DLTR-2013-02-02-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 2, 2013
Commission File No.0-25464
DOLLAR TREE, INC.
(Exact name of registrant as specified in its charter)
Virginia
26-2018846
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
500 Volvo Parkway, Chesapeake, VA 23320
(Address of principal executive offices)
Registrant’s telephone number, including area code: (757) 321-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)
NASDAQ
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (X)
    No (  )
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes (  )
    No (X)
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X)
    No (  )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).




Yes (X)
    No (  )
   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X)
Accelerated filer (  )
Non-accelerated filer (  )
Smaller reporting company (  )
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (  )
    No (X)
The aggregate market value of Common Stock held by non-affiliates of the Registrant on July 27, 2012, was $11,507,786,430, based on a $51.73 average of the high and low sales prices for the Common Stock on such date.  For purposes of this computation, all executive officers and directors have been deemed to be affiliates.  Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.
On March 6, 2013, there were 224,590,879 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information regarding securities authorized for issuance under equity compensation plans called for in Item 5 of Part II and the information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company to be held June 20, 2013, which will be filed with the Securities and Exchange Commission not later than May 31, 2013.

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DOLLAR TREE, INC.
TABLE OF CONTENTS

 
 
Page
 
PART I
 
 
 
 
Item 1.
BUSINESS
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 1B.
UNRESOLVED STAFF COMMENTS
 
 
 
Item 2.
PROPERTIES
 
 
 
Item 3.
LEGAL PROCEEDINGS
 
 
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
 
PART II
 
 
 
 
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
 
 
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
Item 6.
SELECTED FINANCIAL DATA
 
 
 
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 
 
CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 
 
ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
 
Item 9A.
CONTROLS AND PROCEDURES
 
 
 
Item 9B.
OTHER INFORMATION
 
 
 
 
PART III
 
 
 
 
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
 
 
Item 11.
EXECUTIVE COMPENSATION
 
 
 
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
 
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
 
Item 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 
 
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
 
 
PART IV
 
 
 
 
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
 
 
 
SIGNATURES

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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 and results.  They include statements preceded by, followed by or including 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 and earnings growth;
costs of pending and possible future legal claims;
our growth plans, including our plans to add, expand or relocate stores, our anticipated square footage increase, and our ability to renew leases at existing store locations;
the average size of our stores to be added in 2013 and beyond;
the effect of a shift in merchandise mix to consumables and the increase in the number of our stores with freezers and coolers on gross profit margin and sales;
the net sales per square foot, net sales and operating income of our stores and store-level cash payback metrics;
the potential effect of the current economic downturn, inflation and other economic changes on our costs and profitability, including the potential effect of future changes in minimum wage rates, shipping rates, domestic and import freight costs, fuel costs and wage and benefit costs;
our gross profit margin, earnings, inventory levels and ability to leverage selling, general and administrative and other fixed costs;
our seasonal sales patterns including those relating to the length of the holiday selling seasons and the effect of an earlier Easter in 2013;
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;
our cash needs, including our ability to fund our future capital expenditures and working capital requirements;
our expectations regarding competition and growth in our retail sector; and
management's estimates associated with our critical accounting policies, including inventory valuation, accrued expenses and income taxes.
For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the risk factors described in Item 1A “Risk Factors” beginning on page 8, as well as Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 19 of this Form 10-K.
Our forward-looking statements could be wrong in light of these 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 annual 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 securities 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 projections, forecasts or opinions, such reports are not our responsibility.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "Dollar Tree" generally refer to Dollar Tree, Inc. and its direct and indirect subsidiaries on a consolidated basis.  Unless specifically indicated otherwise, any references to “2013” or “fiscal 2013”, “2012” or “fiscal 2012”, “2011” or “fiscal 2011”, and “2010” or “fiscal 2010”, relate to as of or for the years ended February 1, 2014, February 2, 2013, January 28, 2012 and January 29, 2011, respectively.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.dollartree.com as soon as reasonably practicable after electronic filing of such reports with the SEC.

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PART I
Item 1.  BUSINESS
Overview
We are the leading operator of discount variety stores offering merchandise at the fixed price of $1.00.  We believe the variety and quality of products we sell for $1.00 sets us apart from our competitors.  At February 2, 2013, we operated 4,671 discount variety retail stores.  Our stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Tree Canada, Dollar Giant and Dollar Bills.  In 4,476 of these stores, we sell substantially all items for $1.00 or less in the United States and $1.25(CAD) or less in Canada.  In substantially all of the remaining stores, operating as Deal$, we sell items for $1.00 or less but also sell items for more than $1.00.
We believe our optimal store size is between 8,000 and 10,000 selling square feet.  This store size provides the appropriate amount of space for our broad merchandise offerings while allowing us to provide ease of shopping to our customers.  As we have been expanding our merchandise offerings, we have added freezers and coolers to approximately 2,550 stores to increase sales and shopping frequency.  At January 31, 2009, we operated 3,591 stores in 48 states.  At February 2, 2013, we operated 4,531 stores in 48 states and the District of Columbia, as well as 140 stores in Canada.  Our selling square footage increased from approximately 30.3 million square feet in January 2009 to 40.5 million square feet in February 2013.  Our store growth has resulted primarily from opening new stores and the acquisition of Dollar Giant.
Business Strategy
Value Merchandise Offering.  We strive to exceed our customers' expectations of the variety and quality of products that they can purchase for $1.00 by offering items that we believe typically sell for higher prices elsewhere.  We buy approximately 58% to 60% of our merchandise domestically and import the remaining 40% to 42%.  Our domestic purchases include basic, seasonal, closeouts and promotional merchandise.  We believe our mix of imported and domestic merchandise affords our buyers flexibility that allows them to consistently exceed the customer's expectations.  In addition, direct relationships with manufacturers permit us to select from a broad range of products and customize packaging, product sizes and package quantities that meet our customers' needs.
Mix of Basic Variety and Seasonal Merchandise.  We maintain a balanced selection of products within traditional variety store categories.  We offer a wide selection of everyday basic products and we supplement these basic, everyday items with seasonal, closeout and promotional merchandise.  We attempt to keep certain basic consumable merchandise in our stores continuously to establish our stores as a destination and we have slightly increased the mix of consumable merchandise in order to increase the traffic in our stores.  Closeout merchandise is purchased opportunistically and represents less than 10% of our purchases.
Our merchandise mix consists of:
consumable merchandise, which includes candy and food, health and beauty care, and household consumables such as paper, plastics and household chemicals and in select stores, frozen and refrigerated food;
variety merchandise, which includes toys, durable housewares, gifts,  party goods, greeting cards, softlines, and other items; and
seasonal goods, which include Easter, Halloween and Christmas merchandise.
We have added freezers and coolers to certain stores and increased the amount of consumable merchandise carried by those stores.  We believe this initiative helps drive additional transactions and allows us to appeal to a broader demographic mix.  We have added freezers and coolers to 330 additional stores in 2012.  Therefore, as of February 2, 2013, we have freezers and coolers in 2,550 of our stores.  We plan to add them to 475 more stores in 2013.  As a result of the installation of freezers and coolers in select stores, consumable merchandise has grown as a percentage of purchases and sales and we expect this trend to continue. The following table shows the percentage of sales of each major product group for the years ended February 2, 2013 and January 28, 2012:
 
February 2,
 
January 28,
Merchandise Type
2013
 
2012
Consumable
51.4
%
 
50.8%
Variety categories
44.2
%
 
44.6%
Seasonal
4.4
%
 
4.6%

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At any point in time, we carry approximately 6,500 items in our stores and as of the end of 2012 approximately 3,800 of our basic, everyday items are automatically replenished.  The remaining items are primarily ordered by our store managers on a weekly basis.  Through automatic replenishment and our store managers’ ability to order product, each store manager is able to satisfy the demands of their particular customer base.
Customer Payment Methods.  All of our stores in the United States accept cash, checks, debit cards and credit cards.  Along with the shift to more consumables and the rollout of freezers and coolers, we have increased the number of stores accepting Electronic Benefits Transfer (EBT) cards and food stamps (under the Supplemental Nutrition Assistance Program (“SNAP”)) to approximately 4,200 stores as of February 2, 2013.
Convenient Locations and Store Size.  We primarily focus on opening new stores in strip shopping centers anchored by mass merchandisers or grocers, whose target customers we believe to be similar to ours.  Our stores have proven successful in metropolitan areas, mid-sized cities and small towns.  The range of our store sizes allows us to target a particular location with a store that best suits that market and takes advantage of available real estate opportunities.  Our stores are attractively designed and create an inviting atmosphere for shoppers by using bright lighting, vibrant colors and decorative signs.  We enhance the store design with attractive merchandise displays.  We believe this design attracts new and repeat customers and enhances our image as both a destination and impulse purchase store.
For more information on retail locations and retail store leases, see Item 2 "Properties” beginning on page 12 of this Form 10-K.
Profitable Stores with Strong Cash Flow.  We maintain a disciplined, cost-sensitive approach to store site selection in order to minimize the initial capital investment required and maximize our potential to generate high operating margins and strong cash flows.  We believe that our stores have a relatively small shopping radius, which allows us to profitably concentrate multiple stores within a single market.  Our ability to open new stores is dependent upon, among other factors, locating suitable sites and negotiating favorable lease terms.
The strong cash flows generated by our stores allow us to self-fund infrastructure investment and new stores.  Over the past five years, cash flows from operating activities have exceeded capital expenditures.
For more information on our results of operations, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 19 of this Form 10-K.
Cost Control.  We believe that our substantial buying power and our flexibility in making sourcing decisions contributes to our successful purchasing strategy, which includes targeted merchandise margin goals by category.  We also believe our ability to select quality merchandise helps to minimize markdowns.  We buy products on an order-by-order basis and have no material long-term purchase contracts or other assurances of continued product supply or guaranteed product cost.  No vendor accounted for more than 10% of total merchandise purchased in any of the past five years.
Our supply chain systems continue to provide us with valuable sales information to assist our buyers and improve merchandise allocation to our stores.  Controlling our inventory levels has resulted in more efficient distribution and store operations.
Information Systems.  We believe that investments in technology help us to increase sales and control costs.  Our inventory management system has allowed us to improve the efficiency of our supply chain, improve merchandise flow, increase inventory turnover and control distribution and store operating costs.  Our automatic replenishment system replenishes key items, based on actual store level sales and inventory.  At the end of 2012, we had approximately 3,800 basic, everyday items on automatic replenishment.
Point-of-sale data allows us to track sales and inventory by merchandise category at the store level and assists us in planning for future purchases of inventory.  We believe that this information allows us to ship the appropriate product to stores at the quantities commensurate with selling patterns.  Using this point-of-sale data to plan purchases of inventory has helped us increase our inventory turns in each of the last five years.  Our inventory turns were 4.3 in 2012.
Corporate Culture and Values.  We believe that honesty and integrity, doing the right things for the right reasons, and treating people fairly and with respect are core values within our corporate culture.  We believe that running a business, and certainly a public company, carries with it a responsibility to be above reproach when making operational and financial decisions.  Our executive management team visits and shops our stores like every customer, and ideas and individual creativity on the part of our associates are encouraged, particularly from our store managers who know their stores and their customers.  We have standards for store displays, merchandise presentation, and store operations.  We maintain an open door

