dollar tree equity valuation & analysis - texas...

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DOLLAR TREE Equity Valuation & Analysis

[June 02, 2007]

Arun Chauhan

[email protected]

Jacob Caldwell [email protected]

Maegan Farrris

[email protected]

Matt Ramirez [email protected]

Phillip Adcock

[email protected]

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Table of Content

Executive Summary 2 Financial Analysis 40 Industry Analysis 3 Liquidity Ratios 40 Accounting Analysis 4 Profitability Ratios 48 Financial Analysis 4 Capital Structure Ratios 56 Valuations 5 Financial Statement Analysis 61 Income Statement 62Business and Industry Analysis 7 Balance Sheet 63 Company Overview 7 Cash Flow Statement 65 Industry Overview 8 Five Forces Model 9 Analysis of Valuations 66 Rivalry Among Existing Firms 10 Weighted Average Cost of Capital 67 Threat of New Entrants 15 Method of Comparables 69 Threat of Substitute Products 17 Intrinsic Valuations Methods 77 Bargaining Power of Customers 18 Bargaining Power of Suppliers 20 Appendices 89 Value Chain Analysis Competitive Strategies 21 Firm Competitive Advantage Analysis 23 References 118 Accounting Analysis 25 Key Accounting Policies 25 Potential Accounting Flexibility 28 Actual Accounting Strategy 29 Quality of Disclosure 32 Qualitative 32 Quantitative (Screening Ratios) 32 Revenue Diagnostics 33 Expense Diagnostics 34 Potential Red Flags 39 Undo Accounting Distortions 39

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Executive Summary

Investment Recommendation: Overvalued, Sell 6/1/07

DLTR – NasdaqGS(6/1/07) - $42.41 EPS Forecast 52 week range: $26.22 - $42.21

2007 2008 2009 2010 2011 Initial 2.29 2.57 2.88 3.22 3.61

Revenue: (1/31/2007) $3969.40 2007 2008 2009 2010 2011 Revised Market Capitalization – (yahoo.finance) $4.36B 3.27 3.41 3.56 3.69 3.81 Shares Outstanding $99.66M Ratio comparison DLTR DG FDO NDN 3-mth Avg Daily Trading Volume: 1,275,050 Trailing P/E 38.5 54.54 22.46 95.76Percent Institutional Ownership: 94% Forward P/E 22.02 25.30 18.73 43.59Book Value per Share: (Equity/Shares) $11.72 PEG 1.77 1.95 1.59 2.41 ROE: .16 P/B 3.89 3.82 3.95 1.68 ROA: .11 Valuations Estimates Cost of Capital est. R2 Beta Ke Actual Price (6/1/07): $42.213-Month .0013 .097 .058 Ratio Based Valuations 6-Month .3520 1.7129 .1722 Trailing P/E 71.232-Year .3563 1.7187 Forward P/E 40.73 5-Year .3543 1.7159 .1719 PEG 18.01 10-Year .3574 1.7209 .0217 P/B 42.58 Kd .05425 P/EBITDA 17.42WACC 15.9% P/FCF 47.20 EV/EBITDA 33.15 Altman Z-Score Intrinsic Valuations Initial Revised 2002 2003 2004 2005 2006 Free Cash Flows 46.73 46.63 Initial 9.95 8.37 6.44 6.11 6.76 Residual Income 12.98 9.55 Revised 5.02 5.58 4.27 4.01 4.31 LR ROE 4.36 26.47 AEG 7.11 7.63

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Recommendation – Overvalued Firm Industry Analysis

“Dollar Tree Stores, Inc. is a customer-oriented, value driven variety store,

operating at a one dollar price point. The company’s mission will be consistent with

controlled and profitable growth” (Mission Statement, dollartree.com). They are

categorized in the Discount Variety Industry. Dollar Tree was established in Dalton, GA

in 1986. Currently, their headquarters is located in Chesapeake, VA. As of 2007, there

are 3,219 Dollar Stores in 48 states. This number has grown from 2,914 in just one

year.

Dollar Tree’s direct competitors discussed in this valuation paper are Family

Dollar, Dollar General, and 99 Cent Only store. In the discount variety industry, firms

compete on cost rather than on quality. The industry is currently growing at 2.38%.

Dollar Tree has 19% of the market share in terms of total revenue.

From the Five Forces Model we determined that rivalry among existing firms and

the threat of substitute products are very high in this particular industry. This is mainly

due to the low consumer loyalty that is associated with undifferentiated products.

Similar products also yield low switching costs which increases the threat of substitute

products. The threat of new entrants, the bargaining power of customers, and the

bargaining power of suppliers are all low in the discount variety industry. The low

threat of new entrants is due to the preexisting relationships that must exist with the

suppliers. The threat of bargaining power of customers and suppliers are low because

the products are undifferentiated. Also, because the prices are already so low, there is

no need to bargain for a lower price.

Dollar Tree’s key success factors are economies of scale, low cost distribution,

and tight cost control. Following these factors, Dollar Tree is trying to grow their

customer base and become more of a leading force in the Discount Variety Industry.

One way in which they are trying to achieve this is by acquiring other stores, opening

new stores, and be selling perishable items in their stores in order to make Dollar Tree

a one-stop venue for their customers.

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Accounting Analysis

An accounting analysis analyzes a firm’s accounting practices and determines if

the employed accounting practices reflect the true or attainable transparent information

about the firm. The accounting analysis can help in valuing the firm and can help spot

potential “red flags”.

The key accounting policies should agree with the key success factors which

include: economies of scale, low-cost distribution, and tight cost control. Dealing with

economies of scale, Dollar Tree experienced a very notable increase in revenue with the

increase in their retail outlets. The disclosure of leases is another important aspect that

falls under key accounting policies. Most of Dollar Tree’s stores are under operating

leases. Dollar Tree expenses these as rent expense and does not report the future

obligation on their balance sheet.

The flexibility in GAAP, Generally Accepted Accounting Principles, can lead to

distortions in the financial statements. However, Dollar Tree’s information is

transparent and they provide a fairly high amount of disclosure about their firm’s

position. Dollar Tree is aggressive in their accounting practices with their operating

leases. This has a significant effect on both their net income and to their Balance

Sheet.

In computing the ratio diagnostics, we did not identify any real “red flags”. One

thing that might need to be looked into as a potential “red flag” is Dollar Tree’s

operating leases. These leases are amortized on a straight line basis over the term of

the leases. As a result of Dollar Tree not capitalizing their leases, their liabilities were

understated by $920M as compared to their total reported liabilities in 2006 of $705.6M.

Financial Analysis, Forecast Financials and Cost of Capital Estimation

In the process of assessing the outlook of a firm, analysts make estimates

regarding the firm’s liquidity, profitability, and capital structure based on financial

statements, present and forecasted. By making these estimates, analysts can

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benchmark the firm being analyzed against the other firms in the industry. These ratios

are then used to forecast a firm’s financial statements for the next ten years. Once a

Beta is calculated, analysts can use Capital Asset Pricing Model (CAPM) to estimate cost

of equity for the firm. Then, a cost of capital for the firm can be determined using the

weighted average cost of capital (WACC).

Dollar Tree is a fairly liquid company in relation to its competitors and the

industry average. Its Current Ratio and Quick Asset Ratio are above the industry

average, which says that it is able to pay off its current liabilities better than the

industry as a whole. Its Days Supply Inventory is higher than the industry average

which means that it takes them longer, on average, to move merchandise than the

competition. Its Inventory Turnover, and Working Capital Turnover are lower than the

industry average. As far as profitability goes, Dollar Tree is very profitable in

comparison with the industry. Operating Profit Margin, Net Profit Margin, Return on

Assets, and Return on Equity are all areas that Dollar Tree rises above the industry as a

whole. The only area of profitability that Dollar Tree lacks in is Asset Turnover. Dollar

Tree’s capital structure is about like the industry average, which says that they are able

to support their debt just about as well as the industry as a whole.

When forecasting, analysts make assumptions to determine the future years’

growth or decline. Dollar Tree’s Forecast for the years 2007 through 2016 were

computed using our financial analysis using ratios and average growth rates. As Dollar

Tree’s net income from each prior year was added back into the following year’s

retained earnings, Total Assets and total Equity increased exponentially. The huge

addition to Retained Earnings year by year had to be compensated for by sacrificing

Total Liabilities.

Valuations

According to our overall valuations, Dollar Tree’s stock price is overvalued. Many

people value a company based on stock price. Investors base their purchasing or

selling decision on the stock price. It is the analysts job to determine whether or not

the published price of the stock is overvalued, undervalued, or fairly valued. There are

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two main methods used to determine whether the stock price is overvalued,

undervalued, or fairly valued. These Methods are Method of Comparables and the

Intrinsic Valuation Method.

The ratios that the Method of Comparables uses the Trailing & Forecast Price-

Earnings, Price to Book, Dividend Yield, P.E.G., Price over EBITDA, Price over Free Cash

Flow per Share, and Enterprise Value over EBITDA. Each Ratio is then averaged for the

competitors. After taking the average, price for Dollar Tree is determined by setting

Dollar Tree’s ratios equal to the average and solving for price. The P.E.G, P/EBITDA,

and Enterprise Value/EBITDA, ratios show that this firm is overvalued. Trailing P/E,

forward P/E, and P/B ratio, supports Dollar Tree as being ‘fairly valued’ firm. Price/Free

Cash Flows ratio proves that Dollar Tree is slightly undervalued. Using the Method of

Comparables doesn’t really show us whether Dollar Tree is overvalued, undervalued, or

fairly valued.

The Intrinsic Valuation Method uses the Discounted Dividends models,

Discounted Free Cash flows model, The Residual Income Method, Residual Income

Perpetuity, and Abnormal Earnings Approach. From our model analysis we concluded

that Dollar Tree is overvalued. We felt that the only two of these models that are

accurate were the Residual Income and the Abnormal Earnings. The Residual Income

Model and the Abnormal Earnings Model showed that the price should be lower than

the published price, therefore being overvalued. The Free cash flow model was to

variable in the estimation of stock prices to determine whether it is over, under, or fairly

valued. The Discounted Dividends Model doesn’t apply to Dollar Tree since they don’t

pay dividends.

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Business & Industry Analysis

Company Overview

Dollar Tree Stores Inc. (DLTR) which was established in Dalton, GA in 1986,

operates in the Discount Variety Stores Industry. While the corporate headquarters is

located at Chesapeake, VA, they have distribution centers in Georgia, Oklahoma, Utah,

Washington, Mississippi, Illinois, California, and Pennsylvania. “Dollar Tree Stores, Inc.

is a customer-oriented, value driven variety store, operating at a one dollar price point.

It will operate profitably, empower its associates to share in its opportunities, rewards

and successes; and deal with others in an honest and considerate way. The company's

mission will be consistent with controlled and profitable growth” (Mission Statement

Dollartree.com). Dollar Tree also has stores registered under the names of Dollar Bills,

Deal$, and Dollar Express; most of them were brought in through acquisitions and

mergers. The corporation has approximately 3,219 stores in 48 states as of February 3,

2007 in comparison with just 2,914 in the prior year (Dollar Tree 10K 2006). Because

the company believes in effectively utilizing all available selling space, the future growth

strategy of the company includes the continuation of putting in new larger stores in

underrepresented markets. These underrepresented markets are stated in the Dollar

Tree 2007 10-K as the Midwest region of the US. It is Dollar Tree’s strategy to place

their retail locations in strip malls as to attract and share common customers with other

mall tenants. “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, and in neighborhood centers anchored by large grocery retailers” (Dollar Tree

2007 10-K). Dollar Tree’s products are lines of merchandise in consumable areas

including: basic foods, candy, health and beauty products, toys, house wares, greeting

cards, and apparel. Also, the stores carry different products seasonally for holidays such

as Easter, Christmas, and Halloween. A specific growth strategy is to start including

large freezers that will carry consumer refreshments to attract a wider customer base

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(Dollar Tree 10-K 2006). This demonstrates that the company acknowledges the

importance of growth in their industry and is implementing new expansion plans.

http://moneycentral.msn.com

Industry Overview

The retail industry is large. Hence, it can be broken down into many sub-

industries which include: discount variety stores, specialty retail stores, and up-scale

retail stores. The sub industry in which Dollar Tree competes is that of Discount Variety

Stores. This sub-industry concentrates on providing retail based on cost rather than

quality. This discount variety store industry includes Dollar Tree and its competitors,

Dollar General Corp. (DG), 99 Cent Only Stores (NDN), and Family Dollar Stores Inc.

(FDO). It is important to note that the focus of the firms in this industry is to compete

2002 2003 2004 2005 2006 Assets $1,304.2390 $1,501.5190 $1,792.6720 $1,798.4000 $1,873.3000 Sales $160.7890 $2,799.8720 $3,126.0000 $3,393.9000 $3,969.4000

Stock Price $24.57 $30.07 $28.77 $23.94 $30.10 Comparable Sales

Growth 17.20% 18.70% 11.60% 8.60% 16.90% *assets and sales in thousands

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on cost. Although Wal-Mart (WMT) and Target (TGT) are also listed as Discount Variety

competitors, they are indirect competitors to Dollar Tree because they carry a larger

variety of products, focus more on quality, and are more flexible in the price rage in

which they operate when compared with Dollar Tree. The discount variety store

industry can be defined partly by the ways in which the retailers obtain their products.

According to the 99 Cent Only 10-K, “Portions of purchases are acquired at prices

substantially below original wholesale cost through closeouts, manufacturer overruns,

and other special-situation merchandise transactions.” This results in the companies

using different supplier’s products at different times of the year. The direct competitors

previously stated compete on cost. As compared with the industry, Dollar Tree was

valued on the stock market as the least valuable from late 2002 to the middle of 2004.

Its value rose steadily from then on and its price is currently valued the second highest,

only behind Dollar General Corp.’s stock. Currently, Dollar Tree is third in Market Cap

with 4.17 Billion Dollars behind Family Dollar Stores Inc. and Dollar General Corp

(Yahoo Finance 2007). Dollar Tree currently ranks third in number of locations behind

Family Dollar Stores Inc. with 6,300 stores and Dollar General Corp. with 8,260. (Dollar

General & Family Dollar 10K’s 2006). Overall, the industry reached a peak in growth in

mid-2003 with an average growth of approximately 19.25% to a low in mid-2006 with

an inverse growth of approximately -37.5% (Per own calculations from the

moneycentral.msn.com graph). The industry grew at a rate of 2.38% over the past year

and Dollar Tree had a 19% share of the market in terms of total revenue in 2006

(Yahoo Finance 2007). It should be noted that industry numbers were only provided for

the year 2006.

Five Forces Model

The Five Forces Model is a tool which helps in analyzing the industry structure

and average profitability. With this model, a company can top their rival firms by

gaining a better understanding of their particular industry. This model aids in classifying

an industry. This allows us to determine industry value drivers. The five forces include:

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rivalry among existing firms, threat of new entrants, threat of substitute products,

bargaining power of customers, and bargaining power of suppliers. The first three

forces analyze the competition within an industry. The last two provide information on

the relationship between the bargaining power of the buyers and the suppliers. Overall,

the Five Forces Model is a very informative, easy to understand business model that

analyzes where and how value of a particular industry can be created. If a company

knows where and how their value is created, they can put their time and money into

those activities and areas in order to experience more rapid growth within their

industry.

DISCOUNT VARIETY INDUSTRY Rivalry Among Existing Firms Very High Threat of New Entrants Low Threat of Substitute Products Very High Bargaining Power of Customers Low Bargaining Power of Suppliers Low

Rivalry Among Existing Firms

Rivalry within this industry tells us that to be successful a company must

compete on cost. Existing firms tend to have preexisting relationships with both buyers

and sellers. To overcome these relationships, a firm must be willing and able to have

the lowest prices since there is little product differentiation.

The discount variety store industry experiences a moderate level of concentration

and a very high level of rivalry amongst existing firms. The amount of concentration is

determined by the number of firms, or the saturation, in the industry. The rivalry

among all of the competing firms is aggressive because there is such a low amount of

consumer loyalty. Since the firms compete on price rather than quality, they all must

focus on keeping prices down by minimizing their costs. There is not a need for much

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differentiation in this industry because they are competing on low cost and not

necessarily on quality and brand name.

Industry Growth Rate

For investors, this typically represents the compounded annualized rate of

growth of a company's revenues, earnings, dividends and even macro concepts - such

as the economy as a whole (http://www.investopedia.com). In short, historical growth

rates can be very helpful in forecasting a company’s or an industry’s future growth.

This growth rate also shows how their activities have lead to or hindered company

expansion. It also shows how well management decisions have translated into sales.

Sales Growth Rate 2002 2003 2004 2005 2006 Mean: Dollar Tree 16.81% 10.43% 7.89% 14.50% 12.41%Dollar General 12.75% 11.23% 10.30% 10.74% 6.41% 10.28%Familiy Dollar 11.95% 12.37% 10.07% 9.32% 8.91% 10.52%99 Cent Only 21.38% 18.66% 12.21% 76.44% 32.17%Mean: 15.36% 14.77% 10.75% 9.32% 26.56%

Industry Sales Growth past 5 years: 15.69%

Sales Growth

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

2002 2003 2004 2005 2006

Year

Dollar TreeDollar GeneralFamiliy Dollar99 Cent Only

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According to our calculations, the discount variety industry averaged a 15.69%

sales growth rate over the last 5 years. This is a relatively high sales growth rate. The

reason for this number is due to the large number of new and acquired stores within

each company in the industry. The missing values in years 2002 and 2005 are due to

incomplete financial statements. Dollar Tree and 99 Cent Only changed their filing

dates in these years.

Since there is a relatively high growth rate in an industry with undifferentiated

products, there is extreme competition for market share. Discount Variety Stores must

focus on taking competition away from other stores in order to grow. Obviously there

are an abundance of buyers willing to spend money in this industry. The companies

must come up with different ways to attract the buyers to their stores and to make the

buyers choose them over their competitors. In order for an individual firm to

continually gain market share from its rivals, they must focus on keeping their prices as

low as, if not lower, than their competitors’ prices. In this industry, the company with

the lowest prices usually has the most customers. More buyers also translates into a

greater chance for the company to grow. As long as a company is able to grow their

customer base, they can afford to acquire other stores and build new stores. This all

contributes to a company’s growth rate. To keep their prices low, Discount Variety

stores must minimize costs in order to have bargaining power in the market. We will

talk more about this in the coming paragraphs.

Concentration

Concentration is measured by the number of firms in an industry and their sizes

relative to the industry as a whole. The concentration ratio is a percentage of an

industry’s four largest firm’s market share. In an industry with a high concentration a

single company can control prices.

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Market Share (# of Stores)

Year: 2002 2003 2004 2005 2006 Dollar Tree 2263 2513 2735 2914 3217 Family Dollar NA 5066 5481 5908 6208 Dollar General 6113 6700 7320 7929 8229 99 Cent Only NA 154 194 225 232

2003

Family Dollar35%

Dollar Tree17%

99 Cent Only1%

Dollar General

47%

2004

Family Dollar 35%

Dollar Tree 17%

99 Cent Only 1%

Dollar General

47%

2005

Family Dollar 35%

Dollar Tree 17%

99 Cent Only 1%

Dollar General

47%

2006

Family Dollar 35%

Dollar Tree 18%

99 Cent Only 1%

Dollar General

46%

In the discount variety store industry there are many companies competing for

the same market share. The discount variety industry is an oligopoly with no collusion.

This means that the stores have the ability to work with each other when setting their

prices. Although they have this power, they will not do this due to the highly

competitive and low cost nature in this industry. This low level of concentration can

eventually lead to price wars (Palepu 2004). Currently, Dollar General holds the highest

percentage of market share in the industry with over 8000 stores. They have

consistently held more market share than any of Dollar Tree’s other direct competitors.

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Over the past 5 years, they have steadily held 35% of the industry’s market share.

Dollar Tree, Family Dollar, & 99 Cent Only Store do not hold a huge market share

individually, but remain in the top competing companies in the industry.

Switching Costs and Differentiation

Whenever switching costs are low, the buyers have the ability to easily move

their business to another supplier. The more differentiated the products are, the more

likely the company is to experience high customer retention. In the discount variety

industry there is very little product differentiation and the switching costs are low. Low

switching costs also give way to high price competition between similar businesses.

Ratio of Fixed to Variable Costs

A fixed cost is one that does not change over the course time. An example of

this is a lease payment. A $1000 lease payment will not be any higher or any less than

$1000. A variable cost is subject to change in relation to economic fluctuations and

specific business activities. In this sector, the ratio of fixed to variable costs can have a

large effect on product prices. There are low fixed costs and high variable costs.

Their fixed costs are mostly made up by their lease payments. With over 3200

stores, there are a lot of these types of payments being made. In the Discount Variety

Industry, most retail locations are set up on five to seven year leases. Dollar General,

Family Dollar, and Dollar Tree all have distribution centers. These distribution centers

are all owned by their prospective companies.

Another fixed cost incurred in this sector is salaries expense. The employees will

receive a set wage regardless of economic fluctuations.

Like most other companies, those in the discount variety industry are affected by

varying fuel costs. They ship their products from their distribution centers to the

individual stores via truck. Trucks use a lot of fuel. When the fuel prices spike, the

store experience a higher variable cost.

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Excess Capacity and Exit Barriers

Excess capacity is when the economic demand is less than what a company can

actually produce. From the consumer’s point of view, excess capacity could be a good

thing. When their demand is lower than supply, there tends to be little or no inflation.

On the other hand, “a company with sizable excess capacity can often lose a

considerable amount of money if it is not able to meet the high fixed costs that are

associated with producers” (www.investopedia.com).

When merchandise surplus occurs, operating efficiency slows, forcing firms to

slash prices. This is commonly referred to as excess capacity.

Exit barriers can prove to be very threatening in a period of economic or

industry decline. Different factors may force a company to continue operations during

period of low returns. These factors include “economic, strategic, & emotional factors”

(http://www.acad.poly.edu).

Dollar Tree avoids these exit barriers because of their non-specialized assets and

their short lease periods, which are typically five-seven years.

The competitive nature of the discount variety industry requires that these

businesses compete on price rather than on quality or differentiation. This industry

consists of a high level of concentration, low switching costs, low fixed to variable cost

ratio, and few exit barriers. All of these considerations yield extreme competition

between existing firms.

