Dollar Tree Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (DLTR-NASDAQ)

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1 February 26, 2015 Dollar Tree Inc. Current Recommendation Earnings Update: Dollar Tree Tops Q4 Earnings & Sales; Guides FY15 SUMMARY DATA NEUTRAL Prior Recommendation Neutral Date of Last Change 08/21/2011 Current Price (02/25/15) $79.16 Target Price $83.00 (DLTR-NASDAQ) SUMMARY Dollar Tree posted solid fourth-quarter fiscal 2014 results where both top and bottom lines beat the Zacks Consensus Estimate and registered year-over-year growth. We believe the company is progressing well with its growth endeavors, including store expansion, omni-channel development and venture into new markets. We also commend its strategic investments in technological advancements and acquisitions, such as the proposed takeover of Family Dollar, focused on boosting its performance in the long run. However, we are slightly cautious about the company s future results as rising freight costs are continuously weighing on its gross margin. Moreover, the stock remains vulnerable to sluggish economic recovery and cautious consumer spending. Risks of sourcing merchandise from overseas markets may also drag its results going forward. Thus, we retain our Neutral view on the stock. 52-Week High $ Week Low $50.00 One-Year Return (%) Beta 0.28 Average Daily Volume (sh) 3,495,645 Shares Outstanding (mil) 206 Market Capitalization ($mil) $16,280 Short Interest Ratio (days) 2.48 Institutional Ownership (%) 90 Insider Ownership (%) 4 Risk Level * Below Avg., Type of Stock Large-Growth Industry Retail-Discount Zacks Industry Rank * 85 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 10.5 Earnings Per Share (%) 21.4 Dividend (%) N/A using TTM EPS 25.4 using 2015 Estimate 22.6 using 2016 Estimate 19.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page ,866 A 1,855 A 1,885 A 2,235 A 7,840 A ,000 A 2,031 A 2,095 A 2,476 A 8,602 A ,201 E 2,220 E 2,285 E 2,670 E 9,376 E ,239 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.59 A $0.56 A $0.58 A $1.02 A $2.72 A 2014 $0.67 A $0.61 A $0.69 A $1.16 A $3.12 A 2015 $0.74 E $0.72 E $0.78 E $1.26 E $3.50 E 2016 $4.06 E Projected EPS Growth - Next 5 Years % 17 (Note: Qtly. figures may not add up to annual due to rounding off.) 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Dollar Tree Tops Q4 Earnings & Sales; Guides FY15- Feb 25, 2015 Dollar Tree posted its fourth-quarter fiscal 2014 results wherein both its top and bottom lines beat the Zacks Consensus Estimate and also registered year-over-year growth. The discount variety store operator s adjusted earnings of $1.16 per share for the quarter were 13.7% higher than the year-ago comparable quarter s earnings per share of $1.02. Also, adjusted earnings came a penny ahead of the Zacks Consensus Estimate. Adjusted earnings exclude the impact of costs associated with the pending acquisition of Family Dollar Stores. Including the same, Dollar Tree s earnings came in at $1.00 per share, down nearly 2% year over year. Dollar Tree is seeking clearance from the Federal Trade Commission to conclude its pending acquisition of Family Dollar, attempting to close the buyout by Apr 27, Quarterly Details Consolidated net sales surged 10.8% on a year-over-year basis in the quarter to $2,475.6 million, surpassing the Zacks Consensus Estimate of $2,469 million. Comparable-store sales (comps), on a constant currency basis, climbed 5.6% compared with a 1.2% rise recorded in the prior-year quarter. The improvement in comps was mainly driven by a 5% jump in transaction count. During the quarter, party supplies, household products and food witnessed significant strength, which in turn, drove comps. Dollar Tree's quarterly gross profit rose 11.3% year over year to $918.1 million, with the gross margin expanding 20 basis points (bps) to 37.1%. The year-over-year enhancement in gross margin came on the back of higher markups, coupled with leverage on distribution and occupancy expenses, partially offset by greater freight expenses and continuous merchandise value investments. Adjusted selling, general and administrative (SG&A) expenses escalated 10.6% to $527.8 million. However, as a percentage of revenues, the same remained flat at 21.3% as the effect of higher payroll expenses was compensated by leverage on other expenses, benefiting from solid comps. Adjusted operating income for the quarter ascended 12.1% to $390.3 million. As a percentage of sales, it expanded 20 bps to 15.8%, primarily due to enhanced gross margin. Fiscal 2014: At a Glance The company s adjusted earnings for fiscal 2014 jumped 14.7% year over year to $3.12 per share, beating the Zacks Consensus Estimate by a penny. Including acquisition-related expenses, earnings for fiscal 2014 rose 6.6% to $2.90 per share. Also, revenues for the fiscal advanced 9.7% to $8,602.2 million, but fell short of the Zacks Consensus Estimate of $8,655 million. Balance Sheet Dollar Tree ended fiscal 2014 with cash and cash equivalents of $864.1 million, compared with cash balance of $267.7 million at the end of fiscal Net merchandise inventories were $1,035.7 million, almost in line with the fiscal 2013 level. Equity Research DLTR Page 2

