10-K 1 dltr-2014x02x01x10k.htm 10-K DLTR-2014-02-01-10K


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 1, 2014
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. (X)
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 August 2, 2013, was $11,637,937,009, based on a $54.13 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 5, 2014, there were 206,224,996 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 19, 2014, which will be filed with the Securities and Exchange Commission not later than May 30, 2014.

2

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

3



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 2014 and beyond;
the effect on merchandise mix of 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;
the potential effect of 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;
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 18 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 “2014” or “fiscal 2014”, “2013” or “fiscal 2013”, “2012” or “fiscal 2012”, and “2011” or “fiscal 2011”, relate to as of or for the years ended January 31, 2015, February 1, 2014, February 2, 2013 and January 28, 2012, 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.

4



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 value of products we sell for $1.00 sets us apart from our competitors.  At February 1, 2014, we operated 4,992 discount variety retail stores.  Our stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Tree Canada, Dollar Giant and Dollar Bills.  In 4,778 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 3,160 stores to increase sales and shopping frequency.  At January 30, 2010, we operated 3,806 stores in 48 states.  At February 1, 2014, we operated 4,812 stores in 48 states and the District of Columbia, as well as 180 stores in Canada.  Our revenue and assets in Canada are not material. Our selling square footage increased from approximately 32.3 million square feet in January 2010 to 43.2 million square feet in February 2014.  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 and promotional 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 everyday consumables such as paper and 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, among others, Valentine's Day, 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 610 additional stores in 2013.  Therefore, as of February 1, 2014, we have freezers and coolers in 3,160 of our stores.  We plan to add them to 320 more stores in 2014. The following table shows the percentage of net sales of each major product group for the years ended February 1, 2014 and February 2, 2013:
 
February 1,
 
February 2,
Merchandise Type
2014
 
2013
Consumable
49.4
%
 
49.9
%
Variety categories
46.3
%
 
45.8
%
Seasonal
4.3
%
 
4.3
%

5



At any point in time, we carry approximately 6,700 items in our stores and as of the end of 2013 approximately 35% of our items are automatically replenished.  The remaining items are pushed to the stores and many can be reordered 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 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 4,620 stores as of February 1, 2014. SNAP benefits were lowered for recipients after November 1, 2013; however, we do not expect the effect on our sales to be material.
Convenient Locations and Store Size.  We primarily focus on opening new stores in strip shopping centers anchored by large retailers who draw 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 18 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. It is also used to provide information to calculate our estimate of inventory cost under the retail inventory method, which is widely used in the retail industry. Our automatic replenishment system replenishes key items, based on actual store level sales and inventory.  At the end of 2013, approximately 35% of our items are 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 manage our inventory levels.  
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

6



customers.  We have standards for store displays, merchandise presentation, and store operations.  We maintain an open door 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.
Seasonality. For information on the impact of seasonality, see Item 1A. "Risk Factors" beginning on page 8 of this Form 10-K and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 18 of this Form 10-K.
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 10.6%.  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
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
2013
 
4,992
 
8,660
 
8,020
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 2014 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 1, 2014, approximately 2,750 of our stores, totaling 65% 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 $1.00.  These stores provide us an opportunity to leverage our Dollar Tree infrastructure in different merchandise concepts, including higher price points, without disrupting the single-price point model in our Dollar Tree stores.  We operated 214 Deal$ stores as of February 1, 2014.
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 2,750 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.
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.
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

7



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 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which began shipping merchandise in June 2013 and expanded our Marietta, Oklahoma distribution center to 1.0 million square feet. In addition, we leased an additional 0.4 million square feet at our San Bernardino, California distribution center in 2013. In 2011, we expanded our Savannah, Georgia distribution center to 1.0 million square feet.   We believe our distribution center network is currently capable of supporting 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 17,600 full-time and 69,800 part-time associates on February 1, 2014.  Part-time associates work an average of less than 30 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.
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.  The minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage. 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

8



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 or other cost increases.  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 18 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, governmental investigations, administrative proceedings, regulatory actions or other litigation.  Our products could also cause illness or injury, harm our reputation, and subject us to litigation. We are currently defendants in several employment-related class and collective actions, litigation concerning leases, and a governmental investigation concerning retail hazardous waste.  The outcome of litigation 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 may remain unknown for substantial periods of time.  In addition, certain of these matters, if decided adversely to us or settled by us, may result in an expense that may be 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, customer information and environmental requirements, 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 and Item 8. Financial Statements and Supplementary Data, "Note 4 - Commitments and Contingencies" under the caption "Contingencies" beginning on page 42 to this Form 10-K.  Resolution of these matters, if decided against the Company, could have a material adverse effect on our results of operations, accrued liabilities or cash flows.
A significant disruption in our computer and technology systems could adversely affect our results of operation or business.

We rely extensively on our computer and technology systems to manage inventory, process credit card and 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, may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions and may receive negative publicity, which could adversely affect our results of operation or business.

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

We have procedures and technology in place to safeguard our customers' debit and credit card information, our associates' private data, suppliers' data, and our business records and intellectual property. Despite these measures, criminals are constantly devising schemes to circumvent safeguards and we may be vulnerable to, and unable to detect and appropriately respond to, data security breaches and data loss, including cyber-security attacks. Other sophisticated retailers have recently suffered serious security breaches. If we experience a data security breach, we could be exposed to negative publicity, government enforcement actions, private litigation, or costly response measures. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores or not shopping in our stores altogether. This could could have an adverse effect on our results of operation or business.

9



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.  The minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage. 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 8, 2012, March 31, 2013, and will be observed on April 20, 2014.
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.  It remains difficult for third party developers to obtain financing for new projects due to the recent turmoil in the financial markets.  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.