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policy for all associates.  Our distribution centers are operated based on objective measures of performance and virtually everyone in our store support center is available to assist associates in the stores and distribution centers.
Our disclosure committee meets at least quarterly and monitors our internal controls over financial reporting to ensure that our public filings contain discussions about the risks our business faces.  We believe that we have the controls in place to be able to certify our financial statements.  Additionally, we have complied with the listing requirements for the Nasdaq Stock Market.
Growth Strategy
Store Openings and Square Footage Growth.  The primary factors contributing to our net sales growth have been new store openings, an active store expansion and remodel program, and selective mergers and acquisitions.  In the last five years, net sales increased at a compound annual growth rate of 12.3%.  We expect that the majority of our future sales growth will come primarily from new store openings and from our store expansion and relocation program.
The following table shows the average selling square footage of our stores and the selling square footage per new store opened over the last five years.  Our growth and productivity statistics are reported based on selling square footage because our management believes the use of selling square footage yields a more accurate measure of store productivity.
Year
 
Number of Stores
 
Average Selling Square Footage Per Store
 
Average Selling Square Footage Per New Store Opened
2008
 
3,591
 
8,440
 
8,100
2009
 
3,806
 
8,480
 
7,950
2010
 
4,101
 
8,570
 
8,400
2011
 
4,351
 
8,640
 
8,360
2012
 
4,671
 
8,660
 
8,060
We expect to increase our selling square footage in the future by opening new stores in underserved markets and strategically increasing our presence in our existing markets via new store openings and store expansions (expansions include store relocations).  In fiscal 2013 and beyond, we plan to predominantly open stores that are approximately 8,000 - 10,000 selling square feet and we believe this size allows us to achieve our objectives in the markets in which we plan to expand.  At February 2, 2013, approximately 2,560 of our stores, totaling 65.4% of our selling square footage, were 8,000 selling square feet or larger.
We also continue to grow our Deal$ format, which offers an expanded assortment of merchandise including items that sell for more than $1.00.  These stores provide us an opportunity to leverage our Dollar Tree infrastructure in different merchandise concepts, including higher price points, without disrupting the single-price point model in our Dollar Tree stores.  We operated 194 Deal$ stores as of February 2, 2013.
In addition to new store openings, we plan to continue our store expansion program to increase our net sales per store and take advantage of market opportunities.  We target stores for expansion based on the current sales per selling square foot and changes in market opportunities.  Stores targeted for expansion are generally less than 6,000 selling square feet in size.  Store expansions generally increase the existing store size by approximately 3,300 selling square feet.
Since 1995, we have added a total of 695 stores through several mergers and acquisitions.  Our acquisition strategy has been to target companies that have a similar single-price point concept that have shown success in operations or companies that provide a strategic advantage.  We evaluate potential acquisition opportunities as they become available.
In November 2010, we completed our acquisition of 86 Dollar Giant stores based in Vancouver, British Columbia.  These stores offer a wide assortment of quality general merchandise, contemporary seasonal goods and everyday consumables, all priced at $1.25 (CAD) or less.  The stores that we acquired operate in the Canadian provinces of British Columbia, Ontario, Alberta and Saskatchewan and we now have stores in Manitoba.  This is the first expansion of our retail operations outside of the United States and provides us with a proven management team and distribution network as well as additional potential store growth in a new market.
From time to time, we also acquire the rights to store leases through bankruptcy or other proceedings.  We will continue to take advantage of these opportunities as they arise depending upon several factors including their fit within our location and selling square footage size parameters.

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Merchandising and Distribution.  Expanding our customer base is important to our growth plans.  We plan to continue to stock our new stores with a compelling mix of ever-changing merchandise that our customers have come to appreciate.  Consumable merchandise typically leads to more frequent return trips to our stores resulting in increased sales.  The presentation and display of merchandise in our stores are critical to communicating value to our customers and creating a more exciting shopping experience.  We believe our approach to visual merchandising results in higher sales volume and an environment that encourages impulse purchases.
A strong and efficient distribution network is critical to our ability to grow and to maintain a low-cost operating structure.  In July 2012, we began construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which is expected to begin shipping product in 2013. In 2013, we plan to expand our Marietta, Oklahoma distribution center to 1.0 million square feet and lease an additional 0.4 million square feet at our distribution center in San Bernardino, California. In 2011, we expanded our Savannah distribution center to 1.0 million square feet.  In 2009, we purchased a new distribution center in San Bernardino, California which began shipping merchandise in April 2010.  This distribution center replaced the Salt Lake City distribution center which closed when its lease expired in April 2010.  We believe our distribution center network is currently capable of supporting approximately $8.0 billion in annual sales in the United States.  Upon completion of the additional distribution center capacity listed above, we believe our distribution center network will support approximately $10.2 billion in annual sales in the United States. New distribution sites are strategically located to reduce stem miles, maintain flexibility and improve efficiency in our store service areas. We also are a party to an agreement which provides distribution services from two facilities in Canada.
Our stores receive approximately 90% of their inventory from our distribution centers via contract carriers.  The remaining store inventory, primarily perishable consumable items and other vendor-maintained display items, are delivered directly to our stores from vendors.  For more information on our distribution center network, see Item 2 “Properties” beginning on page 12 of this Form 10-K.
Competition
The retail industry is highly competitive and we expect competition to increase in the future.  We operate in the discount retail merchandise business, which is currently and is expected to continue to be highly competitive with respect to price, store location, merchandise quality, assortment and presentation, and customer service.  Our competitors include single-price dollar stores, multi-price dollar stores, mass merchandisers, discount retailers and variety retailers.  In addition, several competitors have locations with dollar price point merchandise in their stores, which increases competition.  We believe we differentiate ourselves from other retailers by providing high value, high quality, low cost merchandise in attractively designed stores that are conveniently located.  Our sales and profits could be reduced by increases in competition.  There are no significant economic barriers for others to enter our retail sector.
Trademarks
We are the owners of several federal service mark registrations including "Dollar Tree," the "Dollar Tree" logo, the Dollar Tree logo with a “1”, and "One Price...One Dollar."  In addition, we own a concurrent use registration for "Dollar Bill$" and the related logo.  We also acquired the rights to use trade names previously owned by Everything's A Dollar, a former competitor in the $1.00 price point industry.  Several trade names were included in the purchase, including the marks "Everything's $1.00 We Mean Everything!," and "Everything's $1.00."  With the acquisition of Deal$, we became the owners of the trademark "Deal$”.  With the acquisition of Dollar Giant, we became the owners of the trademark “Dollar Giant” and others in Canada. We have federal trademark registrations for a variety of private labels that we use to market some of our product lines.  Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly renewed, they have a perpetual duration.
Employees
We employed approximately 15,380 full-time and 66,540 part-time associates on February 2, 2013.  Part-time associates work an average of less than 35 hours per week.  The number of part-time associates fluctuates depending on seasonal needs.  We consider our relationship with our associates to be good, and we have not experienced significant interruptions of operations due to labor disagreements.
Item 1A.  RISK FACTORS
An investment in our common stock involves a high degree of risk.  Any failure to meet market expectations, including our comparable store sales growth rate, earnings and earnings per share or new store openings, could cause the market price of our stock to decline.  You should carefully consider the specific risk factors listed below together with all other information included or incorporated in this report.  Any of the following risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise.  In such event, our business, financial condition, results of operations or prospects could be materially adversely affected.

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Our profitability is vulnerable to cost increases.
Future increase in costs such as the cost of merchandise, wage and benefit costs, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability.  We do not raise the sales price of our merchandise to offset cost increases because we are committed to selling primarily at the $1.00 price point to continue to provide value to the customer.  We are dependent on our ability to adjust our product assortment, to operate more efficiently or effectively or to increase our comparable store net sales in order to offset inflation.  We can give no assurance that we will be able to operate more efficiently or increase our comparable store net sales in the future.  Please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," beginning on page 19 of this Form 10-K for further discussion of the effect of Inflation and Other Economic Factors on our operations.
A downturn in economic conditions could impact our sales.
Deterioration in economic conditions, such as those caused by a recession, inflation, higher unemployment, consumer debt levels, lack of available credit, cost increases, as well as adverse weather conditions or terrorism, could reduce consumer spending or cause customers to shift their spending to products we either do not sell or do not sell as profitably.  Adverse economic conditions could disrupt consumer spending and significantly reduce our sales, decrease our inventory turnover, cause greater markdowns or reduce our profitability due to lower margins.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation involving employees, consumers, suppliers, competitors, shareholders, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation.  We are currently defendants in several employment-related class action cases and changes in Federal law could cause these types of claims to rise.  The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify.  Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time.  In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required.  The cost to defend current and future litigation may be significant.  There also may be adverse publicity associated with litigation, including litigation related to product safety and customer information, which could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.
For a discussion of current legal matters, please see Item 3. “Legal Proceedings” beginning on page 13 of this Form 10-K.  Resolution of certain matters described in that item, if decided against the Company, could have a material adverse effect on our results of operations, accrued liabilities or cash flows.
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 business is subject to a wide array of laws and regulations.  Significant legislative changes, such as the healthcare legislation, that impact our relationship with our workforce could increase our expenses and adversely affect our operations.  Changes in other regulatory areas, such as consumer credit, privacy and information security, product safety or environmental protection, among others, could cause our expenses to increase.  In addition, if we fail to comply with applicable laws and regulations, particularly wage and hour laws, we could be subject to legal risk, including government enforcement action and class action civil litigation, which could adversely affect our results of operations.  Changes in tax laws, the interpretation of existing laws, or our failure to sustain our reporting positions on examination could adversely affect our effective tax rate.
Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.
Existing store sales growth is dependent on a variety of factors including merchandise selection and availability, store operations and customer satisfaction.  In addition, competition could affect our sales.  Our highest sales periods are the Christmas and Easter seasons and we generally realize a disproportionate amount of our net sales and our operating and net income during the fourth quarter.  In anticipation, we stock extra inventory and hire many temporary employees to prepare our stores.  A reduction in sales during these periods could adversely affect our operating results, particularly operating and net income, to a greater extent than if a reduction occurred at other times of the year.  Untimely merchandise delays due to receiving or distribution problems could have a similar effect.  Easter was observed on April 24, 2011, April 8, 2012, and will be observed on March 31, 2013.