3 Store Update Dollar Tree opened 90 outlets, expanded or relocated 6 outlets, and shuttered 5 outlets during the quarter. Retail selling square footage grew 7.4% year over year to 46.5 million in the quarter. Looking Ahead Management remains impressed with its business model and stable inventory position, and is all set to embrace the Spring season. Following a strong quarter, the company issued the following guidance for fiscal 2015 and the first quarter. Based on the expectation that comps will grow in a low to low-mid single-digit range in fiscal 2015, Dollar Tree anticipates sales for the fiscal to come in the range of $9.21 $9.45 billion. Moreover, the company envisions adjusted earnings per share to come in a band of $3.30 $3.50 in fiscal For the first quarter of fiscal 2015, Dollar Tree expects total sales to be in the range of $2.15 $2.20 billion, on the back of low-mid single-digit comps growth. Further, the company anticipates adjusted earnings for the quarter to range from $0.69 $0.74 per share. The guidance for both first-quarter and fiscal 2015 excludes the impact of acquisition-related expenses. Equity Research DLTR Page 3

4 VALUATION Dollar Tree s current trailing 12-month earnings multiple is 25.4x, compared with the 32.3x industry average and 18.5x for the S&P500. Over the last five years, Dollar Tree s shares have traded in a range of 15.5x to 25.4x trailing 12-month earnings. The stock is also trading at a discount to the industry average, based on forward earnings estimates. Our target price of $83.00, 23.7x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Dollar Tree, Inc. (DLTR) Industry Average S&P Family Dollar Stores Inc. (FDO) Ross Stores Inc. (ROST) Big Lots Inc. (BIG) Burlington Stores, Inc. (BURL) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow Dollar Tree, Inc. (DLTR) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Industry Average S&P N/A 2.1 N/A Equity Research DLTR Page 4

