of the comparable store net sales change until after
the first fifteen months of operation under the new brand.
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AtNovember 2, 2019 , we operated stores in 48 states and theDistrict of Columbia , as well as stores in five Canadian provinces. A breakdown of store counts and square footage by segment for the 39 weeks endedNovember 2, 2019 andNovember 3, 2018 is as follows: 39 Weeks EndedNovember 2, 2019
Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total
Store Count:
Beginning 7,001 8,236 15,237 6,650 8,185 14,835
New stores 286 120 406 237 166 403
Re-bannered stores 190 (199 ) (9 ) 47 (49 ) (2 )
Closings (30 ) (342 ) (372 ) (11 ) (38 ) (49 )
Ending 7,447 7,815 15,262 6,923 8,264 15,187
Relocations 35 10 45 44 9 53
Selling Square Feet (in millions):
Beginning 60.3 59.8 120.1 57.3 59.3 116.6
New stores 2.5 0.9 3.4 2.0 1.2 3.2
Re-bannered stores 1.4 (1.4 ) - 0.3 (0.3 ) -
Closings (0.2 ) (2.4 ) (2.6 ) (0.1 ) (0.3 ) (0.4 )
Relocations 0.1 - 0.1 0.1 - 0.1
Ending 64.1 56.9 121.0 59.6 59.9 119.5
Stores are included as re-banners when they close or open, respectively.
Comparable store net sales for Dollar Tree may be negatively affected when a
Family Dollar store is re-bannered near an existing Dollar Tree store.
The average size of stores opened during the 39 weeks ended November 2, 2019 was
approximately 8,570 selling square feet for the Dollar Tree segment and 7,710
selling square feet for the Family Dollar segment. We believe that these size
stores are in the ranges of our optimal sizes operationally and give our
customers a shopping environment which invites them to shop longer, buy more and
make return visits.
For the 13 weeks ended November 2, 2019 , comparable store net sales increased
2.5% on a constant currency basis. Constant currency basis refers to the
calculation excluding the impact of currency exchange rate fluctuations. We
calculated the constant currency basis increase by translating the current year
quarter's comparable store net sales in Canada using the prior year third
quarter's currency exchange rates. We believe that the constant currency basis
provides a more accurate measure of comparable store net sales performance.
Including the impact of Canadian currency fluctuations, comparable store net
sales increased the same 2.5% due to increases in average ticket and customer
count. On a constant currency basis, comparable store net sales increased 2.8%
in the Dollar Tree segment and increased 2.3% in the Family Dollar segment for
the 13 weeks ended November 2, 2019 . Including the impact of currency,
comparable store net sales in the Dollar Tree segment increased the same 2.8%.
Comparable store net sales are positively affected by our expanded and relocated
stores, which we include in the calculation, and are negatively affected when we
open new stores, re-banner stores or expand stores near existing stores.
We believe comparable store net sales continue to be positively affected by a
number of our Dollar Tree initiatives. We continued the roll-out of frozen and
refrigerated merchandise to more of our Dollar Tree stores in the third quarter
of 2019 and as of November 2, 2019 , the Dollar Tree segment had frozen and
refrigerated merchandise in approximately 6,100 stores compared to approximately
5,580 stores at November 3, 2018 . Over the past year, we rolled out a new layout
to a number of our Dollar Tree stores, which we call our Snack Zone . This layout
highlights our immediate consumption snack offerings in the front of the store
near the checkout areas. As of November 2, 2019 , we have this layout in
approximately 2,090 Dollar Tree stores. We believe these initiatives have and
will continue to enable us to increase sales and earnings by increasing the
number of shopping trips made by our customers.
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As announced in
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 andespecially 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 2019we plan to close approximately 420 stores and have closed 342 stores as
of
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
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
installed adult beverage product in approximately 345 stores and
expanded freezers and coolers in approximately 70 stores.