10



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 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 we can give no assurance that this trend will not continue.  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.
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.
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.
Failure to comply with our debt covenants could adversely affect our capital resources, financial condition and liquidity.
Our debt agreements contain certain restrictive covenants, which impose various operating and financial restrictions on us. Our failure to comply with the restrictive covenants in our debt agreements could result in an event of default, which, if not cured or waived, could result in us having to repay our borrowings before their due dates. If we are forced to refinance these borrowings on less favorable terms or if we were to experience difficulty in refinancing the debt prior to maturity, our results of operations or financial condition could be materially affected.
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.


11



Item 1B.  UNRESOLVED STAFF COMMENTS
None.

Item 2.  PROPERTIES
Stores
As of February 1, 2014, we operated 4,992 stores in 48 states and the District of Columbia, and five Canadian provinces as detailed below:
Alabama
 
103

 
Maine
 
27

 
Oklahoma
 
54

Arizona
 
86

 
Maryland
 
102

 
Oregon
 
85

Arkansas
 
48

 
Massachusetts
 
89

 
Pennsylvania
 
244

California
 
437

 
Michigan
 
180

 
Rhode Island
 
23

Colorado
 
80

 
Minnesota
 
85

 
South Carolina
 
92

Connecticut
 
52

 
Mississippi
 
61

 
South Dakota
 
8

Delaware
 
27

 
Missouri
 
95

 
Tennessee
 
123

District of Columbia
 
1

 
Montana
 
10

 
Texas
 
307

Florida
 
367

 
Nebraska
 
16

 
Utah
 
45

Georgia
 
186

 
Nevada
 
35

 
Vermont
 
5

Idaho
 
23

 
New Hampshire
 
30

 
Virginia
 
150

Illinois
 
195

 
New Jersey
 
115

 
Washington
 
95

Indiana
 
99

 
New Mexico
 
36

 
West Virginia
 
36

Iowa
 
36

 
New York
 
239

 
Wisconsin
 
95

Kansas
 
32

 
North Carolina
 
194

 
Wyoming
 
13

Kentucky
 
79

 
North Dakota
 
7

 
 
 
 

Louisiana
 
83

 
Ohio
 
182

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Alberta
 
26

 
Manitoba
 
10

 
Saskatchewan
 
8

British Columbia
 
52

 
Ontario
 
84

 
 
 
 
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 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which began shipping merchandise in June 2013.  In addition, we expanded our Marietta, Oklahoma distribution center by 0.4 million square feet and leased an additional 0.4 million square feet at our San Bernardino, California distribution center in 2013. In 2011, we expanded our Savannah, Georgia distribution center to 1.0 million square feet.  We believe our distribution center network is currently capable of supporting 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
1,004,000
San Bernardino, California
802,000
Ridgefield, Washington
665,000
Windsor, Connecticut
1,001,000
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, Washington 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.

Store Support Center
Our Store Support Center is located in an approximately 190,000 square foot building which we own in Chesapeake, Virginia.
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 18 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;
real estate matters related to store leases; and
environmental issues.

In addition, we are defendants in several class or collective action lawsuits, lease restriction cases and an environmental investigation. These proceedings are described in "Note 4 - Commitments and Contingencies" under the caption "Contingencies" beginning on Page 42 of this Form 10-K included in "Part II. Item 8. Financial Statements and Supplementary Data."

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 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 except as specified in Note 4. When a range is expressed, we are currently unable to determine the probability of loss within that range.

13




Item 4.  MINE SAFETY DISCLOSURES
None.

14



PART II
Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER 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 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

Fiscal year ended February 1, 2014:
 

 
 

First Quarter
$
48.92

 
$
38.43

Second Quarter
55.02

 
47.70

Third Quarter
60.19

 
50.33

Fourth Quarter
60.11

 
49.66

On March 5, 2014, the last reported sale price for our common stock, as quoted by Nasdaq, was $54.01 per share.  As of March 5, 2014, we had approximately 268 shareholders of record.
The following table presents our share repurchase activity for the 13 weeks ended February 1, 2014:
 
 
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)
November 3, 2013 to November 30, 2013
 

 
$

 

 
$
1,000.0

December 1, 2013 to January 4, 2014
 

 

 

 
1,000.0

January 5, 2014 to February 1, 2014
 

 

 

 
1,000.0

Total
 

 
$

 

 
$
1,000.0

On September 17, 2013, we entered into two $500.0 million variable maturity accelerated share repurchase agreements ("ASRs") to repurchase $1.0 billion of our common shares in the aggregate. One agreement is collared and the other is uncollared.
The number of shares to be received under the collared agreement is determined based on the weighted average market price of our common stock, less a discount, during a calculation period ending on or before June 2014, subject to a minimum and maximum number of shares. Under this agreement, we received 7.8 million shares in fiscal 2013. This amount represents the minimum number of shares to be received based on a calculation using the "cap" or high-end of the price range of the "collar".
The number of shares to be received under the uncollared agreement is determined based on the weighted average market price of our common stock, less a discount, during a calculation period ending on or before June 2014. We received an initial delivery of 7.2 million shares during fiscal 2013. If the actual number of shares to be repurchased under the agreement exceeds the number of shares initially delivered, we will receive the excess shares at the end of the calculation period. If the number of shares initially delivered exceeds the actual number of shares to be repurchased, we will pay or deliver an amount equal to that excess in either cash or shares at our election. On February 14, 2014 the uncollared agreement concluded and we received an additional 1.9 million shares resulting in a total of 9.1 million shares repurchased under this agreement.