5 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research DLTR Page 5

6 OVERVIEW Founded in 1986 and headquartered in Chesapeake, VA, Dollar Tree Inc. is an operator of discount variety stores offering merchandise at a fixed price point of $1.00. Its stores successfully operate in major metropolitan areas, mid-sized cities and small towns and perform well in the various locations. It offers a wide range of quality everyday general merchandise in many categories, including house wares, seasonal goods, candy and food, toys, health and beauty care, gifts, party goods, stationery, books, personal accessories, and other consumer items. As of Nov 1, 2014, Dollar Tree operated 5,282 stores under the names of Dollar Tree, Dollar Tree Canada and Deal$. The company s stores are spread across the 48 U.S. states and the District of Columbia as well as the Canadian provinces of British Columbia, Ontario, Alberta, Saskatchewan and Manitoba. Its stores are supported by a nationwide logistics network of ten distribution centers. Dollar Tree also owns an e-commerce platform DollarTree.com which sells its merchandise in bulk to individuals and small businesses as well as organizations. Through its online platform, the company advertises its in-store-events and showcases its special and seasonal promotions for featured products. REASONS TO BUY Family Dollar Acquisition will Make Dollar Tree a Mega US Discount Retailer: We believe that Dollar Tree has hit the bull s eye by entering into an agreement to acquire Family Dollar. The giant that will rise from the combination of these two companies will be strong enough to single-handedly counter competition from retail bellwethers such as Wal-Mart Stores Inc. and Dollar General Corporation, in the dollar-discount store segment. The combined chain, with an ability to generate sales of over $18 billion, will be in a better position to reach out to more value seeking consumers through its vast network of more than 13,000 stores spanning across 48 states and five Canadian Provinces. Furthermore, the acquisition will enhance the buying power of the pair, providing better negotiating terms with suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distributional efficiencies as well as cost synergies. Strategic Growth Initiatives: Dollar Tree s long-term growth strategy remains intact. We believe the company is progressing well with its growth initiatives, which include store expansion strategies, enhancement of store productivity, creating new store formats, tapping of new markets and incorporating innovative sales channels to serve its patrons better. Further, we remain confident that the company will continue to implement strategies such as increasing consumables mix, rolling out of freezers/coolers at stores and multi-price point expansion to boost top line performance. In order to improve operating margin, the company is focusing on imported goods, supply chain efficiency and aggressive cost cuts. Store Expansion Program: Dollar Tree is concentrating on expanding its store base and incorporating technological advancements. The company leverages an extensive network of stores to effectively penetrate its targeted markets, which in turn, enables it to generate healthy sales and gain market share. During third-quarter fiscal 2014, the company opened 117 new stores and expanded or relocated 18 stores, for a total of 135 projects. As a result, the company s retail square footage grew 6.8% to 45.8 million. The company is on track to achieve its fiscal 2014 target of opening about 375 stores and relocating or expanding 75 stores, for a total of 450 projects across the U.S. and Canada, and increasing its square footage by 7%. Equity Research DLTR Page 6

7 Active Management of Cash Flows: Dollar Tree has been actively managing its cash flows. The company s strong free cash flow generation signals an enhanced share buyback program, apart from other strategic investment opportunities. Dollar Tree s Accelerated Share Repurchase (ASR) program reflects management s continued confidence in the business and the consistency of its cash flow generation capability. In the first half of fiscal 2014, the company completed its ASR program by repurchasing 18.1 million shares. Looking forward, the company has $1 billion remaining under its share repurchase program. Further, the company has been making prudent investments related to store infrastructure; store openings, expansions and relocations; and improvement of distribution centers to drive revenue growth. Impressive Comparable-Store Sales Performance: Dollar Tree has displayed a fabulous comparable-store sales (comps) growth. The comps remained robust despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans, including remodeling and relocations. Fiscal 2013 represented the 8th consecutive year of positive comps, which increased 2.4% for the year. In fiscal 2014, comps improved 3.9% in the first nine months. Furthermore, comps growth of 5.9% in the third quarter represents the 27th straight quarter of positive comps for the company. Dollar Tree expects comps to increase in the low- to low-mid-single digits range for fiscal REASONS TO SELL Gross Margin Remains Under Pressure: Though Dollar Tree managed to pull off a strong quarter, the company s gross margin remained the weak spot registering an 80 basis points decline to 34.2%. This was primarily due to higher freight costs and unfavorable merchandise mix. Though the company did not provide much detail on the projections for freight expenses in the quarters ahead, it anticipates transportation costs to be on the higher side due to driver shortages, which would continue to build pressure on gross margin. Competitive Pressure: Dollar Tree operates in the highly competitive discount retail merchandise sector. The company faces stiff competition from Wal-Mart and Dollar General, which would probably continue to weigh on its results. The competitors have larger number of stores, greater market presence, brand recognition and financial resources. Risks of Sourcing Merchandise from Overseas Markets: A significant portion of Dollar Tree s merchandise is imported from countries outside the U.S. such as China and other Asian countries. Accordingly, the company is exposed to political, social and economic risks associated with the operations in these countries. Further, an adverse movement in foreign currency exchange rates may dent the company s operational performance. Macroeconomic Headwinds: The company s customers remain sensitive to macroeconomic factors, including rise in interest rate, increase in fuel and energy costs, credit availability, growing unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company s growth and profitability. Equity Research DLTR Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DLTR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1137 companies covered: Outperform %, Neutral %, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DLTR Page 8