Threat of New Entrants

When entering into a new industry is made relatively easy, the existing firms

automatically experience price constraints. However, in differentiated industries, the

existing firms are not held to the same constraints. Most discount variety stores

operate off of huge discounts from their suppliers which they in turn pass on to their

customer. This industry is not easily accessible to new businesses because of the

preexisting relationships that must exist with the suppliers.

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Economies of Scale

As a firm increases in size, its costs per unit decline. This is an example of

economies of scale. To achieve the economies of scale new entrants must come up

with large amounts of capital (Palepu 2004). Since the discount variety sector is

already saturated, the large amount of capital may not be easily attainable for new

entrants. This capital is required to start a viably competitive company that will be

eligible for bulk discount from suppliers.

Distribution Access and Supplier Relationships

Because there are only so many suppliers who offer these bulk discounts, only a

limited number of stores are allowed access to the discount. Good, pre-existing

relationships with suppliers are essential in this industry. It is not likely that new

entrants would have the ability develop a mutually benefiting relationship with the

suppliers like that of huge conglomerates like Family Dollar and Dollar Tree.

Firms like Big Lots, gain most, if not all, of their inventory from brand name close

outs. In order to get these branded items at close out prices, they must form some

type of contractual agreement with the supplier. Dollar General sells branded items like

Pepsi, Colgate, and Tide. Because Dollar Tree sells their products at a fixed price of

$1.00, they are not able to carry branded items. Also, most brands want to make sure

that their item will sell. This might hinder them from supplying new, unknown

businesses.

Legal Barriers to Entry

One legal barrier that the discount variety industry might face is that of foreign

importation. Because 40% of Dollar Tree’s products are imported from other countries,

an embargo placed on a certain foreign country’s goods could substantially affect their

supply chain. Other legal problems that could arise include raw material shortages,

labor strikes, shipment issues, and political unrest.

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New firms looking to enter the discount variety industry face a plethora of

obstacles like preexisting relationships with suppliers, economies of scale, and the

possibility of legal barriers.

The Threat of Substitute Products

Substitute products are a huge threat in the discount variety industry. Most of

these vendors carry relatively the same products at a similar price. This leads to

nonexistent switching costs. Buyers of discount products tend to be very disloyal and

highly price sensitive. This threat of substitute products is typical of the highly

competitive nature in this type of industry.

Buyer’s Willingness to Switch

Due to the responsive demand relative to price, buyers show no particular

allegiance to any one store. Similar products found in directly competing stores allows

the buyer to pick and choose where they will buy from due to small price differences.

Increased prices or obsolete inventory may cause customers to shop elsewhere. Dollar

Tree’s one major advantage in that its customer can always count on the prices

remaining at $1.00.

Relative Price and Performance

Because the price point Dollar Tree is aiming for is so low, consumers are willing

to accept poor service in exchange for the low prices. Performance is not the same as

differentiated retail stores because the products are not substitutable. Dollar Tree is

the highest performing store charging a flat rate of $1.00 per item. Discount variety

stores must also continually reiterate to their customers that low price does not

necessarily mean low quality. This allows the companies in this sector to engage in

price wars in order to try and win over the competitor’s customers.

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Bargaining Power of Buyers

The power relationship which exists between the buyers and company is known

in the five forces model as the bargaining power of buyers. This point of the model

deals with who holds the leverage to bargain or state their demands onto the other.

This relationship is important because it determines how the company must operate

and relate with its buyers. If the company holds the power, it can charge high prices for

its products. If the buyers hold the power, the company must compete on low cost.

This relationship also works when the company is the buyer of suppliers’ products,

which is when the company effectively becomes the customer.

Switching costs

The cost of switching from Dollar Tree to Dollar General or Family Dollar would

result in higher cost of certain products. The only other switching alternative would be

to switch to 99 Cents Only store which has fewer locations than Dollar Tree. The

overall cost of switching for the buyer is low, but can be higher depending on the

product. Switching cost is important because it tells the company how much power they

can have over the buyer. In this industry, since the switching costs are very low, the

buyer has most of the power. This means that the industry must be very competitive to

retain their customers.

Differentiation

The products offered at all of the direct competitors are basically the same as

Dollar Tree’s products. There is a small amount of differentiation in products offered

between the stores. There is a differentiation in the quantity offered. These small

differences in the product and quantity offered is why Dollar General and Family Dollar

charge more. Buyers are price sensitive when there is an undifferentiated product.

Because the stores essentially offer the same products, they must compete on pricing.

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This causes the industry to be more competitive. Economics says the more competitive

a market is, the lower the prices are, and the better it is for the buyer.

Importance of Product for Costs and Quality

The cost of products are important because cost is what stores like 99 Cent Only

& Dollar Tree compete on. The cost of 99 Cent Only store and Dollar Tree’s products

are lower than that of Dollar General and Family Dollar. Quality is not as important

because they do not compete on quality. The quality offered at their stores are

comparable to the quality of the products offered at the other Discount Variety stores.

This in turn means that the industry can not compete on quality, but rather must

compete on cost. Quality must be considered somewhat, but only very little when

compared with cost.

Number of Buyers

The number of buyers is very important to Discount Variety stores. They are able

to sell everything at around dollar because of the costs for one, but the quantity that

they sell. The more buyers they have, the more quantity they sell. This means that the

companies in the market are all competing to have the most buyers. Family Dollar

generally sells to more than 2000 people each week. While this amount of traffic can

generate business for the surrounding stores, the surrounding stores can bring in

business for Family Dollar as well (www.familydollar.com). Real estate and store

location is an important factor to consider when thinking about the number of buyers.

The reason for this is that the better location you have as the buyer, the more likely the

shoppers are to choose your store. If products are offered at the same price, and we

presume buyers to be rational, then they will choose the store most convenient to

them. Because of this competition for the buyers, or the competition for market share,

the industry must be more competitive. This means that they must compete on low

cost.

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Volume per Buyer

Volume per buyer is important because it determines how much income your

company is making. If a buyer comes to a store and makes a very small purchase, then

the company has not done a good job of providing more or what the customer needs or

wants. The goal of the company should be to provide all the products that the buyer

needs to purchase at that point in time. If this happens, then the volume per buyer will

increase which means an increase in overall sales. Within the total sales for the retailer,

the individual buyer makes up only a very small percent of the total. The buyer is

considered to be a very small volume buyer. Due to this, the buyer has very little power

over the retailer. If the buyer threatens to go somewhere else, unless the retailer meets

their demands, the retailer will simply let them switch. This is not to say that the buyers

desires are not important to the company, but the company is not going to take on a

loss just to meet a few customers demands.

Bargaining Power of the Suppliers

There are many suppliers that supply these Discount Variety stores with their

products. They consist of major brands such as Angel Soft bath tissue, Dole bananas,

2-liter Coke Classic, Kleenex, Imperial canned nuts, Reynolds wrap, Eveready batteries,

and candy such as Reese's, Butterfinger and Snickers. Many of the Discount Retail

stores, such as Dollar General, Dollar Tree, Family Dollar, and 99 Cents Only store,

share some of the same suppliers. Discount variety stores also carry their own private

labels. Some of Dollar Store’s brands include Cobblestone Corners, April Bath & Shower

spa line, Max Grey socks, Voila and Boutique in gift wrap, Victoria's Garden in garden

decor, Royal Norfolk in linens and Cooking Concepts in kitchen gadgets

(http://findarticles.com). Brand preference among customers helps to set Dollar Tree

apart from its competitors.

- 21 -

Consumer-products giants like Clorox, Dial, and Procter & Gamble have begun to

develop items especially for Dollar Tree. For example, when Dollar Tree wanted a new

line of cleaning supplies early last year, Dollar Tree worked closely with P&G designers

to produce 18-ounce bottles of Dawn dish soap to sell at $1. The bottles were smaller

than Dawn's standard 20-ounce size. Last fall, when a rival canceled an order for

Pringles potato chips, Dollar Tree bought 2 tons of the products at pennies on the dollar

and sold it all in a few weeks. Dollar Tree’s CEO, Sasser, says, "We take things off

manufacturers' hands, and everyone's happy” (www.cnn.com). These are examples of

how Dollar Tree gets brand name goods at a low cost. This allows them to sell these

quality goods at a lower price than other discount stores like Wal-Mart. This gives the

suppliers a lower amount of bargaining power since these Discount Retail stores are

selling such a high volume. The suppliers need these Discount Retail stores to sell

higher volumes of their products.

Value Chain Analysis Competitive Strategies

There are two primary scales on which firms compete. Those are cost leadership

and differentiation. The competitive strategy that is utilized by this Discount Variety

Industry is cost leadership. The reason for this is that most of the products sold in this

industry are considered commodities. The firms in this industry aim to “supply the

same product or service [as their competitors] at a lower cost” (Palepu, p. 2-8). The

way in which these firms implement the cost leadership strategy is through economies

of scale and scope, low-cost distribution, and tight cost control.

Economies of Scale

The Discount Variety industry strives to keep their costs as low as possible. One

contributing factor to this is by bulk purchasing. As the firms evolve, they begin to

build and maintain strong relationships with their suppliers. Both, supplier and buyer,

benefit from these relationships financially. These discount variety stores are signing

- 22 -

long-term contracts with their suppliers. These contracts negotiate future price

arrangements which can bare both negative and positive connotations. The negative

side is that being locked into these contracts might keep the discount stores from being

able to buy items from other suppliers. On the contrary, this legal relationship with a

supplier might allow the buyers to reap the benefits of special discounts that they would

not otherwise have access to. Since most of these companies experience such high

economies of scale when opening up new stores, they begin to expand too much and

this can defeat the purpose of these economies of scale. One firm, Dollar General, has

recently had to close over 400 stores throughout the country because they just can not

sustain themselves in their current markets (“Dollar Stores feel the pinch” 2006).

Low-Cost Distribution

In the past, left over inventories from seasonal merchandise and other similar

products have been stored until the next year. Most discount variety entities are now

selling those left-over items at clearance prices in order to avoid accumulating excess

inventory. Currently, Dollar General is working towards implementing a new inventory

management system.

Tight Cost Control

Discount Variety stores have always had tight cost control systems. Cost has

always been an important factor in being successful in this line of business. One way

that these stores are looking to control costs is by closing their underperforming stores

and by upgrading their existing stores. Also, they are looking to improve the customer

base of their already existing stores rather than opening new stores. Family Dollar, in

particular, has opened over 2000 new stores in the last three years

(www.familydollar.com). Another cost cutting measure discount variety stores are

taking advantage of is that of finding the lowest priced rental and lease locations. As

previously mentioned, Family Dollar has a Facilities and Energy Management

Department in place as part of a cost control effort (www.familydollar.com).

- 23 -

Little Brand Advertising

Discount Variety Stores are one of only a few markets in the economy that can

flourish with little or no advertising. Since these discount variety stores have become

such a huge staple of strip and outdoor shopping centers, they are easy for people to

recognize and shop at. Most thrive simply by repeat customers; therefore, it is not yet

beneficial to spend millions on advertising when people already know of the discounted

bargains awaiting them.

Firm Competitive Advantage Analysis

The Future of Dollar Tree

Dollar Tree is continually trying to maintain the same growth rate as the industry

as a whole. Because they are expecting to increase the selling per square footage, they

are adding actual square footage to their existing stores as well as opening new, larger

stores. Dollar Tree is trying to widen their customer base by carrying perishable items.

This will allow them to add the title of “grocery store” or “convenient store” to their

repertoire. (Dollar Tree 10-K 2006)

Economies of Scale

Since Dollar Tree has an established network of suppliers, the corporation is able

to benefit from economies of scale. They are able to achieve their low selling price of

$1.00 by buying their products in bulk from the supplier. They also buy wholesale

items. The relationships they have developed between Dollar tree and its suppliers are

only from their years of doing business together. Despite their history with their

suppliers, Dollar Tree refuses to make any long-term contractual agreements with the

suppliers (Dollar Tree 10K 2006). Dollar Tree is also benefiting from economies of scale

when it comes to building new stores. As Dollar Tree is able to network with builders

throughout the country to establish relationships, the time it takes to construct and

supply a new store is considerably lessened. It takes less time, from start to finish, to

- 24 -

open a new store than it used to because they benefit from these economies, and are

able to more efficiently duplicate a store that is already established.

Low Cost Distribution

One huge factor as to the means of Dollar Tree’s success is its low cost

distribution methods. The difference between profitability and no profitability for a firm,

can mean being able to efficiently distribute its products to its stores. Dollar Tree

implements the automatic replenishment system. This is a big factor in their keeping

their distribution costs at a minimum. The automatic replenishment system is utilized

among all of the 3,219 stores. It utilizes nine distribution centers throughout the United

States. Individual stores manage a computerized selection of inventory and as items are

sold they are in real-time added to the stores next shipment. All of these items are sent

to the distribution centers from across the globe and disbursed to the thousands of

stores by means of the automatic replenishment system. This efficient means of

distribution saves time and money and eliminates inventory surpluses and shortages

(Dollar Tree 10K 2006).

Tight Cost Control

Dollar Tree’s cost control strategy is attributed to their “successful purchasing

strategy, which includes: disciplined, targeted, merchandise margin goals by category.”

(Dollar Tree 10K 2006). Dollar Tree purchases only high quality merchandise. By doing

this they are able to cut back on avoid mark-downs and clearance items. In an effort to

control the cost of each item, Dollar Tree does not allow individual suppliers to have a

huge amount of pricing power over them by not purchasing more than 10% of their

total yearly inventory from any one company (Dollar Tree 10K 2006).

- 25 -

Accounting Analysis

An accounting analysis is performed to analyze a firm’s accounting practices and

to determine if the employed accounting practices reflect the true or attainable

transparent information about the firm. Firms often “window dress” their financial

statements to make them look more appealing to investors. Thus, after analyzing, the

analyst must decide if the reported financials are believable, or if they must be

rewritten to paint a better picture. During the accounting analysis, many ratios are

considered. These ratios aid in better valuing the firm and possibly help in spotting a

“potential red flag”. An improper accounting analysis may lead to a distorted value of a

firm in comparison to its competitors. Normally, financial analysts follow a set of steps

to perform an accounting analysis of a firm. These steps start with first identifying the

key accounting policies. Next, the analyst assesses the degree of potential accounting

flexibility. After that, they evaluate the actual accounting strategy used by the firm.

Then, the analyst evaluates the quality of disclosure, both quantitatively and

qualitatively, which shows the transparency of the firm’s financial statements. After the

analyst evaluates the quality of disclosure, they identify all potential “red flags” or

inconsistencies in the reporting. This leads the analyst to the final step, where they

undo any significant accounting distortions discovered during their analysis of the firm.

Key Accounting Policies

The key success factors are closely related to the key accounting policies

deployed by the firm. The key success factors are closely related and usually agree

with the key accounting policies. As stated earlier in the Five Forces Model, Dollar

Tree’s key success factors includes: economies of scale, low-cost distribution, and tight

cost control. Due to the nature of this industry, cost becomes the most important factor

- 26 -

for firms. If a competitor were to get a product at the lowest cost, this would have a

direct effect on the profit of the firms.

Net Sales v/s No. of Stores

$160.79

$2,799.87

$3,126.00$3,393.90

$3,969.40

2002 2003 2004 2005 2006

Year No. Of Stores Net Sales (in millions) 2002 2263 $ 160.79 2003 2513 $ 2,799.87 2004 2735 $ 3,126.00 2005 2914 $ 3,393.90 2006 3219 $ 3,969.40

Economies of Scale e\affect discount retail industry in a different pattern than

that of a manufacturing industry. In the case of Dollar Tree, there is a notable increase

in revenue with the increase in their retail outlet. According to Dollar Tree’s 2007 10-K,

“From 2002 to 2006 net sales increased at a compounding annual growth rate of

14.3%.” This growth results from the opening of new stores, and mergers and

acquisitions. A $54.1 million acquisition of 138 Deal$ stores and its inventory was

completed in 2006. This shows that Dollar Tree is concerned about its growth and

market capitalization. Also, this proves that the firm has been successful in

implementing its strategies for growth, which has significantly increased their sales.

- 27 -

Disclosure of leases also comes under key accounting policies in this industry.

Leases can be disclosed in two forms: capital lease and operating lease. Capital leases

have the economic characteristics of an asset and affects the Balance Sheet directly. An

operating lease is usually expensed as rent expense in the Income Statement and the

future obligation is not reported to the Balance Sheet. In its acquisitions and mergers,

Dollar Tree has acquired 21 new leases due to bankruptcy proceedings of other

discount retailers and in 2006 and 2005, they acquired favorable lease rights for

operating leases for retail locations from third parties, including the acquired favorable

lease rights in its acquisition of 138 Deal$ stores (Dollar Tree 10-K). The leases will

expire in 2016, which makes these leases carry a future cash obligation. Dollar Tree

also carries some capital leases. According to Dollar Tree 10-K, they amortize their

leasehold improvements and to amortize the assets held under capital leases over the

estimated useful lives of the respective assets. Firms can also use intangible assets to

increase the reported assets. Dollar Tree also uses intangible assets called “Favorable

Lease Rights” and “Non-competition agreements” which affects their total reported

assets. While these two intangible assets are amortized over their useful life, Goodwill is

an intangible asset that is not amortized.

Dollar Tree experiences some risk in the area of foreign currency. Although this

risk accounts for less than 1% of purchases in euros, it is still subject to some risk.

As stated earlier in this section, key success factors are closely related and

usually agree with the key accounting policies. If they do not match, then an analyst

should see it as a “red flag”. Flexibility of GAAP can lead to distortion in the financial

statements. Overall, we noticed that Dollar Tree’s financial information is transparent

and they provided a fair amount of disclosures about the firm’s position. However, we

also noticed that the level of disclosure has decreased in recent years, but the notes to

the financial statements provide a good amount of information about the firm.

- 28 -

Potential Accounting Flexibility

SEC (Security & Exchange Commission) regulates the accounting practices of all

the firms in United States. GAAP (Generally Accepted Accounting Principles) are utilized

by the firms to report their financial statements. Since GAAP allows the firms to be

flexible in choosing the method of reporting, it becomes essential for an analyst to

analyze the firm’s flexibility in accounting choices to check for any intentional or

unintentional distortions. GAAP allows the firm flexibility so that management can

disclose the information in a way which provides a better understanding of the firm.

There is one more area of accounting flexibility in the case of inventory in this

industry. This flexibility deals with valuation of outdated, damaged, or unwanted

inventory. Dollar Tree has choices in disclosing these activities. They can either choose

to impair their inventory or keep the inventory without making any changes.

Impairment would reduce the inventory and increase the expense; thus, it would

provide a true understanding of the firm’s asset. On the other hand, if no changes are

made the company would be overstating the value of its inventory which would lead to

overstatement of their balance sheet.

The second flexibility deals with intangible assets. Dollar Tree reports Goodwill,

Non-Competition agreements, and Favorable lease rights as its intangible assets. Also,

they have implemented SFAS No. 144 to tackle with impairment and amortization issues

(Dollar Tree 10-K). Goodwill is usually impaired upon revaluation by the management at

the end of each fiscal year. It becomes the management option to determine the value

of impairment. Thus, an unjustified valuation can affect the assets in the balance sheet

and the expenses in the income statement. Since, Dollar Tree has a valuable amount of

mergers and acquisition, one must be very careful when analyzing the goodwill of the

firm, as distortions in goodwill can effect the firm’s total value.

Finally, the big area of flexibility which was noticed is accounting for leases.

Dollar Tree has the choice of booking their leases as an operating lease or a capital

lease. An operating lease is written off as a rent expense in the income statement. This

- 29 -

means that it does not show the true future cash obligation undertaken by the firm.

The second choice is recording the leases, as a capital lease. By capitalizing the leases,

the firm discloses the leases as an asset as well as a liability to show the future cash

obligation tied up with the lease. The firm can also depreciate the asset as well as

amortize any loan taken for the purchase of the lease. Dollar Tree chooses to report

these leases as an operating lease; hence, a detailed study is performed in the sections

below.

Dollar Tree has cushion when choosing their reporting methods. These choices

are all legal and are accepted by the GAAP. As stated earlier, the flexibility in accounting

is meant to allow the management to disclose financial statements in a way that the

true image of the business can be shown.

Actual Accounting Strategy

Dollar Tree does a fairly good job of disclosing many of its accounting policies

that they use for reporting their financial statements. As compared with the standard of

conservative accounting practices and the accounting practices of the industry, Dollar

Tree is mostly moderate with their accounting standards and with preparation of

financial statements. Dollar Tree mostly follows conservative accounting policies,

however, they also utilizes aggressive policies in the same areas as the rest of the

industry.

All of the companies in the industry use the straight line method of depreciation.

This is a standard way of allocating the depreciation expense of the assets over their

Accounting

Policy

Strategy Significant Effect

to Net Income?

Significant Effect

to Balance Sheet?

Operating Leases Aggressive Yes Yes

Intangible Assets Aggressive No Yes

- 30 -

useful life. This results in a fair and transparent report for the expense account which

results in a fair amount for net income on the Income Statement. It should be noted

though, that in 2004 Dollar Tree re-estimated the useful life of their assets which

resulted in a 4 million dollar increase in net income (Dollar Tree 2006 10-K, Dollar Tree

2004 10-K, Dollar General 2006 10-K, Family Dollar 2006 10-K, 99 Cent Only 2006 10-

K).

Capitalization of Operating Leases using a 8% Discount Rate

Year T PMT Beginning Balance

Interest Expense Payment

PV Factor

PV Payment

Ending Balance

2007 1 284.2 927.74 74.22 284.20 0.93 263.15 717.762008 2 246 717.76 57.42 246.00 0.86 210.91 529.182009 3 207.2 529.18 42.33 207.20 0.79 164.48 364.322010 4 161.5 364.32 29.15 161.50 0.74 118.71 231.962011 5 110.6 231.96 18.56 110.60 0.68 75.27 139.922012 6 66.8 139.92 11.19 66.80 0.63 42.10 84.312013 7 40.35 84.31 6.74 40.35 0.58 23.54 50.712014 8 24.37 50.71 4.06 24.37 0.54 13.17 30.392015 9 14.72 30.39 2.43 14.72 0.50 7.36 18.112016 10 8.891 18.11 1.45 8.89 0.46 4.12 10.662017 11 5.37 10.66 0.85 5.37 0.43 2.30 6.152018 12 3.243 6.15 0.49 3.24 0.40 1.29 3.402019 13 1.959 3.40 0.27 1.96 0.37 0.72 1.712020 14 1.183 1.71 0.14 1.18 0.34 0.40 0.662021 15 0.715 0.66 0.05 0.71 0.32 0.23 0

* (Discount Rate calculated from www.pages.stern.nyu.edu)

This table shows our operating lease schedule. The Dollar Tree 10-K discloses

these lease payments up to the year 2012. From this year on it discloses that the

remaining value of the leases totals 167.5 million. For this value we decreased it back

by a percentage matching the decrease in payments from 2007 to 2011. The sum of

the payments of 2012 to 2021 equals the 167.5 million disclosed in the 10-K.

