form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended February 2, 2008

Commission File No.0-25464
Dollar Tree, Inc. Logo
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
None
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
        Large accelerated filer (X)
Accelerated filer (  )
        Non-accelerated filer (  )
Smaller reporting company (  )

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (  )
    No (X)


The aggregate market value of Common Stock held by non-affiliates of the Registrant on August 3, 2007, was $3,664,182,086 based on a $39.28 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 28, 2008, there were 89,808,123 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, 2008, which will be filed with the Securities and Exchange Commission not later than May 30, 2008.

 
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DOLLAR TREE, INC.
TABLE OF CONTENTS


   
Page
 
PART I
 
     
Item 1.
BUSINESS
6
     
Item 1A.
RISK FACTORS
10
     
Item 1B.
UNRESOLVED STAFF COMMENTS
12
     
Item 2.
PROPERTIES
13
     
Item 3.
LEGAL PROCEEDINGS
14
     
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
15
     
 
PART II
 
     
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
 
 
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
16
     
Item 6.
SELECTED FINANCIAL DATA
17
     
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 
 
CONDITION AND RESULTS OF OPERATIONS
19
     
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
29
     
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
31
     
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 
 
ACCOUNTING AND FINANCIAL DISCLOSURE
57
     
Item 9A.
CONTROLS AND PROCEDURES
57
     
Item 9B.
OTHER INFORMATION
58
     
 
PART III
 
     
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
58
     
Item 11.
EXECUTIVE COMPENSATION
58
     
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
 
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
58
     
Item 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
59
     
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
59
     
 
PART IV
 
     
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
59
     
 
SIGNATURES
60


 
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS:  This document contains "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements address future events, developments and results.  They include statements preceded by, followed by or including words such as "believe," "anticipate," "expect," "intend," "plan," "view," “target” or "estimate."  For example, our forward-looking statements include statements regarding:

· 
our anticipated sales, including comparable store net sales, net sales growth and earnings growth;
· 
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 2008 and beyond;
· 
the effect of a slight shift in merchandise mix to consumables and the increase in freezers and coolers on gross profit margin and sales;
· 
the effect that expanding tender types accepted by our stores will have on sales;
· 
the net sales per square foot, net sales and operating income attributable to smaller and larger stores and store-level cash payback metrics;
· 
the possible effect of inflation and other economic changes on our costs and profitability, including the possible effect of future changes in minimum wage rates, shipping rates, domestic and foreign freight costs, fuel costs and wage and benefit costs;
· 
our cash needs, including our ability to fund our future capital expenditures and working capital requirements;
· 
our gross profit margin, earnings, inventory levels and ability to leverage selling, general and administrative and other fixed costs;
· 
our seasonal sales patterns including those relating to the length of the holiday selling seasons and the effect of an earlier Easter in 2008;
· 
the capabilities of our inventory supply chain technology and other new systems;
· 
the future reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China;
· 
the capacity, performance and cost of our distribution centers, including opening and expansion schedules;
· 
our expectations regarding competition and growth in our retail sector;
· 
costs of pending and possible future legal claims;
· 
management's estimates associated with our critical accounting policies, including inventory valuation, accrued expenses, and income taxes;

You should assume that the information appearing in this annual report is accurate only as of the date it was issued.  Our business, financial condition, results of operations and prospects may have changed since that date.

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 10, as well as Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 19 of this Form 10-K.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions.  The future events, developments or results described in this report could turn out to be materially different.  We have no obligation to publicly update or revise our forward-looking statements after the date of this 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, we do not, by policy, 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.  We generally do not issue financial forecasts or projections and we do not, by policy, confirm those 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.

 
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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 “2008” or “fiscal 2008”, “2007” or “fiscal 2007”, “2006” or “fiscal 2006,” and “2005” or “fiscal 2005,” relate to as of or for the years ended January 31, 2009, February 2, 2008, February 3, 2007 and January 28, 2006, respectively.

On March 2, 2008, we reorganized by creating a new holding company structure. The new parent company is Dollar Tree, Inc., replacing Dollar Tree Stores, Inc., which is now an operating subsidiary.  The primary purpose of the reorganization was to create a more efficient corporate structure.  Outstanding shares of the capital stock of Dollar Tree Stores, Inc., were automatically converted, on a share for share basis, into identical shares of common stock of the new holding company.  The articles of incorporation, the bylaws, the executive officers and the board of directors of our new holding company are the same as those of the former Dollar Tree Stores, Inc. in effect immediately prior to the reorganization.  The common stock of our new holding company will continue to be listed on the NASDAQ Global Select Market under the symbol “DLTR”.  The rights, privileges and interests of our stockholders will remain the same with respect to our new holding company.

AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.dollartree.com as soon as reasonably practicable after electronic filing of such reports with the SEC.

 
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PART I
 
Item 1.  BUSINESS

Overview
Since our founding in 1986, we have become the leading operator of discount variety stores offering merchandise at the fixed price of $1.00.  We believe the variety and quality of products we sell for $1.00 sets us apart from our competitors.  At February 2, 2008, we operated 3,411 discount variety retail stores.  Approximately 3,300 of these stores sell substantially all items for $1.00 or less.  The remaining stores, operating as Deal$, which were acquired in March 2006, sell most items for $1.00 or less but also sell items at prices greater than $1.00.  Our stores operate under the names of Dollar Tree, Deal$ and Dollar Bills. On March 2, 2008, Dollar Tree, Inc. became the new parent holding company for Dollar Tree Stores, Inc., which is now an operating subsidiary.

In the past five years, we have modified our average store size to reflect what we believe is our optimal store size of between 10,000 and 12,500 square feet.  At February 2, 2008, approximately 14% of our stores are less than 6,000 square feet, which is down from approximately 40% of our stores at January 31, 2004.  These smaller stores are comprised of mall and older strip shopping center locations and are candidates for relocation as their leases expire.  Our current store size reflects our expanded merchandise offerings and improved service to our customers.  As we have been expanding our merchandise offerings, we have added freezers and coolers to approximately 1,100 stores during the past three years to increase traffic and transaction size.  At January 31, 2004, we operated 2,513 stores in 47 states.  At February 2, 2008, we operated 3,411 stores in 48 states.  Our selling square footage increased from approximately 16.9 million square feet in January 2004 to 28.4 million square feet in February 2008.  Our store growth since 2003 has resulted from opening new stores and completing mergers and acquisitions.  We centrally manage our store and distribution operations from our corporate headquarters in Chesapeake, Virginia.

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 55% to 60% of our merchandise domestically and import the remaining 40% to 45%.  Our domestic purchases include closeouts.  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 and closeout merchandise.  We attempt to keep certain basic consumable merchandise in our stores continuously to establish our stores as a destination and we increased slightly the mix of consumable merchandise in order to increase the traffic in our stores.  Closeout merchandise is purchased opportunistically and represents less than 10% of our purchases.  National, regional and corporate brands have become a bigger part of our merchandise mix.

Our merchandise mix consists of:

   
· 
consumable merchandise, which includes candy and food, basic health and beauty care, and household consumables such as paper, plastics and household chemicals and in select stores, frozen and refrigerated food;
   
· 
variety merchandise, which includes toys, durable housewares, gifts, fashion health and beauty care, party goods, greeting cards, apparel, and other items; and
   
· 
seasonal goods, which include Easter, Halloween and Christmas merchandise, along with summer toys and lawn and garden merchandise.

6

We have added freezers and coolers to certain stores which has increased the consumable merchandise carried by those stores.  We believe this initiative helps us drive additional transactions and allows us to appeal to a broader demographic mix, and these stores will carry more consumable merchandise than stores without freezers.  We have added freezers and coolers to approximately 360 more stores in 2007.  Therefore, as of February 2, 2008, we have freezers and coolers in approximately 1,100 of our stores.  We plan to add them to approximately 150 more stores in 2008.  As a result of the installation of freezers and coolers in select stores, consumable merchandise has grown as a percentage of purchases and sales and we expect this trend to continue.  The following table shows the percentage of purchases of each major product group for the years ended February 2, 2008 and February 3, 2007:

 
February 2,
February 3,
Merchandise Type
2008
2007
     
Variety categories
48.1%
48.9%
Consumable
46.0%
45.3%
Seasonal
 5.9%
 5.8%

Customer Payment Methods.  All of our stores accept cash, checks, debit cards and VISA credit cards and approximately 1,000 stores accept MasterCard credit cards. Prior to May 2005, approximately 900 of our stores accepted debit cards.  By the end of 2005, approximately 2,300 of our stores accepted debit cards and as of the end of 2006, all of our stores accepted debit cards.  We began accepting VISA credit cards at all of our stores in the fourth quarter of 2007.  Along with the shift to more consumables, the rollout of freezers and coolers, and the acceptance of pin-based debit and VISA credit transactions, we increased the number of stores accepting Electronic Benefits Transfer cards and food stamps at qualified stores in the current year.  We believe that expanding our tender types has helped increase both the traffic and the average size of transactions at our stores in the current year.

Convenient Locations and Store Size.  We primarily focus on opening new stores in strip shopping centers anchored by mass merchandisers, whose target customers we believe to be similar to ours. Our stores have proven successful in metropolitan areas, mid-sized cities and small towns.  The range of our store sizes allows us to target a particular location with a store that best suits that market and takes advantage of available real estate opportunities.  Our stores are attractively designed and create an inviting atmosphere for shoppers by using bright lighting, vibrant colors, decorative signs and background music.  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 13 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.