In fiscal 2019, in addition to the approximately$42.8 million in store closure costs, we expect to incur approximately$28.0 million of incremental initiative costs based on project count and velocity, of which substantially all has been incurred throughNovember 2, 2019 . As part of our continuing integration of Family Dollar's organization and support functions, in 2019 we consolidated our store support centers inMatthews, North Carolina andChesapeake, Virginia to our development inChesapeake, Virginia . Approximately 30 percent of theMatthews associates, including more than 50 percent of the officers and directors, invited to move toChesapeake agreed to do so. We expect the consolidation to be complete in 2019 and we expect to incur pre-tax expense of approximately$29.0 million in 2019 in connection with these plans, of which approximately$24.5 million was incurred through the third quarter of 2019. Additionally, the following items have already impacted or could impact our business or results of operations during 2019 or in the future: •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
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
• Earlier this year, the USTR began a process to impose a tariff on all
of the
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
on List 4B goods are scheduled to go into effect
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 ifthey 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.
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• We anticipate higher import freight costs continuing into the fourth
quarter of 2019 and beyond based on our
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.
Results of Operations
13 weeks ended November 2, 2019 compared to the 13 weeks ended November 3, 2018
Net Sales . Net sales increased $207.4 million , or 3.7%, compared with last
year's third quarter, resulting from increases in comparable store net sales in
the Dollar Tree and Family Dollar segments and sales of $217.5 million in new
stores, partially offset by lost sales resulting from store closures primarily
on the Family Dollar segment. Comparable store net sales increased 2.5% on a
constant currency basis as a result of a 1.4% increase in average ticket and a
1.1% increase in customer count. On a constant currency basis, comparable store
net sales increased 2.8% in the Dollar Tree segment and increased 2.3% in the
Family Dollar segment for the 13 weeks ended November 2, 2019 . Comparable store
net sales are positively affected by our expanded and relocated stores, which we
include in the calculation, and are negatively affected when we open new stores,
re-banner stores or expand stores near existing stores.
Gross Profit. Gross profit increased by $32.6 million to $1,704.5 million in the
third quarter of 2019 compared to $1,671.9 million in the third quarter of 2018.
Gross profit margin decreased to 29.7% in the current quarter from 30.2% in the
same quarter last year. Our gross profit margin decrease was the result of the
following:
• 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.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to$1,346.1 million in the third quarter of 2019 from$1,284.1 million in the same quarter last year, an increase of$62.0 million or 4.8%. As a percentage of net sales, selling, general and administrative expenses increased to 23.5% in the third quarter of 2019 from 23.2% in the same quarter last year. The increase in selling, general and administrative expenses was a result of the net of the following: • 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 werepartially 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.
Operating Income. Operating income for the current quarter decreased to$358.4 million compared with$387.8 million in the same period last year and operating income margin decreased to 6.2% in the current quarter from 7.0% in last year's third quarter. Interest expense, net. Interest expense, net was$41.4 million in the third quarter of 2019 compared to$47.6 million in the prior year quarter. The decrease is due to our having less debt outstanding as a result of the prepayment of the$782.0 million Term Loan Facility in the fourth quarter of 2018. Income Taxes. Our effective tax rate for the 13 weeks endedNovember 2, 2019 was 19.3% compared to 17.1% for the 13 weeks endedNovember 3, 2018 . In the third quarter of 2018, the Company recorded a tax benefit of$15.7 million based on the substantial completion of its analysis of the impact of the Tax Cuts and Jobs Act on the net deferred tax liability valuation. This benefit resulted in a 4.6% decrease in the quarterly tax rate for the 13 weeks endedNovember 3, 2018 . The current year tax rate reflects the benefits of statute expirations and the reconciliation of the tax provision to the tax returns. 39 weeks endedNovember 2, 2019 compared to the 39 weeks endedNovember 3, 2018 Net Sales . Net sales in the 39 weeks endedNovember 2, 2019 increased$677.4 million , or 4.1%, compared with the same period last year, resulting from increases in comparable store net sales in theDollar Tree and Family Dollar segments and sales of$589.7 million at new stores, partially offset by lost sales resulting from store closures primarily on the Family Dollar segment. 23