One area of accounting that Dollar Tree might be considered to have shown

aggressive practices is on the recording of their leases. Dollar Tree holds 3200 retail

stores; most of these are in the form of leases. These leases are an off-balance sheet

asset. These leases are defined as operating leases which means that no significant

disclosure is performed on the balance sheet. However, the lease payments are

- 31 -

expensed as rent expense, which does affect the balance sheet in the retained earnings

section. Since these leases are not reported on the Balance Sheet, both assets and

liabilities become understated. This accounting strategy allows Dollar Tree to avoid

showing $.92 billion in assets and liabilities on the Balance Sheet. This accounting

practice is commonly used by all of the other competitors in the industry as well. (Dollar

Tree 2006 10-K, Dollar General 2006 10-K, Family Dollar 2006 10-K, 99 Cent Only 2006

10-K).

Another area that Dollar Tree would be considered to have aggressive

accounting policies is its recording of intangible assets. Dollar Tree performs annual

tests to determine the value of its goodwill. This gives management of Dollar Tree a

direct power over the amount of Goodwill that they impair each year. This is important

because if they believe the net income to be lower one year, then they can choose not

to impair any goodwill to show a higher net income. Vice-versa, they can also choose to

impair the goodwill in the opposite case when they what to save on taxes. The way in

which the company records its non-competition agreements with former executives is

also aggressive. Instead of treating the agreements as a current asset, they should

treat the agreements as an expense because the agreements provide no direct, nor any

future benefits to the company. The agreements have already been paid for, and are

only an assumption of what would be a future asset. Therefore, it should be expensed.

These accounting procedures are definitely aggressive; however, they are not very

significant to affect any financial statements as they only represent 7.8% of the firm’s

total assets. In comparison with the industry, Dollar Tree does a good job in disclosing

its intangible assets, as many of its competitors only list their intangible assets on the

Balance Sheet and fail to disclose how they value them. (Dollar Tree 2006 10-K, Dollar

General 2006 10-K, Family Dollar 2006 10-K, 99 Cent Only 2006 10-K).

- 32 -

Quality of Disclosure

Qualitative

Dollar Tree has consistently done a good job of disclosing much of their

accounting information in their 10-K. They openly talk about their operating leases,

goodwill, inventory, and write offs of inventory. It should be noted though that the

transparency of their 10-K reporting has declined over the years. For example, they

used to list the intangible assets (Non-competition agreements, Favorable Lease Rights,

and Goodwill) individually on the balance sheet, but they are now only disclosed as

combined intangible assets. A possible reason that they would have gone to this form

of accounting policy is to follow the similar reporting procedures as of their competitors

in the industry. However, Dollar Tree does disclose most of this information in the notes

to the financial statements. A specific example of something being disclosed in the

notes is goodwill. Also, it should be noted that Dollar Tree’s managers do have some

incentive for altering their financial statements. Dollar Tree provides its managers with

stock options; so the better the financial statements look, the higher the stock price is

leading to more money money cashed in from these stock options. Also, Dollar Tree is

involved in a revolving credit facility where they have a huge credit balance with an

outside lender. They must keep certain financial ratios up in order to continue having

this credit balance to borrow from. These incentives may also be one of the reasons for

the declining amount of transparency in the financial statement because they need the

room to alter the statements in order to keep the ratios up.

Quantitative

Quantitative approaches in general vary greatly. Some act as “screening” ratios.

Others predict future stock returns. Quantitative approaches play a more important

role in security analysis today than they did a decade or two ago. (Palepu 9-5)

Quantitative accounting ratios are done in order to test the validity and believability of

- 33 -

the reported revenue and expenses. Quantitative analysis is a useful tool in predicting

or measuring different aspects reported in a company’s financial statements.

Revenue diagnostics

Revenue diagnostics include: net sales/cash from sales, net sales/net accounts

receivable, net sales/unearned revenues, net sales, warranty liabilities, net

sales/inventory. Notice that in each one of these ratios reported net sales is the

numerator. The reason for this is that these ratios determine whether or not the

varying denominator entries support the reported sales.

Net sales ratio: (net sales/inventory)

This revenue diagnostic ratio determines the extent to which net sales is

supported by inventory. A bigger ratio is better but companies want it to remain

constant. A large spike in the net sales ratio would be a red flag. This would indicate

that the inventory is not supported by the reported net sales.

Net Sales / Inventory

0.001.002.003.004.005.006.007.008.009.00

10.00

2001 2002 2003 2004 2005 2006

Dollar Tree99 Cents OnlyFamily DollarDollar General

This ratio is important in the discount variety industry because when dealing with

commodities it is essential to maintain the lowest inventory possible. This will prevent

working capital from being clogged up by inventory. Family Dollar, Dollar Tree, and

- 34 -

Dollar General had a steadily increasing ratio. However in 2005, Dollar Tree maintained

the highest position. This means that they led the industry in being more efficient with

their inventory. Dollar Tree has implemented an inventory management method which

allows them to keep an efficient level of inventory. The sudden spike in Dollar Tree’s

ratio was due to a sudden drop in sales from 2001 to 2002. In 2003, net sales went

back up to the normal range. They do not keep an excess of inventory which would

translate into extra warehousing inventory related expenses. 99 Cents Only Store has

experienced volatile net sales to inventory ratio. The sudden drop in net sales could be

justified due to a shortage of inventory.

Conclusion

The only revenue diagnostic ratio that applies to Dollar Tree is the net sales

ratio, because they do not have any accounts receivable, unearned revenue, or

warranty liabilities to speak of. Also most other companies in the discount variety

industry do not have the above mentioned accounts.

Expense diagnostic ratios

Much like the revenue diagnostic ratios, the purpose of expense diagnostic ratios

is to assess the believability of the numbers reported on the financial statements.

Expense diagnostic ratios include: Asset Turnover, Changes in CFFO/OI, Changes in

CFFO/NOA, Total accruals/Change in sales, Pension expense/SG&A, Other employment

expenses/SG&A. The expense ratios tell analysts and investors how well a company

manages its expenses.

Asset Turnover: (Net sales/Total Assets)

The asset turnover ratio is computed by dividing net sales by the average of the

total assets from the current year and the previous year. This ratio helps to determine

if the reported total assets support the reported net sales. A higher asset turnover

- 35 -

means that the firm is very efficient is using its assets. Also, a company with a very

high asset turnover tends to have a low profit margin.

(www.beginnersinvest.about.com)

Asset Turnover (Sales/Assets)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2001 2002 2003 2004 2005 2006

Dollar Tree

99 Cents Only

Family Dollar

Dollar General

Dollar TreeRevised

Discount variety stores normally operate under operating leases rather than

capital leases. A capital lease would normally appear as an asset in the balance sheet

when compared to operating leases which are expensed to rent expense in the income

statement. The asset turnover ratio tells us how well a company uses its assets to

increase its revenue. Dollar General operates more stores than any of its direct

competitors. This explains why their sales are more than the other stores. This tells us

that their assets contribute to increasing net sales. Also, it can be seen from this graph

that Dollar Tree is catching up with their competitors and one reason for this steady

growth in this ratio could be explained by the new mergers and acquisitions which

Dollar Tree had in the recent years. Upon revision to Dollar Tree’s books from Capital

Lease corrections, our asset turnover ratio declined. This can be attributed to an

increase in Total Assets.

Cash Flows From Operations (CFFO): CFFO/NOA

Cash flows from operations are the cash that is generated from operating

activities. This is calculated using revenues and expense from the balance sheet.

- 36 -

Expenses are subtracted from the revenues; this yields the number know as Operating

Cash flow on the statement of cash flows. Essentially this is the cash that pays a

company’s bills. (www.investopedia.com)

Operating assets include things in the line item Plant, Property, and Equipment

on the balance sheet. The ratio, CFFO/NOA, shows investors how well PPE are utilized

in relation to cash flows. As ratios increase, this indicates the firm is increasing the

utilization of its PPE.

CFFO/NOA

0.000.100.200.300.400.500.600.700.800.90

2001 2002 2003 2004 2005 2006

Dollar Tree99 Cents OnlyFamily DollarDollar GeneralDollar Tree Revised

Change in CFFO/NOA

(0.20)

(0.10)

0.00

0.10

0.20

0.30

0.40

2001 2002 2003 2004 2005 2006


By looking at the graphs we can infer that both Dollar Tree and Dollar General

allocate their PPE to cash flows well. The steady increase in their CFFO is a reflection

- 37 -

of an increase in cash flow due to the acquisition of new buildings. Once Dollar Tree’s

books were revised the CFFO/NOA increased the ratio. The ratio reflects the change in

CFFO as a result from the change in Net Income.

Cash Flows From Operations/Operating Income: (CFFO/OI)

CFFO, once again, is the cash that is generated from operating activities and it is

found on the balance sheet. Operating income is also known as EBIT, earning before

interest and taxes. Operating income is found on the income statement. This can be

used to measure and firm’s profitability. CFFO/OI will tell investors if a firm’s reported

operating income matches up to their reported cash generated by operating activities.

Change in CFFO/OI

(1.20)(1.00)(0.80)(0.60)(0.40)(0.20)0.000.200.400.600.80

2001 2002 2003 2004 2005 2006

Dollar Tree

99 Cents Only

Family Dollar

Dollar General

Dollar TreeRevised

CFFO/OI

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2001 2002 2003 2004 2005 2006


- 38 -

Throughout the past five years the discount variety sectors, CFFO divided by

operating income have been relatively steady. However in 2005, 99 Cent Only Stores

have experienced a rapid succession of increased CFFO. This could be the result of a

low operating income. Revisions to the Dollar Tree books yielded a increase in CFFO

from net income and inherently changed the ratio to a higher number.

Total Accruals/Change in Sales:

Accruals are expenses for which invoices have not been received at the end of

an accounting period (moneyterms.co). Accruals reported on the financial statements

include: accounts payable, accounts receivable, goodwill, future tax liability and future

interest expense, among others. Accrual based accounting provides a better, more

accurate view of a firm’s financial standing at a given point and time. It allows a

company to account for expenses which have not actually been paid and revenue that

has not yet been received. These accrued revenues and expenses will take place within

a year.

This ratio will help explain if a company does a lot of business in terms of credit.

Investors might view a higher number of accounts receivable and accounts payable as a

bad thing.

Total Accruals/Change in Sales

-0.80

-0.70

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

2002 2003 2004 2005 2006

Family DollarDollar TreeDollar General99 Cent Only Store

- 39 -

Through the five year period Dollar Tree has had a decrease in accruals/change

in sales. This means that the firm is selling less to customers on credit and making

more sales in cash. As compared with the industry, Dollar Tree’s ratio is average. This is

a good thing because the nature of the industry requires that most purchases by

customers be made on a cash basis.

Potential “Red Flags”

Part of analyzing financial statements includes the daunting task identifying

detrimental information within the companies’ financial statements. The only significant

accounting item that can be classified as a “red flag” for Dollar Tree is that of operating

leases. According to the company’s 10K, the operating leases are amortized on a

straight line basis over the term of these leases. Other possible “red flags” are so

irrelevant that they need not be corrected. Intangibles, like goodwill, have increased by

$14.6M in the year 2006. However, this increase can be justified by the 138 Deal$

stores that were acquired during the year. This looks like a potential “red flag”, but it

can be justified.

Undo Accounting Distortions

As part of an investors accounting analysis one must be able to take an unbiased

and fair look at their financial statements. Unfortunately, for most investors, ulterior

motives begin to play a huge part in distorting the financial statements. Managers of

the firms sometimes have reasons to tweak these statements to make themselves and

their constituents look better, even though it is not the best for the firm. One of the

potential “red flags” was that they failed to capitalize their lease expense payments.

This resulted in liabilities being understated by $.92 billion on the balance sheet.

- 40 -

Financial Analysis

Performing a ratio analysis is very helpful in charting a company’s performance

over time. The analysis yields a benchmark which is a useful tool in comparing

different companies within the same industry. When looking at a set of financial

statements you have the power to “evaluate the financial condition of the company and

the results of its operations (Financial Statement Analysis handout). The ratios are

divided into three classifications: Liquidity Ratios, Profitability Ratios, and Capital

Structure Ratios. Different ratios pull information from different financial statements.

This allows for cross-examination of the statements.

Included in the final portion of a ratio analysis is the financial forecasting. A

forecast is a prediction of a company’s future performance based on their historical

performance. Financial forecasting is done by examining the companies past balance

sheets, income statements, and statement of cash flows.

Liquidity Ratios:

Liquidity ratios evaluate how quickly a company can turn their assets into cash in

order to meet their current debts. These ratios include: current ratio, quick asset ratio,

accounts receivable turnover, inventory turnover, and working capital turnover.

Current Ratio: (current assets/current liabilities)

The current ratio can be used by an investor to assess the ratio of current assets

to current liabilities. The presence of a high relation of current assets to current

liabilities would yield a higher ratio than one with a high amount of current liabilities in

relation to current assets.

- 41 -

Current Ratio 2001 2002 2003 2004 2005 2006 Dollar Tree 2.79 3.47 2.73 3.29 3.19 2.50 Dollar Tree Revised 2.79 3.47 2.73 3.29 3.19 2.50

99 Cents Only

7.74

6.38

4.81

2.87

2.85

Family Dollar

2.07

1.99

1.94

1.72

1.51 1.44

Dollar General

1.37

1.99

2.22

2.10

1.89 2.09 Industry 2.82

Current Ratio

0.001.002.003.004.005.006.007.008.009.00

2001 2002 2003 2004 2005 2006


99 Cent Only Stores had the leading, highest, ratios until it plummeted in 2004

and fell to second place. Dollar Tree has had the highest consistent ratio as compared

to the two non-volatile ones, Dollar General and Family Dollar. The industry average is

at 2.82. Dollar Tree’s is slightly above average at 3.00. This demonstrates Dollar

Tree’s ability to pay off their current liabilities with their current assets. Family Dollar

and Dollar General are below industry average with a 1.78 and a 1.94, respectively.

Revision to the books resulted in the same value for the current ratio.

Quick Asset Ratio: (cash+securities+A/R) / (current liabilities)

The Quick Asset Ratio test shows marketable securities, plus accounts receivable,

and cash over current liabilities. The test shows a company’s quick assets in relation to

their liabilities. This can be a positive or a negative attribute to a company because too

- 42 -

low a number can mean that they have too many liabilities and an extremely high

number can mean they do not have enough.

Quick Asset Ratio (Acid-Test) 2001 2002 2003 2004 2005 2006Dollar Tree 1.18 1.63 0.64 1.08 1.15 0.80 Dollar Tree Revised 1.18 1.63 0.64 1.08 1.15 0.80

99 Cents Only

5.25

4.11

2.59

0.97

1.15

Family Dollar

0.06

0.41

0.35

0.21

0.16

0.22

Dollar General

0.23

0.18

0.54

0.33

0.22

0.26

Industry

1.03

Quick Asset Ratio (Acid-Test)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2001 2002 2003 2004 2005 2006


99 Cent Only stores have consistently had an extremely high ratio of quick assets

to liabilities. This has improved over the years back to the average of the industry.

Dollar Tree, however, has been somewhat volatile throughout the past six years. Dollar

Tree has been hugging the 1-to-1 ratio line, which is appreciated by investors and

financial institutions, and is high enough to yield the returns the company needs to

sustain itself. The industry average is 1.03. Dollar Tree is just above average at 1.08.

This lets analysts and potential investors know that Dollar Tree is able to pay its current

- 43 -

liabilities with assets. Family Dollar and Dollar General are at the bottom of the industry

with .23 and .30, respectively. Revisions in Dollar Tree’s books yielded the same ratio.

Accounts Receivable Turnover: (sales/accounts receivable)

The Accounts Receivables Turnover ratio is a measure of the total sales for a

company divided by its accounts receivables. The ratio provides a number which shows

their rate of return for credit extended to their buyers. For the Discount Variety Store

Industry most companies tend to not lend out credit to buyers, and therefore, do not

have accounts receivable. Dollar General is the only exception in that they do have

accounts receivables.

Accounts Receivable Turnover 2001 2002 2003 2004 2005 2006 Dollar Tree N/A N/A N/A N/A N/A N/A 99 Cents Only 164.14 259.33 384.17 280.73 320.57 N/A Family Dollar N/A N/A N/A N/A N/A N/A Dollar General N/A N/A N/A N/A N/A N/A

Days Supply of Receivables: (365/ AR Turnover)

The Days Supply of Receivables ratio is a way for an individual investor to

recognize how long it takes a company to get paid on credit extended. Since most of

these stores do not extend credit they do not have accounts receivable and therefore

do not have a Days supply of Receivables ratio.

Days Supply of Receivables 2001 2002 2003 2004 2005 2006 Dollar Tree N/A N/A N/A N/A N/A N/A

99 Cents Only

2.22

1.41

0.95

1.30

1.14 N/A Family Dollar N/A N/A N/A N/A N/A N/A Dollar General N/A N/A N/A N/A N/A N/A

- 44 -

Inventory Turnover: (cost of goods sold/inventory)

Inventory turnover ratio, receivables turnover, and working capital turnover are

all measures of operating efficiency. Inventory turnover is calculated by dividing cost of

goods sold by average inventory. This ratio is used to measure the number of times a

company turns it inventory over in each fiscal year. Inventory is stated at cost. In the

case of this particular ratio, “bigger is better.” A larger inventory turnover rate means

that products are selling quickly. The inventory turnover can be calculated as an

“inventory category or by individual product” (www.bizwiz.ca/inventory_turnover_ratio).

Inventory Turnover 2001 2002 2003 2004 2005 2006Dollar Tree 4.29 4.13 3.39 3.27 3.85 4.32 Dollar Tree Revised 4.29 4.13 3.39 3.27 3.85 4.32

99 Cents Only

5.27

5.14

4.81

3.80

4.58

Family Dollar

3.38

3.61

3.68

3.57

3.58

4.12

Dollar General

3.37

3.90

4.19

3.92

4.15

4.75

Inventory Turnover

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2001 2002 2003 2004 2005 2006


Dollar Tree’s inventory turnover rate remained relatively steady at about four

percent over the past five years. 99 Cent Only, Dollar General, and Family Dollar also

- 45 -

remained in the four percent range. Dollar General had the highest inventory turnover

rate with 4.75%. This means that their products are selling at a faster rate than their

direct competitors. Family Dollar has developed an inventory system that allows them

to maintain a higher level of sales with a lower level of inventory. This should allow for

less inventory and warehousing costs than those of the other companies in the industry.

The industry average is 5.83. This shows that Dollar Tree is less than the industry

average with 3.87. This means that Dollar Tree does not turnover their inventory as

many times per year as other competitors in the industry. This is important for analysts

because they have to know how quickly a company can get rid of their inventory.

Revisions of the books yielded no change, once again, in the Inventory Turnover Ratio.

Days Supply of Inventory: (365/Inventory Turnover)

Day’s supply of inventory is used in conjunction with inventory turnover. This

ratio is computed by taking the 365 days in a year and dividing it by inventory turnover.

Unlike the inventory turnover ratio, in the case of the Day’s Supply of Inventory ratio, a

small number is desired. This ratio tells us how long a product is in the store before it

sells.

Days Supply of Inventory 2001 2002 2003 2004 2005 2006Dollar Tree 85.12 88.37 107.70 111.57 94.74 84.54 Dollar Tree Revised 85.12 88.37 107.70 111.57 94.74 84.54

99 Cents Only

69.30

71.04

75.88

95.99

79.77

Family Dollar

107.97 101.14

99.13 102.32 101.86 88.58

Dollar General

108.25

93.67

87.01

93.08

87.97 76.86

- 46 -

Days Supply of Inventory

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2001 2002 2003 2004 2005 2006


Dollar General comes in ahead of the crowd in the Day’s Supply Inventory ratio.

Their ratio has been on the decline for the past five years. In 2006, their ratio was

76.86 days. This means that their products remained on the shelf for approximately 77

days before being sold. It is a good sign that this ratio has steadily declined. Dollar

General seems to be taking steps in their inventory management and marketing

departments in order to get their products off the shelves and out of their doors

quicker. The industry average is 91.82 days. Dollar Tree is a little bit above average

with 95.34 day average. This tells analysts that it takes Dollar Tree, on average, 95.34

days to sell merchandise. Revisions of the books had no effect on this ratio.

Working Capital Turnover: (sales/working capital)

Working Capital Turnover equals net sales revenue divided by working capital.

Working capital is computed by taking a company’s current assets and subtracting their

current liabilities. This ratio shows how well a company’s management is able to

generate revenue by using the working capital. Accounts Receivable Turnover and

Inventory Turnover are both related to Working Capital Turnover.

(www.chartfiller.com)

- 47 -

Working Capital Turnover 2001 2002 2003 2004 2005 2006Dollar Tree 5.52 4.57 6.12 4.63 5.24 6.89 Dollar Tree Revised 5.52 4.57 6.12 4.63 5.24 6.89

99 Cents Only

2.98

3.46

3.96

5.19

5.08

Family Dollar

8.79

7.93

8.46

10.32

12.66

14.78

Dollar General 12.60

9.25

7.56

8.46

10.35

10.08

Working Capital Turnover

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2001 2002 2003 2004 2005 2006


In the Discount Variety industry, the working capital turnover varies from one

company to the next. Once again, Family Dollar and Dollar General excel in this area.

Family Dollar has excelled with a Working Capital Turnover of 14.78% in the year 2006.

This means that for ever $1.00 they have in working capital, they are able to generate

$14.78 in sales. Their closest competitor in Working Capital Turnover is Dollar General

with a Working Capital Turnover rate of 10.08% in 2006. Dollar General has had ups

and down in this area, but have steadily improved since 2003. The industry average is

7.60. Dollar Tree is just below average at 5.50. This lets analysts know that Dollar

Tree is not as good as the overall industry at generating revenue from working capital.

