DOLLAR TREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Dollar Tree, Inc. and its wholly-owned subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended January 28, 2012 contained in the Company’s Annual Report on Form 10-K filed March 15, 2012.   The results of operations for the 13 and 26 weeks ended July 28, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 2, 2013.

In the Company’s opinion, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of those of a normal recurring nature) considered necessary for a fair presentation of its financial position as of July 28, 2012 and July 30, 2011 and the results of its operations and cash flows for the periods presented.  The January 28, 2012 balance sheet information was derived from the audited consolidated financial statements as of that date.

On May 29, 2012, the Company’s Board of Directors approved a 2-for-1 stock split in the form of a 100% common stock dividend.  New shares were distributed on June 26, 2012 to shareholders of record as of the close of business on June 12, 2012.  As a result, all share and per share data in these condensed consolidated financial statements and accompanying notes have been retroactively adjusted to reflect this stock split.

In the first quarter of 2012, the Company adopted Accounting Standards Update (“ASU”) No. 2011-05, “ Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.”   This update requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income.

2. LONG-TERM DEBT

       On June 6, 2012, the Company, through its wholly-owned subsidiary Dollar Tree Stores, Inc., entered into a five-year $750.0 million Unsecured Credit Agreement (the Unsecured Credit Agreement or the Agreement) with Wells Fargo Bank, N.A., as administrative agent and the lenders party thereto.  The Agreement provides for a $750.0 million revolving line of credit, including up to $150.0 million in available letters of credit.  The interest rate on the facility will be based, at the Company’s option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  The revolving line of credit bears a facilities fee, calculated as a percentage, as defined, of the total amount of the line of credit, payable quarterly.  The Agreement also bears an administrative fee payable annually.  The Agreement, 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.  The Company’s February 2008, $550.0 million Credit Agreement was terminated concurrent with entering into this Agreement.  As of July 28, 2012, $250.0 million was outstanding under this Agreement.

3. FUEL DERIVATIVE CONTRACTS

In order to manage fluctuations in cash flows resulting from changes in diesel fuel costs, the Company entered into fuel derivative contracts with third parties.  The Company has entered into fuel derivative contracts for approximately 1.2 million gallons of diesel fuel, or approximately 36% of the Company’s domestic truckload fuel needs from August 2012 through October 2012 and 1.4 million gallons of diesel fuel, or approximately 20% of the Company’s domestic truckload fuel needs from November 2012 through April 2013.  Under these contracts, the Company pays the third party a fixed price for diesel fuel and receives variable diesel fuel prices at amounts approximating current diesel fuel costs, thereby creating the economic equivalent of a fixed-rate obligation.  These derivative contracts do not qualify for hedge accounting and therefore all changes in fair value for these derivatives are included in “Other (income) expense, net” on the accompanying condensed consolidated income statements. The fair value of these contracts at July 28, 2012 was an asset of $0.7 million.

 

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4. FAIR VALUE MEASUREMENTS

The Company’s cash and cash equivalents, restricted investments and diesel fuel swaps represent the financial assets and liabilities that were accounted for at fair value on a recurring basis as of July 28, 2012.  As required, financial assets and liabilities are classified in the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  The fair value of the Company’s cash and cash equivalents and restricted investments was $379.8 million and $83.6 million, respectively at July 28, 2012.  These fair values were determined using Level 1 measurements in the fair value hierarchy.  The fair value of the diesel fuel swaps as of July 28, 2012 was an asset of $0.7 million and was estimated using Level 2 measurements in the fair value hierarchy which used discounted cash flow calculations based upon diesel fuel cost curves.

 

The carrying value of the Company’s long-term debt approximates its fair value because the debt’s interest rates vary with market interest rates.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).  There were no changes in fair value related to these assets during the 13 or 26 weeks ended July 28, 2012.

5. INCOME TAXES

During the second quarter of 2012, the Company adjusted its balance of unrecognized tax benefits primarily as a result of statute expirations, settlement of state tax audits and additional reserves for uncertain tax positions.  Accordingly, “Income taxes payable, long-term” was decreased by $11.3 million.  The total amount of unrecognized tax benefits as of July 28, 2012, that, if recognized would affect the effective tax rate was $2.8 million (net of federal tax benefit).