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Comparable store net sales increased 2.4% on a constant currency basis as a result of a 1.6% increase in average ticket and a 0.8% increase in customer count. Comparable store net sales increased 2.3% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 2.6% in theDollar Tree segment and increased 2.1% in the Family Dollar segment for the 39 weeks endedNovember 2, 2019 . Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores. Gross Profit. Gross profit increased by$44.8 million to$5,080.2 million in the 39 weeks endedNovember 2, 2019 compared to$5,035.4 million in the 39 weeks endedNovember 3, 2018 . Gross profit margin decreased to 29.4% in the first nine months of 2019 from 30.3% in the first nine months of 2018. Our gross profit margin decrease was the result of the following: • 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 resultingprimarily 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.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to$4,067.4 million in the 39 weeks endedNovember 2, 2019 from$3,827.5 million in the same period last year, an increase of$239.9 million or 6.3%. As a percentage of net sales, selling, general and administrative expenses increased to 23.5% in the 39 weeks endedNovember 2, 2019 from 23.0% in the same period last year. The increase in selling, general and administrative expenses was a result of the following: • 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.
Operating Income. Operating income for the 39 weeks ended November 2, 2019
decreased to $1,012.8 million compared with $1,207.9 million in the same period
last year and operating income margin decreased to 5.9% in the first nine months
of 2019 from 7.3% in the first nine months of 2018.
Interest expense, net. Interest expense, net was $122.9 million in the first
nine months of 2019 compared to $323.7 million in the first nine months of the
prior year. The prior year included prepayment premiums totaling $114.3 million
and the acceleration of the expensing of $41.2 million of amortizable non-cash
deferred financing costs related to the debt refinancing in the first quarter of
2018. In addition, our 2018 debt refinancing resulted in lower interest rates
and the prepayment of the $782.0 million Term Loan Facility in the fourth
quarter of 2018 resulted in our having less debt outstanding.
Income Taxes. Our effective tax rate for the 39 weeks ended November 2, 2019 was
20.8% compared to 19.1% for the 39 weeks ended November 3, 2018 . In the third
quarter of 2018, the Company recorded a tax benefit of $15.7 million based on
the substantial completion of its analysis of the impact of the Tax Cuts and
Jobs Act on the net deferred tax liability valuation. The current year rate
reflects the benefits of statute expirations and the reconciliation of the tax
provision to the tax returns.
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Segment Information We operate a chain of more than 15,200 retail discount stores in 48 states and five Canadian provinces. Our operations are conducted in two reporting business segments:Dollar Tree and Family Dollar. We define our segments as those operations whose results our chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources. TheDollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price of$1.00 . TheDollar Tree segment includes our operations under the "Dollar Tree" and "Dollar Tree Canada" brands, 13 distribution centers inthe United States and two distribution centers inCanada . Because of our Canadian operations, we report comparable store net sales on a constant currency basis. The Family Dollar segment operates a chain of general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores. The Family Dollar segment consists of our operations under the "Family Dollar" brand and 11 distribution centers. We measure the results of our segments using, among other measures, each segment's net sales, gross profit and operating income. The CODM reviews these metrics for each of our reporting segments.We may revise the measurement of each segment's operating income, as determined by the information regularly reviewed by the CODM. If the measurement of a segment changes, prior period amounts and balances are reclassified to be comparable to the