While they are not at the average, they still do a better job than 99 Cents Only store.

- 48 -

Upon correction of Dollar Tree’s financial statements, no change occurred in the

working Capital Turnover.

Overall Liquidity

Overall, Dollar Tree is a fairly liquid company. Its Current Ratio and Quick Asset

Ratio are above the industry average, which says that it is able to pay off its current

liabilities better than the industry as a whole. Its Inventory Turnover Ratio was a little

bit lower than the industry average, but it is still a respectable number. Its Days Supply

Inventory is higher than the industry average which means that it takes them longer,

on average, to move merchandise than the industry. The Working Capital Turnover is a

little bit less than the industry average, but it is still a pretty good number.

Profitability Ratios:

Profitability ratios evaluate “four critical factors related to profits”: operating

efficiency, asset productivity, rate of return on assets, and rate of return on equity.

(Financial Statement Analysis hand-out).

Gross Profit Margin: (gross profit/sales)

This chart and graph show the gross profit margin of Dollar Tree and its direct

competitors over six years. The numbers are based of a percentage of sales. This

number is a percentage representation of a company’s sales less its cost of goods sold.

As this number increases, it shows that companies are either reducing their cost of

goods sold or they are increasing their sales. Either way, a larger number is better.

Gross Profit Margin 2001 2002 2003 2004 2005 2006Dollar Tree 0.36 0.37 0.36 0.36 0.35 0.34 Dollar Tree Revised 0.36 0.37 0.36 0.36 0.35 0.34 99 Cents Only 0.39 0.40 0.40 0.39 0.37 Family Dollar 0.33 0.34 0.34 0.34 0.33 0.33 Dollar General 0.28 0.28 0.29 0.30 0.29 0.26

- 49 -

Gross Profit Margin

0.000.050.100.150.200.250.300.350.400.45

2001 2002 2003 2004 2005 2006


The industry’s ratio is slowly declining. 99 cents only store is the industry leader

with Dollar Tree right behind it. Following is Family Dollar and Dollar General,

respectively. The reason for the decrease in Dollar Tree’s Ratio is because of an

increase in cost of goods sold year by year. The same holds true for the competitors.

The industry average is 34%. Over the years, Dollar Tree has remained just above the

industry average at 36%. This shows that Dollar Tree has kept their cost of goods sold

down in relation to the industry. This number is relevant to a financial analysis because

it shows the operating efficiency of a company in relation to the industry and its

competitors. Dollar Tree’s revised books had no effect on their Gross Profit Margin

because the sales and the Cost of Sales were not affected by the Capitalization of

Leases.

Operating Profit Margin: (operating income/sales)

The Operating Profit ratio is found by dividing income from operations by sales.

This is another measurement of how efficient a company is at its operations. It

compares the quality of a company’s operations to its competitors. A business with a

higher operating margin than its industry’s average tends to have lower fixed costs and

a better gross margin. This gives management more flexibility in determining prices

(http://beginnersinvest.about.com). The bigger the number, the better it is for the

company.

- 50 -

Operating Profit Margin 2001 2002 2003 2004 2005 2006Dollar Tree 0.10 0.11 0.10 0.09 0.08 0.08 Dollar Tree Revised 0.14 0.15 0.15 0.14 0.13 0.13 99 Cents Only 0.13 0.13 0.10 0.04 0.01 Family Dollar 0.08 0.08 0.08 0.08 0.06 0.05 Dollar General 0.07 0.07 0.07 0.07 0.07 0.03

Operating Profit Margin

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

2001 2002 2003 2004 2005 2006


The industry average is 8%. Dollar Tree leads the competition with an average

over the past six years of 10%. They are doing the best job of keeping low operating

expenses in relation to their revenues. This shows that Dollar Tree is above the

industry average of keeping its operating expenses down in relation to the industry and

the competition. This ratio is important in a thorough financial analysis because it tells

analysts about the operating efficiency of a firm. More specifically, it provides an

explanation about how low or high they are keeping their operating expenses. Dollar

Tree’s revised books yielded a slight change due to the increase in depreciation and

reduction of Operating Lease expenses.

Net Profit Margin: (net income/sales)

Net Profit Margin is a ratio that is calculated by dividing net income by sales. It

measures the efficiency of a firm in relation to its competitors. This number is also

- 51 -

better if it is bigger. This is important to a financial analysis because it shows the

efficiency of the firm in relation to the industry and its competitors. More specifically it

shows how much they still profit after taking taxes and interest expense out of

operating income.

Net Profit Margin 2001 2002 2003 2004 2005 2006Dollar Tree 0.06 0.07 0.06 0.06 0.05 0.05 Dollar Tree Revised 0.08 0.09 0.09 0.09 0.08 0.08 99 Cents Only 0.08 0.08 0.07 0.03 0.01 Family Dollar 0.05 0.05 0.05 0.05 0.04 0.03 Dollar General 0.04 0.04 0.04 0.04 0.04 0.02

Net Profit Margin

0.000.010.020.030.040.050.060.070.080.090.10

2001 2002 2003 2004 2005 2006


Overall, the industry has an average of 5%. Dollar Tree has an average of 6%,

which is slightly above the industry average. This shows that Dollar Tree is more

profitable, in relation to its sales, than its competitors. Some might say that in the

discount variety industry it is better to have a lower net profit margin because it shows

that you are keeping your prices to consumers low. Ultimately, this is what this industry

competes on. Upon revision to the books, Net Income and Interest Expense increased

enough to change the overall ratio.

- 52 -

Asset Turnover: (sales/total assets)

Asset turnover ratio is a ratio measuring the amount of sales of the company in

relation to total assets. Sales are, of course, the number one factor in a company being

profitable and succeeding in the industry. A company wants this number to be high

when calculated out. A high number would indicate that they are efficiently utilizing

their assets and turning them into sales.

Asset Turnover 2001 2002 2003 2004 2005 2006Dollar Tree 2.31 2.16 1.91 1.89 2.16 Dollar Tree Revised 1.60 1.59 1.45 1.38 1.53 99 Cents Only 1.80 1.74 1.69 1.67 Family Dollar 2.64 2.54 2.54 2.55 2.59 Dollar General 2.50 2.76 2.79 2.94 3.04

Asset Turnover

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2001 2002 2003 2004 2005 2006


Dollar Tree’s Asset Turnover ratio went from 2.31 in 2002 to 2.16 in 2006. This

shows an overall decrease in asset turnover for the six year period, which is

unfavorable for the company. This means that in 2002 the company was generating

sales of $2.31 per asset dollar but that has slipped to sales of $2.16 in 2006 per asset

dollar. While this decrease is not overly alarming, it is still something the company

should be concerned about. As compared with the industry, Dollar Tree is third in asset

turnover behind Family Dollar and Dollar General for the six year span. Family Dollar

- 53 -

and Dollar General may either have more sales or less total assets to have achieved

these higher Asset Turnover ratios. Either way, they are making more sales per asset

dollar than is Dollar Tree. 99 Cent Only is last in the industry in Asset Turnover ratio. In

no one year did Dollar Tree have a higher Asset Turnover ratio than the industry

average. This is a concern because it shows that they are losing ground in the industry

in turning their total assets into sales. Since Dollar Tree’s Total Assets were increased

as a result of the revisions for Capital Leases.

Return on Assets: (net income/total assets)

Return on Assets is a ratio that measures a company’s amount of net income

returned from its total assets. It should be noted though that the net income number is

derived from the current year’s financial statements, where as the total assets come

from the previous year’s statements. This is because it is measuring the net income as

an investment of total assets and the investment needs time to manifest itself. The

company wants this number to be as high as possible. This indicates how well the

company is turning its total assets into net income over the span of a year.

Return On Assets (ROA) 2001 2002 2003 2004 2005 2006Dollar Tree 0.17 0.16 0.12 0.10 0.11 Dollar Tree Revised 0.16 0.16 0.15 0.12 0.13 99 Cents Only 0.17 0.13 0.05 0.02 Family Dollar 0.15 0.14 0.13 0.10 0.08 Dollar General 0.10 0.13 0.13 0.12 0.05

- 54 -

Return On Assets (ROA)

0.000.020.040.060.080.100.120.140.160.180.20

2001 2002 2003 2004 2005 2006


Dollar Tree went from a 17% return in 2002 to an 11% return in 2006. This

means that for every dollar invested in total assets the previous year, it yielded $1.17 in

2002, then declined to a yield of $1.11 in 2006. This declining number should be of

some concern to the company. Dollar Tree was the industry leader for two years before

falling into the pack the last three years. Family Dollar is most competitive with Dollar

Tree in this ratio. Dollar Tree has beat the industry average every year in the six year

time span, but this could be due to the very low average of 99 Cent Only. The declining

number over last six years for Dollar Tree is still unfavorable and should be of some

concern to the company. Revision to Dollar Tree’s books produced a increase in the

ROA ratio because even though Net Income and Assets both increases, Net Income

increased more.

Return on Equity: (net income/equity)

Return on Equity is much like ROA in that it measures the return on an

investment from one year to the next. In this ratio, the return on equity is measured in

terms of net income from one year to the next. Again, the net income figures need a

year to manifest itself from the investment of the equity the year earlier. A company

wants this number to be high.

- 55 -

Return On Equity (ROE) 2001 2002 2003 2004 2005 2006Dollar Tree 0.24 0.21 0.18 0.15 0.16 Dollar Tree Revised 0.32 0.30 0.27 0.25 0.27 99 Cents Only 0.18 0.14 0.06 0.02 Family Dollar 0.23 0.21 0.20 0.16 0.14 Dollar General 0.25 0.23 0.22 0.21 0.08

Return On Equity (ROE)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2001 2002 2003 2004 2005 2006


Dollar Tree went from a 24% return in 2002 down to a 16% return in 2006. This

means that for every dollar invested into equity in the six year span, there was a return

of $1.24 in 2002, down to a $1.16 return in 2006. Dollar Tree beat the industry average

every year in ROE, but this may be due to 99 Cent Only’s low numbers for the time

span. Family Dollar and Dollar General were very competitive with Dollar Tree in ROE

over the time span. Still the ROE for Dollar General has steadily decreased over the last

six years, which is unfavorable for the company. Net Income increased more as a result

of Capital Lease restructuring than Equity did.

Overall Profitability

It turns out that Dollar Tree is a profitable company compared to the other in the

Discount Variety industry. They lead the industry in the areas of Operating Profit

Margin, Net Profit Margin, Return on Assets, and Return on Equity. Dollar Tree

- 56 -

struggles in their asset turnover. They were third in their industry at 2.16 times per

year. The industry average was 2.3 times per year, and the industry leader in 2006

was Dollar General with 3.04 inventory turns per year. Overall, investors should be

please with Dollar Tree’s results from their profitability analysis.

Capital Structure Ratios:

Capital structure of a company includes the different financing activities that

were undertaken to acquire assets. There are two things to consider with analyzing

capital structure: “the amount of debt relative to the owners’ equity and the ability to

service the principal and the interest requirements on debt” (Financial Statement

Analysis hand-out).

Debt to Equity Ratio: (total liabilities/owners’ equity)

The Debt to Equity Ratio is a valuable tool for assessing the percentage of Total

Liabilities divided by the Total Equity in a firm. The lower this number is, the more

fiscally responsible a company is. This infers that a company is mostly financed by

equity and not debt and can be a good sign to banks and stockholders because of

liquidity concerns.

Debt To Equity Ratio 2001 2002 2003 2004 2005 2006Dollar Tree 0.38 0.31 0.46 0.54 0.53 0.60 Dollar Tree Revised 0.38 0.31 0.46 0.54 0.53 0.60

99 Cents Only

0.10

0.11

0.13

0.23

0.25

Family Dollar

0.46

0.52

0.51

0.59

0.69

1.09

Dollar General

1.45

0.81

0.68

0.69

0.74

0.74

- 57 -

Debt To Equity Ratio

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2001 2002 2003 2004 2005 2006


The four companies have had a pretty consistently low ratio spectrum. 99 Cent

Only Store has had a very consistently low ratio, since they are on average only 10%

debt financed by equity. Dollar Tree is in second place with an average of about 47%

debt financed by equity. Dollar Tree’s debt to equity did not change as a result of

revisions because they both increased simultaneously.

Times Interest Earned: (NIBIT/Interest Expense)

The Times Interest Earned ratio is the total operating income divided by the

interest expense. This ratio is best described as how well operating income covers the

interest charges. The bigger the number the more able the firm is to make their

interest payments.

Times Interest Earned 2001 2002 2003 2004 2005 2006Dollar Tree 28.37 42.40 39.18 31.90 18.32 18.84 Dollar Tree Revised 38.96 57.81 54.64 47.67 29.23 30.35 99 Cents Only

Family Dollar

24.23

Dollar General

8.16

10.72

16.23

19.34

21.42

7.11

- 58 -

Times Intrest Earned

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2001 2002 2003 2004 2005 2006


According to this graph all of the firms are able to make their interest payments

well. This is important for a thorough financial analysis because it lets investors and

lenders know how well the company can pay their interest payments with operating

income. 99 Cent Only cannot be used in comparison to the other companies because

they are an outlier in this particular category. Times Interest Earned Ratio increased as

a result of revision to the books because NIBIT changed more than Interest.

Debt Service Margin: (operating cash flow/notes payable-current)

Debt Service Margin is equal to operating cash flow divided by notes payable

(current). It is used to measure “the adequacy of cash provided by operations to cover

required annual installment payments on the principal amount of long-term liabilities”

(Financial Statement Analysis hand-out).

Debt Service Margin 2001 2002 2003 2004 2005 2006Dollar Tree 7.15 8.28 9.37 14.55 19.22 21.96 Dollar Tree Revised 8.97 10.34 12.38 19.55 25.11 28.66 99 Cents Only Family Dollar

Dollar General 0.67

26.78

31.11

30.31

63.23

50.17

- 59 -

Debt Service Margin

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2001 2002 2003 2004 2005 2006


Although a larger number is more desirable, 99 Cent Only cannot even be

compared to the others’ in its industry because it is an outlier. The industry average

that was computed is also not valid because of the outlier included in the computation.

Dollar General is very able to cover their installment payments with the amount of cash

that they generate each year. After the lease revisions, operating cash flow changed

with the change in net income. Therefore, it affected the Debt Service Margin.

Internal Growth Rate: (IGR = ROA(1-Div%))

The Internal Growth rate for a company explains how much the company is

growing its asset base through its retained earnings. That means that they do not use

any external funding to grow their total assets. This is important to show how the

company is growing without the use of debt in their capital structure. This equation is

found by multiplying a company’s return on assets by one minus its dividend payment.

The main driver for this model is the company’s return on its assets.

Year 2001 2002 2003 2004 2005 2006

Internal Growth Rate -

0.17

0.16

0.12

0.10

0.11

Over the five year time span our company has had an overall declining IGR. This

shows that we have been less and less able, over the years, to grow our asset base

- 60 -

using our own funds. This is most likely due to the growth plan of our company to

expand itself and open new retail stores. This is less than desirable, as we want our IGR

to be as high as possible, but our current results are not a big concern.

Sustainable Growth Rate: (SGR = IGR(1+(D/E))

Sustainable Growth Rate measures how much a company can grow itself without

having to borrow outside debt. This equation is computed by IGR multiplied by one plus

dividends over equity. The main driving factor for this model is the company’s IGR. The

higher the company’s IGR, the higher the SGR will be. The theory behind this is that the

more a company grows its assets internally, the more it can grow itself without using

financial leverage.

Year 2001 2002 2003 2004 2005 2006

Sustainable Growth Rate - 0.22

0.23

0.19

0.15

0.17

The overall trend for our company has been a decline in SGR. The reason for this

is because of the concurrent decline in IGR in the same years. This again is because of

the growth strategy of our company to open new retail locations. Although the numbers

are declining, they are not a big concern.

Cash to Cash Cycle: (Day’s Inventory Turnover * Day’s Accounts Receivables)

This model is a measure of how many days it takes a company to turn its

inventory into money. It takes into account two separate models; Day’s Inventory

Turnover and Days Accounts Receivables. The smaller the number of the Cash to Cash

Cycle the better, because it means that the company is being more efficient. The more

efficient a company is the less money it spends on operating expenses; this translates

into more net income.

Year 2001 2002 2003 2004 2005 2006 Cash to Cash Cycle

85.12

88.37

107.70

111.57

94.74

84.54

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Our company has a good cash to cash cycle. It showed an increase in three

years, but then recently decreased. Our company has a low Cash to Cash Cycle because

we have no accounts receivable, therefore it has a zero Day’s Account Receivable

collection period. This in turns leaves our cash to cash cycle to be our Day’s Inventory

Turnover. While that number may be a bit too high it still makes for a good Cash to

Cash Cycle day period

Overall Capital Structure

In relation to its competitors and the industry as a whole, Dollar Tree is only

mediocre in their capital structure. The Debt to Equity industry average was 53%.

Dollar Tree came in second behind 99 Cent Only. In the Times Interest Earned and

Debt Service Margins 99 Cent Only was an outlier. Therefore, we cannot compare the

other companies to 99 Cent Only. We now know that although Dollar Tree was better

able to make their interest payments than both Dollar General and Family Dollar, they

did not fair as well in generating enough cash to cover their installment payments.

Overall, Dollar Tree is in good standing when it comes to covering their debts.

Financial Statement Analysis

In this section, we will discuss the technique and method used for forecasting

Dollar Tree’s financial statements. The three financial statements forecasted are Income

Statement, Balance Sheet, and Cash Flow Statement. We forecasted these statements

for next ten years starting from 2007. Six years (2001 till 2006) of reported 10-Ks were

analyzed to determine trends, ratios, and any information disclosed regarding the future

of Dollar Tree. Similar information was gathered for Dollar General, Family Dollar

Stores, and 99 Cents Only Stores. Apart from 10-K’s, we also used 10-Q’s to verify and

adjust our assumptions. We also looked at Yahoo! Finance to compare our assumptions

with others analysts. Our forecast computation was made under the assumption that

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Dollar Tree is a “going concern” firm and that it does not look to terminate its business

activities in the foreseeable future.

Income Statement:

Dollar Tree Stores Inc.Forecasted Income Statement 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)

Net sales 1,987.27$ 2,329.19$ 2,799.87$ 3,126.00$ 3,393.90$ 3,969.40$ 12% 4,445.73$ 4,979.22$ 5,576.72$ 6,245.93$ 6,995.44$ 7,834.89$ 8,775.08$ 9,828.09$ 11,007.46$ 12,328.35$ Cost of sales 1,271.31 1,477.21 1,781.46 2,013.50 2,221.50 2,612.20 2,934.18 3,286.28 3,680.64 4,122.31 4,616.99 5,171.03 5,791.55 6,486.54 7,264.92 8,136.71 Gross profit 715.96 851.97 1,018.41 1,112.50 1,172.40 1,357.20 34% 1511.55 1692.93 1896.09 2123.62 2378.45 2663.86 2983.53 3341.55 3742.54 4191.64

Selling, general and administrativeexpenses 512.09 598.05 724.82 819.00 888.50 1,046.40 26% 1,155.89$ 1,294.60$ 1,449.95$ 1,623.94$ 1,818.81$ 2,037.07$ 2,281.52$ 2,555.30$ 2,861.94$ 3,205.37$

Operating income 203.87 253.92 293.60 293.50 283.90 310.80 8% 355.66$ 398.34$ 446.14$ 499.67$ 559.64$ 626.79$ 702.01$ 786.25$ 880.60$ 986.27$

Interest income 3.57 3.53 2.65 3.90 6.80 8.60Interest expense (7.19) (5.99) (7.49) (9.20) (15.50) (16.50)

Income before income taxes 200.25 251.46 288.75 288.20 275.20 302.90 7.84% 348.55$ 390.37$ 437.21$ 489.68$ 548.44$ 614.26$ 687.97$ 770.52$ 862.98$ 966.54$

Provision for income taxes 77.17 96.81 111.17 107.90 101.30 110.90

Net income 123.08$ 154.65$ 177.58$ 180.30$ 173.90$ 192.00$ 5.50% 244.52$ 273.86$ 306.72$ 343.53$ 384.75$ 430.92$ 482.63$ 540.54$ 605.41$ 678.06$

Actual Forcasted

In preparing our forecasts for Income Statement, we noticed a trend which

Dollar Tree’s Income Statements had followed from 2001 till 2006. We assumed that

sales for Dollar Tree would grow at 12% for next 10 years. This assumption is made by

looking at the past two year’s growth of 12.76%, as well as, keeping in mind the

Yahoo! Finance reported growth to be 10.3% for 2007. We chose 12% as we believe

that the net sales could go down however, the new acquisitions and business plan

adopted by Dollar Tree would help it to keep the growth around the 12% range. We

also verified our assumption with 10-Q for the first quarter of 2007. We also assumed

our Gross Profit to be 34% of net sales. Past 5 years trend shows that the average

Gross Profit was 36% of sales. However, Dollar Tree has managed to keep its Gross

Profit at the range of 33% to 36% of their Sales. 10-Q for the first quarter of 2007

shows that Gross Profit for Dollar Tree is 33% of their sales however, we also noticed

that Dollar Tree usually pulls its gross profit in the later quarters of the years. We also

have noticed a patter in the Interest section of the Dollar Tree’s Income Statement. We

computed Net Interest Income (Expense) divided by income before income taxes and

got the result around 2% each time. A similar pattern was shown in their 10-Q’s also.

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Therefore, we assumed the net interest income (Expense) to be 2% of Income before

Income Tax. Apart from this, we mostly used the 6 years average to forecast Dollar

Tree’s Income Statement.

Income Statement with Capital Lease Corrections:

Income Statement with capital lease corrections was computed across the actual

and forecasted years. We were able to do this because future net income is not

dependent on the previous period’s net income. The corrections in the capital leases

resulted in the actual years’ net income being higher in the forecasted years. This is

because of the present value change in expenses of capital lease expense, interest

expense, and depreciation expense.