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Expanding our square footage profitably depends on a number of uncertainties, including our ability to locate, lease, build out and open or expand stores in suitable locations on a timely basis under favorable economic terms.  In addition, our expansion is dependent upon third-party developers’ abilities to acquire land, obtain financing, and secure necessary permits and approvals.  Turmoil in the financial markets has made it difficult for third party developers to obtain financing for new projects.  We also open or expand stores within our established geographic markets, where new or expanded stores may draw sales away from our existing stores.  We may not manage our expansion effectively, and our failure to achieve our expansion plans could materially and adversely affect our business, financial condition and results of operations.
Risks associated with our domestic and foreign suppliers from whom our products are sourced could affect our financial performance.
We are dependent on our vendors to supply merchandise in a timely and efficient manner.  If a vendor fails to deliver on its commitments due to financial or other difficulties, we could experience merchandise shortages which could lead to lost sales or increased merchandise costs if alternative sources must be used.
Merchandise imported directly accounts for approximately 40% to 42% of our total retail value purchases.  In addition, we believe that a portion of our goods purchased from domestic vendors is imported.  China is the source of a substantial majority of our imports.  Imported goods are generally less expensive than domestic goods and increase our profit margins.  A disruption in the flow of our imported merchandise or an increase in the cost of those goods may significantly decrease our profits.  Risks associated with our reliance on imported goods may include disruptions in the flow of or increases in the cost of imported goods because of factors such as:
raw material shortages, work stoppages, strikes and political unrest;
economic crises and international disputes;
changes in currency exchange rates or policies and local economic conditions, including inflation in the country of origin; and
failure of the United States to maintain normal trade relations with China.
We could encounter disruptions in our distribution network or additional costs in distributing merchandise.
Our success is dependent on our ability to transport merchandise to our distribution centers and then ship it to our stores in a timely and cost-effective manner.  We may not anticipate, respond to or control all of the challenges of operating our receiving and distribution systems.  Additionally, if a vendor fails to deliver on its commitments, we could experience merchandise shortages that could lead to lost sales or increased costs.  Some of the factors that could have an adverse effect on our distribution network or costs are:
Shipping disruption.  Our oceanic shipping schedules may be disrupted or delayed from time to time.
Shipping costs.  We could experience increases in shipping rates imposed by the trans-Pacific ocean carriers.  Changes in import duties, import quotas and other trade sanctions could increase our costs.
Diesel fuel costs.  We have experienced significant volatility in diesel fuel costs over the past few years, which could recur unexpectedly, at any time.
Vulnerability to natural or man-made disasters.  A fire, explosion or natural disaster at a port or any of our distribution facilities could result in a loss of merchandise and impair our ability to adequately stock our stores.  Some facilities are vulnerable to earthquakes, hurricanes or tornadoes.
Labor disagreement.  Labor disagreements, disruptions or strikes may result in delays in the delivery of merchandise to our distribution centers or stores and increase costs.
War, terrorism and other events.  War and acts of terrorism in the United States, the Middle East, or in China or other parts of Asia, where we buy a significant amount of our imported merchandise, could disrupt our supply chain or increase our transportation costs.
Economic conditions.  Suppliers may encounter financial or other difficulties.
Our profitability is affected by the mix of products we sell.
Our gross profit margin could decrease if we increase the proportion of higher cost goods we sell in the future.  In recent years, the percentage of our sales from higher cost consumable products has increased and is likely to increase in 2013.  As a result, our gross profit margin could decrease unless we are able to maintain our current merchandise cost sufficiently to offset any decrease in our product margin percentage.  We can give no assurance that we will be able to do so.

10



Pressure from competitors may reduce our sales and profits.
The retail industry is highly competitive.  The marketplace is highly fragmented as many different retailers compete for market share by utilizing a variety of store formats and merchandising strategies.  We expect competition to increase in the future.  There are no significant economic barriers for others to enter our retail sector.  Some of our current or potential competitors have greater financial resources than we do.  We cannot guarantee that we will continue to be able to compete successfully against existing or future competitors.  Please see Item 1, “Business,” beginning on page 5 of this Form 10-K for further discussion of the effect of competition on our operations.
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.
We rely extensively on our computer systems to manage inventory, process customer transactions and summarize results.  Systems may be subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events.  If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions, which could aversely affect our results of operations.
The protection of customer, employee, and company data is increasingly demanding, with frequent imposition of new requirements across our business.  In addition, our customers have a high expectation that we will adequately protect their personal information.  A significant breach of customer, employee, or company data could damage our reputation and result in lost sales, fines, and/or lawsuits.
Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.
Our growth and performance is dependent on the skills, experience and contributions of our associates, executives and key personnel.  Various factors, including overall labor availability, wage rates, regulatory or legislative impacts, and benefit costs could impact the ability to attract and retain qualified associates at our stores, distribution centers and corporate office.
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 Articles of Incorporation and Bylaws currently contain provisions that may delay or discourage a takeover attempt that a shareholder might consider in his best interest.  These provisions, among other things:
provide that only the Board of Directors, chairman or president may call special meetings of the shareholders;
establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings;
permit the Board of Directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock.
However, we believe that these provisions allow our Board of Directors to negotiate a higher price in the event of a takeover attempt which would be in the best interest of our shareholders.

Item 1B.  UNRESOLVED STAFF COMMENTS
None.

11




Item 2.  PROPERTIES
Stores
As of February 2, 2013, we operated 4,671 stores in 48 states and the District of Columbia, as well as the Canadian provinces of British Columbia, Ontario, Alberta, Saskatchewan and Manitoba as detailed below:
Alabama
 
95

 
Maine
 
25

 
Oklahoma
 
52

Arizona
 
84

 
Maryland
 
100

 
Oregon
 
83

Arkansas
 
49

 
Massachusetts
 
88

 
Pennsylvania
 
239

California
 
396

 
Michigan
 
172

 
Rhode Island
 
20

Colorado
 
76

 
Minnesota
 
79

 
South Carolina
 
85

Connecticut
 
49

 
Mississippi
 
59

 
South Dakota
 
9

Delaware
 
26

 
Missouri
 
91

 
Tennessee
 
114

District of Columbia
 
1

 
Montana
 
10

 
Texas
 
285

Florida
 
342

 
Nebraska
 
16

 
Utah
 
44

Georgia
 
176

 
Nevada
 
33

 
Vermont
 
5

Idaho
 
23

 
New Hampshire
 
30

 
Virginia
 
144

Illinois
 
186

 
New Jersey
 
106

 
Washington
 
87

Indiana
 
97

 
New Mexico
 
33

 
West Virginia
 
35

Iowa
 
35

 
New York
 
209

 
Wisconsin
 
89

Kansas
 
32

 
North Carolina
 
179

 
Wyoming
 
12

Kentucky
 
75

 
North Dakota
 
7

 
 
 
 

Louisiana
 
76

 
Ohio
 
173

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Alberta
 
18

 
Manitoba
 
5

 
Saskatchewan
 
5

British Columbia
 
49

 
Ontario
 
63

 
 
 
 
We lease the vast majority of our stores and expect to lease the majority of our new stores as we expand.  Our leases typically provide for a short initial lease term, generally five years, with options to extend, however in some cases we have initial lease terms of seven to ten years.  We believe this leasing strategy enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions.  As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.
Distribution Centers
The following table includes information about the distribution centers that we own and operate in the United States.  In 2011, we expanded our Savannah distribution center to 1.0 million square feet.  In 2009, we purchased a new distribution center in San Bernardino, California which began shipping merchandise in April 2010.  This facility replaced the Salt Lake City distribution center which closed when its lease expired in April 2010.  We believe our distribution center network is currently capable of supporting approximately $8.0 billion in annual sales in the United States.  In 2012, we began construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which is expected to begin shipping product in 2013. In 2013, we plan to expand our Marietta, Oklahoma distribution center to 1.0 million square feet and lease an additional 0.4 million square feet at our San Bernardino, California distribution center. Upon completion of this additional distribution center capacity, we believe our distribution center network will support approximately $10.2 billion in annual sales in the United States.

12



 
Location
Size in
Square Feet
Chesapeake, Virginia
400,000
Olive Branch, Mississippi
425,000
Joliet, Illinois
1,200,000
Stockton, California
525,000
Briar Creek, Pennsylvania
1,003,000
Savannah, Georgia
1,014,000
Marietta, Oklahoma
603,000
San Bernardino, California
448,000
Ridgefield, Washington
665,000
Each of our distribution centers contains advanced materials handling technologies, including radio-frequency inventory tracking equipment and specialized information systems.  With the exception of our Ridgefield facility, each of our distribution centers in the United States also contains automated conveyor and sorting systems.
We are also a party to an agreement which provides distribution services from facilities in British Columbia and Ontario.
For more information on financing of our distribution centers, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations- Funding Requirements" beginning on page 19 of this Form 10-K.
Item 3.  LEGAL PROCEEDINGS
From time to time, we are defendants in ordinary, routine litigation or proceedings incidental to our business, including allegations regarding:
employment-related matters;
infringement of intellectual property rights;
personal injury/wrongful death claims;
product safety matters, which may include product recalls in cooperation with the Consumer Products Safety Commission or other jurisdictions; and
real estate matters related to store leases.

In 2006, a former store manager filed a collective action against us in Alabama federal court. She claims that she and other store managers should have been classified as non-exempt employees under the Fair Labor Standards Act and received overtime compensation. The Court preliminarily allowed nationwide (except California) certification. Our motion to decertify the collective action was dismissed without prejudice in 2010. We filed another motion to decertify on February 29, 2012. That motion was granted on November 2, 2012. The individual claims of the four named plaintiffs were consolidated and proceeded to trial on February 22, 2013. On March 1, a jury returned four verdicts in our favor. On that day the Court entered Final Judgement in favor of us against all four plaintiffs and dismissed the cases without prejudice. We anticipate post trial motions will be filed by the plaintiffs asking that the Court set aside the Final Judgement and the jury verdicts. The individual claims of the 261 opt-in plaintiffs were dismissed in the November 2nd order without prejudice. Seventy-five of those opt-in decertified plaintiffs have recently filed individual claims in eight different federal courts throughout the United States. None of these cases have as yet proceeded beyond the pleadings stage so that discovery has not begun nor have any cases been set for trial.

In April 2011, a former assistant store manager, on behalf of himself and those similarly situated, instituted a class action in a California state court primarily alleging a failure by us to provide meal breaks, to compensate for all hours worked, and to pay overtime compensation. We removed the case to federal court which denied plaintiffs' motion for remand of the case to state court. Discovery in this case is on going. There is no trial date.