Our older, smaller stores continue to generate significant store-level operating income and operating cash flows and have some of the highest operating margin rates among our stores; however, the increased size of our newer stores allows us to offer a wider selection of products, including more basic consumable merchandise, thereby making them more attractive as a destination store.

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 and seasonality of sales, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 19 of this Form 10-K.

Cost Control.  We believe that substantial buying power at the $1.00 price point and our flexibility in making sourcing decisions contributes to our successful purchasing strategy, which includes disciplined, targeted merchandise margin goals by category.  We believe our disciplined buying and quality merchandise help 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.


 
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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 and control distribution and store operating costs.  Our automatic replenishment system automatically reorders key items, based on actual store level sales and inventory.  At the end of 2007, we had over 1,000 basic, everyday items on automatic replenishment.

Point-of-sale data allows us to track sales 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 for planning purchases of inventory has helped us maintain our inventory levels on a per store basis in 2007 compared to 2006 despite lower than planned fourth quarter 2007 sales and increased merchandise flow resulting from the earlier Easter season in 2008.  Our inventory turns also increased 25 basis points in 2007.

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 management team visits and shops our stores like every customer; we have an open door policy for all our associates; and ideas and individual creativity are encouraged.  We have standards for store displays, merchandise presentation, and store operations.  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 and ensures 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 updated listing requirements for the Nasdaq Stock Market.

Growth Strategy
Store Openings and Square Footage Growth.  The primary factors contributing to our net sales growth have been new store openings, an active store expansion and remodel program, and selective mergers and acquisitions.  From 2003 to 2007, net sales increased at a compound annual growth rate of 10.9%.  We expect that the substantial 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 total 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.  The selling square footage statistics for 2003 through 2007 are estimates based on the relationship of selling to gross square footage.

Year
Number of Stores
Average Selling Square Footage Per Store
Average Selling Square Footage Per New Store Opened
2003
2,513
6,716
9,948
2004
2,735
7,475
10,947
2005
2,914
7,900
9,756
2006
3,219
8,160
8,780
2007
3,411
8,300
8,480


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 2008 and beyond, we plan to predominantly open stores that are approximately 8,500 - 9,000 selling square feet and we believe this size allows us to achieve our objectives in the markets in which we plan to expand.  At February 2, 2008, 1,370 of our stores, totaling 55.6% of our selling square footage, were 8,500 selling square feet or larger.

8

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 4,000 selling square feet.

Since 1995, we have added a total of 609 stores through four mergers and several small acquisitions.  Our acquisition strategy has been to target companies with a similar single-price point concept that have shown success in operations or provide a strategic advantage.  We evaluate potential acquisition opportunities in our retail sector as they become available.

On March 25, 2006, we completed our acquisition of 138 Deal$ stores and paid $32.0 million for store-related and other assets and $22.1 million for inventory.  These stores are located primarily in the Midwest part of the United States and we have existing logistics capacity to service these stores.  This acquisition also included a few “combo” stores that offer an expanded assortment of merchandise including items that sell for more than $1.  Substantially all Deal$ stores acquired continue to operate under the Deal$ banner while providing us an opportunity to leverage our Dollar Tree infrastructure in the testing of new merchandise concepts, including higher price points, without disrupting the single-price point model in our Dollar Tree stores.

In 2007, we also acquired the rights to 32 store leases through bankruptcy proceedings of certain discount retailers.  We will take advantage of these opportunities as they arise in the future.

Merchandising and Distribution.  Expanding our customer base is important to our growth plans.  We plan to continue to stock our new stores with the ever-changing merchandise that our current customers have come to appreciate.  In addition, we are opening larger stores that contain more basic consumable merchandise to attract new customers.  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 store traffic, 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.  We expect to continue to add distribution capacity to support our store opening plans, with the aim of remaining approximately one year ahead of our distribution needs.  In 2007, we added capacity to our Briar Creek distribution center which services the northeast part of the country.  We believe these distribution centers, including the expanded Briar Creek, Pennsylvania distribution center, in total are capable of supporting approximately $6.7 billion in annual sales.  New distribution sites are strategically located to reduce stem miles, maintain flexibility and improve efficiency in our store service areas.

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 13 of this Form 10-K.

Competition
The retail industry is highly competitive and we expect competition to increase in the future.  The principal methods of competition include closeout merchandise, convenience and the quality of merchandise offered to the customer.  Our competitors include single-price dollar stores, multi-price dollar stores, mass merchandisers, discount retailers and variety retailers.  In addition, several mass merchandisers and grocery store chains carry "dollar store" or “dollar zone” concepts in their stores, which increases competition.  Our sales and profits could be reduced by increases in competition, especially because there are no significant economic barriers for others to enter our retail sector.

9

Trademarks
We are the owners of federal service mark registrations for "Dollar Tree," the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and "One Price...One Dollar."  We also own a concurrent use registration for "Dollar Bill$" and the related logo.  During 1997, we 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 $1.00," the registration of which is pending.  With the acquisition of Dollar Express, we became the owner of the service marks "Dollar Express" and "Dollar Expres$." We became the owners of the "Greenbacks All A Dollar" and "All A Dollar" service marks, with the acquisition of Greenbacks.  We also became the owners of “Deal$” and “Deal$ Nothing Over A Dollar” trademarks, with the acquisition of Deal$. We have applied for federal trademark registrations for various private labels that we use to market some of our product lines.

Employees
We employed approximately 13,300 full-time and 29,300 part-time associates on February 2, 2008.  Part-time associates work 35 hours per week or less. 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.  None of our employees are subject to collective bargaining agreements.

Item 1A.  RISK FACTORS

An investment in our common stock involves a high degree of risk.  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.  If that occurs, the market price of our common stock could fall, and you could lose all or part of your investment.

Our profitability is especially vulnerable to cost increases.

Future increase in costs such as the cost of merchandise, wage levels, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability.  As a fixed price retailer, we cannot raise the sales price of our merchandise to offset cost increases.  Unlike multi-price retailers, we are primarily dependent on our ability to operate more efficiently or effectively or increase our comparable store net sales in order to offset inflation.  We can give you no assurance that we will be able to operate more efficiently or increase our comparable store net sales in the future.  Please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," beginning on page 19 of this Form 10-K for further discussion of the effect of Inflation and Other Economic Factors on our operations.

We could encounter disruptions or additional costs in receiving and distributing merchandise.

Our success depends on our ability to transport merchandise from our suppliers 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.  Some of the factors that could have an adverse effect on our shipping and receiving systems or costs are:

§ Shipping.  Our oceanic shipping schedules may be disrupted or delayed from time to time.  We also have experienced shipping rate increases over the last several years imposed by the trans-Pacific ocean carriers.
§ Diesel fuel costs.  We have experienced increases in diesel fuel costs over the past few years and expect increases in 2008.
§ Vulnerability to natural or man-made disasters.  A fire, explosion or natural disaster at any of our distribution facilities could result in a loss of merchandise and impair our ability to adequately stock our stores.  Some of our facilities are especially vulnerable to earthquakes, hurricanes or tornadoes.
§ Labor disagreement.  Labor disagreements or disruptions may result in delays in the delivery of merchandise to our stores and increase costs.
§ War, terrorism and other events.  War and acts of terrorism in the United States, or in China or other parts of Asia where we buy a significant amount of our imported merchandise, could disrupt our supply chain.


 
10

 

A downturn in economic conditions could adversely affect our sales.

Economic conditions, such as those caused by recession, inflation, cost increases, 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.

Sales below our expectations during peak seasons may cause our operating results to suffer materially.

Our highest sales periods are the Christmas and Easter seasons.  We generally realize a disproportionate amount of our net sales and a substantial majority of our operating and net income during the fourth quarter.  In anticipation, we stock extra inventory and hire many temporary employees to supplement our stores.  An economic downturn during these periods could adversely affect our operating results, particularly operating and net income, to a greater extent than if a downturn occurred at other times of the year.  Untimely merchandise delays due to receiving or distribution problems could have a similar effect.  Sales during the Easter selling season are materially affected by the timing of the Easter holiday.  Easter in fiscal 2007 was on April 8th, while in fiscal 2008, it will be two weeks earlier on March 23rd.  We believe that the earlier Easter in 2008 could potentially result in $25.0 million of lost sales when compared to the first quarter of 2007.  In fiscal 2008, there is one fewer weekend between Thanksgiving and Christmas compared to fiscal 2007.   We believe this could potentially reduce the total foot traffic in our stores for the Christmas holiday in fiscal 2008 compared to fiscal 2007.

Our sales and profits rely on imported merchandise, which may increase in cost or become unavailable.

Merchandise imported directly from overseas accounts for approximately 40% to 45% of our total purchases at retail.  In addition, we believe that a small 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 include:

§ disruptions in the flow of imported goods because of factors such as:
o raw material shortages, work stoppages, strikes and political unrest;
o problems with oceanic shipping, including shipping container shortages; and
o economic crises and international disputes.
 
§ increases in the cost of purchasing or shipping foreign merchandise, resulting from:
o increases in shipping rates imposed by the trans-Pacific ocean carriers;
o changes in currency exchange rates and local economic conditions, including inflation in the country of origin;
o failure of the United States to maintain normal trade relations with China; and
o import duties, import quotas and other trade sanctions.

We may be unable to expand our square footage as profitably as planned.

We plan to expand our selling square footage by approximately 9% in 2008 to increase our sales and profits.  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.  We must 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.