Balance Sheet: Dollar Tree Stores Inc.Forecasted Balance Sheet 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)

ASSETSCurrent assets:Cash and cash equivalents 236.65 292.19 168.69 106.53 65.80 85.00Short-term investments 0.00 43.78 0.00 211.28 274.00 221.80 11.90% 284.67$ 318.83$ 357.09$ 399.95$ 447.94$ 501.69$ 561.89$ 629.32$ 704.84$ 789.42$ Merchandise inventories 296.47 357.67 525.64 615.48 576.60 605.00 4.09 717.40 803.49 899.91 1,007.90 1,128.85 1,264.31 1,416.03 1,585.95 1,776.26 1,989.42 Deferred tax assets 8.88 10.41 11.72 8.07 10.80 10.70Prepaid expenses and other current assets 18.78 12.09 16.53 28.53 16.50 36.50Total current assets 560.78 716.14 722.57 969.89 943.70 959.00 51.70% 1,236.77$ 1,385.19$ 1,551.41$ 1,737.58$ 1,946.09$ 2,179.62$ 2,441.17$ 2,734.11$ 3,062.20$ 3,429.67$

Property, plant and equipment, net 279.01 344.32 613.21 685.39 681.80 715.30 38.00% 909.04$ 1,018.12$ 1,140.30$ 1,277.14$ 1,430.39$ 1,602.04$ 1,794.28$ 2,009.60$ 2,250.75$ 2,520.84$ Intangibles, net 45.79 41.42 123.74 129.03 129.30 146.60 7.80% 186.59$ 208.98$ 234.06$ 262.15$ 293.61$ 328.84$ 368.30$ 412.50$ 462.00$ 517.44$ Other assets, net 16.46 14.50 20.79 8.37 43.60 52.40 2.50% 59.81$ 66.98$ 75.02$ 84.02$ 94.10$ 105.40$ 118.04$ 132.21$ 148.08$ 165.84$ Total Non Current Assets 341.27 400.24 757.74 822.79 854.70 914.30 48.30% 1,155.44$ 1,294.09$ 1,449.38$ 1,623.31$ 1,818.10$ 2,036.28$ 2,280.63$ 2,554.30$ 2,860.82$ 3,204.12$

TOTAL ASSETS 902.05$ 1,116.38$ 1,480.31$ 1,792.67$ 1,798.40$ 1,873.30$ 2.07 2,392.21$ 2,679.27$ 3,000.79$ 3,360.88$ 3,764.19$ 4,215.89$ 4,721.80$ 5,288.41$ 5,923.02$ 6,633.79$

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt 25.00 25.00 25.00 19.00 19.00 18.80Accounts payable 58.09 59.45 114.97 124.20 135.60 189.20 25.30% 244.61$ 247.25$ 250.21$ 253.53$ 257.24$ 261.39$ 266.05$ 271.26$ 277.10$ 283.65$ Other current liabilities 79.09 94.02 88.10 117.49 99.20 132.00Income taxes payable 38.85 28.04 37.04 33.67 41.70 43.30Total current liabilities 201.02 206.51 265.10 294.36 295.50 383.30 56.70% 548.20$ 554.12$ 560.75$ 568.18$ 576.50$ 585.81$ 596.25$ 607.93$ 621.02$ 635.68$

Long-term debt, excluding current portion 12.00 6.00 142.57 250.00 250.00 250.00Deferred tax liabilities 0.00 9.90 29.72 42.08 23.50 1.50Other liabilities 37.28 38.56 28.39 42.03 57.10 70.80Total Non Current Liablities 49.28 54.46 200.68 334.11 330.60 322.30 43.30% 418.64$ 423.16$ 428.23$ 433.90$ 440.25$ 447.37$ 455.33$ 464.26$ 474.25$ 485.45$

Total liabilities 250.31$ 260.97$ 465.78$ 628.46$ 626.10$ 705.60$ 966.84$ 977.28$ 988.98$ 1,002.08$ 1,016.75$ 1,033.18$ 1,051.58$ 1,072.19$ 1,095.28$ 1,121.13$

Shareholders' equity:Common stock, par value $0.01. 300,000,000 sharesauthorized, 99,663,580 and 106,552,054 sharesissued and outstanding at February 3, 2007and January 28, 2006, respectively 1.13 1.14 1.14 1.13 1.10 1.00Additional paid-in capital 167.15 217.27 208.87 177.68 11.40 0.00Unearned Compensation 0.00 (0.12) 0.06 0.10 0.00 0.00Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) 0.10 0.10Retained earnings 483.84 638.49 805.54 985.79 1,159.70 1,166.60 1,411.12$ 1,684.97$ 1,991.69$ 2,335.22$ 2,719.97$ 3,150.89$ 3,633.52$ 4,174.06$ 4,779.47$ 5,457.53$ Total shareholders' equity 651.74$ 855.40$ 1,014.52$ 1,164.21$ 1,172.30$ 1,167.70$ 99% 1,425.37$ 1,701.99$ 2,011.81$ 2,358.81$ 2,747.44$ 3,182.71$ 3,670.22$ 4,216.22$ 4,827.75$ 5,512.66$

Total Shareholders' Equity and Total Liablities 2392.21 2679.27 3000.79 3360.88 3764.19 4215.89 4721.80 5288.41 5923.02 6633.79Error Check -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Actual Forcasted

(Also in Appendices)

Balance sheet forecast was performed in much similar way as the Income

Statement. The only difference would be that we considered the pattern in which the

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Industry was moving when constructing the forecasts for Dollar Tree’s Balance Sheet.

The industry average for asset turnover ratio was 2.49 for the past 5 years. However,

Dollar Tree’s highest asset turnover was 2.31. Therefore, we assumed that Dollar Tree

would maintain the Asset Turnover ratio of approximately 2.07 for the next 10 years.

We used the Asset Turnover ratio to compute total assets for Dollar Tree. We used the

ratio as shown below:

Asset Turnover = (Sales/Total Assets)

Therefore, Total Assets = (Sales/Asset Turnover).

We similarly, used Inventory Turnover ratio to compute the inventory for next 10

years. Other items in the asset section were either forecasted using the ratios, or by

using the average of the past 5 years.

The liabilities and shareholders’ equity section was computed from the total asset

benchmark number we forecasted for 10 years. We worked backwards to compute the

numbers for this section. We also used ratios and trends to identify and justify our

choices. We skipped some areas where we could not make assumptions based on the

historical data provided. An example of this would be in the area of common stock and

APIC (Additional Paid in Capital) as these activities are influenced more by the stock

market than by the nature of the business.

Forecasted Balance Sheet with Capital Lease Corrections:

For the revised Balance Sheets, which is disclosed in the appendices, we had to

find the total present values of the lease schedules. These capital leases were equally

added into the assets and liabilities sections. As the forecasted years progressed, the

leases were being paid off so the asset and liability values of the leases were

decreasing.

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Actual Years’ Balance Sheet with Capital Lease Corrections:

For the years 2001 to 2006 we went back and corrected the actual Balance

Sheet for capital lease corrections. This involved computing a present value lease chart

for each year. Once the value of these leases was computed they were added back

into the assets and liabilities for each individual year. We made a conscience decision

to separate this Balance Sheet from the forecasted Balance Sheet. The reason for this

being that it would have significantly distorted our previously forecasted retained

earnings.

Cash Flow Statement:

Dollar Tree Stores Inc.Forcasted Cash Flow Statement 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions)

Net income (loss) 123.08 154.65 177.58 180.25 173.92 192.00 53% 244.52$ 273.86$ 306.72$ 343.53$ 384.75$ 430.92$ 482.63$ 540.54$ 605.41$ 678.06$ Depreciation & amortization 53.76 71.62 101.50 129.29 140.72 159.00 (Gain) loss on disposal of property & equip 1.73 1.60 4.02 2.80 3.32 - Cumulative effect of change in acctg princ - - - - - - Change in lease loss - - - - - - Chng in fair val of non-hedging int rate swap 1.72 1.47 (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt - - - - - - Provision of deferred income taxes (6.22) 16.44 21.06 15.58 (21.50) (21.90) Tax benefit of stock option exercises 2.35 10.70 5.62 2.14 1.18 - Stock based compensation expense - - - - - 6.70 Other non-cash adjustments to net income 1.32 0.31 0.59 2.11 5.53 5.10 Merchandise inventories (37.79) (61.19) (61.17) (89.84) 38.94 (6.20) Prepaid expenses & other current assets 10.59 6.71 (0.43) (0.40) - - Other assets (0.94) (1.00) (1.42) 0.93 (5.56) (19.80) Accounts payable (17.31) 1.36 (29.14) 9.22 11.36 53.70 55.41$ 247.25$ 249.96$ 8.91$ 9.98$ 11.18$ 12.52$ 14.03$ 15.71$ 17.60$ Income taxes payable 15.40 (10.81) 16.91 (3.37) 8.03 1.60 Other current liabilities 28.31 13.02 0.80 15.32 (6.41) 31.80 Other liabilities 2.72 2.01 (0.75) 13.50 16.39 10.80 Total adjustments - - - - - - Net cash flows from operating activities 178.73$ 206.88$ 234.29$ 276.49$ 365.15$ 412.80$ 461.35$ 516.71$ 578.72$ 648.16$ 725.94$ 813.05$ 910.62$ 1,019.90$ 1,142.28$ 1,279.36$

Capital expenditures (121.57) (136.13) (227.32) (181.78) (139.25) (175.30) -41.00% (189.15)$ (211.85)$ (237.27)$ (265.75)$ (297.64)$ (333.35)$ (373.35)$ (418.16)$ (468.34)$ (524.54)$ Acquisition, net of cash acquired - - - - - - Purchase of Greenbacks, Inc. net - - (100.52) - - - Investment in Ollie's Holdings, Inc. - - (4.00) - - - Purchase of short-term investments - (60.28) (30.36) (465.82) (885.48) (1,044.40) Proceeds from sales of short-term investments - 16.50 93.89 339.04 822.81 1,096.60 Purchase of Deal$ assets, net - - - - - (54.10) Acquisition of favorable lease rights - (0.81) (0.11) (6.85) (3.65) (4.20) Purchase of restricted investments - - - - (29.94) (9.30) Proceeds from sale of property & equipment 0.10 0.22 0.04 - - - Settlement of merger-related contingencies - 6.69 1.02 - - - Net cash flows from investing activities (121.47)$ (173.82)$ (267.36)$ (315.41)$ (235.51)$ (190.70)$ 83.00% (227.90)$ (255.24)$ (285.87)$ (320.18)$ (358.60)$ (401.63)$ (449.83)$ (503.80)$ (564.26)$ (631.97)$

Distributions paid - - - - - - Proceeds from long-term debt - - - 248.91 - - Principal payments under long-term debt & cap - - - - - (0.60) Proceeds from revolving credit facilities 82.00 - 39.70 - - - Repayment of long-term debt - - - (148.57) - - Net change in notes payable to bank - - - - - - Repayments of revolving credit facilities (82.00) - (39.70) - - - Repayment of long-term debt & facility fees (6.24) (6.03) (11.67) - - - Principal payments under capital lease obligs (3.56) (3.97) (7.99) (5.57) (0.60) - Principal payments on shareholder loans - - - (48.61) - - Payments for share repurchases (3.78) - (38.05) - (180.40) (248.20) Proceeds from senior notes - - - - - - Repayment of credit facility fees - - - - - - Proceeds from sale-leaseback transaction - - - - - - Proceeds from stock issued pursuant to stock- 11.81 32.48 22.18 15.11 10.67 40.30 Tax benefit of stock options exercised - - - - - 5.60 Net cash flows from financing activities (1.77)$ 22.48$ (35.54)$ 61.26$ (170.33)$ (202.90)$

Net incr (decr) in cash & cash equivalents 55.49 55.54 (68.62) 22.34 (40.70) 19.20 Cash & cash equivs at beginning of year 181.17$ 236.65$ 237.30$ 84.19$ 106.53$ 65.80$ Cash & cash equivalents at end of year 236.65$ 292.19$ 168.69$ 106.53$ 65.83$ 85.00$ Cash paid for interest, net of amount capital 5.14 3.69 7.25 8.12 11.82 14.90 Cash paid for income taxes 65.69 82.42 70.17 93.40 113.86 125.50

Actual Forcasted

(Also in Appendices)

Computation of Cash Flow Statement is one of the most difficult activities which

an analyst performs. We used our net sales to start up with CFFO (Cash Flows from

Operations) and moved forward to compute our Net Cash Flow from Operations. We

verified our forecasts using the ratios of CFFO/OI, as well as Net Cash Flow from

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Operations/NI. Also, we noticed that accounts payable in the CFFO was directly

influenced by the Balance Sheet account payable item as the difference between the

current year and past year that were used to compute the number in the CFFO. Also,

we computed capital expenditure by using the negative 41% of Net Cash Flows from

Operations. This 41% was computed by dividing capital expenditure from Net Cash

Flow from Operating and taking the average of the past five years. Similarly, we also

noticed that Net Cash Flow from Investing Activities was directly influenced by the

capital expenditure and we noticed that when we divide capital expenditure from Net

Cash Flow from Investing Activities we were constantly getting results of around 85%.

This provided us the confidence to use 83% for computing our Net Cash Flows from

Investing Activities.

Analysis and Forecasting Conclusion:

Since we have forecasted the financials of Dollar Tree, we believe that they will

continue to grow for at least 12% every year. However, we also noticed that they have

been consistent in acquiring new businesses by mergers in recent years. Therefore, we

cannot determine if they stop these acquisition activities whether their growth would

decline or stabilize. Also, Dollar Tree is trying to reach more consumers by adding

refrigerators in their stores to carry grocery type products which could increase their

customer base as well as increase their future sales. These are some concerns which

we tried to overcome because they could adversely effect our forecasting.

Analysis of Valuations

A Valuation Analysis is crucial to an investor as it provides him/her with a better

understanding of the firm’s future. Assumptions as to whether the firm is undervalued,

fairly-valued, or overvalued, is made after the firm’s valuation is complete. There are

two valuations methods used in assessing the value (price) of Dollar Tree’s stock.

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The first method of valuation is the method of comparables. This method

requires the use of various ratios such as: Trailing & Forecast Price-Earnings, Price to

Book, Dividend Yield, P.E.G., Price over EBITDA, Price over Free Cash Flow per Share,

and Enterprise Value over EBITDA. These ratios of competitive firms are calculated and

then averaged. After that, these ratios are used as a benchmark of the industry. The

price is computed for a given firm, in our case it is Dollar Tree. For this computation an

assumption is made that the given firm would follow the same trend and patterns that

its competitors are following.

The second method of valuation is the intrinsic valuation method. This method of

valuation requires the use of elaborated forecasts and prior years’ analysis. This method

helps in justifying if the firm is overvalued, undervalued, or fairly-valued. Discounted

Dividends, Discounted Free Cash Flows, The Residual Income Method, The Residual

Income Perpetuity, and the Abnormal Earnings approach, are some of the models which

are computed in this valuation. However, in the case of Dollar Tree, we managed to

skip Discounted Dividends model because they are a non dividend paying firm. They

have yet to pay any dividends from the time of its initial pubic offering.

Weighted Average Cost of Capital

For financially valuing a company it is important to make a structural model of

their financing activities. One useful model for this is to use the WACC. The WACC

effectively weights the company’s debts and equities and takes them by the rates of the

market. To find the input data for the model there is a process to derive the numbers.

The first step is to find the cost of equity, Ke.

CAPM Model

To find the value of Ke one must use the CAPM model. To use this model one

must have values for the risk free rate, beta, and the market risk premium. For our

input value of the risk free rate we used data collected from the St. Louis Federal

Reserve. We collected rates of Treasury Bills of 3 months, 6 months, 2 years, 5 years,

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and 10 years. By putting this data into a regression analysis we found that the Beta

with the highest explanatory rate, R^2, was the 10 year T-Bill rate of 4.75%. The Beta

produced by this rate was 1.72 and had an R^2 of 35.74%. The 1.72 for Beta means

that our company has a high systematic risk when compared to the market. For our

market risk premium value we used 7%. We came to this value, because historically the

market returns for large firms on the S&P 500 have been somewhere between 7-10%.

Currently firms have been earning around 3-5%. We believe that the market will return

to its historical returns but we went with the low end of the spectrum taking into

account the current state or the market. By entering all of these values into the CAPM

model we arrived at a Ke of 16.79%.

CAPM- Ke= .0475+1.72(.07)

Now having our cost of equity, Ke, we put the rest of our values into the WACC

model. This included breaking down our liabilities into separate accounts and assigning

them the proper interest rate taken from our 10-K. After weighting and rating our debt

we calculated a cost of debt, Kd, of 5.47%. We then took the weight of debt divided by

the cost of debt and the weight of equity divided by the cost of equity. This gave us a

before tax WACC of 15.94%.

WACC bt= (705.6/1873.3)*.054+(1167.7/1873.3)*.167

Debt Equity

Then we took our calculated WACC and weighted the debt portion by the tax

corporate tax rate of 35%. This resulted in an after tax WACC of 11.81%.

WACC at= ((705.6/1873.3)*.036)*.65+ (1167.7/1873.3)*.167

Debt Tax Equity

The cost of debt numbers are straight from the Dollar Tree 10K.

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Dollar Tree

Current Liabilites Weight Rate Value Weighted Rate

Current Portion of Long Term Debt 18.8 0.0266

0.0540 0.144%

Accounts Payable 189.2 0.2681

0.0543 1.456%

Other Current liabilites 132 0.1871

0.0519 0.971%

Income Taxes Payable 43.3 0.0614

0.0519 0.318%

Total Current Liabilites 383.3 Long Term Debt, excluding current portion 250

0.3543

0.0580 2.055%

Deffered tax liabilites 1.5 0.0021

0.0485 0.010%

Other Liabilites 70.8 0.1003

0.0519 0.521%

Total Liabilites 705.6 Kd= 5.475%

After Tax Kd= 3.559%

Shareholdres Equity 1167.7 Ke= 16.790%Market Value of Equity 4518.87261

WACC= 15.94% After Tax WACC= 11.81%

Method of Comparables

The Method of Comparables uses a set of ratios that help a prospective or

current investor to analyze what a firm’s value is when compared with the value or ratio

of the industry. We used Dollar General, Family Dollar, and 99 Cents Only, to get an

industry ratio. Then, we worked backwards to compute the price of Dollar Tree’s stock

given these ratios. Since we noticed that 99 Cents only ratios were much different than

the other two businesses, we decided to mark 99 Cents Only as an ‘outlier’ and did not

include them when computing our averages.

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Trailing Price to Earnings

Trailing Price to Earnings Ratio is calculated by taking the current share price and

dividing it by the past twelve month’s earnings per share.

Remark P/E (Trailing) Price/Earning

Dollar Tree (DLTR) Dollar General (DG) 54.5400 Family Dollar (FDO) 22.4600 99 Cent Only (NDN) (Outlier) 95.7600

Industry Average without DLTR n NDN 38.5000

Dollar Tree Current Selling Price (Jun 1, 2007) 42.4100

DLTR - Share Price 41.7756

We computed the same for all our competitors and then took an average of

Dollar General and Family Dollar to get an industry average. We then set this average

equal to the Dollar Tree Trailing Price to Earning Ratio and solved to get our price

based on this model. We got the result of $41.78, which when compared to its current

selling price shows that the firm is fairly valued (as the overvaluation is of around 60

cents) when compared with the industry average of this ratio.

Forecast Price to Earnings

Forecast Price to Earnings is a measure of the price-to-earnings ratio (P/E) using

the forecasted earnings. It is calculated by dividing the Market Price per Share by the

Expected Earning per share.

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Remark P/E (Forecast) Price/Earning





Again, we calculated it for all our competitors and used that average as a

benchmark to get the Price for Dollar Tree’s share. The Industry average excluding

Dollar Tree and 99 Cents Only (because of outlier) is 22.015. We used this number and

our forecasted earnings for Dollar Tree to compute the price. Below is the description of

how we used the forecast Price to Earning Ratio to compute the price.

Dollar Tree’s Forecast P/E = Industry Average P/E

Therefore, Dollar Tree’s ‘P’ = Industry Average P/B * Dollar Tree’s ‘E’

40.73 = 22.02 * 1.85

Dollar Tree’s current selling price is 42.41 per share. The price according to the

calculation of forward P/E ratio is 40.73 per share. According to this ratio, Dollar Tree

is fairly valued. The difference in the current selling price and the computed price from

the ratio is not enough of a difference to say that the stock price of Dollar Tree is

overvalued.

Price to Book Value

The Price to Book ratio is used to compare a stock's market value of a firm to its

book value. It is calculated by dividing the current closing price of the stock by the

latest quarter's book value per share.

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Remark P/B Price/Book Value





We computed this ratio and got an industry average of 3.885 without having 99

Cents Only in our computation. We used this ratio and set it equal to Dollar Tree’s Price

to Book Value ratio to solve for the price. This computation was done in a much similar

way shown below:

Dollar Tree’s P/B = Industry Average P/B

Therefore, Dollar Tree’s ‘P’ = Industry Average P/B * Dollar Tree’s ‘B’

42.58 = 3.89 * (1167.7 / 116.552)

We got the Book Value of Dollar Tree from their latest (2007) published 10-K.

Dollar Tree’s current selling price is 42.41. The Price of Dollar Tree according to our

calculation using the P/B ratio is $42.58. Again, we found that the difference (which is

of around 17 cents) isn’t enough to say if the firm is undervalued; hence we concluded

that Dollar Tree is ‘fairly valued’ when using P/B ratio method of comparables.

Dividend Yield

The Dividend yield is a ratio that shows how much a company pays out in

dividends each year relative to its share price. In the absence of any capital gains, the

dividend yield is the return on investment for a stock. Dividend yield is a way to

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measure how much cash flow you are getting for each dollar invested in an equity

position. This ratio is calculated by taking the Annual dividends per share and dividing

it by the price per share.

Remark D/P Dividend/Price

Dollar Tree (DLTR) Dollar General (DG) 0.0046 Family Dollar (FDO) 0.0034 99 Cent Only (NDN) (Outlier) -



DLTR - Share Price N/A

We did similar for our competitors and got a ratio of about .004. This ratio could

be set and used to compute the price of Dollar Tree’s stock. However, Dollar Tree is a

non dividend paying firm; thus, we could not use this ratio for determining the price of

Dollar Tree’s stock.

P.E.G.

P.E.G. is a ratio used to determine a stock's value while taking into account the

earnings growth. It is calculated by taking the P/E Ratio and dividing it by the Annual

EPS growth.

Remark P.E.G. (P/E)/(1-Year Growth Rate)





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We computed the P.E.G. for the industry and averaged it to get a result of 1.77.