In June 2011, Winn-Dixie Stores, Inc. and various of its affiliates instituted suit in federal court in Florida alleging that we, in approximately 48 shopping centers in the state of Florida and five other states where Dollar Tree and Winn-Dixie are both tenants, were selling goods and products in Dollar Tree stores in violation of an exclusive right of Winn-Dixie to sell and distribute such items. It sought both monetary damages and injunctive relief. At approximately the

13



same time, Winn-Dixie also sued Dollar General, Inc. and Big Lots, Inc. making essentially the same allegations against them and seeking the same relief. The Court consolidated the three cases and they proceeded to trial, without a jury, in May of 2012. On August 10, 2012, the Court issued its Findings of Fact and Conclusions of Law. The ruling denied Winn-Dixie's claim for monetary damages, either compensatory or punitive, and, of the original 48 Dollar Tree stores at issue, granted plaintiff's request for injunctive relief with respect to just one store. A final Order incorporating these findings and conclusions was entered and Winn-Dixie has appealed to the U.S. Court of Appeals for the 11th Circuit.

In the summer and fall of 2011, five collective action lawsuits were filed against us in federal courts in Georgia, Colorado, Florida, Michigan and Illinois by different assistant store managers, each alleging he or she was forced to work off the clock in violation of the federal Fair Labor Standards Act. Plaintiffs also asserted various state law claims for which they seek class treatment. The Michigan case is currently stayed. The Florida case has been transferred to the U.S. District Court for the Eastern District of Virginia which thereafter entered an Order staying the case. In the Georgia case the state law claims were dismissed and the case then transferred to the U.S. District Court for the Eastern District of Virginia; the Fair Labor Standards Act claims remain with motions to dismiss by us pending. In the Colorado case the statewide class claims were dismissed. The Court conditionally certified under the Fair Labor Standards Act a class of all assistant store managers who worked for Dollar Tree from July 16, 2008 to the present. Notice was sent to potential class members and 2,201 elected to opt-in. Discovery is now on-going pursuant to a scheduling Order of the Court and the case has been assigned a May 2014 trial date. The Illinois case in addition to assistant store managers, also included a putative class of all other hourly store associates, and made the same allegations on their behalf. The Illinois case was transferred to the Eastern District of Virginia in June and the Virginia federal judge ruled that all claims made on behalf of assistant store managers under the Fair Labor Standards Act should be dismissed on the basis those claims could be adjudicated in the Colorado case. The assistant store manager class claims based on state law were dismissed. The Court however, did conditionally certify under the Fair Labor Standards Act a class of all hourly sales associates who worked for Dollar Tree from October 2, 2009 to the present. Notice to the putative class was sent and 6,276 associates elected to opt-in, approximately 3% of the potential class. Discovery has recently commenced. No trial date has been established.

In May 2012, three associates who were formerly employed at our distribution center in Joliet, Illinois filed a Rule 23 class action lawsuit in federal court in Illinois alleging that at the time of their termination of employment, they failed to receive compensation for their accrued paid time off. They brought this case on behalf of themselves and those former associates similarly situated. At the request of the parties, the case was stayed and referred to a U.S. Magistrate Judge for a settlement conference. A settlement was reached and preliminarily approved by the Court. Notice of the proposed settlement was issued to the individual potential class members with 113 of them returning completed claims forms. The Court conducted a fairness hearing on February 27 and approved the settlement. The settlement process will now be effectuated. The settlement amount is immaterial and has been included in the accompanying consolidated financial statements.

In July 2012, a former non-exempt hourly associate who alleges his primary duty was to work a cash register, on behalf of himself and those similarly situated, filed a Complaint under the California Private Attorneys General Act (“PAGA”), in a California state court, alleging we failed to provide suitable seating at our cash registers as allegedly required by state law. We removed the case to federal court and filed our Answer to the Complaint. Discovery is presently under way and the case has been scheduled for trial in July 2013.

In July 2012, a former assistant store manager, on behalf of himself and those similarly situated, filed a class action Complaint in a California state court, alleging we failed to provide paid, duty-free 10 minute rest breaks to assistant store managers who worked for periods in excess of three and one-half hours. The alleged relevant time period is July 13, 2008 to the present. We removed the case to federal court and plaintiff has filed a motion seeking remand to state court. Initial discovery has commenced.

In February 2013, a former assistant store manager on behalf of himself and those similarly situated filed in a California federal court a representative action claim under PAGA. He alleges we failed to provide meal and rest periods, failed to pay minimum, regular and overtime wages, failed to maintain accurate time records and wage statements, and failed to pay wages due upon termination of employment. We have just begun our investigation of the allegations contained in the Complaint.
We will vigorously defend ourselves in these matters.  We do not believe that any of these matters will, individually or in the aggregate, have a material effect on our business or financial condition.  We cannot give assurance, however, that one or more of these lawsuits will not have a material effect on our results of operations for the period in which they are

14



resolved.  Based on the information available, including the amount of time remaining before trial, the results of discovery and the judgment of internal and external counsel, we are unable to express an opinion as to the outcome of those matters which are not settled and cannot estimate a potential range of loss on the outstanding matters.
Item 4.  MINE SAFETY DISCLOSURES
None.

15



PART II
Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDHER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market®.  Our common stock has been traded on Nasdaq under the symbol "DLTR" since our initial public offering on March 6, 1995.  The following table gives the high and low sales prices of our common stock as reported by Nasdaq for the periods indicated.
 
High
 
Low
Fiscal year ended January 28, 2012:
 
 
 
First Quarter
$
29.25

 
$
24.26

Second Quarter
35.27

 
28.82

Third Quarter
41.25

 
30.00

Fourth Quarter
43.32

 
36.04

Fiscal year ended February 2, 2013:
 

 
 

First Quarter
$
51.21

 
$
42.04

Second Quarter
56.82

 
46.35

Third Quarter
53.00

 
38.40

Fourth Quarter
42.66

 
37.12

On March 6, 2013, the last reported sale price for our common stock, as quoted by Nasdaq, was $45.47 per share.  As of March 6, 2013, we had approximately 344 shareholders of record.
The following table presents our share repurchase activity for the 14 weeks ended February 2, 2013:
 
 
Total number
of shares
 
Average
price paid
 
Total number
of shares
purchased as
part of publicly
announced plans
 
Approximate
dollar value of
shares that may
yet be purchased
under the plans
or programs
Period
 
purchased
 
per share
 
or programs
 
(in millions)
October 28, 2012 to November 24, 2012
 

 
$

 

 
$
964.7

November 25, 2012 to December 29, 2012
 
2,677,057

 
39.19

 
2,677,057

 
859.8

December 30, 2012 to February 2, 2013
 

 

 

 
859.8

Total
 
2,677,057

 
$
39.19

 
2,677,057

 
$
859.8

 Including the Accelerated Share Repurchase Agreement ("ASR") which was completed in the first quarter of fiscal 2012, we repurchased approximately 8.1 million shares for approximately $340.2 million in fiscal 2012.  At February 2, 2013, we have $859.8 million remaining under Board authorization.
For further discussion of our ASRs during 2012, see Item 8 “Financial Statements and Supplementary Data - Note 7 to the Consolidated Financial Statements” beginning on page 46 of this Form 10-K.
We anticipate that substantially all of our cash flow from operations in the foreseeable future will be retained for the development and expansion of our business, the repayment of indebtedness and, as authorized by our Board of Directors, the repurchase of stock.  Management does not anticipate paying dividends on our common stock in the foreseeable future.
Stock Performance Graph
The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years ended February 2, 2013, compared with the cumulative total returns of the S&P 500 Index and the S&P Retailing Index.  The comparison assumes that $100 was invested in our common stock on February 2, 2008, and, in each of the foregoing indices on February 2, 2008, and that dividends were reinvested.

16









Item 6.  SELECTED FINANCIAL DATA
The following table presents a summary of our selected financial data for the fiscal years ended February 2, 2013, January 28, 2012, January 29, 2011, January 30, 2010, and January 31, 2009.  Fiscal 2012 included 53 weeks, commensurate with the retail calendar, while all other fiscal years reported in the table contain 52 weeks. The selected income statement and balance sheet data have been derived from our consolidated financial statements that have been audited by our independent registered public accounting firm.  This information should be read in conjunction with the consolidated financial statements and related notes, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial information found elsewhere in this report.
Comparable store net sales compare net sales for stores open throughout each of the two periods being compared, including expanded stores.  Net sales per store and net sales per selling square foot are calculated for stores open throughout the period presented.
Amounts in the following tables are in millions, except per share data, number of stores data, net sales per selling square foot data and inventory turns. 

17



 
Year Ended
 
February 2,
2013

 
January 28,
2012

 
January 29,
2011

 
January 30,
2010

 
January 31,
2009

Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
7,394.5

 
$
6,630.5

 
$
5,882.4

 
$
5,231.2

 
$
4,644.9

Gross profit
2,652.7

 
2,378.3

 
2,087.6

 
1,856.8

 
1,592.2

Selling, general and administrative expenses
1,732.6

 
1,596.2

 
1,457.6

 
1,344.0

 
1,226.4

Operating income
920.1

 
782.1

 
630.0

 
512.8

 
365.8

Net income
619.3

 
488.3

 
397.3

 
320.5

 
229.5

Margin Data (as a percentage of net sales):
 
 
 
 
 

 
 

 
 

Gross profit
35.9
%
 
35.9
%
 
35.5
%
 
35.5
%
 
34.3
%
Selling, general and administrative expenses
23.5
%
 
24.1
%
 
24.8
%
 
25.7
%
 
26.4
%
Operating income
12.4
%
 
11.8
%
 
10.7
%
 
9.8
%
 
7.9
%
Net income
8.4
%
 
7.4
%
 
6.8
%
 
6.1
%
 
4.9
%
Per Share Data:
 

 
 

 
 

 
 

 
 

Diluted net income per share
$
2.68

 
$
2.01

 
$
1.55

 
$
1.19

 
$
0.84

Diluted net income per share increase
33.3
%
 
29.7
%
 
30.3
%
 
41.7
%
 
20.0
%
 
As of
 
February 2,
2013

 
January 28,
2012

 
January 29,
2011

 
January 30,
2010

 
January 31,
2009

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
and short-term investments
$
399.9

 
$
288.3

 
$
486.0

 
$
599.4

 
$
364.4

Working capital
798.1

 
628.4

 
800.4

 
829.7

 
663.3

Total assets
2,752.0

 
2,328.6

 
2,380.5

 
2,289.7

 
2,035.7

Total debt, including capital lease obligations
271.3

 
265.8

 
267.8

 
267.8

 
268.2

Shareholders' equity
1,667.3

 
1,344.6

 
1,459.0

 
1,429.2

 
1,253.2

 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 30,
2010
 
January 31,
2009
Selected Operating Data:
 

 
 

 
 

 
 

 
 