current period's presentation. In the current year, we identified Corporate and support costs, mainly store support center costs that are considered shared services, and excluded these selling, general and administrative costs from our two reporting business segments. These costs include operating expenses for our store support centers inChesapeake, Virginia andMatthews, North Carolina . During fiscal 2019 we consolidated ourMatthews, North Carolina store support center with our store support center inChesapeake, Virginia . We continue to own our facility inMatthews, North Carolina . Amounts for the 13 and 39 weeks endedNovember 3, 2018 have been reclassified to be comparable to the current year presentation.Dollar Tree The following table summarizes the operating results of theDollar Tree segment: 13 Weeks Ended 39 Weeks Ended November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018 (in % of % of % of % of millions) $ Net Sales $ Net Sales $ Net Sales $ Net Sales Net sales$ 3,074.3 $ 2,853.8 $ 8,991.4 $ 8,407.0 Gross profit 1,050.5 34.2 % 993.7 34.8 % 3,070.8 34.2 % 2,909.8 34.6 % Operating income 371.7 12.1 % 366.4 12.8 % 1,096.7 12.2 % 1,069.9 12.7 % Net sales for theDollar Tree segment increased 7.7% and 7.0% for the 13 and 39 weeks endedNovember 2, 2019 , respectively, compared to the same periods last year. These increases were due to sales from new stores of$165.5 million and$416.4 million for the 13 and 39 weeks endedNovember 2, 2019 , respectively, and comparable store net sales increases of 2.8% and 2.6% on a constant currency basis for the 13 and 39 weeks endedNovember 2, 2019 , respectively. For the 13 weeks endedNovember 2, 2019 , customer count increased 1.6% and average ticket increased 1.2%. For the 39 weeks endedNovember 2, 2019 , customer count increased 1.5% and average ticket increased 1.1%. Gross profit margin for theDollar Tree segment decreased to 34.2% for the 13 weeks endedNovember 2, 2019 compared to 34.8% for the same period last year as a result of the following: • 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.
Gross profit margin for theDollar Tree segment decreased to 34.2% for the 39 weeks endedNovember 2, 2019 compared to 34.6% for the same period last year as a result of the following: • 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.
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Operating income margin for theDollar Tree segment decreased to 12.1% for the 13 weeks endedNovember 2, 2019 as compared to 12.8% for the same period last year. The decrease in operating income margin in the 13 weeks endedNovember 2, 2019 was the result of the gross profit margin decrease noted above and increased selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses increased to 22.1% as a percentage of net sales in the 13 weeks endedNovember 2, 2019 compared to 22.0% for the same period last year as a result of the net of the following: • 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. Operating income margin for theDollar Tree segment decreased to 12.2% for the 39 weeks endedNovember 2, 2019 as compared to 12.7% for the same period last year. The decrease in operating income margin in the 39 weeks endedNovember 2, 2019 was the result of the gross profit margin decrease noted above and increased selling, general and administrative expenses. Selling, general and administrative expenses increased to 22.0% as a percentage of net sales for the 39 weeks endedNovember 2, 2019 compared to 21.9% for the 39 weeks endedNovember 3, 2018 as a result of the net of the following: • 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.
Family Dollar The following table summarizes the operating results of the Family Dollar segment:
13 Weeks Ended 39 Weeks Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
(in % of % of % of % of
millions) $ Net Sales $ Net Sales $ Net Sales $ Net Sales
Net sales $ 2,671.9 $ 2,685.0 $ 8,304.1 $ 8,211.1
Gross
profit 654.0 24.5 % 678.2 25.3 % 2,009.4 24.2 % 2,125.6 25.9 %
Operating
income 53.8 2.0 % 83.7 3.1 % 159.5 1.9 % 341.2 4.2 %
Net sales for the Family Dollar segment decreased $13.1 million or 0.5% and
increased $93.0 million or 1.1% for the 13 and 39 weeks ended November 2, 2019 ,
respectively, compared to the same periods last year. These increases were due
to comparable store net sales increases of 2.3% and 2.1%, respectively and $52.0
million and $173.4 million , respectively, of new store sales, partially offset
by lost sales resulting from store closures that exceed historical closure rates
as a result of the store optimization program. For the 13 weeks ended
November 2, 2019 , average ticket increased 1.8% and customer count increased
0.5%. For the 39 weeks ended November 2, 2019 , average ticket increased 2.3% and
customer count decreased 0.2%.