15



We also repurchased 2.4 million shares of common stock on the open market for $112.1 million in fiscal 2013.
In September 2013 our Board of Directors authorized the repurchase of an additional $2.0 billion of our common stock. The authorization replaced all previously announced share repurchase authorizations. At February 1, 2014, we had $1.0 billion remaining under Board repurchase authorization.
For further discussion of our ASRs during 2013, see Item 8 “Financial Statements and Supplementary Data - Note 7 to the Consolidated Financial Statements” beginning on page 45 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 1, 2014, 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 January 31, 2009, and, in each of the foregoing indices on January 31, 2009, 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 1, 2014, February 2, 2013, January 28, 2012, January 29, 2011, and January 30, 2010.  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 before December of the year prior to the two years 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. 
 
Year Ended
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 30,
2010
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
7,840.3

 
$
7,394.5

 
$
6,630.5

 
$
5,882.4

 
$
5,231.2

Gross profit
2,789.8

 
2,652.7

 
2,378.3

 
2,087.6

 
1,856.8

Selling, general and administrative expenses
1,819.5

 
1,732.6

 
1,596.2

 
1,457.6

 
1,344.0

Operating income
970.3

 
920.1

 
782.1

 
630.0

 
512.8

Net income
596.7

 
619.3

 
488.3

 
397.3

 
320.5

Margin Data (as a percentage of net sales):
 
 
 
 
 
 
 

 
 

Gross profit
35.6
%
 
35.9
%
 
35.9
%
 
35.5
%
 
35.5
%
Selling, general and administrative expenses
23.2
%
 
23.5
%
 
24.1
%
 
24.8
%
 
25.7
%
Operating income
12.4
%
 
12.4
%
 
11.8
%
 
10.7
%
 
9.8
%
Net income
7.6
%
 
8.4
%
 
7.4
%
 
6.8
%
 
6.1
%
Per Share Data:
 

 
 

 
 

 
 

 
 

Diluted net income per share
$
2.72

 
$
2.68

 
$
2.01

 
$
1.55

 
$
1.19

Diluted net income per share increase
1.5
%
 
33.3
%
 
29.7
%
 
30.3
%
 
41.7
%

17



 
As of
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 30,
2010
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
and short-term investments
$
267.7

 
$
399.9

 
$
288.3

 
$
486.0

 
$
599.4

Working capital
692.2

 
797.3

 
628.4

 
800.4

 
829.7

Total assets
2,771.9

 
2,752.0

 
2,328.6

 
2,380.5

 
2,289.7

Total debt, including capital lease obligations
769.8

 
271.3

 
265.8

 
267.8

 
267.8

Shareholders' equity
1,170.7

 
1,667.3

 
1,344.6

 
1,459.0

 
1,429.2

 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 30,
2010
Selected Operating Data:
 

 
 

 
 

 
 

 
 

Number of stores open at end of period
4,992

 
4,671

 
4,351

 
4,101

 
3,806

Gross square footage at end of period
54.3

 
50.9

 
47.4

 
44.4

 
41.1

Selling square footage at end of period
43.2

 
40.5

 
37.6

 
35.1

 
32.3

Selling square footage annual growth
6.9
%
 
7.7
%
 
6.9
%
 
8.8
%
 
6.6
%
Net sales annual growth
6.0
%
 
11.5
%
 
12.7
%
 
12.4
%
 
12.6
%
Comparable store net sales increase
2.4
%
 
3.4
%
 
6.0
%
 
6.3
%
 
7.2
%
Net sales per selling square foot
$
187

 
$
190

 
$
182

 
$
174

 
$
167

Net sales per store
$
1.6

 
$
1.6

 
$
1.6

 
$
1.5

 
$
1.4

Selected Financial Ratios:
 

 
 

 
 

 
 

 
 

Return on assets
21.6
%
 
24.4
%
 
20.7
%
 
17.0
%
 
14.8
%
Return on equity
42.1
%
 
41.1
%
 
34.8
%
 
27.5
%
 
23.9
%
Inventory turns
4.1

 
4.3

 
4.2

 
4.2

 
4.1

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 2013, 2012 and 2011;
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 2013 and 2012 and what we expect them to be in 2014; 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 1, 2014, February 2, 2013 and January 28, 2012.  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 2013 compared to fiscal year 2012 and for fiscal year 2012 compared to fiscal year 2011.



18



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:
On September 17, 2013, we entered into agreements with JP Morgan Chase Bank to repurchase $1.0 billion of our common stock under a variable maturity accelerated share repurchase program, 50% of which is collared and 50% of which is uncollared.
On September 16, 2013, we completed a private placement with institutional investors of $750 million aggregate principal amount of Senior Notes. The Senior Notes include three tranches with $300 million of 4.03% Senior Notes due in September 2020, $350 million of 4.63% Senior Notes due in September 2023 and $100 million of 4.78% Senior Notes due in September 2025.
On September 13, 2013, our Board of Directors authorized the repurchase of an additional $2.0 billion of our common stock. This authorization replaced all previous authorizations. At February 1, 2014, we had $1.0 billion remaining under Board repurchase authorization.
In August 2013, we completed a 401,000 square foot expansion of our distribution center in Marietta, Oklahoma. The Marietta distribution center is now a 1,004,000 square foot, fully automated facility.
In June 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut.
In March 2013, we leased an additional 0.4 million square feet at our distribution center in San Bernardino, California. The San Bernardino distribution center is now an 802,000 square foot facility.
On June 6, 2012, we entered into a five-year $750.0 million Unsecured Credit Agreement which 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.
In October 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.
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 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 1, 2014, we operated 4,992 stores in 48 states and the District of Columbia, and five Canadian provinces, with 43.2 million selling square feet compared to 4,671 stores with 40.5 million selling square feet at February 2, 2013.  During fiscal 2013, we opened 343 stores, expanded 71 stores and closed 22 stores, compared to 345 new stores opened, 87 stores expanded and 25 stores closed during fiscal 2012.  In the current year we increased our selling square footage by 6.9%. Of the 2.7 million selling square foot increase in 2013, 0.2 million was added by expanding existing stores.  The average size of our stores opened in 2013 was approximately 8,020 selling square feet (or about 9,800 gross square feet).  For 2014, 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 2013 and Fiscal 2011 which ended on February 1, 2014, and January 28, 2012, respectively, each included 52 weeks. 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.
In fiscal 2013, comparable store net sales increased by 2.4%.  This increase was based on the comparable 52 weeks for both years. The comparable store net sales increase was the result of a 1.9% increase in the number of transactions and a 0.5% 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 2013, and we continued the roll-out of frozen and refrigerated merchandise to more of our stores.  At February 1, 2014 we had frozen and refrigerated merchandise in approximately 3,160 stores compared to approximately 2,550 stores at February 2, 2013.  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 4,620 qualified stores compared to 4,200 at the end of 2012. SNAP benefits were lowered for recipients after November 1, 2013; however, we do not expect the effect on our sales to be material.