The industry P.E.G. ratio was then compared to Dollar Tree’s P.E.G. ratio to get a price

(P). This computation was performed in much similar way as shown below:

Dollar Tree’s P/ (E/G) = Industry Average P.E.G.

Therefore, Dollar Tree’s ‘P’ = Industry Average P.E.G * Dollar Tree’s ‘E’ * ‘G’

18 = 1.77 * 1.85 * 5.5%

Dollar Tree’s current selling price is $42.41 per share. The price according to the

P.E.G ratio is $18.01 per share. According to this ratio Dollar Tree is overvalued

because the selling price is more than what the P.E.G. ratio estimates it to be.

P/EBITDA

This Ratio is used to calculate the estimated price per share of a firm. It is

calculated by dividing the Price by the Earnings before Interest, Taxes, Depreciation,

and Amortization (EBITDA).

Remark P/EDITDA Price/EDITBA

Dollar Tree (DLTR) Dollar General (DG) 0.0496 Family Dollar (FDO) 0.0625 99 Cent Only (NDN) (Outlier) (4.5338)




- 75 -

We computed this ratio for the industry first and then used the average of the

Industry to benchmark to compute the price of the stock for Dollar Tree. Our

computation for this ratio is similar to the one as shown below:

Dollar Tree’s P/EBITDA = Industry Average P/EBITDA

Therefore, Dollar Tree’s ‘P’ = Industry Average P/EBITDA * Dollar Tree’s EBITDA

17.42 = 0.056 * 310.8

When we completed our computation the price we got for Dollar Tree is $17.42. This

price is extremely low when compared with the price at which Dollar Tree’s stocks are

currently traded. Hence, according to this ratio Dollar Tree is overvalued.

Price/Free Cash Flows

Price to Free Cash Flows is another ratio that is used to determine the estimated

price per share of the firm. It is calculated by taking the Price per Share and dividing it

by the Free Cash Flows.

Remark P/(FCF per share) Price/Free Cash Flows

Dollar Tree (DLTR) Dollar General (DG) 0.1753 Family Dollar (FDO) 0.0603 99 Cent Only (NDN) (Outlier) (4.5338)




Free Cash Flows is calculated as:

FCF = CFFO +(-) CFFI

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Once the calculation is performed for the industry we took the average of the

result and compared it to the Price to Earning ratio of Dollar Tree. Our computation to

get the price for Dollar Tree was done in the same pattern as shown below:

Dollar Tree’s P/FCF = Industry Average P/FCF

Therefore, Dollar Tree’s ‘P’ = Industry Average P/FCF * Dollar Tree’s FCF

7.20 = .1178 * 400.6

Our result showed that the Dollar Tree’s price based on this valuation method

should be $47.20. This means that Dollar Tree is undervalued when compared to its

current selling price at the market.

Enterprise Value/ EBITDA

Enterprise Value to EBITA is one more ratio to estimate the price of a firm. It is

calculated by taking the Enterprise value (EV) and dividing it by the EBITDA. We

computed the Industry EV/EBITA and then averaged it to benchmark for our

computation of Dollar Tree’s stock price.

Remark (Enterprise value)

/(EBITDA)





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Our calculation shows that Dollar Tree’s estimated price according to this ratio is

$33.20 and the actual selling price of their stock is $42.41. This concludes that Dollar

Tree is overvalued as the estimated price is less than the current selling price.

Overall Method of Comparables Valuation

The Trailing P/E, forward P/E, and P/B ratios, support Dollar Tree as being a

fairly valued firm. The P.E.G, P/EBITDA, and Enterprise Value/EBITDA, ratios show that

this firm is overvalued. The Price/Free Cash Flows ratio proves that Dollar Tree is

slightly undervalued. So, all these ratios do guide us in making some conclusions, yet, it

distorts our accuracy estimation when trying to determine whether the firm is

overvalued or fairly valued. Since both the overvalued and undervalued decision can be

backed up by three ratios, we could not come up with a clear result and would rely on

Intrinsic Valuation to provide us with a better understanding of the firm’s value.

Intrinsic Valuation Methods

The Intrinsic Valuation Method examines five methods for predicating a firm’s

adjusted share price. It takes into account past year’s earnings, dividends, and book

values for Dollar Tree and its competitors. There are five different models that analysts

use to value the firm. These are Discounted Dividends models, Discounted Free Cash

flows model, The Residual Income Method, Residual Income Perpetuity, and Abnormal

Earnings Approach.

Discounted Dividend Model

The discount dividend model values a company’s share price based on dividends

and future dividends paid out. To compute the DD model one needs for the company

forecasted financial statements of dividends and a calculated cost of equity. The DD

model does the poorest job of explaining the way which stock price is driven by the

company’s actions regarding dividends. Dollar Tree does not pay dividends; therefore, it

is not applicable to compute the DD model for Dollar Tree.

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Free Cash Flow Model

The Free Cash Flow model is a valuation model that values a company based on

estimated future cash flows of the company. The model explains the value of the firm

by discounting back all future cash flows minus future liabilities. To calculate the FCF

model one needs forecasted cash flows from operations, forecasted cash flows from

investing, forecasted liabilities, a calculated WACC, and an observed share price. By

taking the forecasted CFFO and CFFI difference a FCF value is found. This can then be

valued at a present value. After these future liabilities are taken out, this market value

of equity is divided by the number of shares outstanding. This then gives you the

intrinsic value of price per share for the company according to FCF model. The biggest

factors affecting this model are how the future cash flows is forecasted out and how the

WACC is calculated out. Because of the degree of estimation in these forecasts and

calculations the explanation of the results of FCF is fairly small.

Sensitivity Analysis 0.08 0.1 0.12 0.13 0.14

0.2 16.19 17.92 20.5 22.35 24.81 0.18 20.95 2.99 29.05 33.09 39.17

0.1594 28.35 34.44 46.73 59.13 84.34 0.14 39.94 54.02 96.26 180.71 - 0.12 63.62 113.67 - - -

Observed Price-$42.41

The sensitivity graph above shows that within reasonable growth and Ke rates

that our firm is mostly either undervalued or overvalued. This sensitivity graph shows

how volatile that the FCF model is to changes in rates for Ke and growth. This is

because the FCF model explains little with accuracy about what happens between the

workings of a company and its share price.

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Residual Income Model

The RI model is a financial model that values a company’s stock price. It is the

model with the highest degree of explanatory value of the intrinsic value. The model

values the company by the book value of equity plus the present value of value added

by residual income to the company. This means that the company is worth its physical

being plus any future value added over the cost of doing business. To use this model

one must have equity from projected financial statements, a calculated cost of equity,

and a current share price. By calculating these values into the model and weighing it in

a per share basis, it will result in a quantitative intrinsic value of the company. For our

company we took our forecasted net income and dividends to produce an annual book

value of net income. Then, using our calculated Ke of 16.79% we discounted the future

cash flows back into present values. From there we compared these numbers to the

benchmark values that the company must meet to either create or destroy value, which

was calculated using Ke. From our calculations of the RI model we found that our

company’s PV of RI is continually beating the benchmark, and therefore adding value.

The rate at which it is beating the benchmark though is decreasing. In a rational market

the cost of equity will converge with the rate at which our company is beating the

market, which will result in a long run RI of zero.

G Ke 0 -0.05 -0.1 -0.15 -0.2

0.21 7.70 7.68 7.67 7.66 7.66 0.19 8.98 8.96 8.94 8.93 8.92

0.1679 10.69 10.65 10.63 10.61 10.6 0.15 12.35 12.3 12.27 12.25 12.23 0.13 14.57 14.5 14.45 14.43 14.41

Observed Price- $42.41

The graph above shows that according to the RI model our company is

overvalued. It shows not to be very price sensitive to changes in Ke or growth

estimations. This allows us to say with a high degree of confidence from the RI model

that our company is overvalued. From the RI model we can see that most of our

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company’s value lies in its ability to produce RI. This means that our company

continually makes more money than it costs them to fund the business. Dollar Tree has

some value in initial value of equity, and very little in perpetuity. This is most likely

because our company does not pay dividends and since the RI will converge to zero,

there is not much value in future estimates.

Residual Income Perpetuity

The Residual Income Perpetuity is a model that values the company on the basis

of return on equity and the calculated Ke.

=BVEo+BVEo*((ROE-Ke)/(Ke-g))

This ratio measures the intrinsic value of the company stock price as driven by

the book value of equity. This model shows a fairly high level of significance in

explaining how the factors in the equation drive the intrinsic stock price.

Growth Ke 0.12 0.14 0.16 0.18 0.2

0.21 3.03 2.79 2.34 1.3 -3.9 0.19 3.32 3.1 2.58 4.68 7.75

0.1679 3.93 3.99 4.36 3.51 3.72 0.15 5.09 7.64 0 2.55 3.06 0.13 11.38 -3.79 1.26 2.28 2.71

ROE Ke 0.12 0.14 0.16 0.18 0.2

0.21 0.39 1.17 1.95 2.73 3.51 0.19 -0.65 0.65 1.94 3.23 4.52

0.1679 -7.81 -2.94 1.92 6.79 1.66 0.15 9.55 5.73 1.91 -1.91 -5.73 0.13 4.42 3.16 1.9 0.63 -0.63

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ROE Growth 0.12 0.14 0.16 0.18 0.2

0.12 0 2.72 3.53 4.33 5.13 0.14 0.54 1.92 3.3 2.76 6.06 0.16 -7.81 -2.94 1.92 6.79 11.966 0.18 11.45 8.28 5.1 1.92 -1.26 0.2 6.71 5.52 4.32 3.12 1.92

From this model we calculated that our company is overvalued. This is because

Dollar Tree’s intrinsic value does not have the present value contributions of dividends.

The lack of a presence of dividends is contributing to the company being overvalued

because they do not have the present value of future dividends and the expected stock

price can not be accommodated for.

Abnormal Earnings Growth

The AEG model is a valuation model used to determine the intrinsic market price

of a share. The AEG valuation model is a representation of how DRIP income (Dividend

Reinvestment & Repurchase Plan) can affect Earnings, and the intrinsic price per share.

Ideally the AEG model will eventually converge to the P/E ratio. DRIP is computed by

Dividend in the Previous Year multiplied by Cost of Equity. Abnormal Earnings Growth

Model assumes dividends should be reinvested and should gain value as the years go

by. As a measure of consistency between financial statements and valuations, there

should be a linkage between annual AEG and the change in residual income.

Ke g 0.21 0.19 0.1679 0.15 0.13 0 4.54 5.60 7.11 8.65 10.74

-0.05 4.80 6.00 7.77 9.68 12.53 -0.1 4.98 6.27 8.19 10.30 13.53

-0.15 5.11 6.45 8.48 10.71 14.17 -0.2 5.20 6.59 8.68 11.01 14.62

Observed Price: $42.41

Annual AEG -11.71 -13.12 -14.69 -16.45 -18.43 -20.64 -23.12 -25.89 -29.00Change in RI -11.71 -13.12 -14.69 -16.45 -18.43 -20.64 -23.12 -25.89 -29.00

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Our company’s DRIP income is equal to zero because we do not issue dividends.

Also the growth rate is negative because they should move towards our Cost of Equity.

Dollar Tree’s investors benefit from appreciation of share price instead of dividends so

models implementing dividends don’t give a correct representation of the firms intrinsic

share price.

Altman Z-Score Analysis

The Altman Z-Score Analysis is a measure that uses a weighted combination of

five different financial ratios. The Z-Score is assessed upon where it lies on the Z-Score

plane.

Dollar Tree 2001 2002 2003 2004 2005 2006 Z-score 10.80 9.95 8.37 6.44 6.11 6.76

1-3 Financial Uncertainty

>3 Good Financial Standing

The Z-Score is calculated by using the following formula:

1.2 (Working Capital/Total Assets) + 1.4 (Retained Earnings/ Total Assets) +

3.3 (EBIT/Total Assets) + .6 (Market Value of Equity/Total Liabilities) + 1.0

(Sales/ Total Assets)

The weights are assigned by importance of credit risk. The EBIT/Total Assets is

weighted with a 3.3 multiple. It’s a measure of Core Earnings for the company that are

assessed by the company’s total asset base. Dollar Tree’s latest Z-Score of 6.76 is a

representation of financial stability as perceived by creditors. That score demonstrates

Dollar Tree’s strength for overcoming bankruptcy. It tells creditors that dollar tree has a

extremely finite chance of bankruptcy since is surpasses average scores for other debt

financed companies. The Z-Score was created by bankers to be used by bankers. This

allows financial institutions to more thoroughly evaluate a company’s

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Differences in RI and AEG

As seen from the sensitivity tables presented for RI and AEG there are

differences in the intrinsic share values. AEG equals the change in RI from year to year;

although the models should produce very similar intrinsic share values, they do not. The

spread of the AEG sensitivity table is greater than that of the RI sensitivity table. An

example of this spread is of the RI sensitivity table at a Ke of 16.79% and growth rate

of -10%, which resulted in an intrinsic share price of $12.29. The AEG model sensitivity

table with the same Ke of 16.79% and same growth rate of -10% results in an intrinsic

share price of $8.19. These results show a difference in the intrinsic share price of

$4.10. The Ke and growth rate used are the median values in the sensitivity tables for

RI and AEG; therefore, the $2.44 is a close to median difference in share prices

between the models. The reason for this is because of the nature of the perpetuities in

the models. In the RI model, the perpetuity will be a smaller fraction compared with

year by year value than the AEG model. This is because that RI converges to zero over

time but AEG is just the difference in how RI converges to zero by each year. So in the

perpetuity time, the RI reaches zero, but AEG perpetuity stays at a constant change

rate as if the RI perpetuity approaches a negative number. This is what causes the

differences in the intrinsic share price vales in the sensitivity tables.

Model Conclusions

From our model analysis we can conclude that our company is overvalued. The

reason for this is that the RI model states very confidently that Dollar Tree’s intrinsic

value stock price is much lower that the observed price. The FCF model is sensitive to

changes in rate estimations and goes from being overvalued, to fairly valued, to

undervalued. We know that the FCF model has a low degree of explanatory value and

we are not able to compute a DD model value. The AEG model implements dividends in

its calculation of DRIP income; thus, it produces an intrinsic share price not relevant to

valuations. Therefore it is logical to base our valuation on the results of the RI model,

which states that Dollar Tree is overvalued.

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Revised Free Cash Flow Model

From our accounting analysis we found Dollar Tree to have understated their

liabilities and assets by $.92 billion. The total value of reported liabilities is $.705B. This

caused the forecasted earnings for the FCF model to initially be more than the

operating lease financial statements, but then, to be less in later years. For these

changes in earnings over the years, we ran a new FCF model for capital lease

adjustments. Using the same Ke and growth rates in the sensitivity tables, here are our

results:

Growth Ke 0.08 0.1 0.12 0.13 0.14

0.2 17.61 19.24 21.68 23.42 25.74 0.18 22.2 25.06 29.84 33.66 39.39

0.1594 29.28 35.04 46.63 58.35 82.14 0.14 40.33 53.62 93.5 173.25 - 0.12 62.8 110.05 - - -


From this revised FCF model sensitivity we see that our company is about fairly

priced from our initial Ke and growth rates. The sensitivity spread shows the intrinsic

share price to go from undervalued to overvalued, but overall we can say that out

company is fairly valued. This conclusion cannot be made with a high degree of

confidence though. This is because of the large spread of the share price in the

sensitivity table because of the volatility of the FCF model.

Revised Residual Income Model

From our accounting analysis we found that Dollar Tree’s use of capital leases

distorted the amounts on their financial statements. After accounting back for these

lease changes we forecasted new financial statements. This changed the values of

earnings computed in the RI model. The earnings were initially larger and then declined

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to being less than the initial earnings. With these new earnings we computed the

intrinsic share price using the RI model and these are the sensitivity table results:


From the table we can see that our company is consistently overvalued using the

RI model. Using this model and results we can say that it is overvalued with a high

degree of confidence. This is because of the high explanatory power of the RI model.

Revised Residual Income Perpetuity

From our revised forecasted financial statements we computed a revised RI

Perpetuity. The changes in values for this model were the forecasted earnings. The

earnings were initially higher in the earlier years but declined to be less in the later

years. With these new earnings we computed new intrinsic share values using the RI

Perpetuity model. Here is the sensitivity table for these new share values:

Growth Ke 0.12 0.14 0.16 0.18 0.2

0.21 18.45 16.94 14.23 7.91 - 0.19 20.19 18.84 15.7 - 47.1

0.1679 23.88 24.25 26.47 21.34 22.6 0.15 30.96 46.44 - 15.48 18.57 0.13 69.15 - 7.68 13.83 16.46


Growth Ke 0 -0.05 -0.1 -0.15 -0.2

0.21 7.37 7.8 8.09 8.31 8.47

0.19 8.35 8.95 9.34 9.61 9.81

0.1679 9.55 10.41 10.96 11.33 11.59

0.15 10.58 11.77 12.49 12.97 13.31

0.13 11.7 13.47 14.48 15.12 15.57

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ROE Growth 0.12 0.14 0.16 0.17 0.2

0.12 11.68 16.56 21.44 26.21 31.2 0.14 3.31 11.68 20.06 29.13 36.81 0.16 - - 11.68 - 70.84 0.18 69.62 50.31 31 17.48 -

0.2 40.8 33.52 26.24 20.39 11.68 Observed Price- $42.41

ROE Ke 0.12 0.14 0.16 0.17 0.2

0.21 2.37 7.11 11.86 - 21.340.19 - 3.93 11.78 47.1 27.48

0.1679 - - 11.68 22.6 70.840.15 58.05 34.83 11.61 18.57 - 0.13 26.89 34.7 11.52 16.46 -


With the observations taken from these sensitivity tables we can say that our

company is overvalued. The spread on the tables show a range that goes from

overvalued to fairly valued to undervalued. The majority though shows our intrinsic

share values being low so our company being overvalued, including our all of our initial

Ke, ROE, and growth rates. We can say that the company is overvalued with a fair

degree of confidence.

Revised Abnormal Earnings Growth Model

After revising the financial statements to account back for the lease changes we

computed a revised AEG. The input values that changed due the revised financial

statements were earnings. Initially the earnings were larger than the original values and

then became less in the later years. Using these new earnings values we computed a

new sensitivity table showing the new intrinsic share values which are shown here:

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Ke Growth 0.12 0.14 0.1679 0.18 0.2

-0.16 15.45 11.55 7.96 6.84 5.38 -0.14 15.18 11.38 7.87 6.77 5.33 -0.12 14.87 11.18 7.76 6.68 5.27

-0.1 14.5 10.95 7.63 6.58 5.2 -0.08 14.06 10.68 7.48 6.47 5.13


Observing these revised intrinsic share values we can say that our company is

overvalued. We can say this with a high degree of confidence because the AEG model is

closely related to the RI model which has a very high degree of explanatory power. Also

because the year by year change in RI is equal to the annual AEG we can show that our

AEG calculations are correct here:

Annual AEG -44.19 -44.69 -49.66 -53.05 -47.56 -35.35 -29.13 -26.63 -26.57 Change in RI -44.19 -44.69 -49.66 -53.05 -47.56 -35.35 -29.13 -26.63 -26.57

Revised Z-Score

Dollar Tree 2001 2002 2003 2004 2005 2006 Z-score revised 5.74 5.02 5.58 4.27 4.01 4.31 Z-score 10.80 9.95 8.37 6.44 6.11 6.76

Overall, the revised z-score is lower than the actual z-score for the six year

period. The reason for this is that assets have increased due to the capitalization of the

leases. This affected all of the financial statements that were used to compute the

revised z-score. The revised z-score results show our company to be more at risk for

bankruptcy, but Dollar Tree is still in good standing with their z-score being greater

than 3.

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Revised Valuation Model Conclusion

From our accounting analysis we found that our company’s financial statements

were distorted from the operating leases. After accounting back for these leases, we

revised financial statements that then affected our valuation models. Using these new

values in the valuation models, we computed revised intrinsic share prices. Observing

these revised intrinsic share prices we conclude Dollar Tree to be overvalued. The

Discounted Dividend Model still does not apply to Dollar Tree since our company doesn’t

pay dividends. The FCF model still has a poor explanatory power in explaining the

sensitivity table. That leaves us with the Residual Income Model and the Abnormal

Earnings Growth Model, which both have a high explanatory power. The intrinsic share

prices from these revised models both conclude that our company is overvalued.