 

 

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6. NET INCOME PER SHARE

The following table sets forth the calculation of basic and diluted net income per share:

		13 Weeks Ended								26 Weeks Ended
		July 28,				July 30,				July 28,				July 30,
(In millions, except per share data)		2012				2011				2012				2011
Basic net income per share:
Net income		$	119.2			$	94.9			$	235.3			$	195.9
Weighted average number of
shares outstanding			231.3				244.6				231.4				244.9
Basic net income per share		$	0.52			$	0.39			$	1.02			$	0.80
Diluted net income per share:
Net income		$	119.2			$	94.9			$	235.3			$	195.9
Weighted average number of
shares outstanding			231.3				244.6				231.4				244.9
Dilutive effect of stock options and
restricted stock units (as determined
by applying the treasury stock method)			1.3				1.5				1.3				1.6
Weighted average number of shares and
dilutive potential shares outstanding			232.6				246.1				232.7				246.5
Diluted net income per share		$	0.51			$	0.39			$	1.01			$	0.79

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, 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," “view,” “target” or "estimate."  For example, our forward-looking statements include statements regarding:

·	our anticipated sales, including comparable store net sales, net sales growth, earnings growth and new store growth;

·	costs of pending and possible future legal claims;

·	the average size of our stores and their performance compared with other store sizes;

·	the effect of the continued shift in merchandise mix to include more consumables and the continued roll-out of frozen and refrigerated merchandise on gross profit margin and sales;

·	the possible effect of the current economic downturn, inflation and other economic changes on our costs and profitability, including future changes in domestic and foreign freight costs, shipping rates, fuel costs and wage and benefit costs;

·	our cash needs, including our ability to fund our future capital expenditures and working capital requirements; and,

·	the future reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China and Hong Kong.

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 summarized below and the more detailed discussions in the "Risk Factors” and “Business” sections in our Annual Report on Form 10-K filed March 15, 2012.  Also see section 1A. “Risk Factors” in Part II of this Quarterly Report on Form 10-Q.

·	Our profitability is vulnerable to cost increases.

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

·	Changes in federal, state or local law, or our failure to comply with such laws, could increase our expenses and expose us to legal risks.

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

·	Risks associated with our domestic and foreign suppliers from whom our products are sourced could affect our financial performance.

 

 

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·	We could encounter disruptions in our distribution network or additional costs in distributing merchandise.

·	A downturn in economic conditions could impact our sales.

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

 

·	Pressure from competitors may reduce our sales and profits.

·	A significant disruption in or security breach in our computer systems could adversely affect our operations or our ability to secure customer, employee and company data.

 

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

·	Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a takeover attempt that may be in a shareholder’s best interest.

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 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, it is against our policy to 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, as we have a policy against confirming information issued by others.  Thus, to the extent that reports issued by securities analysts contain any financial projections, forecasts or opinions, such reports are not our responsibility.

Overview

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 change 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 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.

At July 28, 2012 we operated 4,406 stores in 48 states and the District of Columbia, as well as 117 stores in Canada, with a total of 39.2 million selling square feet compared to 4,242 stores with 36.6 million selling square feet at July 30, 2011.  During the 26 weeks ended July 28, 2012, we opened 187 stores, expanded 65 stores and closed 15 stores, compared to 159 stores opened, 64 stores expanded and 18 stores closed during the 26 weeks ended July 30, 2011.  In the 26 weeks ended July 28, 2012 and July 30, 2011, we added approximately 1.7 million and 1.5 million selling square feet, respectively, of which approximately 0.2 million and 0.3 million, respectively, was added through expanding existing stores.  The average size of stores opened during the 26 weeks ended July 28, 2012 was approximately 8,300 selling square feet.  We believe that this size store is in the range of our optimal size operationally and that this size also gives our customers a shopping environment which invites them to shop longer, buy more and make return visits, which increases our customer traffic.

 

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For the 13 and 26 weeks ended July 28, 2012, comparable store net sales increased 4.5% and 5.1% primarily due to increased traffic.  We believe comparable store net sales continue to be positively affected by a number of our initiatives, as debit and credit card penetration continued to increase in the 13 and 26 weeks ended July 28, 2012, and we continued the roll-out of frozen and refrigerated merchandise to more of our stores.  At July 28, 2012, we had frozen and refrigerated merchandise in approximately 2,400 stores compared to approximately 2,040 stores at July 30, 2011.  We believe that this has and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers.  In addition, we accept food stamps (under the Supplemental Nutrition Assistance Program (“SNAP”)) in approximately 4,060 qualified stores compared to approximately 3,735 stores at July 30, 2011.