11

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

Our gross profit could decrease if we increase the proportion of higher cost goods we sell in the future.  In recent years, the percentage of our sales from higher cost consumable products has increased and is likely to increase slightly in 2008.  Our gross profit will decrease, unless we are able to maintain our current merchandise cost sufficiently to offset any decrease in our product margin percentage.  We can give you 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 because there are no significant economic barriers for others to enter our retail sector.  Many 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 6 of this Form 10-K for further discussion of the effect of competition on our operations.

The resolution of certain legal matters could have a material adverse effect on our results of operations, accrued liabilities and cash.

For a discussion of current legal matters, please see Item 3. “Legal Proceedings” beginning on page 14 of this Form 10-K.  Resolution of certain matters described in that item, if decided against the Company, could have a material adverse effect on our results of operations, accrued liabilities or cash flows.

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 contain provisions that may delay or discourage a takeover attempt that a shareholder might consider in his best interest. These provisions, among other things:

· classify our board of directors into three classes, each of which serves for different three-year periods;
· 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;
· require a vote of the holders of more than two-thirds of the shares entitled to vote in order to remove a director, change the number of directors, or amend the foregoing and certain other provisions of the articles of incorporation and bylaws; and
· permit the board of directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock.

However, we believe that these provisions allow our Board of Directors to negotiate a higher price in the event of a takeover attempt which would be in the best interest of our shareholders.

Item 1B.  UNRESOLVED STAFF COMMENTS
None.

 
12

 

Item 2.  PROPERTIES

Stores
As of February 2, 2008, we operated 3,411 stores in 48 states as detailed below:

Alabama
    82
 
Maine
    17
 
Ohio
   157
Arizona
    58
 
Maryland
    79
 
Oklahoma
    51
Arkansas
    45
 
Massachusetts
    47
 
Oregon
    70
California
   241
 
Michigan
   123
 
Pennsylvania
   186
Colorado
    46
 
Minnesota
    51
 
Rhode Island
    12
Connecticut
    29
 
Mississippi
    47
 
South Carolina
    70
Delaware
    20
 
Missouri
    79
 
South Dakota
     6
Florida
   206
 
Montana
     8
 
Tennessee
    86
Georgia
   135
 
Nebraska
    14
 
Texas
   212
Idaho
    23
 
Nevada
    28
 
Utah
    33
Illinois
   145
 
New Hampshire
    16
 
Vermont
     6
Indiana
    97
 
New Jersey
    79
 
Virginia
   131
Iowa
    26
 
New Mexico
    25
 
Washington
    61
Kansas
    30
 
New York
   154
 
West Virginia
    31
Kentucky
    65
 
North Carolina
   149
 
Wisconsin
    66
Louisiana
    56
 
North Dakota
     5
 
Wyoming
     8
 
We currently lease our stores and expect to continue to lease 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 currently operate.  We expanded the Briar Creek distribution center in 2007.  We believe our distribution center network, including this expansion, is capable of supporting approximately $6.7 billion in annual sales.

 
Location
 
Own/Lease
 
Lease Expires
Size in
Square Feet
       
Chesapeake, Virginia
Own
N/A
400,000
Olive Branch, Mississippi
Own
N/A
425,000
Joliet, Illinois
Own
N/A
1,200,000
Stockton, California
Own
N/A
525,000
Briar Creek, Pennsylvania
Own
N/A
1,003,000
Savannah, Georgia
Own
N/A
603,000
Marietta, Oklahoma
Own
N/A
603,000
Salt Lake City, Utah
Lease
April 2010
252,000
Ridgefield, Washington
Own
N/A
665,000

In addition to our distribution centers noted above, during the past several years, we have used off-site facilities to accommodate limited quantities of seasonal merchandise.

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 Salt Lake City and Ridgefield facilities each of our distribution centers also contains automated conveyor and sorting systems.

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 25 of this Form 10-K.

 
13

 

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;
   
· 
product safety matters, which may include product recalls in cooperation with the Consumer Products Safety Commission or other jurisdictions;
   
· 
personal injury/wrongful death claims; and
   
· 
real estate matters related to store leases.

 
In 2003, we were served with a lawsuit in a California state court by a former employee who alleged that employees did not properly receive sufficient meal breaks and paid rest periods, along with other alleged wage and hour violations.  The suit requested that the Court certify the case as a class action.  The parties engaged in mediation and reached an agreement which upon presentation to the Court, received preliminary approval and the certification of a settlement class.  Notices have been mailed to the class members and the final fairness hearing is expected to occur on May 22, 2008. The settlement amount has been accrued in the accompanying consolidated balance sheet as of February 2, 2008.
 
In 2005, we were served with a lawsuit by former employees in Oregon who allege that they did not properly receive sufficient meal breaks and paid rest periods, and that terminated employees were not paid in a timely manner. The plaintiffs requested the Court to certify classes for their various claims and the presiding judge did so with respect to two classes, but denied others.  After a partly successful appeal by the plaintiffs, one additional class has been certified.  The certified classes now include two for alleged violations of that state’s labor laws concerning rest breaks and one related to untimely payments upon termination. Discovery is now on-going and no trial is anticipated before the latter part of 2008.
 
In 2006, we were served with a lawsuit by a former employee in a California state court alleging that she was paid for wages with a check drawn on a bank which did not have any branches in the state, an alleged violation of the state's labor code; that she was paid less for her work than other similar employees with the same job title based on her gender; and that she was not paid her final wages in a timely manner, also an alleged violation of the labor code.  The plaintiff requested the Court to certify the case and those claims as a class action.  The parties have reached a settlement and executed an Agreement by which the named plaintiff individually settled her Equal Pay Act and late payment claims.  The Court accepted the proposed settlement and certified a class for the check claim.  Notices have been mailed to class members and a hearing for final approval of the settlement has been scheduled for April 22, 2008.  The estimated settlement amount has been accrued in the accompanying consolidated balance sheet as of February 2, 2008.
 
In 2006, we were served with a lawsuit filed in federal court in the state of Alabama by a former store manager.  She claims that she should have been classified as a non-exempt employee under the Fair Labor Standards Act and, therefore, should have received overtime compensation and other benefits.  She filed the case as a collective action on behalf of herself and all other employees (store managers) similarly situated.  Plaintiff sought and received from the Court an Order allowing nationwide (except for the state of California) notice to be sent to all store managers employed by the Company now or within the past three years.  Such notice has been mailed and each involved person will determine whether he or she wishes to opt-in to the class as a plaintiff.  We intend at the appropriate time to challenge the anticipated effort by the opt-in plaintiffs to be certified as a class.
 
In 2007, we were served with a lawsuit filed in federal court in the state of California by one present and one former store manager.  They claim they should have been classified as non-exempt employees under both the California Labor Code and the Fair Labor Standards Act.  They filed the case as a class action on behalf of California based store managers.  We responded with a motion to dismiss which the Court granted with respect to allegations of fraud.  The plaintiff then filed an amended complaint which has been answered by us. We were thereafter served with a second suit in a California state court which alleges essentially the same claims as those contained in the federal action and which likewise seeks class certification of all California store managers.  We have removed the case to the same federal court as the first suit, answered it and the two cases have been consolidated.  We will defend plaintiffs’ anticipated effort to seek class certification.
 
14

In 2007, we were served with a lawsuit filed in federal court in California by two former employees who allege they were not paid all wages due and owing for time worked, that they were not paid in a timely manner upon termination of their employment and that they did not receive accurate itemized wage statements.  They filed the suit as a class action and seek to include in the class all of our former employees in the state of California.  We responded with a motion to dismiss which the Court denied.  We answered and a motion for summary judgment on our part is presently pending before the Court.
 
We were recently served in federal court in California with a Complaint, on behalf of a former employee, alleging meal and rest break violations among other causes of action, and seeking class action status.  The settlement Order entered by the Court in the 2003 case referenced above included an injunction against meal and rest break claims on the part of class members which we believe include this plaintiff.  We will seek to stay this litigation in accordance with that injunction.
 
We will vigorously defend ourselves in these lawsuits.  We do not believe that any of these matters will, individually or in the aggregate, have a material adverse effect on our business or financial condition.  We cannot give assurance, however, that one or more of these lawsuits will not have a material adverse effect on our results of operations for the period in which they are resolved.
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of our 2007 fiscal year.


 
15

 

PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been traded on The Nasdaq Stock Market® 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 3, 2007:
           
             
First Quarter
  $ 28.68     $ 24.34  
Second Quarter
    27.89       23.90  
Third Quarter
    32.00       25.62  
Fourth Quarter
    32.78       29.34  
                 
Fiscal year ended February 2, 2008:
               
                 
First Quarter
  $ 40.31     $ 31.24  
Second Quarter
    45.98       37.93  
Third Quarter
    44.13       33.69  
Fourth Quarter
    36.17       20.72  

On March 28, 2008, the last reported sale price for our common stock, as quoted by Nasdaq, was $27.00 per share.  As of March 28, 2008, we had approximately 519 shareholders of record.

The following table presents our share repurchase activity for the 13 weeks ended February 2, 2008.