Number of stores open at end of period
4,671

 
4,351

 
4,101

 
3,806

 
3,591

Gross square footage at end of period
50.9

 
47.4

 
44.4

 
41.1

 
38.5

Selling square footage at end of period
40.5

 
37.6

 
35.1

 
32.3

 
30.3

Selling square footage annual growth
7.7
%
 
6.9
%
 
8.8
%
 
6.6
%
 
6.7
%
Net sales annual growth
11.5
%
 
12.7
%
 
12.4
%
 
12.6
%
 
9.5
%
Comparable store net sales increase
3.4
%
 
6.0
%
 
6.3
%
 
7.2
%
 
4.1
%
Net sales per selling square foot
$
190

 
$
182

 
$
174

 
$
167

 
$
158

Net sales per store
$
1.6

 
$
1.6

 
$
1.5

 
$
1.4

 
$
1.3

Selected Financial Ratios:
 

 
 

 
 

 
 

 
 

Return on assets
24.4
%
 
20.7
%
 
17.0
%
 
14.8
%
 
12.0
%
Return on equity
41.1
%
 
34.8
%
 
27.5
%
 
23.9
%
 
20.5
%
Inventory turns
4.3

 
4.2

 
4.2

 
4.1

 
3.8


18




Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including:
what factors affect our business;
what our net sales, earnings, gross margins and costs were in 2012, 2011 and 2010;
why those net sales, earnings, gross margins and costs were different from the year before;
how all of this affects our overall financial condition;
what our expenditures for capital projects were in 2012 and 2011 and what we expect them to be in 2013; and
where funds will come from to pay for future expenditures.
As you read Management’s Discussion and Analysis, please refer to our consolidated financial statements, included in Item 8 of this Form 10-K, which present the results of operations for the fiscal years ended February 2, 2013, January 28, 2012 and January 29, 2011.  In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal year 2012 compared to fiscal year 2011 and for fiscal year 2011 compared to fiscal year 2010.
Key Events and Recent Developments

Several key events have had or are expected to have a significant effect on our operations. You should keep in mind that:
In July 2012, we began construction on a new 1.0 million square foot distribution center in Windsor, Connecticut. We expect to begin shipping product from this building in 2013.
On June 6, 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement).  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 is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin. Our February 2008, $550.0 million Credit Agreement was terminated concurrent with entering into this Agreement.
On October 7, 2011, our Board of Directors authorized the repurchase of an additional $1.5 billion of our common stock. At February 2, 2013, we had $859.8 million remaining under Board authorizations.
On October 7, 2011, we completed a 410,000 square foot expansion of our distribution center in Savannah, Georgia.  The Savannah distribution center is now a 1,014,000 square foot, fully automated facility.
On November 15, 2010, we completed our acquisition of 86 Dollar Giant stores, located in the Canadian provinces of British Columbia, Ontario, Alberta and Saskatchewan and we have since opened stores in Manitoba.  These stores offer a wide assortment of quality general merchandise, contemporary seasonal goods and everyday consumables, all priced at $1.25 (CAD) or less.  This is our first expansion of retail operations outside of the United States.
We assign cost to store inventories using the retail inventory method, determined on a weighted average cost basis.  From our inception and through fiscal 2009, we used one inventory pool for this calculation.  Because of our investments over the years in our retail technology systems, we were able to refine our estimate of inventory cost under the retail method and on January 31, 2010, the first day of fiscal 2010, we began using approximately 30 inventory pools in our retail inventory calculation.  As a result of this change, we recorded a non-recurring, non-cash charge to gross profit and a corresponding reduction in inventory, at cost, of $26.3 million in the first quarter of 2010. This was a prospective change and did not have any effect on prior periods.
On November 2, 2009, we purchased a new distribution center in San Bernardino, California.  This new distribution center replaced our Salt Lake City, Utah leased facility whose lease ended in April 2010.
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 acquisitions.  Second, 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 compare only those stores that are open throughout both of the periods being compared.  We include sales from stores expanded during the year in the

19



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 February 2, 2013, we operated 4,671 stores in 48 states and the District of Columbia, as well as the Canadian provinces of British Columbia, Ontario, Alberta, Saskatchewan and Manitoba, with 40.5 million selling square feet compared to 4,351 stores with 37.6 million selling square feet at January 28, 2012.  During fiscal 2012, we opened 345 stores, expanded 87 stores and closed 25 stores, compared to 278 new stores opened, 91 stores expanded and 28 stores closed during fiscal 2011.  In the current year we increased our selling square footage by 7.7%.  Of the 345 stores opened in fiscal 2012, 25 were opened in January and five were expanded in January 2013. Excluding these stores, our selling square footage increased by 7.1%. Of the 2.9 million selling square foot increase in 2012, 0.3 million was added by expanding existing stores.  The average size of our stores opened in 2012 was approximately 8,060 selling square feet (or about 9,900 gross square feet).  For 2013, we continue to plan to open stores that are approximately 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet).  We believe that this store size is our optimal size operationally and that this size also gives our customers an ideal shopping environment that invites them to shop longer and buy more.
Fiscal 2012 ended on February 2, 2013 and included 53 weeks, commensurate with the retail calendar. The 53rd week in 2012 added approximately $125 million in sales. Fiscal 2011 and Fiscal 2010 which ended on January 28, 2012, and January 29, 2011, respectively, each included 52 weeks.
In fiscal 2012, comparable store net sales increased by 3.4%.  This increase was based on the comparable 53 weeks for both years. The comparable store net sales increase was the result of a 2.8% increase in the number of transactions and a 0.6% increase in average ticket.  We believe comparable store net sales continued to be positively affected by a number of our initiatives, as debit and credit card penetration continued to increase in 2012, and we continued the roll-out of frozen and refrigerated merchandise to more of our stores.  At February 2, 2013 we had frozen and refrigerated merchandise in approximately 2,550 stores compared to approximately 2,220 stores at January 28, 2012.  We believe that the addition of frozen and refrigerated product enables 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 4,200 qualified stores compared to 3,860 at the end of 2011.
With the pressures of the current economic environment, we have seen continued demand for basic, consumable products in 2012.  As a result, we have continued to shift the mix of inventory carried in our stores to more consumer product merchandise which we believe increases the traffic in our stores and has helped to increase our sales even during the current economic downturn.  While this shift in mix has impacted our merchandise costs we were able to offset that impact in the current year with decreased costs for merchandise in many of our categories.
Our point-of-sale technology provides us with valuable sales and inventory information to assist our buyers and improve our merchandise allocation to our stores.  We believe that this has enabled us to better manage our inventory flow resulting in more efficient distribution and store operations and increased inventory turnover for each of the last five years.
We must continue to control our merchandise costs, inventory levels and our general and administrative expenses as increases in these line items could negatively impact our operating results.

20



Results of Operations
The following table expresses items from our consolidated statements of operations, as a percentage of net sales.  On January 31, 2010, the first day of fiscal 2010, we began using approximately 30 inventory pools in our retail inventory calculation, rather than one inventory pool as we had used since our inception.  As a result of this change, we recorded a non-recurring, non-cash charge to gross profit and a corresponding reduction in inventory, at cost, of $26.3 million in the first quarter of 2010.
 
Year Ended
 
February 2,
2013

 
January 28,
2012

 
January 29,
2011

Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales, excluding non-cash beginning inventory adjustment
64.1
 %
 
64.1
 %
 
64.1
 %
Non-cash beginning inventory adjustment
 %
 
 %
 
0.4
 %
Gross profit
35.9
 %
 
35.9
 %
 
35.5
 %
Selling, general and administrative
 

 
 

 
 

expenses
23.5
 %
 
24.1
 %
 
24.8
 %
Operating income
12.4
 %
 
11.8
 %
 
10.7
 %
Interest expense,net

 
 %
 
(0.1
)%
Other income, net
(0.8
)%
 
 %
 

Income before income taxes
13.2
 %
 
11.8
 %
 
10.7
 %
Provision for income taxes
(4.8
)%
 
(4.4
)%
 
(3.9
)%
Net income
8.4
 %
 
7.4
 %
 
6.8
 %
Fiscal year ended February 2, 2013 compared to fiscal year ended January 28, 2012
Net Sales.  Net sales increased 11.5%, or $764.0 million, in 2012 compared to 2011, resulting from sales in our new stores and the 53rd week in 2012, which accounted for approximately $125 million of the increase. Our sales increase was also impacted by a 3.4% increase in comparable store net sales for the year.  This increase is based on a 53-week comparison for both periods. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and, to a lesser extent, are negatively affected when we open new stores or expand stores near existing ones.
The following table summarizes the components of the changes in our store count for fiscal years ended February 2, 2013 and January 28, 2012.
 
February 2, 2013
 
January 28, 2012
New stores
345

 
278

Expanded or relocated stores
87

 
91

Closed stores
(25
)
 
(28
)
Of the 345 new stores added in 2012, 25 stores were opened in January 2013. Of the 2.9 million selling square foot increase in 2012 approximately 0.3 million was added by expanding existing stores.
 Gross profit margin was 35.9% in 2012 and 2011.  Improvement in initial mark-up in many categories and occupancy and distribution cost leverage were offset by an increase in the mix of higher cost consumer product merchandise and higher freight costs in fiscal 2012 than in fiscal 2011.
Selling, General and Administrative Expenses.  Selling, general and administrative expenses, as a percentage of net sales, decreased to 23.5% for 2012 compared to 24.1% for 2011.  The decrease is primarily due to the following:
Payroll expenses decreased 25 basis points due to lower incentive compensation achievement.
Store operating costs decreased 15 basis points due to lower utility costs and reduced repairs and maintenance expenses.
Operating and corporate expenses decreased 15 basis points due to a favorable legal settlement and lower debit and credit fees.

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Depreciation decreased 10 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year and sales in the 53rd week of 2012.
Operating Income.  Operating income margin was 12.4% in 2012 compared to 11.8% in 2011.    Due to the reasons noted above, operating income margin improved 60 basis points.
Other Income, net.  Other income, net in 2012 includes a $60.8 million gain on the sale of our investment in Ollie's Holdings, Inc.
Income Taxes.  Our effective tax rate was 36.7% in 2012 compared to 37.4% in 2011. This decrease is the result of statute expirations and the settlement of state tax audits.
Fiscal year ended January 28, 2012 compared to fiscal year ended January 29, 2011
Net Sales.  Net sales increased 12.7%, or $748.0 million, in 2011 compared to 2010, resulting from sales in our new stores and a 6.0% 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, to a lesser extent, are negatively affected when we open new stores or expand stores near existing ones.
The following table summarizes the components of the changes in our store count for fiscal years ended January 28, 2012 and January 29, 2011.
 