 

We continue to see increases in the demand for basic, consumable products in 2012.  As a result, the mix of inventory carried in our stores continues to shift to more consumer product merchandise which we believe increases the traffic in our stores and helps to increase our sales.  This shift in mix may impact our merchandise costs.

 

Results of Operations

13 Weeks Ended July 28, 2012 Compared to the 13 Weeks Ended July 30, 2011

Net Sales .   Net sales increased 10.5%, or $162.2 million, compared with last year’s second quarter resulting from sales in our new stores and a 4.5% increase in comparable store net sales.  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 or expand stores near existing stores.

Gross Profit .   Gross profit margin remained at 35.2% in the current quarter compared to the same quarter last year.  Merchandise mark-on improved and occupancy and distribution costs were leveraged as a result of the comparable store sales increase.  These benefits were offset by a favorable adjustment related to prior periods that was recorded in the second quarter of 2011 and increases in merchandise costs resulting from the continued increased penetration of consumable products in our merchandise mix .

 
 

Selling, General and Administrative Expenses .   Selling, general, and administrative expenses for the current quarter decreased to 24.4%, as a percentage of net sales, compared to 25.2% for the same period last year.  This net decrease was primarily due to the following:

·

Payroll-related expenses decreased 60 basis points due to reduced stock compensation expense, leverage associated with the increase in comparable net store sales, inproved store productivity and a favorable adjustment related to the development of prior years’ workers’ compensation claims in the current year quarter.

·	Store operating costs decreased 15 basis points due to leverage associated with the increase in comparable net store sales as well as favorable utilities and repairs and maintenance expenses.

Operating Income.   Operating income for the current quarter was 10.8% as a percentage of net sales compared to 10.0% for the same period last year.  This increase is the result of lower selling, general and administrative expenses, as a percentage of net sales, as noted above.

Income Taxes.   Our effective tax rate for the 13 weeks ended July 28, 2012 was 35.0% compared to 37.7% for the 13 weeks ended July 30, 2011.  This decrease is the result of statute expirations and the settlement of state tax audits.

26 Weeks Ended July 28, 2012 Compared to the 26 Weeks Ended July 30, 2011

Net Sales .   Net sales increased 11.0%, or $339.8 million, over the same period last year resulting from sales in our new stores and a 5.1% increase in comparable store net sales.  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 or expand stores near existing stores.

 

 

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Gross Profit .   Gross profit margin for the 26 weeks ended July 28, 2012 remained at 35.1% compared to the same period last year.  Improved merchandise mark-on and leverage in occupancy and distribution costs resulting from the comparable store sales increase were offset by increases in merchandise cost resulting from the continued penetration of consumable products in our merchandise mix and a favorable adjustment related to prior periods that was recorded in the second quarter of 2011 .

 
  Selling, General and Administrative Expenses .   Selling, general, and administrative expenses for the 26 weeks ended July 28, 2012 decreased to 24.2%, as a percentage of net sales, compared to 24.9% for the same period last year.  This net decrease was primarily due to the following:

 

·	Payroll expenses, store operating costs and depreciation expenses decreased as a percentage of sales due to the leverage associated with the comparable store sales increase.

·	Workers’ compensation expenses decreased due to a favorable adjustment related to the development of prior years claims compared to the same period in 2011.

·	Store operating costs also decreased due to lower utility costs resulting from favorable weather conditions, lower trash removal expenses and lower repairs and maintenance expenses.

Operating Income.   Operating income for the 26 weeks ended July 28, 2012 was 10.9% as a percentage of net sales compared to 10.2% for the same period last year.  This increase is the result of lower selling, general and administrative expenses, as a percentage of net sales, as noted above.

Income Taxes.   Our effective tax rate for the 26 weeks ended July 28, 2012 was 36.7% compared to 37.6% for the 26 weeks ended July 30, 2011.  This decrease is the result of statute expirations and the settlement of state tax audits.

Liquidity and Capital Resources

Our business requires capital to open new stores, expand our distribution network and operate our existing business.  Our working capital requirements for our existing business 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, funded our store opening and expansion programs and repurchased shares from internally generated funds and borrowings under our credit facilities.

The following table compares cash flow information for the 26 weeks ended July 28, 2012 and July 30, 2011:

		26 Weeks Ended
		July 28,		July 30,
(In millions)		2012		2011
Net cash provided by (used in):
Operating activities		$   279.8		$   259.2
Investing activities		(140.4)		(70.3)
Financing activities		(46.3)		(79.4)