                     
Approximate
 
                     
dollar value
 
               
Total number
   
of shares that
 
               
of shares
   
may yet be
 
               
purchased as
   
purchased under
 
   
Total number
   
Average
   
part of publicly
   
the plans or
 
   
of shares
   
price paid
   
announced plans
   
programs
 
Period
 
purchased
   
per share
   
or programs
   
(in millions)
 
November 4, 2007 to December 1, 2007
    358,953     $ 28.50       358,953     $ 538.2  
December 2, 2007 to January 5, 2008
    3,018,093       27.98       3,018,093       453.7  
January 6, 2008 to February 2, 2008
    -       -       -       453.7  
   Total
    3,377,046     $ 28.03       3,377,046     $ 453.7  

In October 2007, our Board of Directors authorized the repurchase of an additional $500.0 million of our common stock. This authorization was in addition to the November 2006 authorization which had approximately $98.4 million remaining. As of February 2, 2008 we have approximately $453.7 million remaining under Board authorization.

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.


 
16

 


Stock Performance Graph
The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years ended February 2, 2008, compared with the cumulative total returns of the NASDAQ Composite Index and the S&P Retailing Index. The comparison assumes that $100 was invested in our common stock on December 31, 2002, and, in each of the foregoing indices on December 31, 2002, and that dividends were reinvested.

Dollar Tree, Inc. Comparison of 5 Year Cumulative Total Return
 
Item 6.  SELECTED FINANCIAL DATA

The following table presents a summary of our selected financial data for the fiscal years ended February 2, 2008, February 3, 2007, January 28, 2006, January 29, 2005, and January 31, 2004.  Fiscal 2006 included 53 weeks, commensurate with the retail calendar, while all other fiscal years reported in the table contain 52 weeks. The selected income statement and balance sheet data have been derived from our consolidated financial statements that have been audited by our independent registered public accounting firm.  This information should be read in conjunction with the consolidated financial statements and related notes, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial information found elsewhere in this report.

Comparable store net sales compare net sales for stores open throughout each of the two periods being compared, including expanded stores.  Net sales per store and net sales per selling square foot are calculated for stores open throughout the period presented.

Amounts in the following tables are in millions, except per share data, number of stores data, net sales per selling square foot data and inventory turns.

 
17

 

   
Years Ended
 
   
February 2,
   
February 3,
   
January 28,
   
January 29,
   
January 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Income Statement Data:
                             
Net sales
  $ 4,242.6     $ 3,969.4     $ 3,393.9     $ 3,126.0     $ 2,799.9  
Gross profit
    1,461.1       1,357.2       1,172.4       1,112.5       1,018.4  
Selling, general and administrative expenses
    1,130.8       1,046.4       888.5       819.0       724.8  
Operating income
    330.3       310.8       283.9       293.5       293.6  
Net income
    201.3       192.0       173.9       180.3       177.6  
                                         
Margin Data (as a percentage of net sales):
                                       
Gross profit
    34.4 %     34.2 %     34.5 %     35.6 %     36.4 %
Selling, general and administrative expenses
    26.6 %     26.4 %     26.2 %     26.2 %     25.9 %
Operating income
    7.8 %     7.8 %     8.3 %     9.4 %     10.5 %
Net income
    4.7 %     4.8 %     5.1 %     5.8 %     6.3 %
                                         
Per Share Data:
                                       
                                         
Diluted net income per share
  $ 2.09     $ 1.85     $ 1.60     $ 1.58     $ 1.54  
Diluted net income per share increase
    13.0 %     15.6 %     1.3 %     2.6 %     14.1 %


   
As of
 
   
February 2,
   
February 3,
   
January 28,
   
January 29,
   
January 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Balance Sheet Data:
                             
Cash and cash equivalents
                             
   and short-term investments
  $ 81.1     $ 306.8     $ 339.8     $ 317.8     $ 168.7  
Working capital
    382.9       575.7       648.2       675.5       450.3  
Total assets
    1,787.7       1,882.2       1,798.4       1,792.7       1,501.5  
Total debt, including capital lease obligations
    269.4       269.5       269.9       281.7       185.1  
Shareholders' equity
    988.4       1,167.7       1,172.3       1,164.2       1,014.5  
   
Years Ended
 
   
February 2,
   
February 3,
   
January 28,
   
January 29,
   
January 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Selected Operating Data:
                                       
Number of stores open at end of period
    3,411       3,219       2,914       2,735       2,513  
Gross square footage at end of period
    36.1       33.3       29.2       25.9       21.4  
Selling square footage at end of period
    28.4       26.3       23.0       20.4       16.9  
Selling square footage annual growth
    8.0 %     14.3 %     12.6 %     21.1 %     27.5 %
Net sales annual growth
    6.9 %     16.9 %     8.6 %     11.6 %     18.7 %
Comparable store net sales increase (decrease)
    2.7 %     4.6 %     (0.8 %)     0.5 %     2.9 %
Net sales per selling square foot
  $ 155     $ 161     $ 156     $ 168     $ 187  
Net sales per store
  $ 1.3     $ 1.3     $ 1.2     $ 1.2     $ 1.2  
Selected Financial Ratios:
                                       
Return on assets
    11.0 %     10.4 %     9.7 %     10.9 %     13.7 %
Return on equity
    18.7 %     16.4 %     14.9 %     16.5 %     19.0 %
Inventory turns
    3.7       3.5       3.1       2.9       2.9  

 
18

 

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including:
   
· 
what factors affect our business;
   
· 
what our net sales, earnings, gross margins and costs were in 2007, 2006 and 2005;
   
· 
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 2007 and what we expect them to be in 2008; and
   
· 
where funds will come from to pay for future expenditures.

As you read Management’s Discussion and Analysis, please refer to our consolidated financial statements, included in Item 8 of this Form 10-K, which present the results of operations for the fiscal years ended February 2, 2008, February 3, 2007 and January 28, 2006.  In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for the fiscal year 2007 compared to the comparable fiscal year 2006 and the fiscal year 2006 compared to the comparable fiscal year 2005.

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 March 2, 2008, we reorganized by creating a new holding company structure. The new parent company is Dollar Tree, Inc., replacing Dollar Tree Stores, Inc., which is now an operating subsidiary. Outstanding shares of the capital stock of Dollar Tree Stores, Inc., were automatically converted, on a share for share basis, into identical shares of common stock of the new holding company.  The articles of incorporation, the bylaws, the executive officers and the board of directors of our new holding company are the same as those of the former Dollar Tree Stores, Inc. in effect immediately prior to the reorganization.  The common stock of our new holding company will continue to be listed on the NASDAQ Global Select Market under the symbol “DLTR”.  The rights, privileges and interests of our stockholders will remain the same with respect to our new holding company.
· 
On February 20, 2008, we entered into a five-year $550.0 million Credit Agreement (the Agreement).  The Agreement provides for a $300.0 million revolving line of credit, including up to $150.0 million in available letters of credit, and a $250.0 million term loan.  The interest rate on the facility will be based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  Our March 2004, $450.0 million unsecured revolving credit facility was terminated concurrent with entering into the Agreement.
· 
In November 2007, we completed the 400,000 square foot expansion of our Briar Creek distribution center.  Including this expansion, we believe that our nine distribution centers will support approximately $6.7 billion in sales annually.
· 
In October 2007, our Board of Directors authorized the repurchase of an additional $500.0 million of our common stock. This authorization was in addition to the November 2006 authorization which had approximately $98.4 million remaining. At February 2, 2008, we had approximately $453.7 million remaining under Board authorization.
· 
In March 2006, we completed our acquisition of 138 Deal$ stores and related assets.  We paid approximately $32.0 million for store related assets and $22.1 million for inventory.
· 
On December 15, 2005, the Compensation Committee of our Board of Directors approved the acceleration of the vesting date of all previously issued, outstanding and unvested options under all current stock option plans, effective as of December 15, 2005.  This decision eliminated non-cash compensation expense that would have been recorded in future periods following our adoption of Statement of Financial Accounting Standards No. 123, Share-Based Payment (revised 2004) (FAS 123R), on January 29, 2006.  Compensation expense has been reduced by approximately $14.9 million over a period of four years during which the options would have vested, as a result of the option acceleration program.

19

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 2, 2008, we operated 3,411 stores in 48 states, with 28.4 million selling square feet compared to 3,219 stores with 26.3 million selling square feet at February 3, 2007.  During fiscal 2007, we opened 240 stores, expanded 102 stores and closed 48 stores, compared to 211 new stores opened, 85 stores expanded and 44 stores closed during fiscal 2006.  In addition to the new stores opened in 2006, we acquired 138 Deal$ stores on March 25, 2006.  In the current year we achieved 8% selling square footage growth.  Of the 2.1 million selling square foot increase in 2007, 0.4 million was added by expanding existing stores.  The average size of our stores opened in 2007 was approximately 8,500 selling square feet (or about 10,800 gross square feet).  The average new store size decreased slightly in 2007 from approximately 9,000 selling square feet (or about 11,000 gross square feet) for new stores in 2006.  For 2008, we continue to plan to open stores that are approximately 8,500 - 9,000 selling square feet (or about 10,000 - 12,500 gross square feet).  We believe that this store size is our optimal size operationally and that this size also gives our customers an improved shopping environment that invites them to shop longer and buy more.  We expect the substantial majority of our future net sales growth to come from the square footage growth resulting from new store openings and expansion of existing stores.

Fiscal 2006 ended on February 3, 2007 and included 53 weeks, commensurate with the retail calendar.  The 53rd week in 2006 added approximately $70 million in sales. Fiscal 2007 and 2005 ended on February 2, 2008 and January 28, 2006, respectively, and both years included 52 weeks.