Gross profit for the Family Dollar segment decreased $24.2 million or 3.6% for
the 13 weeks ended November 2, 2019 compared to the same period last year. The
gross profit margin for Family Dollar decreased to 24.5% for the 13 weeks ended
November 2, 2019 compared to 25.3% for the same period in the prior year. The
decrease is due to the following:
• 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.
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• 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.
Gross profit for the Family Dollar segment decreased$116.2 million or 5.5% for the 39 weeks endedNovember 2, 2019 compared to the same period last year. The gross profit margin for Family Dollar decreased to 24.2% for the 39 weeks endedNovember 2, 2019 compared to 25.9% for the same period in the prior year. The decrease is due to the following: • 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 resultingprimarily 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 income margin for the Family Dollar segment decreased to 2.0% for the 13 weeks endedNovember 2, 2019 as compared to 3.1% for the same period last year resulting from the gross margin decrease noted above and an increase in selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses were 22.5% as a percentage of net sales in the 13 weeks endedNovember 2, 2019 compared to 22.2% for the same period last year. The current quarter increase in selling, general and administrative expenses as a percentage of net sales was due to the following: • 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 income margin for the Family Dollar segment decreased to 1.9% for the 39 weeks endedNovember 2, 2019 as compared to 4.2% for the same period last year resulting from the gross margin decrease noted above and an increase in selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses were 22.3% as a percentage of net sales in the 39 weeks endedNovember 2, 2019 compared to 21.7% for the same period last year. The current year increase in selling, general and administrative expenses as a percentage of net sales was due to the net of the following: • 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.
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our
distribution network and operate, expand and renovate our existing stores. Our
working capital requirements for existing stores are seasonal in nature and
typically reach their peak in the months of September and October. Historically,
we have satisfied our seasonal working capital requirements for existing stores
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and have funded our store opening and distribution network expansion programs
from internally generated funds and borrowings under our credit facilities.
The following table compares cash-flow related information for the 39 weeks
ended
39 Weeks Ended
November 2, November 3,
(in millions) 2019 2018
Net cash provided by (used in):
Operating activities $ 1,014.5 $ 1,050.9
Investing activities (768.7 ) (619.4 )
Financing activities (212.0 ) (820.6 )
Net cash provided by operating activities decreased $36.4 million primarily as a
result of lower current year earnings, net of non-cash items, a smaller increase
in accounts payable and higher estimated tax payments in the current year,
partially offset by lower cash payments for inventory.
Net cash used in investing activities increased $149.3 million primarily due to
increased capital expenditures related to the Family Dollar segment store
optimization program, including H2 renovations and re-banners, partially offset
by grant money received from state and local governments for our Summit Pointe
development.
Net cash used in financing activities decreased $608.6 million compared with the
prior year, primarily due to our debt refinancing in 2018, which resulted in
debt payments exceeding the proceeds from long-term debt by $656.9 million and
the payment of $155.3 million of debt-issuance and extinguishment costs,
partially offset by $200.0 million of cash paid in 2019 for stock repurchases.
At November 2, 2019 , our long-term borrowings were $4.3 billion and we had $1.1
billion available under our revolving credit facility. We also have $330.0
million in Letter of Credit Reimbursement and Security Agreements with various
financial institutions, under which approximately $165.5 million was committed
to letters of credit issued for routine purchases of imported merchandise as of
November 2, 2019 .
We repurchased 1,967,355 shares of common stock on the open market for $200.0
million during the 39 weeks ended November 2, 2019 . There were no shares
repurchased on the open market during the 39 weeks ended November 3, 2018 . As of
November 2, 2019 , we had $800.0 million remaining under Board repurchase
authorization.
Recent Accounting Pronouncements
See "Note 1 - Basis of Presentation," to the unaudited condensed consolidated
financial statements included in "Part I. Financial Information, Item 1.
Financial Statements" of this Form 10-Q, for a detailed description of recent
accounting pronouncements.
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