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Forecasted Balance Sheet Unrevised Based on Actual Balance Sheets Dollar Tree Stores Inc.Forecasted Balance Sheet 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)


Property, plant and equipment, net 279.01 344.32 613.21 685.39 681.80 715.30 38.00% 909.04$ 1,018.12$ 1,140.30$ 1,277.14$ 1,430.39$ 1,602.04$ 1,794.28$ 2,009.60$ 2,250.75$ 2,520.84$ Intangibles, net 45.79 41.42 123.74 129.03 129.30 146.60 7.80% 186.59$ 208.98$ 234.06$ 262.15$ 293.61$ 328.84$ 368.30$ 412.50$ 462.00$ 517.44$ Other assets, net 16.46 14.50 20.79 8.37 43.60 52.40 2.50% 59.81$ 66.98$ 75.02$ 84.02$ 94.10$ 105.40$ 118.04$ 132.21$ 148.08$ 165.84$ Total Non Current Assets 341.27 400.24 757.74 822.79 854.70 914.30 48.30% 1,155.44$ 1,294.09$ 1,449.38$ 1,623.31$ 1,818.10$ 2,036.28$ 2,280.63$ 2,554.30$ 2,860.82$ 3,204.12$

TOTAL ASSETS 902.05$ 1,116.38$ 1,480.31$ 1,792.67$ 1,798.40$ 1,873.30$ 2.07 2,392.21$ 2,679.27$ 3,000.79$ 3,360.88$ 3,764.19$ 4,215.89$ 4,721.80$ 5,288.41$ 5,923.02$ 6,633.79$


Long-term debt, excluding current portion 12.00 6.00 142.57 250.00 250.00 250.00Deferred tax liabilities 0.00 9.90 29.72 42.08 23.50 1.50Other liabilities 37.28 38.56 28.39 42.03 57.10 70.80Total Non Current Liablities 49.28 54.46 200.68 334.11 330.60 322.30 43.30% 418.64$ 423.16$ 428.23$ 433.90$ 440.25$ 447.37$ 455.33$ 464.26$ 474.25$ 485.45$

Total liabilities 250.31$ 260.97$ 465.78$ 628.46$ 626.10$ 705.60$ 966.84$ 977.28$ 988.98$ 1,002.08$ 1,016.75$ 1,033.18$ 1,051.58$ 1,072.19$ 1,095.28$ 1,121.13$


Total Shareholders' Equity and Total Liablities 2392.21 2679.27 3000.79 3360.88 3764.19 4215.89 4721.80 5288.41 5923.02 6633.79Error Check -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Actual Forcasted

- 90 -

Dollar Tree Balance Sheet Forecast (Common Size) ASSETSCurrent assets:Cash and cash equivalents 26.24% 26.17% 11.40% 5.94% 3.66% 4.54%Short-term investments 0.00% 3.92% 0.00% 11.79% 15.24% 11.84% 12.95%Merchandise inventories 32.87% 32.04% 35.51% 34.33% 32.06% 32.30%Deferred tax assets 0.98% 0.93% 0.79% 0.45% 0.60% 0.57%Prepaid expenses and other current assets 2.08% 1.08% 1.12% 1.59% 0.92% 1.95%Total current assets 62.17% 64.15% 48.81% 54.10% 52.47% 51.19% 55.48%

Property, plant and equipment, net 30.93% 30.84% 41.42% 38.23% 37.91% 38.18% 38.94%Intangibles, net 5.08% 3.71% 8.36% 7.20% 7.19% 7.83% 7.40%Other assets, net 1.83% 1.30% 1.40% 0.47% 2.42% 2.80% 2.61%Total Non Current Assets 37.83% 35.85% 51.19% 45.90% 47.53% 48.81% 47.41%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt 9.99% 9.58% 5.37% 3.02% 3.03% 2.66%Accounts payable 23.21% 22.78% 24.68% 19.76% 21.66% 26.81% 23.15%Other current liabilities 31.59% 36.03% 18.91% 18.70% 15.84% 18.71%Income taxes payable 15.52% 10.74% 7.95% 5.36% 6.66% 6.14%Total current liabilities 80.31% 79.13% 56.92% 46.84% 47.20% 54.32% 60.79%

Long-term debt, excluding current portion 4.79% 2.30% 30.61% 39.78% 39.93% 35.43%Deferred tax liabilities 0.00% 3.79% 6.38% 6.69% 3.75% 0.21%Other liabilities 14.90% 14.78% 6.10% 6.69% 9.12% 10.03%Total Long Term Liablities 19.69% 20.87% 43.08% 53.16% 52.80% 45.68%

Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Shareholders' equity:Common stock, par value $0.01. 300,000,000 sharesauthorized, 99,663,580 and 106,552,054 sharesissued and outstanding at February 3, 2007and January 28, 2006, respectively 0.17% 0.13% 0.11% 0.10% 0.09% 0.09%Additional paid-in capital 25.65% 25.40% 20.59% 15.26% 0.97% 0.00%Unearned Compensation 0.00% -0.01% 0.01% 0.01% 0.00% 0.00%Accumulated other comprehensive income (loss) -0.06% -0.16% -0.10% -0.03% 0.01% 0.01%Retained earnings 74.24% 74.64% 79.40% 84.67% 98.93% 99.91% 85.30%Total shareholders' equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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Forecasted Balance Sheet with Capital Lease Corrections Based on actual Balance Sheets

Dollar Tree Stores Inc.Balance Sheet Forcast with Capital Lease 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)


Capital Lease Rights 927.74 717.76 529.18 364.32 231.96 139.92 84.31 50.71 30.39 18.11Property, plant and equipment, net 279.01 344.32 613.21 685.39 681.80 715.30 38.00% 1,301.11$ 1,324.70$ 1,368.90$ 1,434.42$ 1,526.63$ 1,653.60$ 1,818.85$ 2,017.86$ 2,249.15$ 2,513.29$ Intangibles, net 45.79 41.42 123.74 129.03 129.30 146.60 7.80% 267.07$ 271.91$ 280.98$ 294.43$ 313.36$ 339.42$ 373.34$ 414.19$ 461.67$ 515.89$ Other assets, net 16.46 14.50 20.79 8.37 43.60 52.40 2.50% 85.60$ 87.15$ 90.06$ 94.37$ 100.44$ 108.79$ 119.66$ 132.75$ 147.97$ 165.35$ Total Non Current Assets 341.27 400.24 757.74 822.79 854.70 914.30 48.30% 1,653.78$ 1,683.76$ 1,739.94$ 1,823.22$ 1,940.43$ 2,101.81$ 2,311.85$ 2,564.80$ 2,858.79$ 3,194.53$

TOTAL ASSETS 902.05$ 1,116.38$ 1,480.31$ 1,792.67$ 1,798.40$ 1,873.30$ 2.07 3,423.98$ 3,486.06$ 3,602.36$ 3,774.79$ 4,017.46$ 4,351.57$ 4,786.44$ 5,310.15$ 5,918.83$ 6,613.93$


Capital Lease Obligation 927.74$ 717.76$ 529.18$ 364.32$ 231.96$ 139.92$ 84.31$ 50.71$ 30.39$ 18.11$ Long-term debt, excluding current portion 12.00 6.00 142.57 250.00 250.00 250.00Deferred tax liabilities 0.00 9.90 29.72 42.08 23.50 1.50Other liabilities 37.28 38.56 28.39 42.03 57.10 70.80Total Non Current Liablities 49.28 54.46 200.68 334.11 330.60 322.30 43.30% 418.19$ 377.27$ 343.48$ 317.58$ 302.37$ 300.28$ 310.17$ 327.74$ 350.43$ 376.77$

965.79$ 871.30$ 793.25$ 733.45$ 698.32$ 693.49$ 716.33$ 756.90$ 809.31$ 870.13$ Total liabilities 250.31$ 260.97$ 465.78$ 628.46$ 626.10$ 705.60$ 1,893.53$ 1,589.06$ 1,322.43$ 1,097.77$ 930.28$ 833.41$ 800.64$ 807.61$ 839.70$ 888.24$


Total Shareholders' Equity and Total Liablities 3423.98 3486.06 3602.36 3774.79 4017.46 4351.57 4786.44 5310.15 5918.83 6613.93Error Check 0.00 0.00 (0.00) 0.00 0.00 (0.00) 0.00 (0.00) 0.00 0.00

Actual Forcasted

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Actual Years Balance Sheet with Capital Lease Corrections

Dollar Tree Stores Inc.Balance Sheet Forcast with Capital Lease 2001 2002 2003 2004 2005 2006(In millions, except per share data)

ASSETSCurrent assets:Cash and cash equivalents 236.65 292.19 168.69 106.53 65.80 85.00Short-term investments 0.00 43.78 0.00 211.28 274.00 221.80Merchandise inventories 296.47 357.67 525.64 615.48 576.60 605.00Deferred tax assets 8.88 10.41 11.72 8.07 10.80 10.70Prepaid expenses and other current assets 18.78 12.09 16.53 28.53 16.50 36.50Total current assets 560.78 716.14 722.57 969.89 943.70 959.00

Capital Lease Rights 384.46 509.23 409.39 627.16 715.15 798.38Property, plant and equipment, net 279.01 344.32 613.21 685.39 681.80 715.30Intangibles, net 45.79 41.42 123.74 129.03 129.30 146.60Other assets, net 16.46 14.50 20.79 8.37 43.60 52.40Total Non Current Assets 725.73 909.47 1,167.13 1,449.95 1,569.85 1,712.68

TOTAL ASSETS 1,286.51$ 1,625.61$ 1,889.70$ 2,419.83$ 2,513.55$ 2,671.68$

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt 25.00 25.00 25.00 19.00 19.00 18.80Accounts payable 58.09 59.45 114.97 124.20 135.60 189.20Other current liabilities 79.09 94.02 88.10 117.49 99.20 132.00Income taxes payable 38.85 28.04 37.04 33.67 41.70 43.30Total current liabilities 201.02 206.51 265.10 294.36 295.50 383.30

Capital Lease Obligation 384.46 509.23 409.39 627.16 715.15 798.38Long-term debt, excluding current portion 12.00 6.00 142.57 250.00 250.00 250.00Deferred tax liabilities 0.00 9.90 29.72 42.08 23.50 1.50Other liabilities 37.28 38.56 28.39 42.03 57.10 70.80Total Non Current Liablities 433.74 563.69 610.07 961.27 1,045.75 1,120.68

Total liabilities 634.77$ 770.20$ 875.17$ 1,255.62$ 1,341.25$ 1,503.98$

Shareholders' equity:Common stock, par value $0.01. 300,000,000 sharesauthorized, 99,663,580 and 106,552,054 sharesissued and outstanding at February 3, 2007and January 28, 2006, respectively 1.13 1.14 1.14 1.13 1.10 1.00Additional paid-in capital 167.15 217.27 208.87 177.68 11.40 0.00Unearned Compensation 0.00 (0.12) 0.06 0.10 0.00 0.00Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) 0.10 0.10Retained earnings 483.84 638.49 805.54 985.79 1,159.70 1,166.60Total shareholders' equity 651.74$ 855.40$ 1,014.65$ 1,164.41$ 1,172.30$ 1,167.70$

Total Shareholders' Equity and Total Liablities 1,286.50$ 1,625.61$ 1,889.70$ 2,419.83$ 2,513.55$ 2,671.68$

Actual

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Forecasted Income Statement based on Actual Income Statement

Dollar Tree Stores Inc.Forecasted Income Statement 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)


Selling, general and administrativeexpenses 512.09 598.05 724.82 819.00 888.50 1,046.40 26% 1,155.89$ 1,294.60$ 1,449.95$ 1,623.94$ 1,818.81$ 2,037.07$ 2,281.52$ 2,555.30$ 2,861.94$ 3,205.37$

Operating income 203.87 253.92 293.60 293.50 283.90 310.80 8% 355.66$ 398.34$ 446.14$ 499.67$ 559.64$ 626.79$ 702.01$ 786.25$ 880.60$ 986.27$

Interest income 3.57 3.53 2.65 3.90 6.80 8.60Interest expense (7.19) (5.99) (7.49) (9.20) (15.50) (16.50)



Net income 123.08$ 154.65$ 177.58$ 180.30$ 173.90$ 192.00$ 5.50% 244.52$ 273.86$ 306.72$ 343.53$ 384.75$ 430.92$ 482.63$ 540.54$ 605.41$ 678.06$

Actual Forcasted

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Forecasted Income Statement with Capital Lease Corrections

Dollar Tree Stores Inc.I.S. Forecast with Capital Lease Revision 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions, except per share data)


Selling, general and administrativeexpenses 512.09 598.05 724.82 819.00 888.50 1,046.40 26% 1,155.89$ 1,294.60$ 1,449.95$ 1,623.94$ 1,818.81$ 2,037.07$ 2,281.52$ 2,555.30$ 2,861.94$ 3,205.37$ Adding Back Operating Lease Expense 101.80 126.20 149.80 186.90 216.90 243.20 284.20 246.00 207.20 161.50 110.60 66.80 40.35 24.37 14.72 8.89 Less Capital Lease Depreciation Expense Adjustment 25.63 33.95 33.96 41.81 47.68 53.23 61.85 61.85 61.85 61.85 61.85 61.85 61.85 61.85 61.85 61.85 Operating income 280.04 346.17 409.44 438.59 453.12 500.77 8% 578.01$ 582.49$ 591.49$ 599.32$ 608.39$ 631.74$ 680.51$ 748.77$ 833.47$ 933.31$

Capital Lease Interest Expense 30.76 40.74 40.75 50.17 57.21 63.87 74.22$ 57.42$ 42.33$ 29.15$ 18.56$ 11.19$ 6.74$ 4.06$ 2.43$ 1.45$ Interest income 3.57 3.53 2.65 3.90 6.80 8.60Interest expense (7.19) (5.99) (7.49) (9.20) (15.50) (16.50)Net Interest Income (Expense) - Working Below 7.11$ 7.97$ 8.92$ 9.99$ 11.19$ 12.54$ 14.04$ 15.72$ 17.61$ 19.73$



Net income With Leases Capitalized 168.49$ 206.16$ 252.67$ 275.22$ 285.91$ 318.10$ 5.50% 348.54$ 362.88$ 379.11$ 393.11$ 406.06$ 426.68$ 462.97$ 511.57$ 570.82$ 640.09$

Net Income Under Operating Lease Treatment 123.08$ 154.65$ 177.58$ 180.30$ 173.90$ 192.00$ 244.52$ 273.86$ 306.72$ 343.53$ 384.75$ 430.92$ 482.63$ 540.54$ 605.41$ 678.06$

Difference in Net Income due to Capitalization (45.41)$ (51.51)$ (75.09)$ (94.92)$ (112.01)$ (126.10)$ (104.03)$ (89.02)$ (72.39)$ (49.58)$ (21.31)$ 4.24$ 19.66$ 28.98$ 34.59$ 37.97$

Actual Forcasted

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Income Statement (Common Size)

Sales Growth Percentage 17.21% 20.21% 11.65% 8.57% 16.96%Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Cost of sales 64.0% 63.4% 63.6% 64.4% 65.5% 65.8%Gross profit 36.0% 36.6% 36.4% 35.6% 34.5% 34.2%

Selling, general and administrativeexpenses 25.8% 25.7% 25.9% 26.2% 26.2% 26.4%

Operating income 10.3% 10.9% 10.5% 9.4% 8.4% 7.8%

Interest income 0.2% 0.2% 0.1% 0.1% 0.2% 0.2%Interest expense -0.4% -0.3% -0.3% -0.3% -0.5% -0.4%

Income before income taxes 10.1% 10.8% 10.3% 9.2% 8.1% 7.6%

Provision for income taxes 3.9% 4.2% 4.0% 3.5% 3.0% 2.8%

Net income 6.2% 6.6% 6.3% 5.8% 5.1% 4.8%

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Forecasted Statement of Cash Flows Dollar Tree Stores Inc.Forcasted Cash Flow Statement 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions)

Net income (loss) 123.08 154.65 177.58 180.25 173.92 192.00 53% 244.52$ 273.86$ 306.72$ 343.53$ 384.75$ 430.92$ 482.63$ 540.54$ 605.41$ 678.06$ Depreciation & amortization 53.76 71.62 101.50 129.29 140.72 159.00 (Gain) loss on disposal of property & equip 1.73 1.60 4.02 2.80 3.32 - Cumulative effect of change in acctg princ - - - - - - Change in lease loss - - - - - - Chng in fair val of non-hedging int rate swap 1.72 1.47 (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt - - - - - - Provision of deferred income taxes (6.22) 16.44 21.06 15.58 (21.50) (21.90) Tax benefit of stock option exercises 2.35 10.70 5.62 2.14 1.18 - Stock based compensation expense - - - - - 6.70 Other non-cash adjustments to net income 1.32 0.31 0.59 2.11 5.53 5.10 Merchandise inventories (37.79) (61.19) (61.17) (89.84) 38.94 (6.20) Prepaid expenses & other current assets 10.59 6.71 (0.43) (0.40) - - Other assets (0.94) (1.00) (1.42) 0.93 (5.56) (19.80) Accounts payable (17.31) 1.36 (29.14) 9.22 11.36 53.70 55.41$ 247.25$ 249.96$ 8.91$ 9.98$ 11.18$ 12.52$ 14.03$ 15.71$ 17.60$ Income taxes payable 15.40 (10.81) 16.91 (3.37) 8.03 1.60 Other current liabilities 28.31 13.02 0.80 15.32 (6.41) 31.80 Other liabilities 2.72 2.01 (0.75) 13.50 16.39 10.80 Total adjustments - - - - - - Net cash flows from operating activities 178.73$ 206.88$ 234.29$ 276.49$ 365.15$ 412.80$ 461.35$ 516.71$ 578.72$ 648.16$ 725.94$ 813.05$ 910.62$ 1,019.90$ 1,142.28$ 1,279.36$


Actual Forcasted

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Forecasted Statement of Cash Flows with Capital Lease Corrections Dollar Tree Stores Inc.Cash Flow Statement with Capital Lease 2001 2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(In millions)

Net income (loss) 123.08 154.65 177.58 180.25 173.92 192.00 53% 348.54$ 362.88$ 379.11$ 393.11$ 406.06$ 426.68$ 462.97$ 511.57$ 570.82$ 640.09$ Depreciation & amortization 53.76 71.62 101.50 129.29 140.72 159.00 (Gain) loss on disposal of property & equip 1.73 1.60 4.02 2.80 3.32 - Cumulative effect of change in acctg princ - - - - - - Change in lease loss - - - - - - Chng in fair val of non-hedging int rate swap 1.72 1.47 (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt - - - - - - Provision of deferred income taxes (6.22) 16.44 21.06 15.58 (21.50) (21.90) Tax benefit of stock option exercises 2.35 10.70 5.62 2.14 1.18 - Stock based compensation expense - - - - - 6.70 Other non-cash adjustments to net income 1.32 0.31 0.59 2.11 5.53 5.10 Merchandise inventories (37.79) (61.19) (61.17) (89.84) 38.94 (6.20) Prepaid expenses & other current assets 10.59 6.71 (0.43) (0.40) - - Other assets (0.94) (1.00) (1.42) 0.93 (5.56) (19.80) Accounts payable (17.31) 1.36 (29.14) 9.22 11.36 53.70 55.14$ (23.91)$ (19.75)$ (15.13)$ (8.89)$ (1.22)$ 5.78$ 10.26$ 13.26$ 15.39$ Income taxes payable 15.40 (10.81) 16.91 (3.37) 8.03 1.60 Other current liabilities 28.31 13.02 0.80 15.32 (6.41) 31.80 Other liabilities 2.72 2.01 (0.75) 13.50 16.39 10.80 Total adjustments - - - - - - Net cash flows from operating activities 178.73$ 206.88$ 234.29$ 276.49$ 365.15$ 412.80$ 657.63$ 684.67$ 715.31$ 741.72$ 766.15$ 805.05$ 873.52$ 965.22$ 1,077.03$ 1,207.72$




Actual Forcasted

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Statement of Cash Flows

Dollar Tree Stores Inc.Cash Flow Statement with Capital Lease 2001 2002 2003 2004 2005 2006(In millions)

123.08 154.65 177.58 180.25 173.92 192.00 Net income (loss) 168.49 206.16 252.67 275.22 285.91 318.10 Depreciation & amortization 53.76 71.62 101.50 129.29 140.72 159.00 (Gain) loss on disposal of property & equip 1.73 1.60 4.02 2.80 3.32 - Cumulative effect of change in acctg princ - - - - - - Change in lease loss - - - - - - Chng in fair val of non-hedging int rate swap 1.72 1.47 (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt - - - - - - Provision of deferred income taxes (6.22) 16.44 21.06 15.58 (21.50) (21.90) Tax benefit of stock option exercises 2.35 10.70 5.62 2.14 1.18 - Stock based compensation expense - - - - - 6.70 Other non-cash adjustments to net income 1.32 0.31 0.59 2.11 5.53 5.10 Merchandise inventories (37.79) (61.19) (61.17) (89.84) 38.94 (6.20) Prepaid expenses & other current assets 10.59 6.71 (0.43) (0.40) - - Other assets (0.94) (1.00) (1.42) 0.93 (5.56) (19.80) Accounts payable (17.31) 1.36 (29.14) 9.22 11.36 53.70 Income taxes payable 15.40 (10.81) 16.91 (3.37) 8.03 1.60 Other current liabilities 28.31 13.02 0.80 15.32 (6.41) 31.80 Other liabilities 2.72 2.01 (0.75) 13.50 16.39 10.80 Total adjustments - - - - - - Net cash flows from operating activities 224.14$ 258.39$ 309.38$ 371.46$ 477.14$ 538.90$

Capital expenditures (121.57) (136.13) (227.32) (181.78) (139.25) (175.30) Acquisition, net of cash acquired - - - - - - Purchase of Greenbacks, Inc. net - - (100.52) - - - Investment in Ollie's Holdings, Inc. - - (4.00) - - - Purchase of short-term investments - (60.28) (30.36) (465.82) (885.48) (1,044.40) Proceeds from sales of short-term investments - 16.50 93.89 339.04 822.81 1,096.60 Purchase of Deal$ assets, net - - - - - (54.10) Acquisition of favorable lease rights - (0.81) (0.11) (6.85) (3.65) (4.20) Purchase of restricted investments - - - - (29.94) (9.30) Proceeds from sale of property & equipment 0.10 0.22 0.04 - - - Settlement of merger-related contingencies - 6.69 1.02 - - - Net cash flows from investing activities (121.47)$ (173.82)$ (267.36)$ (315.41)$ (235.51)$ (190.70)$



Actual

- 99 -

Dollar Tree Cash Flows (Common Size) Net income (loss) 68.87% 75% 76% 65% 48% 47%Depreciation & amortization 30.08% 35% 43% 47% 39% 39%(Gain) loss on disposal of property & equip 0.97% 1% 2% 1% 1% 0%Cumulative effect of change in acctg princ 0.00% 0% 0% 0% 0% 0%Change in lease loss 0.00% 0% 0% 0% 0% 0%Chng in fair val of non-hedging int rate swap 0.96% 1% 0% 0% 0% 0%Extraord (gain) loss early extinguish of debt 0.00% 0% 0% 0% 0% 0%Provision of deferred income taxes -3.48% 8% 9% 6% -6% -5%Tax benefit of stock option exercises 1.31% 5% 2% 1% 0% 0%Stock based compensation expense 0.00% 0% 0% 0% 0% 1623%Other non-cash adjustments to net income 0.74% 0% 0% 1% 2% 1%Merchandise inventories -21.14% -30% -26% -32% 11% -2%Prepaid expenses & other current assets 5.93% 3% 0% 0% 0% 0%Other assets -0.52% 0% -1% 0% -2% -5%Accounts payable -9.69% 1% -12% 3% 3% 13%Income taxes payable 8.62% -5% 7% -1% 2% 0%Other current liabilities 15.84% 6% 0% 6% -2% 8%Other liabilities 1.52% 1% 0% 5% 4% 3%Total adjustments 0.00% 0% 0% 0% 0% 0%Net cash flows from operating activities 100.00% 100% 100% 100% 100% 100%