In fiscal 2007, comparable store net sales increased by 2.7%.  This increase was based on the comparable 52 weeks for both years.  We believe comparable store net sales were positively affected by a number of our initiatives over the past year, including expansion of forms of payment accepted by our stores and the roll-out of freezers and coolers to more of our stores.  During 2006, we completed the roll-out of pin-capture debit card acceptance to all of our stores, which has enabled us to accept Electronic Benefit Transfer cards and we now accept food stamps in approximately 1,100 qualified stores.  We believe the expansion of forms of payment accepted by our stores has helped increase the average transaction size in our stores.  On October 31, 2007, all of our stores began accepting VISA credit as well, which we expect to have a positive impact on future sales.

We continued to experience a slight shift in the mix of merchandise sold to more consumables which we believe increases the traffic in our stores; however, this merchandise has lower margins.  The negative impact from the planned shift toward more consumables was smaller in 2007 than in 2006.  The planned shift in mix to more consumables is partially the result of the roll-out of frozen and refrigerated merchandise to more stores in 2007 and 2006.  At February 2, 2008 we had frozen and refrigerated merchandise in approximately 1,100 stores compared to approximately 700 stores at February 3, 2007. We believe that this will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers and increasing the average transaction size.

Our point-of-sale technology provides us with valuable sales and inventory information to assist our buyers and improve our merchandise allocation to our stores.  We believe that this has enabled us to better manage our inventory flow resulting in more efficient distribution and store operations and increased inventory turnover for each of the last two years.  Inventory turnover improved by approximately 25 basis points in 2007 compared to 2006 and by approximately 45 basis points in 2006 compared to 2005.   Inventory per store has also remained constant at February 2, 2008 compared to February 3, 2007 despite slightly lower than expected fourth-quarter 2007 sales and the increased merchandise flow due to the earlier Easter season in 2008.

20

We must continue to control our merchandise costs, inventory levels and our general and administrative expenses.  Increases in these line items could negatively impact our operating results.

Our plans for fiscal 2008 anticipate net sales in the $4.49 billion to $4.62 billion range and diluted earnings per share of $2.17 to $2.35.  This guidance for 2008 is predicated on selling square footage growth of approximately 9%. The earnings per share guidance for 2008 is exclusive of any share repurchase activity in 2008.

On March 25, 2006, we completed our acquisition of 138 Deal$ stores. These stores are located primarily in the Midwest part of the United States and we have existing logistics capacity to service these stores.  This acquisition also included a few “combo” stores that offer an expanded assortment of merchandise including items that sell for more than $1.  Substantially all Deal$ stores acquired continue to operate under the Deal$ banner while providing us an opportunity to leverage our Dollar Tree infrastructure in the testing of new merchandise concepts, including higher price points, without disrupting the single-price point model in our Dollar Tree stores.  At February 2, 2008, 131 of these stores were selling items priced over $1.00, compared to 121 stores at February 3, 2007.

We paid approximately $32.0 million for store-related and other assets and $22.1 million for inventory. The results of Deal$ store operations are included in our financial statements since the acquisition date and did not have a significant impact on our operating results in fiscal 2007 or fiscal 2006.

Results of Operations
The following table expresses items from our consolidated statements of operations, as a percentage of net sales:
 
   
Year Ended
   
Year Ended
   
Year Ended
 
   
February 2,
   
February 3,
   
January 28,
 
   
2008
   
2007
   
2006
 
                   
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    65.6 %     65.8 %     65.5 %
     Gross profit
    34.4 %     34.2 %     34.5 %
                         
Selling, general and administrative
                       
  expenses
    26.6 %     26.4 %     26.2 %
                         
     Operating income
    7.8 %     7.8 %     8.3 %
                         
Interest income
    0.1 %     0.2 %     0.2 %
Interest expense
    (0.4 %)     (0.4 %)     (0.4 %)
                         
     Income before income taxes
    7.5 %     7.6 %     8.1 %
                         
Provision for income taxes
    (2.8 %)     (2.8 %)     (3.0 %)
                         
     Net income
    4.7 %     4.8 %     5.1 %

Fiscal year ended February 2, 2008 compared to fiscal year ended February 3, 2007

Net Sales.  Net sales increased 6.9%, or $273.2 million, in 2007 compared to 2006, resulting primarily from sales in our new and expanded stores. Our sales increase was also impacted by a 2.7% increase in comparable store net sales for the year.  This increase is based on the comparable 52-weeks for both years. These increases were partially offset by an extra week of sales in 2006 due to the 53-week retail calendar for 2006.  On a comparative 52-week basis, sales increased approximately 8.8% in 2007 compared to 2006. 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.


 
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The following table summarizes the components of the changes in our store count for fiscal years ended February 2, 2008 and February 3, 2007.

 
February 2, 2008
February 3, 2007
     
New stores
208
190
Deal$ acquisition
--
138
Acquired leases
32
21
Expanded or relocated stores
102
85
Closed stores
(48)
(44)

Of the 2.1 million selling square foot increase in 2007 approximately 0.4 million was added by expanding existing stores.

Gross Profit.  Gross profit margin increased to 34.4% in 2007 compared to 34.2% in 2006.  The increase was primarily due to a 50 basis point decrease in merchandise cost, including inbound freight, due to improved initial mark-up in many categories in the current year.  This decrease was partially offset by a 40 basis point increase in occupancy costs due to the loss of leverage from the extra week of sales in the prior year and the lower comparable store net sales in the current year.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses, as a percentage of net sales, increased to 26.6% for 2007 compared to 26.4% for 2006.  The increase is primarily due to the following:

         ·   Operating and corporate expenses increased approximately 25 basis points due to increased debit and credit fees resulting from increased debit transactions in the current year and the rollout of VISA credit at October 31, 2007.  Also, in 2006, we had approximately 10 basis points of income related to early lease terminations.
 · 
Occupancy costs increased 15 basis points primarily due to increased repairs and maintenance costs in the current year.
 · 
Partially offsetting these increases was an approximate 15 basis point decrease in depreciation expense due to the expiration of the depreciable life on much of the supply chain hardware and software placed in service in 2002.
 

Operating Income.  Due to the reasons discussed above, operating income margin was  7.8% in 2007 and 2006.

Income Taxes.  Our effective tax rate was 37.1% in 2007 compared to 36.6% in 2006.  The increase in the rate for 2007 reflects a reduction of tax-exempt interest income in the current year due to lower investment levels resulting from increased share repurchase activity and an increase in tax reserves in accordance with the Financial Accounting Standards Board’s Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes.  These increases more than offset a slight decrease in our net state tax rate.

Fiscal year ended February 3, 2007 compared to fiscal year ended January 28, 2006

Net Sales.  Net sales increased 16.9%, or $575.5 million, in 2006 compared to 2005, resulting from sales in our new and expanded stores, including 138 Deal$ stores acquired in March 2006 and the 53 weeks of sales in 2006 versus 52 weeks in 2005, which accounted for approximately $70 million of the increase.  Our sales increase was also impacted by a 4.6% 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 3, 2007 and January 28, 2006.

 
February 3, 2007
January 28, 2006
     
New stores
190
197
Deal$ acquisition
138
--
Acquired leases
21
35
Expanded or relocated stores
85
93
Closed stores
(44)
(53)

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Of the 3.3 million selling square foot increase in 2006, approximately 1.2 million resulted from the acquisition of the Deal$ stores and 0.4 million was added by expanding existing stores.

Gross Profit.  Gross profit margin decreased to 34.2% in 2006 compared to 34.5% in 2005.  The decrease was primarily due to a 35 basis point increase in merchandise cost, including inbound freight.  This increase in merchandise cost was due to a slight shift in mix to more consumables, which have a lower margin, higher cost merchandise at our Deal$ stores and increased inbound domestic freight costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses, as a percentage of net sales, increased to 26.4% for 2006 as compared to 26.2% for 2005.  The increase is primarily due to the following:

· 
Payroll and benefit related costs increased 35 basis points due to increased incentive compensation costs resulting from better overall company performance in 2006 as compared to 2005 and increased stock compensation expense, partially offset by lower workers’ compensation costs in 2006.
· 
Operating and corporate expenses decreased 10 basis points primarily as the result of payments received for early lease terminations in 2006.

Operating Income.  Due to the reasons discussed above, operating income margin decreased to 7.8% in 2006 compared to 8.3% in 2005.

Income Taxes.  Our effective tax rate was 36.6% in 2006 compared to 36.8% in 2005.  The decreased tax rate for 2006 was due primarily to increased tax-exempt interest on certain of our investments in 2006.

Liquidity and Capital Resources

Our business requires capital to build and open new stores, expand our distribution network and operate 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-related information for the years ended February 2, 2008, February 3, 2007, and January 28, 2006:

   
Year Ended
   
Year Ended
   
Year Ended
 
   
February 2,
   
February 3,
   
January 28,
 
(in millions)
 
2008
   
2007
   
2006
 
Net cash provided by (used in):
                 
  Operating activities
  $ 367.3     $ 412.8     $ 365.1  
  Investing activities
    (22.7 )     (190.7 )     (235.5 )
  Financing activities
    (389.0 )     (202.9 )     (170.3 )

Net cash provided by operating activities decreased $45.5 million compared to last year due to increased working capital requirements in the current year and increases in the provision for deferred taxes, partially offset by improved earnings before depreciation and amortization in the current year.