19



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.
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.
Results of Operations
 
Year Ended
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Net sales
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
64.4
%
 
64.1
 %
 
64.1
%
Gross profit
35.6
%
 
35.9
 %
 
35.9
%
Selling, general and administrative expenses
23.2
%
 
23.5
 %
 
24.1
%
Operating income
12.4
%
 
12.4
 %
 
11.8
%
Interest expense,net
0.2
%
 
 %
 
%
Other (income) expense, net
%
 
(0.8
)%
 

Income before income taxes
12.2
%
 
13.2
 %
 
11.8
%
Provision for income taxes
4.6
%
 
4.8
 %
 
4.4
%
Net income
7.6
%
 
8.4
 %
 
7.4
%
Fiscal year ended February 1, 2014 compared to fiscal year ended February 2, 2013
Net sales.  Net sales increased 6.0%, or $445.8 million, in 2013 compared to 2012, resulting from sales in our new stores and a 2.4% increase in comparable store net sales. Excluding the 53rd week in 2012, which accounted for approximately $125.0 million of sales, net sales increased 7.9%, or $570.8 million. The comparable store net sales increase is based on the comparable 52 weeks for both years. 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 1, 2014 and February 2, 2013.
 
February 1, 2014
 
February 2, 2013
New stores
343

 
345

Expanded or relocated stores
71

 
87

Closed stores
(22
)
 
(25
)
Of the 2.7 million selling square foot increase in 2013 approximately 0.2 million was added by expanding existing stores.
Gross profit. Gross profit margin was 35.6% in 2013 compared to 35.9% in 2012 due to loss of leverage in occupancy and distribution cost from the 53rd week of sales in 2012.
Selling, general and administrative expenses.  Selling, general and administrative expenses, as a percentage of net sales, decreased to 23.2% for 2013 compared to 23.5% for 2012.  The decrease is primarily due to lower incentive compensation achievement in 2013 compared with 2012 and lower inventory service fees.
Operating income.  Operating income margin was 12.4% in 2013 and 2012 due to the reasons noted above.
Interest expense, net. Interest expense, net increased $12.9 million due to interest related to the $750.0 million of senior notes issued in September 2013.
Other (income) expense, net.  Other (income) expense, net in 2012 includes a $60.8 million gain on the sale of our investment in Ollie's Holdings, Inc.

20



Income taxes.  Our effective tax rate was 37.5% in 2013 compared to 36.7% in 2012. The rate increase is the result of statute expirations and the settlement of state tax audits in 2012.
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 $125.0 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
)
Prior to fiscal 2012, we did not open new stores or expand stores in the month of January. Of the 345 new stores added in 2012, 25 stores were opened and five were expanded 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. 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.
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) expense, net.  Other (income) expense, 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. The rate decrease is the result of statute expirations and the settlement of state tax audits.
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.
The following table compares cash-flow related information for the years ended February 1, 2014, February 2, 2013 and January 28, 2012:

21



 
 
Year Ended
 
 
February 1,
 
February 2,
 
January 28,
(in millions)
 
2014
 
2013
 
2012
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
793.4

 
$
677.7

 
$
686.5

Investing activities
 
(324.3
)
 
(261.3
)
 
(86.1
)
Financing activities
 
(597.8
)
 
(303.4
)
 
(623.2
)
Net cash provided by operating activities increased $115.7 million in 2013 compared to 2012 due to a decrease in cash used for prepaid rent and purchasing merchandise inventory partially offset by a decrease in income taxes payable.
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 used in investing activities increased $63.0 million in 2013 primarily due to the impact from $62.3 million in proceeds from the sale of the investment in Ollie's Holdings, Inc. in 2012.
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.
In 2013, net cash used in financing activities increased $294.4 million as a result of an increase in share repurchases in 2013 and the repayment of the $250.0 million outstanding on the revolving credit facility partially offset by $750.0 million of proceeds from the issuance of the Senior Notes.
In 2012, net cash used in financing activities decreased $319.8 million as a result of reduced share repurchases in 2012.
At February 1, 2014, our long-term borrowings were $769.8 million.  We also have $130.0 million, $100.0 million and $20.0 million Letter of Credit Reimbursement and Security Agreements, under which approximately $144.1 million were committed to letters of credit issued for routine purchases of imported merchandise at February 1, 2014.