January 28, 2012
 
January 29, 2011
New stores
278

 
235

Acquired stores

 
86

Expanded or relocated stores
91

 
95

Closed stores
(28
)
 
(26
)
Of the 2.4 million selling square foot increase in 2011 approximately 0.3 million was added by expanding existing stores.
 Gross profit margin was 35.9% in 2011 compared to 35.5% in 2010.  Excluding the effect of the $26.3 million non-cash beginning inventory adjustment, gross profit margin remained at 35.9%.  Improvement in initial mark-up in many categories and occupancy and distribution cost leverage were offset by an increase in the mix of higher cost consumer product merchandise and a smaller reduction in the shrink accrual rate in fiscal 2011 than in fiscal 2010.
Selling, General and Administrative Expenses.  Selling, general and administrative expenses, as a percentage of net sales, decreased to 24.1% for 2011 compared to 24.8% for 2010.  The decrease is primarily due to the following:
Payroll expenses decreased 45 basis points due to leveraging associated with the increase in comparable store net sales in the current year, lower store hourly payroll and lower incentive compensation achievement.
Depreciation decreased 25 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year.
Operating Income.  Operating income margin was 11.8% in 2011 compared to 10.7% in 2010.  Excluding the $26.3 million non-cash adjustment to beginning inventory, operating income margin was 11.1% in 2010.  Due to the reasons noted above, operating income margin excluding this charge, improved 70 basis points.
Income Taxes.  Our effective tax rate was 37.4% in 2011 and 36.9% in 2010.
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our distribution network and operate and expand existing stores.  Our working capital requirements for existing stores are seasonal and usually reach their peak in September and October.  Historically, we have satisfied our seasonal working capital requirements for existing stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.

22



The following table compares cash-flow related information for the years ended February 2, 2013, January 28, 2012 and January 29, 2011:
 
 
Year Ended
 
 
February 2,
 
January 28,
 
January 29,
(in millions)
 
2013
 
2012
 
2011
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
677.7

 
$
686.5

 
$
518.7

Investing activities
 
(261.3
)
 
(86.1
)
 
(374.1
)
Financing activities
 
(303.4
)
 
(623.2
)
 
(404.3
)
Net cash provided by operating activities decreased $8.8 million in 2012 compared to 2011 due to an increase in cash used to purchase merchandise inventory and cash used for prepaid rent as a result of February 1st falling in the last week of the fiscal year partially offset by increased earnings before income taxes, depreciation and amortization in 2012 and increases in income taxes payable.
Net cash provided by operating activities increased $167.8 million in 2011 compared to 2010 due to increased earnings before income taxes, depreciation and amortization in 2011, a decrease in cash used to purchase merchandise inventories and an increase in other current liabilities due to increases in sales tax collected and accrued expenses.
Net cash used in investing activities increased $175.2 million in 2012 primarily due to the sale of $180.8 million of short-term investments in 2011 versus none in 2012 and a $62.1 million increase in capital expenditures in 2012 due to the higher number of stores opened compared to 2011 and the construction of our distribution center in Connecticut. The $62.3 million in proceeds from the sale of the investment in Ollie's Holdings, Inc. provided cash for investing activities in 2012.
Net cash used in investing activities decreased $288.0 million in 2011 compared with 2010 primarily due to an additional $170.0 million of proceeds from the sale of short-term investments with minimal purchases of short-term investments compared to $157.8 million of purchases in 2010.  The proceeds were used to fund the share repurchases in 2011.  In addition, in 2010 we used $49.4 million to acquire Dollar Giant.  These increased sources of cash were partially offset by a $71.4 million increase in capital expenditures in 2011 due to funds for new store projects and the expansion of our distribution center in Savannah, Georgia.
In 2012, net cash used in financing activities decreased $319.8 million as a result of reduced share repurchases in 2012.
In 2011, net cash used in financing activities increased $218.9 million as a result of increased share repurchases in 2011 compared with 2010.
At February 2, 2013, our long-term borrowings were $271.3 million.  We also have $110.0 million and $100.0 million Letter of Credit Reimbursement and Security Agreements, under which approximately $147.0 million were committed to letters of credit issued for routine purchases of imported merchandise at February 2, 2013.
In June 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement).  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 Agreement is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  The Agreement also bears a facilities fee, calculated as a percentage, as defined, of the amount available under 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.  Our February 2008, $550.0 million Credit Agreement was terminated concurrent with entering into this Agreement. As of February 2, 2013, $250.0 million was outstanding under the $750.0 million revolving line of credit.
We repurchased 8.1 million shares for $340.2 million in fiscal 2012.  We repurchased 8.7 million shares for $645.9 million in fiscal 2011.  We repurchased 9.3 million shares for $414.7 million in fiscal 2010.  At February 2, 2013, we have $859.8 million remaining under Board authorization.
Funding Requirements
Overview, Including Off-Balance Sheet Arrangements
We expect our cash needs for opening new stores and expanding existing stores in fiscal 2013 to total approximately $200.6 million, which includes capital expenditures, initial inventory and pre-opening costs.

23



Our estimated capital expenditures for fiscal 2013 are between $320.0 and $330.0 million, including planned expenditures for our new and expanded stores, the addition of freezers and coolers to approximately 475 stores and approximately $61.2 million to expand our distribution center in Marietta, Oklahoma and complete construction on a new distribution center in Windsor, Connecticut.  We believe that we can adequately fund our working capital requirements and planned capital expenditures for the next few years from net cash provided by operations and potential borrowings under our existing credit facility.
The following tables summarize our material contractual obligations at February 2, 2013, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):
Contractual Obligations
Total
2013
2014
2015
2016
2017
Thereafter
Lease Financing
 
 
 
 
 
 
 
Operating lease obligations
$
2,149.1

$
493.8

$
408.8

$
376.4

$
293.3

$
207.6

$
369.2

Long-term Borrowings
 

 

 

 

 

 

 

Credit agreement
250.0




 
250.0


Demand revenue bonds
14.3

14.3






Forgivable promissory note
7.0





0.2

6.8

Interest on long-term borrowings
12.6

2.8

2.8

2.8

2.8

0.9

0.5

Total obligations
$
2,433.0

$
510.9

$
411.6

$
379.2

$
296.1

$
458.7

$
376.5

Commitments
Total
Expiring in 2013
Expiring in 2014
Expiring in 2015
Expiring in 2016
Expiring in 2017
Thereafter
Letters of credit and surety bonds
$
177.5

$
177.5

$

$

$

$

$

Technology assets
10.8

10.8






Telecommunication contracts
26.9

7.5

7.2

5.5

5.2

1.5


Total commitments
$
215.2

$
195.8

$
7.2

$
5.5

$
5.2

$
1.5

$

Lease Financing
Operating Lease Obligations.  Our operating lease obligations are primarily for payments under noncancelable store leases.  The commitment includes amounts for leases that were signed prior to February 2, 2013 for stores that were not yet open on February 2, 2013.
Long-term Borrowings
Credit Agreement. In June 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement).  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 is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  The interest rate on the facility was 1.11% at February 2, 2013.  The revolving line of credit also bears a facilities fee, calculated as a percentage, as defined, of the amount available under the line of credit, payable quarterly.  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.  As of February 2, 2013, $250.0 million was outstanding under the $750.0 million revolving line of credit.
Demand Revenue Bonds.  In May 1998, we entered into an agreement with the Mississippi Business Finance Corporation under which it issued $19.0 million of variable-rate demand revenue bonds.  We used the proceeds from the bonds to finance the acquisition, construction and installation of land, buildings, machinery and equipment for our distribution facility in Olive Branch, Mississippi.  At February 2, 2013, the balance outstanding on the bonds was $14.3 million.  These bonds are due to be fully repaid in June 2018.  The bonds do not have a prepayment penalty as long as the interest rate remains variable.  The bonds contain a demand provision and, therefore, outstanding amounts are classified as current liabilities.  We pay interest monthly based on a variable interest rate, which was 0.23% at February 2, 2013.
Forgivable Promissory Note. In 2012, we entered into a promissory note with the state of Connecticut under which the state loaned us $7.0 million in connection with the Company's acquisition, construction and installation of land, building, machinery and equipment for our distribution facility in Windsor, Connecticut. If certain performance targets are met, the loan and any accrued interest will be forgiven in fiscal 2017. If the performance targets are not met, the loan and accrued interest must be repaid beginning in fiscal 2017.

24



Interest on Long-term Borrowings.  This amount represents interest payments on the Credit Agreement, Demand Revenue Bond and Forgivable Promissory Note using the interest rates for each at February 2, 2013.
Commitments
Letters of Credit and Surety Bonds.  We are a party to two Letter of Credit Reimbursement and Security Agreements, one which provides $110.0 million for letters of credit and one which provides $100.0 million for letters of credit.  Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $147.0 million of purchases committed under these letters of credit at February 2, 2013.
We also have approximately $12.9 million of letters of credit outstanding for our self-insurance programs, $14.5 million of letters of credit outstanding for our Demand Revenue Bonds, and $3.1 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores.
Technology Assets.  We have commitments totaling approximately $10.8 million to primarily purchase store technology assets for our stores during 2012.
Telecommunication Contracts.  We have contracted for telecommunication services with contracts expiring in 2017.  The total amount of these commitments is approximately $26.9 million.
Derivative Financial Instruments
In 2012, we were party to fuel derivative contracts with third parties which included approximately 4.8 million gallons of diesel fuel, or approximately 35% of our domestic truckload fuel needs.  These derivative contracts do not qualify for hedge accounting and therefore all changes in fair value for these derivatives are included in earnings.  We currently have fuel derivative contracts to hedge 0.7 million gallons of diesel fuel, or approximately 20% of our domestic truckload fuel needs from February 2013 through April 2013.

In March 2008, we entered into two $75.0 million interest rate swap agreements.  These interest rate swaps were used to manage the risk associated with interest rate fluctuations on a portion of our 2008 $250.0 million variable rate term loan.  Under these agreements, we paid interest to financial institutions at a fixed rate of 2.8%.  In exchange, the financial institutions paid us at a variable rate, which approximated the variable rate on the debt, excluding the credit spread.  These swaps qualified for hedge accounting treatment and expired in March 2011.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates.  Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates.  Following is a discussion of the estimates that we consider critical.
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial Statements, inventories at the distribution centers are stated at the lower of cost or market with cost determined on a weighted-average basis.  Cost is assigned to store inventories using the retail inventory method on a weighted-average basis.  Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories.  From our inception and through fiscal 2009, we used one inventory pool for this calculation.  Because of our investments over the years in our retail technology systems, we were able to refine our estimate of inventory cost under the retail method and on January 31, 2010, the first day of fiscal 2010, we began using approximately 30 inventory pools in our retail inventory calculation.  As a result of this change, we recorded a non-recurring, non-cash charge to gross profit and a corresponding reduction in inventory, at cost, of approximately $26.3 million in the first quarter of 2010.  The retail inventory method is an averaging method that is widely used in the retail industry and results in valuing inventories at lower of cost or market when markdowns are taken as a reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain significant management estimates and judgments, including estimates of future merchandise markdowns and shrink, which significantly affect the ending inventory valuation at cost as well as the resulting gross margins.  The averaging required in applying the retail inventory method and the estimates of shrink and markdowns could, under certain circumstances, result in costs not being recorded in the proper period.
We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal, carryover merchandise on hand, historical markdown statistics and future merchandising plans.  The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.  Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.