Net cash used in investing activities decreased $168.0 million compared to last year.  This decrease is due to $129.1 million of increased proceeds from short-term investment activity in the current year to fund increased capital stock repurchases and $54.1 million used in the prior year to acquire Deal$ assets.   These were partially offset by increased capital expenditures in the current year resulting from the Briar Creek distribution center and the corporate headquarters expansions.

Net cash used in financing activities increased $186.1 million due primarily to increased stock repurchases in the current year partially offset by increased proceeds from stock option exercises in the current year resulting from the Company’s higher stock price earlier in the year.

The $47.7 million increase in cash provided by operating activities in 2006 as compared to 2005 was primarily due to increased earnings before depreciation and better payables management in 2006, partially offset by approximately $28.9 million of rent payments for February 2007 made prior to the end of fiscal 2006.

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The $44.8 million decrease in cash used in investing activities in 2006 compared to 2005 was the result of a $114.9 million increase in net proceeds from short-term investments which were used to help fund stock repurchases and the Deal$ acquisition in 2006.  In 2006, we purchased an additional $9.3 million, net, of investments in a restricted account to collateralize certain long-term insurance obligations.  Additional uses of cash for investing activities consisted of $54.1 million for the Deal$ acquisition in 2006 and an increase of $36.1 million in capital expenditures due primarily to new store growth and the installation of freezers and coolers to certain stores in 2006.

The $32.6 million increase in cash used in financing activities in 2006 compared to 2005 primarily resulted from $248.2 million in stock repurchases in 2006 compared to $180.4 million in 2005.  This increase was partially offset by increased proceeds from stock option exercises in 2006 resulting from our higher stock prices in 2006 as compared to 2005.

At February 2, 2008, our long-term borrowings were $268.5 million and our capital lease commitments were $0.9 million.  We also have $125.0 million and $50.0 million Letter of Credit Reimbursement and Security Agreements, under which approximately $88.9 million were committed to letters of credit issued for routine purchases of imported merchandise at February 2, 2008.

On February 20, 2008, we entered into a five-year $550.0 million Credit Agreement (the Agreement).  The Agreement provides for a $300.0 million revolving line of credit, including up to $150.0 million in available letters of credit, and a $250.0 million term loan.  Our March 2004, $450.0 million unsecured revolving credit facility was terminated concurrent with entering into the Agreement.

In March 2005, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock through March 2008.  In November 2006, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock.  This amount was in addition to the $27.0 million remaining on the March 2005 authorization.  Then, in October 2007, our Board of Directors authorized the repurchase of an additional $500.0 million of our common stock. This authorization was in addition to the November 2006 authorization which had approximately $98.4 million remaining at the time.

In December 2006, we entered into two agreements with a third party to repurchase approximately $100.0 million of our common shares under an Accelerated Share Repurchase Agreement.

The first $50.0 million was executed in an “uncollared” agreement.  In this transaction we initially received 1.7 million shares based on the market price of our stock of $30.19 as of the trade date (December 8, 2006).  A weighted average price of $32.17 was calculated using stock prices from December 16, 2006 – March 8, 2007.  This represented the calculation period for the weighted average price. Based on this weighted average price, we paid the third party an additional $3.3 million on March 8, 2007 for the 1.7 million shares delivered under this agreement.

The remaining $50.0 million was executed under a “collared” agreement.  Under this agreement, we initially received 1.5 million shares through December 15, 2006, representing 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 received under the agreement was determined based on the weighted average market price of our common stock, net of a predetermined discount, during the time after the initial execution date through March 8, 2007. The calculated weighted average market price through March 8, 2007, net of a predetermined discount, as defined in the “collared” agreement, was $31.97.  Therefore, on March 8, 2007, we received an additional 0.1 million shares under the “collared” agreement resulting in 1.6 million total shares being repurchased under this agreement.

On March 29, 2007, we entered into an agreement with a third party to repurchase $150.0 million of our common shares under an Accelerated Share Repurchase Agreement.  The entire $150.0 million was executed under a “collared” agreement.  Under this agreement, we initially received 3.6 million shares through April 12, 2007, representing 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 was determined based on the weighted average market price of our common stock during the four months after the initial execution date.  The calculated weighted average market price through July 30, 2007, net of a predetermined discount, as defined in the “collared” agreement, was $40.78.  Therefore, on July 30, 2007, we received an additional 0.1 million shares under the “collared” agreement resulting in 3.7 million total shares being repurchased under this agreement.

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On August 30, 2007, we entered into an agreement with a third party to repurchase $100.0 million of our common shares under an Accelerated Share Repurchase Agreement.  The entire $100.0 million was executed under a “collared” agreement.  Under this agreement, we initially received 2.1 million shares through September 10, 2007, representing 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 received under the agreement was determined based on the weighted average market price of our common stock, net of a predetermined discount, during the time after the initial execution date through a period of up to four and one half months.  The contract terminated on October 22, 2007 and the weighted average price through that date was $41.16.  Therefore, on October 22, 2007, we received an additional 0.3 million shares resulting in 2.4 million total shares repurchased under this agreement.

We repurchased approximately 12.8 million shares for approximately $473.0 million in fiscal 2007, approximately 8.8 million shares for approximately $248.2 million in fiscal 2006 and approximately 7.0 million shares for approximately 180.4 million in fiscal 2005.  At February 2, 2008, the Company had approximately $453.7 remaining under Board authorization.

Funding Requirements

Overview
We expect our cash needs for opening new stores and expanding existing stores in fiscal 2008 to total approximately $176.0 million, which includes capital expenditures, initial inventory and pre-opening costs.  Our estimated capital expenditures for fiscal 2008 are between $155.0 and $165.0 million, including planned expenditures for our new and expanded stores, the addition of freezers and coolers to approximately 150 stores and completion of the expansion to our home office and data center in Chesapeake, Va.  We believe that we can adequately fund our working capital requirements and planned capital expenditures for the next few years from net cash provided by operations and potential borrowings under our existing credit facility.

The following tables summarize our material contractual obligations at February 2, 2008, including both on- and off-balance sheet arrangements, and our commitments, excluding interest on long-term borrowings (in millions):

Contractual Obligations
 
Total
 
2008
 
2009
 
2010
 
2011
 
2012
 
Thereafter
 
Lease Financing
                             
Operating lease obligations
  $ 1,363.2   $ 319.0   $ 284.3   $ 238.4   $ 185.8   $ 129.9   $ 205.8  
Capital lease obligations
    0.9     0.3     0.3     0.2     0.1     --     --  
                                             
Long-term Borrowings
                                           
Revolving credit facility
    250.0     --     250.0     --     --     --     --  
Revenue bond financing
    18.5     18.5     --     --     --     --     --  
Interest on long-term borrowings
    13.7     11.8     1.9     --     --     --     --  
Total obligations
  $ 1,646.3   $ 349.6   $ 536.5   $ 238.6   $ 185.9   $ 129.9   $ 205.8  



Commitments
 
Total
 
Expiring in 2008
 
Expiring in 2009
 
Expiring in 2010
 
Expiring in 2011
 
Expiring in 2012
 
Thereafter
 
                               
Letters of credit and surety bonds
  $ 108.7   $ 108.1   $ 0.6   $ --   $ --   $ --   $ --  
Freight contracts
    191.2     85.0     83.7     14.5     4.5     3.5     --  
Technology assets
    5.1     5.1     --     --     --     --     --  
Total commitments
  $ 305.0   $ 198.2   $ 84.3   $ 14.5   $ 4.5   $ 3.5   $ --  


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Lease Financing
Operating Lease Obligations.  Our operating lease obligations are primarily for payments under noncancelable store leases.  The commitment includes amounts for leases that were signed prior to February 2, 2008 for stores that were not yet open on February 2, 2008.

Capital Lease Obligations.  Our capital lease obligations are primarily for distribution center equipment and computer equipment at the store support center.

Revolving Credit Facility.  In March 2004, we entered into a five-year Revolving Credit Facility (the Facility).  The Facility provides for a $450.0 million line of credit, including up to $50.0 million in available letters of credit.  Interest is assessed under the line based on matrix pricing which currently approximates LIBOR, plus 0.475%.  This rate was 4.47% at February 2, 2008.  The Facility also bears a facilities fee, calculated as a percentage, as defined, of the amount available under the facility, payable quarterly.  The Facility, among other things, requires the maintenance of certain specified financial ratios, restricts the payment of certain distributions and prohibits the incurrence of certain new indebtedness.  The Facility also bears an administrative fee payable annually.  We used availability under this Facility to repay the $142.6 million of variable-rate debt and to purchase short-term investments.  As of February 2, 2008, we had $250.0 million outstanding on this Facility.

On February 20, 2008, we entered into a five-year $550.0 million Credit Agreement (the Agreement).  The Agreement provides for a $300.0 million revolving line of credit, including up to $150.0 million in available letters of credit, and a $250.0 million term loan.  The interest rate on the facility will be based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  The revolving line of credit also bears a facilities fee, calculated as a percentage, as defined, of the amount available under the line of credit, payable quarterly.  The term loan is due and payable in full at the five year maturity date of the Agreement.  The Agreement also bears an administrative fee payable annually.  The Agreement, among other things, requires the maintenance of certain specified financial ratios, restricts the payment of certain distributions and prohibits the incurrence of certain new indebtedness.  Our March 2004, $450.0 million unsecured revolving credit facility was terminated concurrent with entering into the Agreement.