In September 2013, we entered into a Note Purchase Agreement with institutional accredited investors in which we issued and sold $750.0 million of senior notes (the "Notes") in an offering exempt from the registration requirements of the Securities Act of 1933. The Notes consist of three tranches: $300.0 million of 4.03% Senior Notes due September 16, 2020; $350.0 million of 4.63% Senior Notes due September 16, 2023; and $100.0 million of 4.78% Senior Notes due September 16, 2025. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2014. The Notes are unsecured and rank pari passu in right of repayment with our other senior unsecured indebtedness. We may prepay some or all of the Notes at any time in an amount not less than 5% of the original aggregate principal amount of the Notes to be prepaid, at a price equal to the sum of (a) 100% of the principal amount thereof, plus accrued and unpaid interest, and (b) the applicable make-whole amount. In the event of a change in control (as defined in the Note Purchase Agreement), we may be required to prepay the Notes. The Note Purchase Agreement contains customary affirmative and restrictive covenants. We used the net proceeds of the Notes to finance share repurchases.
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.  As of February 1, 2014, no amount was outstanding under the $750.0 million revolving line of credit.
In September 2013, we amended the Agreement to enable the issuance of the Notes.
We repurchased 17.4 million shares for $1,112.1 million in fiscal 2013.  Subsequent to year end we received an additional 1.9 million shares due to the completion of the uncollared ASR. We may receive additional shares in 2014 upon completion of

22



the collared ASR. We repurchased 8.1 million shares for $340.2 million in fiscal 2012.  We repurchased 17.4 million shares for $645.9 million in fiscal 2011.  At February 1, 2014, we have $1.0 billion remaining under Board repurchase authorization.
Funding Requirements
Overview, Including Off-Balance Sheet Arrangements
We expect our cash needs for opening new stores and expanding existing stores in fiscal 2014 to total approximately $258.8 million, which includes capital expenditures, initial inventory and pre-opening costs.
Our estimated capital expenditures for fiscal 2014 are between $350.0 million and $360.0 million, including planned expenditures for our new and expanded stores, the addition of freezers and coolers to approximately 320 stores, the expansion of our Joliet, Illinois distribution center and the initial phases of work on our eleventh distribution center.  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 1, 2014, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):
Contractual Obligations
Total
2014
2015
2016
2017
2018
Thereafter
Lease Financing
 
 
 
 
 
 
 
Operating lease obligations
$
2,326.3

$
516.4

$
476.4

$
394.2

$
329.6

$
206.3

$
403.4

Long-term Borrowings
 

 

 

 

 

 

 

Senior notes
750.0






750.0

Demand revenue bonds
12.8

12.8






Forgivable promissory note
7.0




0.2

1.4

5.4

Interest on long-term borrowings
294.8

33.2

33.2

33.1

33.1

33.1

129.1

Total obligations
$
3,390.9

$
562.4

$
509.6

$
427.3

$
362.9

$
240.8

$
1,287.9

Commitments
Total
Expiring in 2014
Expiring in 2015
Expiring in 2016
Expiring in 2017
Expiring in 2018
Thereafter
Letters of credit and surety bonds
$
173.8

$
173.8

$

$

$

$

$

Technology assets
2.4

2.4






Telecommunication contracts
19.3

7.2

5.5

5.1

1.5



Total commitments
$
195.5

$
183.4

$
5.5

$
5.1

$
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 1, 2014 for stores that were not yet open on February 1, 2014.
Long-term Borrowings
Senior notes. In September 2013, we entered into a Note Purchase Agreement with institutional accredited investors in which we issued and sold $750.0 million of senior notes (the "Notes") in an offering exempt from the registration requirements of the Securities Act of 1933. The Notes consist of three tranches: $300.0 million of 4.03% Senior Notes due September 16, 2020; $350.0 million of 4.63% Senior Notes due September 16, 2023; and $100.0 million of 4.78% Senior Notes due September 16, 2025. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2014. For complete terms of the Notes please see Item 8. Financial Statements and Supplementary Data, "Note 5 - Long-Term Debt" beginning on page 44 of this Form 10-K.
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 1, 2014, the balance outstanding on the bonds was $12.8 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

23



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 0.19% at February 1, 2014.
On March 3, 2014, we paid the $12.8 million outstanding under the Demand Revenue Bonds and the debt was retired.
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 our 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 over a five-year period beginning in fiscal 2017.
Interest on long-term borrowings.  These amounts represent interest payments on the Senior Notes, Demand Revenue Bond and Forgivable Promissory Note using the interest rates for each at February 1, 2014.
Commitments
Letters of credit and surety bonds.  We are a party to three Letter of Credit Reimbursement and Security Agreements providing $130.0 million, $100.0 million and $20.0 million, respectively for letters of credit.  Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $144.1 million of purchases committed under these letters of credit at February 1, 2014.
We also have approximately $12.9 million of letters of credit outstanding for our self-insurance programs, $13.0 million of letters of credit outstanding for our Demand Revenue Bonds, and $3.8 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores.
Technology assets.  We have commitments totaling approximately $2.4 million to primarily purchase store technology assets for our stores during 2014.
Telecommunication contracts.  We have contracted for telecommunication services with contracts expiring in 2017.  The total amount of these commitments is approximately $19.3 million.
Derivative Financial Instruments
In 2013, we were party to fuel derivative contracts with third parties which included approximately 2.8 million gallons of diesel fuel, or approximately 20% of our domestic truckload fuel needs.  These derivative contracts did not qualify for hedge accounting and therefore all changes in fair value for these derivatives are included in earnings.  We did not have any active fuel derivative contracts as of February 1, 2014.

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 Item 8. Financial Statements and Supplementary Data, "Note 1 - Summary of Significant Account Policies" under the caption "Merchandise Inventories" beginning on page 35 of this Form 10-K, 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.  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.

24



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.
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 1, 2014 is based on estimated shrink for most of 2013, 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.  Certain expenses, such as legal reserves, require a high degree of judgment and 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.