25



Our accrual for shrink is based on the actual, historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends.  These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger.  Our physical inventory counts are generally taken between January and September of each year; therefore, the shrink accrual recorded at February 2, 2013 is based on estimated shrink for most of 2012, including the fourth quarter.  We have not experienced significant fluctuations in historical shrink rates beyond approximately 10-20 basis points in our Dollar Tree stores for the last few years.  However, we have sometimes experienced higher than typical shrink in acquired stores in the year following an acquisition.  We periodically adjust our shrink estimates to address these factors as they become apparent.
Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market each year on a consistent basis.
Accrued Expenses
On a monthly basis, we estimate certain expenses in an effort to record those expenses in the period incurred.  Our most material estimates include domestic freight expenses, self-insurance costs, store-level operating expenses, such as property taxes and utilities, and certain other expenses, such as legal reserves.  Our freight and store-level operating expenses are estimated based on current activity and historical trends and results.  Our workers' compensation and general liability insurance accruals are recorded based on actuarial valuations which are adjusted at least annually based on a review performed by a third-party actuary.  These actuarial valuations are estimates based on our historical loss development factors.  Certain other expenses are estimated and recorded in the periods that management becomes aware of them.  The related accruals are adjusted as management’s estimates change.  Differences in management's estimates and assumptions could result in an accrual materially different from the calculated accrual.  Our experience has been that some of our estimates are too high and others are too low.  Historically, the net total of these differences has not had a material effect on our financial condition or results of operations.  Our legal proceedings are described in Item 3 “Legal Proceedings” beginning on page 13 of this Form 10-K.  The outcome of litigation, particularly class or collective action lawsuits, is difficult to assess, quantify or predict.
Income Taxes
On a quarterly basis, we estimate our required income tax liability and assess the recoverability of our deferred tax assets.  Our income taxes payable are estimated based on enacted tax rates, including estimated tax rates in states where our store base is growing, applied to the income expected to be taxed currently.  Management assesses the recoverability of deferred tax assets based on the availability of carrybacks of future deductible amounts and management’s projections for future taxable income.  We cannot guarantee that we will generate taxable income in future years.  Historically, we have not experienced significant differences in our estimates of our tax accrual.
In addition, we have a recorded liability for our estimate of uncertain tax positions taken or expected to be taken in our tax returns.  Judgment is required in evaluating the application of federal and state tax laws, including relevant case law, and assessing whether it is more likely than not that a tax position will be sustained on examination and, if so, judgment is also required as to the measurement of the amount of tax benefit that will be realized upon settlement with the taxing authority.  Income tax expense is adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amounts recorded.  We believe that our liability for uncertain tax positions is adequate.  For further discussion of our changes in reserves during 2012, see Item 8 “Financial Statements and Supplementary Data - Note 3 to the Consolidated Financial Statements” beginning on page 40 of this Form 10-K.
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, comparable store net sales, operating income and net income and expect this trend to continue.  Our results of operations may also fluctuate significantly as a result of a variety of factors, including:
shifts in the timing of certain holidays, especially Easter;
the timing of new store openings;
the net sales contributed by new stores;
changes in our merchandise mix; and
competition.
Our highest sales periods are the Christmas and Easter seasons.  Easter was observed on April 24, 2011, April 8, 2012, and will be observed on March 31, 2013.  We believe that the earlier Easter in 2013 could result in a $4.0 million decrease in sales in the first quarter of 2013 as compared to the first quarter of 2012.  We generally realize a disproportionate amount of our net

26



sales and of our operating and net income during the fourth quarter.  In anticipation of increased sales activity during these months, we purchase substantial amounts of inventory and hire a significant number of temporary employees to supplement our continuing store staff.  Our operating results, particularly operating and net income, could suffer if our net sales were below seasonal norms during the fourth quarter or during the Easter season for any reason, including merchandise delivery delays due to receiving or distribution problems, changes in consumer sentiment or inclement weather. Fiscal 2012 consisted of 53 weeks, commensurate with the retail calendar. This extra week contributed approximately $125 million of sales in 2012. Fiscal 2013 will consist of 52 weeks. In fiscal 2013, there is one fewer weekend between Thanksgiving and Christmas compared to fiscal 2012. We believe this could potentially reduce the number of customer visits to our stores during the Christmas selling season in fiscal 2013 compared to fiscal 2012.
Our unaudited results of operations for the eight most recent quarters are shown in a table in Footnote 12 of the Consolidated Financial Statements in Item 8 of this Form 10-K.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a profitable basis may be subject to economic factors and influences that we cannot control.  Consumer spending could decline because of economic pressures, including unemployment and rising fuel prices.  Reductions in consumer confidence and spending could have an adverse effect on our sales.  National or international events, including war or terrorism, could lead to disruptions in economies in the United States or in foreign countries.  These and other factors could increase our merchandise costs, fuel costs and other costs that are critical to our operations, such as shipping and wage rates.
Shipping Costs.  Currently, trans-Pacific shipping rates are negotiated with individual freight lines and are subject to fluctuation based on supply and demand for containers and current fuel costs.  We can give no assurances as to the final rate trends for 2013, as we are in the early stages of our negotiations.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and diesel fuel cost changes.  We may enter into interest rate or diesel fuel swaps to manage exposure to interest rate and diesel fuel price changes.  We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Diesel Fuel Cost Risk
In order to manage fluctuations in cash flows resulting from changes in diesel fuel costs, we entered into fuel derivative contracts with third parties.  We hedged 4.8 million, 3.5 million and 5.0 million gallons of diesel fuel in 2012, 2011 and 2010, respectively.  These hedges represented approximately 35%, 31% and 39% of our total domestic truckload fuel needs in 2012, 2011 and 2010, respectively.  We currently have fuel derivative contracts to hedge 0.7 million gallons of diesel fuel, or approximately 20% of our domestic truckload fuel needs from February 2013 through April 2013.  Under these contracts, we pay the third party a fixed price for diesel fuel and receive 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 earnings.  The fair value of these contracts at February 2, 2013 was an asset of $0.5 million.
Interest Rate Risk
We use variable-rate debt to finance certain of our operations and capital improvements.  These obligations expose us to variability in interest payments due to changes in interest rates.  If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases.  We believe it is beneficial to limit the variability of our interest payments.
To meet this objective, we entered into derivative instruments in the form of two $75.0 million interest rate swaps in March 2008 to manage fluctuations in cash flows resulting from changes in the variable-interest rates on a portion of our 2008 $250.0 million term loan.  The interest rate swaps reduced the interest rate exposure on these variable-rate obligations.  Under the interest rate swaps, we paid the bank at a fixed-rate and received variable-interest at a rate approximating the variable-rate on the obligation, thereby creating the economic equivalent of a fixed-rate obligation. These swaps expired in March 2011.


27



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
 
 
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Statements of Operations for the years ended
 
February 2, 2013, January 28, 2012 and January 29, 2011
 
 
Consolidated Statements of Comprehensive Income
 
for the years ended February 2, 2013, January 28, 2012 and
 
January 29, 2011
 
 
Consolidated Balance Sheets as of February 2, 2013 and
 
January 28, 2012
 
 
Consolidated Statements of Shareholders’ Equity for the years
 
ended February 2, 2013, January 28, 2012 and
 
January 29, 2011
 
 
Consolidated Statements of Cash Flows for the years ended
 
February 2, 2013, January 28, 2012 and January 29, 2011
 
 
Notes to Consolidated Financial Statements

28



Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Dollar Tree, Inc.:
 We have audited the accompanying consolidated balance sheets of Dollar Tree, Inc. (the Company) as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the fiscal years in the three-year period ended February 2, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended February 2, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dollar Tree, Inc.’s  internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
/s/ KPMG LLP
Norfolk, Virginia
March 15, 2013

29



DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Year Ended
 
 
February 2,
 
January 28,
 
January 29,
(in millions, except per share data)
 
2013
 
2012
 
2011
Net sales
 
$
7,394.5

 
$
6,630.5

 
$
5,882.4

Cost of sales, excluding non-cash
 
 

 
 

 
 

beginning inventory adjustment
 
4,741.8

 
4,252.2

 
3,768.5

Non-cash beginning inventory adjustment
 

 

 
26.3

Gross profit
 
2,652.7

 
2,378.3

 
2,087.6

Selling, general and administrative
 
 

 
 

 
 

expenses
 
1,732.6

 
1,596.2

 
1,457.6

Operating income
 
920.1

 
782.1

 
630.0

Interest expense, net
 
2.8

 
2.9

 
5.6

Other income, net
 
(61.6
)
 
(0.3
)
 
(5.5
)
Income before income taxes
 
978.9

 
779.5

 
629.9

Provision for income taxes
 
359.6

 
291.2

 
232.6

Net income
 
$
619.3

 
$
488.3

 
$
397.3

Basic net income per share
 
$
2.70

 
$
2.03

 
$
1.56

Diluted net income per share
 
$
2.68

 
$
2.01

 
$
1.55

See accompanying Notes to Consolidated Financial Statements

30




DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Year Ended
 
 
February 2,
 
January 28,
 
January 29,
(in millions)
 
2013
 
2012
 
2011
Net income
 
$
619.3

 
$
488.3

 
$
397.3

 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(0.9
)
 
(0.3
)
 
(0.2
)
Fair value adjustment - derivative cash
 
 
 
 
 
 
flow hedging instrument, net of tax
 

 
0.1

 
2.2

 
 
 
 
 
 
 
Total comprehensive income
 
$
618.4

 
$
488.1

 
$
399.3


See accompanying Notes to Consolidated Financial Statements

31




DOLLAR TREE, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
 
February 2, 2013
 
January 28, 2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
399.9

 
$
288.3

Merchandise inventories, net
 
971.7

 
867.4

Current deferred tax assets, net
 
22.5

 
26.2

Prepaid expenses and other current assets
 
79.4

 
27.5

Total current assets
 
1,473.5

 
1,209.4

Property, plant and equipment, net
 
960.7

 
825.3

Goodwill
 
173.3

 
173.1

Deferred tax assets, net
 
28.3

 
16.8

Other assets, net
 
116.2

 
104.0

TOTAL ASSETS
 
$
2,752.0

 
$
2,328.6

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
14.3

 
$
15.5

Accounts payable
 
346.5

 
286.7

Other current liabilities
 
235.8

 
215.5

Income taxes payable
 
79.6

 
63.3

Total current liabilities
 
676.2

 
581.0

Long-term debt, excluding current portion
 
257.0

 
250.0

Income taxes payable, long-term
 
5.6

 
15.5

Other liabilities
 
145.9

 
137.5

Total liabilities
 
1,084.7

 
984.0

Commitments and contingencies
 


 


Shareholders' equity:
 
 

 
 

Common stock, par value $0.01.  400,000,000 shares
 
 

 
 

authorized, 224,584,393 and 231,164,300 shares
 
 