Revenue Bond Financing.  In May 1998, we entered into an agreement with the Mississippi Business Finance Corporation under which it issued $19.0 million of variable-rate demand revenue bonds.  We used the proceeds from the bonds to finance the acquisition, construction and installation of land, buildings, machinery and equipment for our distribution facility in Olive Branch, Mississippi.  At February 2, 2008, the balance outstanding on the bonds was $18.5 million.  These bonds are due to be fully repaid in June 2018.  The bonds do not have a prepayment penalty as long as the interest rate remains variable.  The bonds contain a demand provision and, therefore, outstanding amounts are classified as current liabilities.  We pay interest monthly based on a variable interest rate, which was 3.38% at February 2, 2008.

Interest on Long-term Borrowings. This amount represents interest payments on the revolving credit facility and the revenue bond financing using the interest rates for each at February 2, 2008.

Commitments
Letters of Credit and Surety Bonds.  In March 2001, we entered into a Letter of Credit Reimbursement and Security Agreement, which provides $125.0 million for letters of credit. In December 2004, we entered into an additional Letter of Credit Reimbursement and Security Agreement, which provides $50.0 million for letters of credit.  Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $88.9 million of purchases committed under these letters of credit at February 2, 2008.

We also have approximately $19.8 million of letters of credit or surety bonds outstanding for our self-insurance programs and certain utility payment obligations at some of our stores.

Freight Contracts.  We have contracted outbound freight services from various carriers with contracts expiring through February 2013.  The total amount of these commitments is approximately $191.2 million.

26

Technology Assets.  We have commitments totaling approximately $5.1 million to primarily purchase store technology assets for our stores during 2008.
 
Derivative Financial Instruments
We are party to one interest rate swap, which allows us to manage the risk associated with interest rate fluctuations on the demand revenue bonds. The swap is based on a notional amount of $18.5 million. Under the $18.5 million agreement, as amended, we pay interest to the bank that provided the swap at a fixed rate.  In exchange, the financial institution pays us at a variable-interest rate, which is similar to the rate on the demand revenue bonds.  The variable-interest rate on the interest rate swap is set monthly.  No payments are made by either party under the swap for monthly periods with an established interest rate greater than a predetermined rate (the knock-out rate).  The swap may be canceled by the bank or us and settled for the fair value of the swap as determined by market rates and expires in 2009.

Because of the knock-out provision in the $18.5 million swap, changes in the fair value of that swap are recorded in earnings.  For more information on the interest rate swaps, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” beginning on page 29 of this Form 10-K.

On March 20, 2008, we entered into two $75.0 million interest rate swap agreements.   These interest rate swaps are used to manage the risk associated with interest rate fluctuations on a portion of our $250.0 million variable rate term note.  Under these agreements, we pay interest to financial institutions at a fixed rate of 2.8%.  In exchange, the financial institutions pay us at a variable rate, which approximates the variable rate on the debt, excluding the credit spread.  We believe these swaps are highly effective as the interest reset dates and the underlying interest rate indices are identical for the swaps and the debt.  These swaps qualify for hedge accounting treatment pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  These swaps expire in March 2011.

Critical Accounting Policies
The preparation of financial statements requires the use of estimates.  Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates.  Following is a discussion of the estimates that we consider critical.

Inventory Valuation
As discussed in Note 1 to the Consolidated Financial Statements, inventories at the distribution centers are stated at the lower of cost or market with cost determined on a weighted-average basis.  Cost is assigned to store inventories using the retail inventory method on a weighted-average basis.  Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories.  The retail inventory method is an averaging method that has been widely used in the retail industry and results in valuing inventories at lower of cost or market when markdowns are taken as a reduction of the retail value of inventories on a timely basis.

Inventory valuation methods require certain significant management estimates and judgments, including estimates of future merchandise markdowns and shrink, which significantly affect the ending inventory valuation at cost as well as the resulting gross margins.  The averaging required in applying the retail inventory method and the estimates of shrink and markdowns could, under certain circumstances, result in costs not being recorded in the proper period.

We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal, carryover merchandise on hand, historical markdown statistics and future merchandising plans.  The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.  Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.

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.  These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger.  Our physical inventory counts are generally taken between January and September of each year; therefore, the shrink accrual recorded at February 2, 2008 is based on estimated shrink for most of 2007, including the fourth quarter.  We have not experienced significant fluctuations in historical shrink rates beyond approximately 10 basis points in our Dollar Tree stores for the last two 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.

27

Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market each year on a consistent basis.

Accrued Expenses
On a monthly basis, we estimate certain expenses in an effort to record those expenses in the period incurred.  Our most material estimates include domestic freight expenses, self-insurance programs, store-level operating expenses, such as property taxes and utilities, and certain other expenses.  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 annually based on a review performed by a third-party actuary.  These actuarial valuations are estimates based on historical loss development factors.  Certain other expenses are estimated and recorded in the periods that management becomes aware of them.  The related accruals are adjusted as management’s estimates change.  Differences in management's estimates and assumptions could result in an accrual materially different from the calculated accrual.  Our experience has been that some of our estimates are too high and others are too low.  Historically, the net total of these differences has not had a material effect on our financial condition or results of operations.

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 a tax return.  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 2007, see Item 8 “Financial Statements and Supplementary Data - Note 3 to the Consolidated Financial Statements” beginning on page 42 of this Form 10-K.

Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, comparable store net sales, operating income and net income and expect this trend to continue.  Our results of operations may also fluctuate significantly as a result of a variety of factors, including:

   
· 
Shifts in the timing of certain holidays, especially Easter;
   
· 
The timing of new store openings;
   
· 
The net sales contributed by new stores;
   
· 
changes in our merchandise mix; and
   
· 
competition.

28

Our highest sales periods are the Christmas and Easter seasons.  Easter was observed on April 16, 2006, April 8, 2007, and will be observed on March 23, 2008. We believe that the earlier Easter in 2008 could potentially result in $25 million of lost sales when compared to the first quarter of 2007.  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, consumer sentiment or inclement weather.  Fiscal 2006 consisted of 53 weeks, commensurate with the retail calendar.  This extra week contributed approximately $70 million of sales in 2006 compared to 2007.  Fiscal 2007 consisted of 52 weeks. In fiscal 2008, there is one fewer weekend between Thanksgiving and Christmas compared to fiscal 2007.   We believe this could potentially reduce the total foot traffic in our stores for the Christmas holiday in fiscal 2008 compared to fiscal 2007.

Our unaudited results of operations for the eight most recent quarters are shown in a table in Footnote 12 of the Consolidated Financial Statements in Item 8 of this Form 10-K.

Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a profitable basis may be subject to economic factors and influences that we cannot control.  Consumer spending could decline because of economic pressures, including 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 where we purchase some of our merchandise.  These and other factors could increase our merchandise costs and other costs that are critical to our operations, such as shipping and wage rates.

Shipping Costs.  Currently, trans-Pacific shipping rates are negotiated with individual freight lines and are subject to fluctuation based on supply and demand for containers and current fuel costs. As a result, our trans-Pacific shipping costs in fiscal 2008 may increase compared with fiscal 2007 when we renegotiate our import shipping rates effective May 2008.  We can give no assurances as to the amount of the increase, as we are in the early stages of our negotiations.

Minimum Wage.  On May 25, 2007, the President signed legislation that increased the Federal Minimum Wage from $5.15 an hour to $7.25 an hour by June 2009.  We do not expect this legislation to have a material effect on our operations in fiscal 2008.

New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS No. 157).  SFAS No. 157, effective for interim or annual reporting periods beginning after November 15, 2007, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  We will adopt this statement in the first quarter of 2008 and we do not expect it to have a material effect on our consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. We adopted FIN 48 in the first quarter of 2007.  For further discussion of the effect of the adoption of FIN 48, see Item 8 “Financial Statements and Supplementary Data” - Notes 1 and 3 of the Consolidated Financial Statements beginning on page 37 of this Form 10-K.

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 foreign currency rate fluctuations.  We may enter into interest rate swaps to manage exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts.  We do not enter into derivative instruments for any purpose other than cash flow hedging purposes and we do not hold derivative instruments for trading purposes.

 
29

 

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 a derivative instrument in the form of an interest rate swap to manage fluctuations in cash flows resulting from changes in the variable-interest rates on the Demand Revenue Bonds.  The interest rate swap reduces the interest rate exposure on this variable-rate obligation.  Under the interest rate swap, we pay the bank at a fixed-rate and receive variable-interest at a rate approximating the variable-rate on the obligation, thereby creating the economic equivalent of a fixed-rate obligation.  Under the swap, no payments are made by parties under the swap for monthly periods in which the variable-interest rate is greater than the predetermined knock-out rate.

The following table summarizes the financial terms of our interest rate swap agreement and the fair value of the interest rate swap at February 2, 2008:

Hedging
Instrument
Receive Variable
Pay
Fixed
Knock-out
Rate
Expiration
Fair
Value
$18.5 million
interest rate swap
LIBOR
4.88%
7.75%
4/1/09
$0.5 million

Hypothetically, a 1% change in interest rates results in approximately a $0.2 million change in the amount paid or received under the terms of the interest rate swap agreement on an annual basis.  Due to many factors, management is not able to predict the changes in fair value of our interest rate swap. These fair values are obtained from an outside financial institution.