We are involved in numerous legal proceedings and claims. Our accruals, if any, related to these proceedings and claims are based on a determination of whether or not the loss is both probable and estimable. We review outstanding matters with external counsel to assess the probability of an unfavorable outcome and estimates of loss. We re-evaluate outstanding proceedings and claims each quarter or as new and significant information becomes available, and we adjust or establish accruals, if necessary. Our legal proceedings are described in "Note 4 - Commitments and Contingencies" under the caption "Contingencies" beginning on Page 42 of this Form 10-K included in "Part II. Item 8. Financial Statements and Supplementary Data.

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 accruals which are materially different from the calculated accruals.  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.
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 2013, see Item 8 “Financial Statements and Supplementary Data - Note 3 to the Consolidated Financial Statements” beginning on page 39 of this Form 10-K.

25



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 8, 2012, March 31, 2013, and will be observed on April 20, 2014.  We believe that the later Easter in 2014 could result in a $8.0 million increase in sales in the first quarter of 2014 as compared to the first quarter of 2013.  We generally realize a disproportionate amount of our net 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.
Our unaudited results of operations for the eight most recent quarters are shown in a table in Note 11 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.  Trans-Pacific shipping rates are negotiated with individual freight lines and are subject to fluctuation based on shipping industry market conditions and fuel costs.  We can give no assurances as to the final rate trends for 2014, as we are in the early stages of our negotiations.
Minimum Wage. Multiple states and local jurisdictions passed legislation that increase their minimum wages in 2014 and 2015 and the federal government has made indications that it may consider increasing the federal minimum wage. As a result, we believe our expenses could increase unless we are able to offset the increase in payroll costs by operating more effectively or efficiently.

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 2.8 million, 4.8 million and 3.5 million gallons of diesel fuel in 2013, 2012 and 2011, respectively.  These hedges represented approximately 20%, 35% and 31% of our total domestic truckload fuel needs in 2013, 2012 and 2011, respectively.  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.  We did not have any active fuel derivative contracts as of February 1, 2014.

26



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 1, 2014, February 2, 2013 and January 28, 2012
 
 
Consolidated Statements of Comprehensive Income
 
for the years ended February 1, 2014, February 2, 2013 and
 
January 28, 2012
 
 
Consolidated Balance Sheets as of February 1, 2014 and
 
February 2, 2013
 
 
Consolidated Statements of Shareholders’ Equity for the years
 
ended February 1, 2014, February 2, 2013 and
 
January 28, 2012
 
 
Consolidated Statements of Cash Flows for the years ended
 
February 1, 2014, February 2, 2013 and January 28, 2012
 
 
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 1, 2014 and February 2, 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended February 1, 2014. 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 1, 2014 and February 2, 2013, and the results of its operations and its cash flows for each of the years in the three‑year period ended February 1, 2014, 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), the Company’s internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Norfolk, Virginia
March 14, 2014


29



DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Year Ended
 
 
February 1,
 
February 2,
 
January 28,
(in millions, except per share data)
 
2014
 
2013
 
2012
Net sales
 
$
7,840.3

 
$
7,394.5

 
$
6,630.5

Cost of sales
 
5,050.5

 
4,741.8

 
4,252.2

Gross profit
 
2,789.8

 
2,652.7

 
2,378.3

Selling, general and administrative
 
 

 
 

 
 

expenses
 
1,819.5

 
1,732.6

 
1,596.2

Operating income
 
970.3

 
920.1

 
782.1

Interest expense, net
 
15.4

 
2.8

 
2.9

Other (income) expense, net
 
0.6

 
(61.6
)
 
(0.3
)
Income before income taxes
 
954.3

 
978.9

 
779.5

Provision for income taxes
 
357.6

 
359.6

 
291.2

Net income
 
$
596.7

 
$
619.3

 
$
488.3

Basic net income per share
 
$
2.74

 
$
2.70

 
$
2.03

Diluted net income per share
 
$
2.72

 
$
2.68

 
$
2.01

See accompanying Notes to Consolidated Financial Statements

30




DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Year Ended
 
 
February 1,
 
February 2,
 
January 28,
(in millions)
 
2014
 
2013
 
2012
Net income
 
$
596.7

 
$
619.3

 
$
488.3

 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(15.4
)
 
(0.9
)
 
(0.3
)
Fair value adjustment - derivative cash
 
 
 
 
 
 
flow hedging instrument, net of tax
 

 

 
0.1

 
 
 
 
 
 
 
Total comprehensive income
 
$
581.3

 
$
618.4

 
$
488.1


See accompanying Notes to Consolidated Financial Statements

31




DOLLAR TREE, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
 
February 1, 2014
 
February 2, 2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
267.7

 
$
399.9

Merchandise inventories, net
 
1,035.3

 
971.7

Current deferred tax assets, net
 
18.9

 
22.5

Prepaid expenses and other current assets
 
56.6

 
79.4

Total current assets
 
1,378.5

 
1,473.5

Property, plant and equipment, net
 
1,094.0

 
960.7

Goodwill
 
169.3

 
173.3

Deferred tax assets, net
 
24.1

 
28.3

Other assets, net
 
106.0

 
116.2

TOTAL ASSETS
 
$
2,771.9

 
$
2,752.0

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
12.8

 
$
14.3

Accounts payable
 
393.9

 
346.5

Other current liabilities
 
232.3

 
235.8

Income taxes payable
 
47.3

 
79.6

Total current liabilities
 
686.3

 
676.2

Long-term debt, excluding current portion
 
757.0

 
257.0

Income taxes payable, long-term
 
5.5

 
5.6

Other liabilities
 
152.4

 
145.9

Total liabilities
 
1,601.2

 
1,084.7

Commitments and contingencies
 


 


Shareholders' equity:
 
 

 
 

Common stock, par value $0.01;  600,000,000 shares
 
 

 
 

authorized, 208,131,669 and 224,584,393 shares
 
 

 
 

issued and outstanding at February 1, 2014
 
 