 
 

issued and outstanding at February 2, 2013
 
 

 
 

and January 28, 2012, respectively
 
2.2

 
1.1

Additional paid-in capital
 
0.3

 

Accumulated other comprehensive loss
 
(1.5
)
 
(0.6
)
Retained earnings
 
1,666.3

 
1,344.1

Total shareholders' equity
 
1,667.3

 
1,344.6

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
2,752.0

 
$
2,328.6

See accompanying Notes to Consolidated Financial Statements

32



DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED February 2, 2013, January 28, 2012, AND January 29, 2011
(in millions)
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Share-
holders'
Equity
Balance at January 30, 2010
 
262.6

 
$
0.9

 
$

 
$
(2.4
)
 
$
1,430.7

 
$
1,429.2

Net income
 

 

 

 

 
397.3

 
397.3

Total other comprehensive income
 

 

 

 
2.0

 

 
2.0

Transfer from additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
for Common Stock dividend
 

 
0.4

 
(0.4
)
 

 

 

Payment for fractional shares resulting
 
 
 
 
 
 
 
 
 
 
 
 
from Commons Stock dividend
 

 

 
(0.3
)
 

 

 
(0.3
)
Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.3

 

 
4.4

 

 

 
4.4

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $1.9
 
1.6

 

 
17.9

 

 

 
17.9

Repurchase and retirement of shares
 
(18.7
)
 
(0.1
)
 
(44.8
)
 

 
(369.8
)
 
(414.7
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $5.9
 
1.0

 

 
23.2

 

 

 
23.2

Balance at January 29, 2011
 
246.8

 
1.2

 

 
(0.4
)
 
1,458.2

 
1,459.0

Net income
 

 

 

 

 
488.3

 
488.3

Total other comprehensive loss
 

 

 

 
(0.2
)
 

 
(0.2
)
Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.2

 

 
4.4

 

 

 
4.4

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $3.0
 
0.7

 

 
9.5

 

 

 
9.5

Repurchase and retirement of shares
 
(17.4
)
 
(0.1
)
 
(43.4
)
 

 
(602.4
)
 
(645.9
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $10.8
 
0.9

 

 
29.5

 

 

 
29.5

Balance at January 28, 2012
 
231.2

 
1.1

 

 
(0.6
)
 
1,344.1

 
1,344.6

Net income
 

 

 

 

 
619.3

 
619.3

Total other comprehensive loss
 

 

 

 
(0.9
)
 

 
(0.9
)
Transfer from additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
  for Common Stock dividend
 

 
1.2

 
(1.2
)
 

 

 

Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.1

 

 
4.8

 

 

 
4.8

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $7.0
 
0.6

 

 
12.8

 

 

 
12.8

Repurchase and retirement of shares
 
(8.1
)
 
(0.1
)
 
(43.0
)
 

 
(297.1
)
 
(340.2
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

  income tax benefit of $14.3
 
0.8

 

 
26.9

 

 

 
26.9

Balance at February 2, 2013
 
224.6

 
$
2.2

 
$
0.3

 
$
(1.5
)
 
$
1,666.3

 
$
1,667.3

See accompanying Notes to Consolidated Financial Statements

33

DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


 
 
Year Ended
 
 
February 2,
 
January 28,
 
January 29,
(in millions)
 
2013
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
619.3

 
$
488.3

 
$
397.3

Adjustments to reconcile net income to net cash
 
 

 
 

 
 

provided by operating activities:
 
 

 
 

 
 

Depreciation and amortization
 
175.3

 
163.9

 
159.7

Gain on sale of Ollie's investment
 
(60.8
)
 

 

Provision for deferred income taxes
 
(7.7
)
 
10.9

 
(14.4
)
Stock-based compensation expense
 
35.5

 
31.6

 
28.3

Non-cash adjustment to beginning inventory
 

 

 
26.3

Other non-cash adjustments to net income
 
4.1

 
4.4

 
5.0

Changes in assets and liabilities increasing
 
 

 
 

 
 

(decreasing) cash and cash equivalents:
 
 

 
 

 
 

Merchandise inventories
 
(104.0
)
 
(64.5
)
 
(126.7
)
Other assets
 
(56.7
)
 
(1.3
)
 
2.0

Accounts payable
 
59.3

 
26.9

 
28.1

Income taxes payable
 
16.3

 
(1.1
)
 
15.2

Other current liabilities
 
20.3

 
25.4

 
(9.2
)
Other liabilities
 
(23.2
)
 
2.0

 
7.1

Net cash provided by operating activities
 
677.7

 
686.5

 
518.7

Cash flows from investing activities:
 
 

 
 

 
 

Capital expenditures
 
(312.2
)
 
(250.1
)
 
(178.7
)
Purchase of short-term investments
 

 
(6.0
)
 
(157.8
)
Proceeds from sale of short-term investments
 

 
180.8

 
10.8

Proceeds from sale of Ollie's investment
 
62.3

 

 

Purchase of restricted investments
 
(11.0
)
 
(16.3
)
 
(50.9
)
Proceeds from sale of restricted investments
 

 
5.3

 
52.1

Acquisition of Dollar Giant, net of cash acquired of $1.9
 

 

 
(49.4
)
Foreign currency gain/loss
 
(0.4
)
 
0.2

 

Acquisition of favorable lease rights
 

 

 
(0.2
)
Net cash used in investing activities
 
(261.3
)
 
(86.1
)
 
(374.1
)
Cash flows from financing activities:
 
 

 
 

 
 

Principal payments under long-term debt and capital lease obligations
 
(1.5
)
 
(2.0
)
 
(15.1
)
Proceeds from long-term debt
 
7.0

 

 

Payments for share repurchases
 
(340.2
)
 
(645.9
)
 
(417.1
)
Proceeds from stock issued pursuant to stock-based
 
 

 
 

 
 

compensation plans
 
10.0

 
10.9

 
20.1

Tax benefit of exercises/vesting of equity based compensation
 
21.3

 
13.8

 
7.8

Net cash used in financing activities
 
(303.4
)
 
(623.2
)
 
(404.3
)
Effect of exchange rate changes on cash and cash equivalents
 
(1.4
)
 
(0.1
)
 
(0.7
)
Net increase (decrease) in cash and cash equivalents
 
111.6

 
(22.9
)
 
(260.4
)
Cash and cash equivalents at beginning of year
 
288.3

 
311.2

 
571.6

Cash and cash equivalents at end of year
 
$
399.9

 
$
288.3

 
$
311.2

Supplemental disclosure of cash flow information:
 
 

 
 

 
 

Cash paid for:
 
 

 
 

 
 

Interest
 
$
3.3

 
$
3.2

 
$
6.5

Income taxes
 
$
333.9

 
$
268.3

 
$
223.7

 See accompanying Notes to Consolidated Financial Statements

34



DOLLAR TREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dollar Tree, Inc. (the Company) is the leading operator of discount variety retail stores offering merchandise at the fixed price of $1.00 or less with 4,671 discount variety retail stores in the United States and Canada at February 2, 2013.  Below are those accounting policies considered by the Company to be significant.
Principles of Consolidation
The consolidated financial statements include the financial statements of Dollar Tree, Inc., and its wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency
The functional currencies of the Company’s international subsidiaries are primarily the local currencies of the countries in which the subsidiaries are located.  Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date.  Results of operations and cash flows are translated using the average exchange rates throughout the period.  The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive income (loss).  Gains and losses from foreign currency transactions, which are included in non-operating income (expense), have not been significant.
Stock Dividends
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 consolidated financial statements and accompanying notes have been retroactively adjusted to reflect these dividends, each having the effect of a 2-for-1 stock split. In connection with the stock dividend authorized by the Company's Board of Directors in 2010, the company issued one-half share for each outstanding share of Common Stock, payable June 24, 2010 to shareholders of record as of June 10, 2010.
Segment Information
The Company's retail stores represent a single operating segment based on the way the Company manages its business.  Operating decisions are made at the Company level in order to maintain a consistent retail store presentation.  The Company’s retail stores sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar classes of customers.  The amounts of long-lived assets and net sales outside of the U.S. were not significant for any of the periods presented.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.  Any reference herein to "2012" or "Fiscal 2012," “2011” or “Fiscal 2011,” and “2010” or “Fiscal 2010,” relates to as of or for the years ended February 2, 2013, January 28, 2012, and January 29, 2011, respectively. Fiscal 2012 ended on February 2, 2013 and included 53 weeks, commensurate with the retail calendar. Fiscal 2011 and 2010 each included 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents at February 2, 2013 and January 28, 2012 includes $344.5 million and $249.3 million, respectively, of investments primarily in money market securities which are valued at cost, which approximates fair value.  For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of 3 months or less to be cash equivalents.  The majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within 3 business days, and therefore are classified as cash and cash equivalents.
Merchandise Inventories
Merchandise inventories at the Company’s distribution centers are stated at the lower of cost or market, determined on a weighted-average cost basis.  Cost is assigned to store inventories using the retail inventory method on a weighted-average basis.  Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by

35



applying a calculated cost-to-retail ratio to the retail value of inventories.  From its inception through fiscal 2009, the Company used one inventory pool for this calculation.  Because of investments over the years in retail technology systems, the Company was able to refine the estimate of inventory cost under the retail method.  On January 31, 2010, the first day of fiscal 2010, the Company began using approximately thirty inventory pools in its retail inventory calculation.  As a result of this change, the Company recorded a non-recurring, non-cash charge to gross profit and a corresponding reduction in inventory, at cost, of approximately $26.3 million in the first quarter of 2010.  This was a prospective change and did not have any effect on prior periods.  This change in estimate to include thirty inventory pools in the retail method calculation is preferable to using one pool in the calculation as it gives the Company a more accurate estimate of cost of store level inventories.
Costs directly associated with warehousing and distribution are capitalized as merchandise inventories.  Total warehousing and distribution costs capitalized into inventory amounted to $38.8 million and $34.5 million at February 2, 2013 and January 28, 2012, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets as follows:
Buildings
39 to 40 years
Furniture, fixtures and equipment
3 to 15 years
Leasehold improvements and assets held under capital leases are amortized over the estimated useful lives of the respective assets or the committed terms of the related leases, whichever is shorter.  Amortization is included in "selling, general and administrative expenses" in the accompanying consolidated statements of operations.
Costs incurred related to software developed for internal use are capitalized and amortized generally over 3 years.
Goodwill
Goodwill is not amortized, but rather tested for impairment at least annually.  In addition, goodwill will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.  The Company performed its annual impairment testing in November 2012 and determined that no impairment loss existed.
Other Assets, Net
Other assets, net consists primarily of restricted investments and intangible assets.  Restricted investments were $94.6 million and $83.6 million at February 2, 2013 and January 28, 2012, respectively and were purchased to collateralize long-term insurance obligations.  These investments are primarily in tax-exempt money market funds that invest in short-term municipal oblig