On March 20, 2008, we entered into two $75.0 million interest rate swap agreements.   These interest rate swaps are used to manage the risk associated with interest rate fluctuations on a portion of our $250.0 million variable rate term note.  Under these agreements, we pay interest to financial institutions at a fixed rate of 2.8%.  In exchange, the financial institutions pay us at a variable rate, which approximates the variable rate on the debt, excluding the credit spread.  We believe these swaps are highly effective as the interest reset dates and the underlying interest rate indices are identical for the swaps and the debt.  These swaps qualify for hedge accounting treatment pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and expire in March 2011.


 
30

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
Page
   
Report of Independent Registered Public Accounting Firm
32
   
Consolidated Statements of Operations for the years ended
 
February 2, 2008, February 3, 2007 and January 28, 2006
33
   
Consolidated Balance Sheets as of February 2, 2008 and
 
February 3, 2007
34
   
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
 
for the years ended February 2, 2008, February 3, 2007 and
 
January 28, 2006
35
   
Consolidated Statements of Cash Flows for the years ended
 
February 2, 2008, February 3, 2007 and January 28, 2006
36
   
Notes to Consolidated Financial Statements
37


31

Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Dollar Tree, Inc. (formerly Dollar Tree Stores, Inc.):

We have audited the accompanying consolidated balance sheets of Dollar Tree, Inc. (formerly Dollar Tree Stores, Inc.) and subsidiaries (the Company) as of February 2, 2008 and February 3, 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended February 2, 2008.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2008 and February 3, 2007, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 2, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective February 4, 2007, and Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, effective January 29, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dollar Tree, Inc.’s (formerly Dollar Tree Stores, Inc.) internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 1, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Norfolk, Virginia
April 1, 2008

 

 
32

 

DOLLAR TREE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Year Ended
   
Year Ended
   
Year Ended
 
   
February 2,
   
February 3,
   
January 28,
 
(In millions, except per share data)
 
2008
   
2007
   
2006
 
Net sales
  $ 4,242.6     $ 3,969.4     $ 3,393.9  
Cost of sales (Note 4)
    2,781.5       2,612.2       2,221.5  
     Gross profit
    1,461.1       1,357.2       1,172.4  
                         
Selling, general and administrative
                       
  expenses (Notes 8 and 9)
    1,130.8       1,046.4       888.5  
                         
     Operating income
    330.3       310.8       283.9  
                         
Interest income
    6.7       8.6       6.8  
Interest expense (Notes 5 and 6)
    (17.2 )     (16.5 )     (15.5 )
                         
     Income before income taxes
    319.8       302.9       275.2  
                         
Provision for income taxes (Note 3)
    118.5       110.9       101.3  
                         
Net income
  $ 201.3     $ 192.0     $ 173.9  
                         
Basic net income per share (Note 7)
  $ 2.10     $ 1.86     $ 1.61  
                         
Diluted net income per share (Note 7)
  $ 2.09     $ 1.85     $ 1.60  

See accompanying Notes to Consolidated Financial Statements.


 
 
33

 

DOLLAR TREE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


(In millions, except share data)
 
February 2, 2008
   
February 3, 2007
 
ASSETS
           
Current assets:
           
   Cash and cash equivalents
  $ 40.6     $ 85.0  
   Short-term investments
    40.5       221.8  
   Merchandise inventories
    641.2       605.0  
   Deferred tax assets (Note 3)
    17.3       10.7  
   Prepaid expenses and other current assets
    49.2       45.4  
Total current assets
    788.8       967.9  
                 
Property, plant and equipment, net (Note 2)
    743.6       715.3  
Goodwill (Note 10)
    133.3       133.3  
Other intangibles, net (Notes 2 and 10)
    14.5       13.3  
Deferred tax assets (Note 3)
    38.7       -  
Other assets, net (Notes 2, 8 and 11)
    68.8       52.4  
                 
TOTAL ASSETS
  $ 1,787.7     $ 1,882.2  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
  Current portion of long-term debt (Note 5)
  $ 18.5     $ 18.8  
  Accounts payable
    200.4       198.1  
  Other current liabilities (Note 2)
    143.6       132.0  
  Income taxes payable
    43.4       43.3  
Total current liabilities
    405.9       392.2  
                 
Long-term debt, excluding current portion (Note 5)
    250.0       250.0  
Income taxes payable, long-term (Note 3)
    55.0       -  
Deferred tax liabilities (Note 3)
    -       1.5  
Other liabilities (Notes 6 and 8)
    88.4       70.8  
                 
Total liabilities
    799.3       714.5  
                 
Commitments, contingencies and
               
  subsequent events (Notes 1,4,5 and 6)
               
                 
Shareholders' equity (Notes 6, 7 and 9):
               
  Common stock, par value $0.01.  300,000,000 shares
               
    authorized, 89,784,776 and 99,663,580 shares
               
    issued and outstanding at February 2, 2008
               
    and February 3, 2007, respectively
    0.9       1.0  
  Additional paid-in capital
    -       -  
  Accumulated other comprehensive income (loss)
    0.1       0.1  
  Retained earnings
    987.4       1,166.6  
Total shareholders' equity
    988.4       1,167.7  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 1,787.7     $ 1,882.2  

See accompanying Notes to Consolidated Financial Statements.


 
 
34

 

DOLLAR TREE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED FEBRUARY 2, 2008, FEBRUARY 3, 2007, AND JANUARY 28, 2006

               
Accumulated
             
   
Common
     
Additional
 
Other
         
Share-
 
   
Stock
 
Common
 
Paid-in
 
Comprehensive
 
Unearned
 
Retained
 
holders'
 
(in millions)
 
Shares
 
Stock
 
Capital
 
Income (Loss)
 
Compensation
 
Earnings
 
Equity
 
                               
Balance at January 29, 2005
    113.0   $ 1.1   $ 177.7   $ (0.3 ) $ (0.1 ) $ 985.8   $ 1,164.2  
                                             
  Net income for the year ended
                                           
      January 28, 2006
    -     -     -     -     -     173.9     173.9  
  Other comprehensive income (Note 7)
    -     -     -     0.4     -     -     0.4  
        Total comprehensive income
                                        174.3  
  Issuance of stock under Employee
                                           
      Stock Purchase Plan  (Note 9)
    0.1     -     3.0     -     -     -     3.0  
  Exercise of stock options, including
                                           
      income tax benefit of $1.2 (Note 9)
    0.4     -     8.8     -     -     -     8.8  
  Repurchase and retirement of shares (Note 7)
    (7.0 )   -     (180.3 )   -     -     -     (180.3 )
  Stock-based compensation (Notes 1 and 9)
    -     -     2.2     -     0.1     -     2.3  
Balance at January 28, 2006
    106.5     1.1     11.4     0.1     -     1,159.7     1,172.3  
                                             
  Net income for the year ended
                                           
      February 3, 2007
    -     -     -     -     -     192.0     192.0  
  Other comprehensive income (Note 7)
    -     -     -     -     -     -     -  
        Total comprehensive income
                                        192.0  
  Issuance of stock under Employee Stock
                                           
      Purchase Plan  (Note 9)
    0.1     -     2.8     -     -     -     2.8  
  Exercise of stock options, including
                                           
      income tax benefit of $5.6 (Note 9)
    1.7     -     43.1     -     -     -     43.1  
  Repurchase and retirement of shares (Note 7)
    (8.8 )   (0.1 )   (63.0 )         -     (185.1 )   (248.2 )
  Stock-based compensation, net (Notes 1 and 9)
    0.1     -     5.7     -     -     -     5.7  
Balance at February 3, 2007
    99.6     1.0     -     0.1     -     1,166.6     1,167.7  
                                             
  Net income for the year ended
                                           
      February 2, 2008
    -     -     -     -     -     201.3     201.3  
  Other comprehensive income (Note 7)
    -     -     -     -     -     -     -  
        Total comprehensive income
                                        201.3  
  Adoption of FIN 48 (Note 3)
    -     -     -     -     -     (0.6 )   (0.6 )
  Issuance of stock under Employee Stock
                                           
      Purchase Plan  (Note 9)
    0.1     -     -     -     -     3.5     3.5  
  Exercise of stock options, including
                                           
      income tax benefit of $13.0 (Note 9)
    2.7     -     -     -     -     81.1     81.1  
  Repurchase and retirement of shares (Note 7)
    (12.8 )   (0.1 )   -           -     (472.9 )   (473.0 )
  Stock-based compensation, net (Notes 1 and 9)
    0.2     -     -     -     -     8.4     8.4  
Balance at February 2,2008
    89.8   $ 0.9   $ -   $ 0.1   $ -   $ 987.4   $ 988.4  

See accompanying Notes to Consolidated Financial Statements.


 
 
35

 

DOLLAR TREE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended
   
Year Ended
   
Year Ended
 
   
February 2,
   
February 3,
   
January 28,
 
(In millions)
 
2008
   
2007
   
2006
 
Cash flows from operating activities:
                 
  Net income
  $ 201.3     $ 192.0     $ 173.9  
  Adjustments to reconcile net income to net cash
                       
    provided by operating activities:
                       
      Depreciation and amortization
    159.3       159.0       140.7  
      Provision for deferred income taxes
    (46.8 )     (21.9 )     (21.5 )
      Tax benefit of stock option exercises
    -       -       1.2  
      Stock based compensation expense
    11.3       6.7       2.4  
      Other non-cash adjustments to net income
    8.0       5.1       5.6  
      Changes in assets and liabilities increasing
                       
         (decreasing) cash and cash equivalents:
                       
         Merchandise inventories
    (36.2 )     (6.2 )     38.9