 
 

and February 2, 2013, respectively
 
2.1

 
2.2

Additional paid-in capital
 
10.7

 
0.3

Accumulated other comprehensive loss
 
(16.9
)
 
(1.5
)
Retained earnings
 
1,174.8

 
1,666.3

Total shareholders' equity
 
1,170.7

 
1,667.3

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
2,771.9

 
$
2,752.0

See accompanying Notes to Consolidated Financial Statements

32



DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED FEBRUARY 1, 2014, FEBRUARY 2, 2013, AND JANUARY 28, 2012
(in millions)
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Share-
holders'
Equity
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

Net income
 

 

 

 

 
596.7

 
596.7

Total other comprehensive loss
 

 

 

 
(15.4
)
 

 
(15.4
)
Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.1

 

 
4.8

 

 

 
4.8

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $1.6
 
0.1

 

 
3.7

 

 

 
3.7

Repurchase and retirement of shares
 
(17.4
)
 
(0.1
)
 
(23.8
)
 

 
(1,088.2
)
 
(1,112.1
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

  income tax benefit of $8.2
 
0.7

 

 
25.7

 

 

 
25.7

Balance at February 1, 2014
 
208.1

 
$
2.1

 
$
10.7

 
$
(16.9
)
 
$
1,174.8

 
$
1,170.7

See accompanying Notes to Consolidated Financial Statements

33

DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


 
 
Year Ended
 
 
February 1,
 
February 2,
 
January 28,
(in millions)
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
596.7

 
$
619.3

 
$
488.3

Adjustments to reconcile net income to net cash
 
 

 
 

 
 

provided by operating activities:
 
 

 
 

 
 

Depreciation and amortization
 
190.5

 
175.3

 
163.9

Gain on sale of Ollie's investment
 

 
(60.8
)
 

Provision for deferred income taxes
 
6.7

 
(7.7
)
 
10.9

Stock-based compensation expense
 
37.0

 
35.5

 
31.6

Other non-cash adjustments to net income
 
3.9

 
4.1

 
4.4

Changes in assets and liabilities increasing
 
 

 
 

 
 

(decreasing) cash and cash equivalents:
 
 

 
 

 
 

Merchandise inventories
 
(67.7
)
 
(104.0
)
 
(64.5
)
Other assets
 
26.1

 
(56.7
)
 
(1.3
)
Accounts payable
 
46.9

 
59.3

 
26.9

Income taxes payable
 
(32.3
)
 
16.3

 
(1.1
)
Other current liabilities
 
(2.9
)
 
20.3

 
25.4

Other liabilities
 
(11.5
)
 
(23.2
)
 
2.0

Net cash provided by operating activities
 
793.4

 
677.7

 
686.5

Cash flows from investing activities:
 
 

 
 

 
 

Capital expenditures
 
(330.1
)
 
(312.2
)
 
(250.1
)
Purchase of short-term investments
 

 

 
(6.0
)
Proceeds from sale of short-term investments
 

 

 
180.8

Proceeds from sale of Ollie's investment
 

 
62.3

 

Purchase of restricted investments
 
(8.8
)
 
(11.0
)
 
(16.3
)
Proceeds from sale of restricted investments
 
15.0

 

 
5.3

Foreign currency gain (loss)
 
(0.1
)
 
(0.4
)
 
0.2

Acquisition of favorable lease rights
 
(0.3
)
 

 

Net cash used in investing activities
 
(324.3
)
 
(261.3
)
 
(86.1
)
Cash flows from financing activities:
 
 

 
 

 
 

Principal payments under long-term debt and capital lease obligations
 
(271.5
)
 
(1.5
)
 
(2.0
)
Proceeds from long-term debt
 
770.0

 
7.0

 

Payments for share repurchases
 
(1,112.1
)
 
(340.2
)
 
(645.9
)
Proceeds from stock issued pursuant to stock-based
 
 

 
 

 
 

compensation plans
 
6.0

 
10.0

 
10.9

Tax benefit of exercises/vesting of equity based compensation
 
9.8

 
21.3

 
13.8

Net cash used in financing activities
 
(597.8
)
 
(303.4
)
 
(623.2
)
Effect of exchange rate changes on cash and cash equivalents
 
(3.5
)
 
(1.4
)
 
(0.1
)
Net increase (decrease) in cash and cash equivalents
 
(132.2
)
 
111.6

 
(22.9
)
Cash and cash equivalents at beginning of year
 
399.9

 
288.3

 
311.2

Cash and cash equivalents at end of year
 
$
267.7

 
$
399.9

 
$
288.3

Supplemental disclosure of cash flow information:
 
 

 
 

 
 

Cash paid for:
 
 

 
 

 
 

Interest
 
$
14.5

 
$
3.3

 
$
3.2

Income taxes
 
$
373.2

 
$
333.9

 
$
268.3

 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 4,992 discount variety retail stores in the United States and Canada at February 1, 2014.  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 Dividend
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.
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 "2013" or "Fiscal 2013," “2012” or “Fiscal 2012,” and “2011” or “Fiscal 2011,” relates to as of or for the years ended February 1, 2014, February 2, 2013, and January 28, 2012, respectively. Fiscal 2012 ended on February 2, 2013 and included 53 weeks, commensurate with the retail calendar. Fiscal 2013 and 2011 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 1, 2014 and February 2, 2013 includes $172.6 million and $344.5 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 applying a calculated cost-to-retail ratio to the retail value of inventories.

35



Costs directly associated with warehousing and distribution are capitalized as merchandise inventories.  Total warehousing and distribution costs capitalized into inventory amounted to $43.2 million and $38.8 million at February 1, 2014 and February 2, 2013, 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 2013 and determined that no impairment loss existed.
Other Assets, Net
Other assets, net consists primarily of restricted investments, deferred compensation plan assets and deferred financing costs.  Restricted investments were $87.9 million and $94.6 million at February 1, 2014 and February 2, 2013, 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 obligations.  These investments are classified as available for sale and are recorded at fair value, which approximates cost.  Deferred compensation plan assets were $5.1 million and $4.2 million at February 1, 2014 and February 2, 2013, respectively and are recorded at fair value. Deferred financing costs represent costs directly related to debt issuances and are amortized over the terms of the related debt. Deferred financing costs, net of amortization, were $4.3 million and $1.7 million at February 1, 2014 and February 2, 2013, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets based on discounted cash flows or other readily available evidence of fair value, if any.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  In fiscal 2013, 2012 and 2011, the Company recorded charges of $0.5 million, $0.5 million and $0.9 million, respectively, to write down certain assets.  These charges are recorded as a component of "selling, general and administrative expenses" in the accompanying consolidated statements of operations.
Financial Instruments
The Company utilizes derivative financial instruments to reduce its exposure to market risks from changes in interest rates and diesel fuel costs.  By entering into receive-variable, pay-fixed interest rate and diesel fuel swaps, the Company limits its exposure to changes in variable interest rates and diesel fuel prices.  The Company is exposed to credit-related losses in the event of non-performance by the counterparty to these instruments but minimizes this risk by entering into transactions with high quality counterparties.  Interest rate or diesel fuel cost differentials paid or received on the swaps are recognized as adjustments to interest and freight expense, respectively, in the period earned or incurred.  The Company formally documents all hedging relationships, if applicable, and assesses hedge effectiveness both at inception and on an ongoing basis.  
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).  The three levels of the fair value hierarchy are as follows:

36



Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
Level 3 - Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
The Company’s cash and cash equivalents, restricted investments and diesel fuel swaps represent the financial assets and liabilities that were accounted for at fair value as of February 1, 2014 and February 2, 2013.  As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  The fair value of the Company’s cash and cash equivalents was $267.7 million and $399.9 million as of February 1, 2014 and February 2, 2013, respectively. The fair value of the Company's restricted investments was $87.9 million and $94.6 million as of February 1, 2014 and February 2, 2013, respectively.  These fair values were determined using Level 1 measurements in the fair value hierarchy.  The Company did not have any active fuel derivative contracts as of February 1, 2014. The fair value of the diesel fuel swaps was an asset of $0.5 million as of February 2, 2013. The fair values of the swaps were estimated using Level 2 measurements in the fair value hierarchy. These estimates used discounted cash flow calculations based upon forward interest-rate yield and diesel cost curves. The curves were obtained from independent pricing services reflecting broker market quotes.
The carrying value of the Company's Demand Revenue Bonds approximates its fair value because the debt’s interest rate varies with market interest rates. The carrying value of the Company's Senior Notes approximates its fair value because they were recently issued.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).  The Company recorded an impairment charge of $0.5 million, $0.5 million, and $0.9 million in fiscal 2013, 2012 and 2011, respectively, to reduce certain store assets to their estimated fair value.  The fair values were determined based on the income approach, in which the Company utilized internal cash flow projections over the life of the underlying lease agreements discounted based on a risk-free rate of return.  These measures of fair value, and related inputs, are considered a level 3 approach under the fair value hierarchy.  There were no other changes related to level 3 assets.

 Lease Accounting
The Company leases almost all of its retail locations under operating leases.  The Company recognizes minimum rent expense beginning when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening.  When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent.  The Company also receives tenant allowances, which are recorded in deferred rent and are amortized as reductions of rent expense over the terms of the leases.
Revenue Recognition
The Company recognizes sales revenue at the time a sale is made to its customer.
Taxes Collected
The Company reports taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions (i.e., sales tax) on a net (excluded from revenues) basis.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution costs, and certain occupancy costs in cost of sales.
Pre-Opening Costs
The Company expenses pre-opening costs for new, expanded and relocated stores, as incurred.
Advertising Costs
The Company expenses advertising costs as they are incurred and they are included in "selling, general and administrative expenses" on the accompanying consolidated statements of operations.  Advertising costs approximated $14.9 million, $13.5 million and $13.8 million for the years ended February 1, 2014, February 2, 2013, and January 28, 2012, respectively.


37



Income Taxes
Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
The Company recognizes a financial statement benefit for a tax position if it determines that it is more likely than not that the position will be sustained upon examination.
The Company includes interest and penalties in the provision for income tax expense and income taxes payable.  The Company does not provide for any penalties associated with tax contingencies unless they are considered probable of assessment.
Stock-Based Compensation
The Company recognizes expense for all share-based payments to employees based on their fair values.  Total stock-based compensation expense for 2013, 2012 and 2011 was $36.2 million, $34.9 million and $31.0 million, respectively.
The Company recognizes expense related to the fair value of restricted stock units (RSUs) over the requisite service period on a straight-line basis or a shorter period based on the retirement eligibility of the grantee.  The fair value is determined using the closing price of the Company’s common stock on the date of grant.
Net Income Per Share
Basic net income per share has been computed by dividing net income by the weighted average number of shares outstanding.  Diluted net income per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential shares and has been computed by dividing net income by the weighted average number of shares and dilutive potential shares outstanding.  Dilutive potential shares include all outstanding stock options and unvested RSUs after applying the treasury stock method.


NOTE 2 - BALANCE SHEET COMPONENTS
Property, Plant and Equipment, Net
Property, plant and equipment, net, as of February 1, 2014 and February 2, 2013 consists of the following: 
 
February 1,
 
February 2,
(in millions)
2014
 
2013
Land
$
65.2

 
$
51.4

Buildings
319.8

 
223.9

Leasehold improvements
960.7

 
876.2

Furniture, fixtures and equipment
1,307.0

 
1,174.5

Construction in progress
57.4