Capital expenditures 100.08% 78.32% 85.02% 57.63% 59.13% 91.92%Acquisition, net of cash acquired 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Purchase of Greenbacks, Inc. net 0.00% 0.00% 37.60% 0.00% 0.00% 0.00%Investment in Ollie's Holdings, Inc. 0.00% 0.00% 1.50% 0.00% 0.00% 0.00%Purchase of short-term investments 0.00% 34.68% 11.36% 147.69% 375.98% 547.67%Proceeds from sales of short-term investments 0.00% -9.49% -35.12% -107.49% -349.37% -575.04%Purchase of Deal$ assets, net 0.00% 0.00% 0.00% 0.00% 0.00% 28.37%Acquisition of favorable lease rights 0.00% 0.47% 0.04% 2.17% 1.55% 2.20%Purchase of restricted investments 0.00% 0.00% 0.00% 0.00% 12.71% 4.88%Proceeds from sale of property & equipment -0.08% -0.12% -0.01% 0.00% 0.00% 0.00%Settlement of merger-related contingencies 0.00% -3.85% -0.38% 0.00% 0.00% 0.00%Net cash flows from investing activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%



- 100 -

Method of Comparables

Remark P/E (Trailing) P/E (Forecast) P/B D/P P.E.G. P/EDITDA P/(FCF per share)

(Enterprise value)

/(EBITDA)Price/Earning Price/Earning Price/Bookvalue Divident/Price (P/E)/(1-Year Growth Rate) Price/EDITBA Price/Free Cash Flows

Dollar Tree (DLTR)Dollar General (DG) 54.5400 25.3000 3.8200 0.0046 1.9500 0.0496 0.1753 15.8280 Family Dollar (FDO) 22.4600 18.7300 3.9500 0.0034 1.5900 0.0625 0.0603 9.4610 99 Cent Only (NDN) (Outlier) 95.7600 43.5900 1.6800 - 2.4100 (4.5338) (4.5338) 18.2550

Industry Average without DLTR n NDN 38.5000 22.0150 3.8850 0.0040 1.7700 0.0560 0.1178 12.6445

Dollar TreeCurrent Selling Price (Jun 1, 2007) 42.4100

P/E (Traling) 71.2250 P/E (Forecast) 40.7278

P/B 42.5756 D/P N/A

P.E.G. 18.0098 P/EDITDA 17.4192

P/FCF 47.1954 Enterprise Value/EBITDA 33.1491

99 Cents OnlyFree Cash Flow 2006 82508-85640 -3.132 (million) FCF = CFFO+(-)CFFI

Close Price (Jun 1, 2007) 14.2EBITDA 4.1 (million)

Dollar GeneralFree Cash Flow 2006 405357-281964 123.393 (million)


Divident (2006) $0.10

Family DollarFree Cash Flow 2006 450993-293348 561.248 (million)


Divident (2006) $0.115

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Intrinsic Valuation – Free Cash Flows

WACC(BT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Earnings 244.52 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.0594633DividendsBook Value 1167.7Cash From Operations 461.35 516.71 578.72 648.16 725.94 813.05 910.62 1019.90 1142.28 1279.36Cash Outflows from Investing Activities 227.90 255.24 285.87 320.18 358.60 401.63 449.83 503.80 564.26 631.97Book Value of Debt and Preferred Stock 705.60

0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12Annual Free Cash Flow 233.45 261.47 292.84 327.99 367.34 411.43 460.80 516.09 578.02 647.39PV Factor 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 0.3506 0.3075 0.2697PV of Free Cash Flows 204.78 201.19 197.66 194.19 190.79 187.44 184.15 180.92 177.75 174.63Total PV of Annual Free Cash Flows 1893.50475 0.1000 Continuing (Terminal) Value Perpetuity 63197.17662PV of Terminal Value Perpetuity 17047.04717 0.9000 0.08 0.1 0.12 0.13 0.14Value of Firm 18,940.55$ 1.0000 0.2 16.19 17.92 20.5 22.35 24.81Book Value of Liabilities 705.60 0.18 20.95 2.99 29.05 33.09 39.17Estimated Market Value of Equity $18,234.95 0.1594 28.35 34.44 46.73 59.13 84.34Number of Shares 106.552 0.14 39.94 54.02 96.26 180.71 -Estimated Price per Share (End of Fiscal Year) $171.14 0.12 63.62 113.67 - - -Estimated Price per Share (June 1, 2007) 180.74Observed Share Price $42.41 $48.77 $36.05 UndervaluedInitial WACC 0.14 Fairly-ValuedPerpetuity Growth Rate (g) 0.13 Overvalued

Sensitivity Analysis

- 102 -

Intrinsic Valuation – Residual Income

WACC(BT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Earnings 244.52 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.06Dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Book Value 192 436.52 710.37 1017.09 1360.62 1745.37 2176.29 2658.92 3199.46 3804.87 4482.93

Actual EPS 244.52 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.06"Normal" (Benchmark) Earnings 24.96 56.75 92.35 132.22 176.88 226.90 282.92 345.66 415.93 494.63Residual Income (Annual) 219.56 217.11 214.37 211.30 207.87 204.02 199.71 194.89 189.48 183.43 10.00PV Factor 0.8850 0.7831 0.6931 0.6133 0.5428 0.4803 0.4251 0.3762 0.3329 0.2946PV of Annual Residual Income 194.30 170.03 148.57 129.60 112.82 98.00 84.89 73.31 63.08 54.04Total PV of Annual Residual Income 1128.62 84.81%Continuing (Terminal) Value Perpetuity 30.30PV of Terminal Value Perpetuity 10.09 0.76% 0 -0.05 -0.1 -0.15 -0.2Initial Book Value of Equity 192.00 14.43% 0.21 7.70 7.68 7.67 7.66 7.66Estimated Price per Share (end of 2006) 1330.71 100.00% 0.19 8.98 8.96 8.94 8.93 8.92Implied Share Price at June 1, 2007 14.41 0.1679 10.69 10.65 10.63 10.61 10.6Observed Share Price 42.41 Undervalued 0.15 12.35 12.3 12.27 12.25 12.23Initial Cost of Equity (You Derive) 0.13 Fairly-Valued 0.13 14.57 14.5 14.45 14.43 14.41Perpetuity Growth Rate (g) -0.2 Overvalued

- 103 -

Intrinsic Valuation – Residual Income Perpetuity Book Value of Equity 192Long Run Return on Equity 0.17 0.17Long Run Growth Rate in Equity 0.16 0.16Cost of Equity 0.1679 0.1679

Estimated Price per Share (end of Fiscal Year) 4Estimated Price per Share (June 1, 2007) 4.36Observed Share Price $42.41

WACC(BT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


ROE 127% 63% 43% 34% 28% 25% 22% 20% 19% 18%BE % G 127% 63% 43% 34% 28% 25% 22% 20% 19% 18%

Average ROE 40%Average Growth in BVE 40%

Growth ROE0.12 0.14 0.16 0.18 0.2 0.12 0.14 0.16 0.18 0.2

Ke 0.21 3.03 2.79 2.34 1.3 -3.9 Ke 0.21 0.39 1.17 1.95 2.73 3.510.19 3.32 3.1 2.58 4.68 7.75 0.19 -0.65 0.65 1.94 3.23 4.52

0.1679 3.93 3.99 4.36 3.51 3.72 0.1679 -7.81 -2.94 1.92 6.79 1.660.15 5.09 7.64 0 2.55 3.06 0.15 9.55 5.73 1.91 -1.91 -5.730.13 11.38 -3.79 1.26 2.28 2.71 0.13 4.42 3.16 1.9 0.63 -0.63

ROE0.12 0.14 0.16 0.18 0.2

Growth 0.12 0 2.72 3.53 4.33 5.130.14 0.54 1.92 3.3 2.76 6.06

Overvalued 0.16 -7.81 -2.94 1.92 6.79 11.966Fairly-Valued 0.18 11.45 8.28 5.1 1.92 -1.26Undervalued 0.2 6.71 5.52 4.32 3.12 1.92

- 104 -

AEG Valuation

WACC(AT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Earnings 244.52 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.06Dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Book Value 1167Cash From Operations 461.35 516.71 578.72 648.16 725.94 813.05 910.62 1019.90 1142.28 1279.36Cash Investments 227.90 255.24 285.87 320.18 358.60 401.63 449.83 503.80 564.26 631.97

Core Perpetuity Component 244.52Forecast EPS 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.06DRIP income 0 0 0 0 0 0 0 0 0Cumulative Dividend Income 273.86 306.72 343.53 384.75 430.92 482.63 540.54 605.41 678.06"Normal" Annual Income (Benchmark) 285.5691 319.8374 358.2179 401.204 449.3485 503.2704 563.6628 631.3023 707.0586Annual AEG adjustment -11.71 -13.12 -14.69 -16.45 -18.43 -20.64 -23.12 -25.89 -29.00 -32.91PV Factor 0.856238 0.733143 0.627745 0.537499 0.460227 0.394063 0.337412 0.288905 0.247371PV of YBY AEG -10.02849 -9.617181 -9.222744 -8.844485 -8.481739 -8.13387 -7.80027 -7.480351 -7.173554Total PV YBY of AEG -76.7827Value of AEG PER -196.0095Present value of AEG perp added to core -48.4871 KeTotal adjusted t+1 Perp 119.2453 g 0.21 0.19 0.1679 0.15 0.13Capitalization Rate (Ke) 0.1679 0 4.54 5.60 7.11 8.65 10.74 Value of Equity 710.22 -0.05 4.80 6.00 7.77 9.68 12.53 Estimated Value at 31 Jan. 2007 6.67$ -0.1 4.98 6.27 8.19 10.30 13.53 Growth 0% -0.15 5.11 6.45 8.48 10.71 14.17 Obeserved Share Price at June 1, 2007 $42.41 7.11 -0.2 5.20 6.59 8.68 11.01 14.62

OvervaluedFairly-ValuedUndervalued

Annual AEG -11.71 -13.12 -14.69 -16.45 -18.43 -20.64 -23.12 -25.89 -29.00Change in RI -11.71 -13.12 -14.69 -16.45 -18.43 -20.64 -23.12 -25.89 -29.00Annual RI 212.27824 200.566 187.4482 172.7564 156.3015 137.872 117.231 94.11301 68.22091 39.22176

- 105 -

Free Cash Flows (Revised)

WACC(BT) 0.1594 Kd 0.05475 Ke

0 1 2 3 4 5 6 72006 2007 2008 2009 2010 2011 2012 2013

Earnings 348.54 362.88 379.11 393.11 406.06 426.68 462.97DividendsBook Value 1167Cash From Operations 657.63 684.67 715.31 741.72 766.15 805.05 873.52Cash Outflows from Investing Activities 324.85 338.21 353.34 366.39 378.46 397.68 431.50Book Value of Debt and Preferred Stock 705.60

0.04 0.04 0.04 0.03 0.05 0.09Annual Free Cash Flow 332.78 346.46 361.96 375.33 387.69 407.38 442.02PV Factor 0.8625 0.7439 0.6417 0.5534 0.4773 0.4117 0.3551PV of Free Cash Flows 287.02 257.74 232.25 207.72 185.06 167.72 156.97Total PV of Annual Free Cash Flows 1927.327478 0.3584 Continuing (Terminal) Value PerpetuityPV of Terminal Value Perpetuity 3450.201551 0.6416 0.08 0.1 0.12 0.13 0.14Value of Firm 5,377.53$ 1.0000 0.2 17.61 19.24 21.68 23.42 25.74Book Value of Liabilities 705.60 0.18 22.2 25.06 29.84 33.66 39.39Estimated Market Value of Equity $4,671.93 0.1594 29.28 35.04 46.63 58.35 82.14Number of Shares 106.552 0.14 40.33 53.62 93.5 173.25 -Estimated Price per Share (End of Fiscal Year) $43.85 0.12 62.8 110.05 - - -Estimated Price per Share (June 1, 2007) 46.63Observed Share Price $42.41 $48.77 $36.05 UndervaluedInitial WACC 0.1594 Fairly-ValuedPerpetuity Growth Rate (g) 0.12 Overvalued

Sensitivity Analysis

- 106 -

Residual Income (Revised)

WACC(BT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Actual EPS 348.54 362.88 379.11 393.11 406.06 426.68 462.97 511.57 570.82 640.09"Normal" (Benchmark) Earnings 195.94 254.46 315.39 379.04 445.04 513.22 584.86 662.59 748.48 844.32Residual Income (Annual) 152.60 108.42 63.73 14.07 -38.99 -86.54 -121.89 -151.02 -177.66 -204.23 -230.00PV Factor 0.8562 0.7331 0.6277 0.5375 0.4602 0.3941 0.3374 0.2889 0.2474 0.2118PV of Annual Residual Income 130.67 79.49 40.00 7.56 -17.94 -34.10 -41.13 -43.63 -43.95 -43.26Total PV of Annual Residual Income 33.71 416.72%Continuing (Terminal) Value Perpetuity -1369.86PV of Terminal Value Perpetuity -338.86 -4189.48% 0 -0.05 -0.1 -0.15 -0.2Initial Book Value of Equity 1167.00 14427.96% 0.21 7.37 7.8 8.09 8.31 8.47Estimated Price per Share (end of 2006) 8.09 100.00% 0.19 8.35 8.95 9.34 9.61 9.81Implied Share Price at June 1, 2007 9.55 0.1679 9.55 10.41 10.96 11.33 11.59Observed Share Price 42.41 Undervalued 0.15 10.58 11.77 12.49 12.97 13.31Initial Cost of Equity (You Derive) 0.1679 Fairly-Valued 0.13 11.7 13.47 14.48 15.12 15.57Perpetuity Growth Rate (g) 0 Overvalued

- 107 -

Long Run ROE (Revised)

Book Value of Equity 1167Long Run Return on Equity 0.17 0.17Long Run Growth Rate in Equity 0.2 0.16Cost of Equity 0.13 0.1679

Estimated Price per Share (end of Fiscal Year) 16Estimated Price per Share (June 1, 2007) 16.46Observed Share Price $42.41

WACC(BT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


ROE 30% 24% 20% 17% 15% 14% 13% 13% 13% 13%BE % G 30% 24% 20% 17% 15% 14% 13% 13% 13% 13%

Average ROE 17%Average Growth in BVE 17%

Growth ROEKe 0.12 0.14 0.16 0.18 0.2 Ke 0.12 0.14 0.16 0.17 0.2

0.21 18.45 16.94 14.23 7.91 - 0.21 2.37 7.11 11.86 - 21.340.19 20.19 18.84 15.7 - 47.1 0.19 - 3.93 11.78 47.1 27.48

0.1679 23.88 24.25 26.47 21.34 22.6 0.1679 - - 11.68 22.6 70.840.15 30.96 46.44 - 15.48 18.57 0.15 58.05 34.83 11.61 18.57 -0.13 69.15 - 7.68 13.83 16.46 0.13 26.89 34.7 11.52 16.46 -

ROEGrowth 0.12 0.14 0.16 0.17 0.2

0.12 11.68 16.56 21.44 26.21 31.20.14 3.31 11.68 20.06 29.13 36.81

Overvalued 0.16 - - 11.68 - 70.84Fairly-Valued 0.18 69.62 50.31 31 17.48 -Undervalued 0.2 40.8 33.52 26.24 20.39 11.68

- 108 -

AEG (REVISED)

WACC(AT) 0.1594 Kd 0.05475 Ke 0.1679

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Earnings 348.54 362.88 379.11 393.11 406.06 426.68 462.97 511.57 570.82 640.094Dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Book Value 1167Cash From Operations 657.63 684.67 715.31 741.72 766.15 805.05 873.52 965.22 1077.03 1207.72Cash Investments 324.85 338.21 353.34 366.39 378.46 397.68 431.50 476.80 532.03 596.59

Core Perpetuity Component 348.54Forecast Earnings 362.88 379.11 393.11 406.06 426.68 462.97 511.57 570.82 640.09DRIP income 0 0 0 0 0 0 0 0 0Cumulative Dividend Income 362.88 379.11 393.11 406.06 426.68 462.97 511.57 570.82 640.09"Normal" Annual Income (Benchmark) 407.0644 423.8047 442.7652 459.1123 474.235 498.3167 540.6977 597.4584 666.6658Annual AEG adjustment -44.19 -44.69 -49.66 -53.05 -47.56 -35.35 -29.13 -26.63 -26.57 -32.91PV Factor 0.856238 0.733143 0.627745 0.537499 0.460227 0.394063 0.337412 0.288905 0.247371PV of YBY AEG -37.83449 -32.76594 -31.17122 -28.51672 -21.88718 -13.93052 -9.829243 -7.694689 -6.573103Total PV YBY of AEG -190.2031Value of AEG PER -196.0095Present value of AEG perp added to core -48.4871 KeTotal adjusted t+1 Perp 109.8537 g 0.12 0.14 0.1679 0.18 0.2Capitalization Rate (Ke) 0.1679 -0.16 15.45 11.55 7.96 6.84 5.38Value of Equity 654.28 -0.14 15.18 11.38 7.87 6.77 5.33Estimated Value at 31 Jan. 2007 6.14$ -0.12 14.87 11.18 7.76 6.68 5.27Growth 0% -0.1 14.5 10.95 7.63 6.58 5.2Obeserved Share Price at June 1, 2007 $42.41 6.55 -0.08 14.06 10.68 7.48 6.47 5.13

OvervaluedFairly-ValuedUndervalued

Annual AEG -44.19 -44.69 -49.66 -53.05 -47.56 -35.35 -29.13 -26.63 -26.57Change in RI -44.19 -44.69 -49.66 -53.05 -47.56 -35.35 -29.13 -26.63 -26.57Annual RI 152.60 108.42 63.73 14.07 -38.99 -86.54 -121.89 -151.02 -177.66 -204.23

- 109 -

3 Month Months Beta R^2

72 months 0.0974 0.0013 60 months 0.0315 -0.0152 48 months -0.0449 -0.0147 36 months -0.0677 -0.0131 24 months -0.0038 -0.0454

6 Months Months Beta R^2

72 months 1.6115 0.3159 60 months 1.7129 0.3520 48 months 1.1496 0.0796 36 months 0.7694 0.0329 24 months 0.5924 0.0013

2 Years

Months Beta R^2 72 months 1.6082 0.3156 60 months 1.7154 0.3543 48 months 1.1674 0.0829 36 months 0.7824 0.0355 24 months 0.6028 0.0032

5 Year


10 Year


- 110 -

SUMMARY OUTPUT Published Beta: 0.8Months Beta R^2

Regression Statistics 72 months 0.0974 0.0013 Rf 0.0487Multiple R 0.123936311 60 months 0.0315 -0.0152 Rm 0.0325R Square 0.015360209 48 months -0.0449 -0.0147Adjusted R Square 0.001293926 36 months -0.0677 -0.0131 CAPM =.0487+.0974(.07)Standard Error 0.104050377 24 months -0.0038 -0.0454 CAPM 0.0555Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.011822385 0.011822385 1.091987796 0.299626436Residual 70 0.757853662 0.010826481Total 71 0.769676047

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.032774614 0.023147497 1.415903162 0.161238138 -0.013391612 0.078940841 -0.013391612 0.078940841X Variable 1 0.09739107 0.093198784 1.044982199 0.299626436 -0.088488041 0.283270181 -0.088488041 0.283270181

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.04457323R Square 0.001986773Adjusted R Square -0.015220352Standard Error 0.099482023Observations 60




SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000373097 0.02169962 0.017193689 0.986356457 -0.043305972 0.044052165 -0.043305972 0.044052165X Variable 1 -0.044906699 0.079297825 -0.566304291 0.573939613 -0.204524939 0.114711542 -0.204524939 0.114711542

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.005931511 0.028699789 -0.206674389 0.8374969 -0.0642565 0.052393477 -0.0642565 0.052393477X Variable 1 -0.067701788 0.091578427 -0.739276594 0.464812748 -0.253811542 0.118407967 -0.253811542 0.118407967

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.007100325R Square 5.04146E-05Adjusted R Square -0.045401839Standard Error 0.054592402Observations 24


Regression 1 3.30572E-06 3.30572E-06 0.001109177 0.973732232Residual 22 0.065567267 0.00298033Total 23 0.065570573

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.022507778 0.041869428 0.537570693 0.596269878 -0.064324102 0.109339657 -0.064324102 0.109339657X Variable 1 -0.003848506 0.115555772 -0.033304315 0.973732232 -0.243496508 0.235799497 -0.243496508 0.235799497

3 Month

- 111 -


Regression Statistics 72 months 1.6115 0.3159 Rf 0.0498Multiple R 0.570540884 60 months 1.7129 0.3520 Rm 0.0325R Square 0.3255169 48 months 1.1496 0.0796Adjusted R Square 0.315881427 36 months 0.7694 0.0329Standard Error 0.086117319 24 months 0.5924 0.0013 CAPM =.0498+1.7129(.07)Observations 72 CAPM 0.1697


Regression 1 0.250542561 0.250542561 33.7831786 1.67423E-07Residual 70 0.519133486 0.007416193Total 71 0.769676047

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010447322 0.010153808 1.028906827 0.307065651 -0.009803809 0.030698454 -0.009803809 0.030698454X Variable 1 1.611493255 0.277254266 5.812329877 1.67423E-07 1.058527064 2.164459446 1.058527064 2.164459446

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.602479812R Square 0.362981924Adjusted R Square 0.351998854Standard Error 0.07947899Observations 60



Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.001643532 0.010338983 -0.158964567 0.874249033 -0.022339254 0.01905219 -0.022339254 0.01905219X Variable 1 1.712940375 0.297962513 5.748845251 3.52291E-07 1.116503609 2.309377141 1.116503609 2.309377141

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.002562109 0.011336945 0.225996402 0.822205391 -0.020257977 0.025382195 -0.020257977 0.025382195X Variable 1 1.149614163 0.510959915 2.249910664 0.029281427 0.121105214 2.178123111 0.121105214 2.178123111

SUMMARY OUTPUT





SUMMARY OUTPUT





6 Months

- 112 -


Regression Statistics 72 months 1.6082 0.3156 Rf 0.0477Multiple R 0.570287193 60 months 1.7154 0.3543 Rm 0.0325R Square 0.325227483 48 months 1.1674 0.0829Adjusted R Square 0.315587875 36 months 0.7824 0.0355 CAPM =.0477+1.7154(.07)Standard Error 0.086135793 24 months 0.6028 0.0032 CAPM 0.1678Observations 72




SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





2 Years

- 113 -


Regression Statistics 72 months 1.6064 0.3156Multiple R 0.570269555 60 months 1.7187 0.3563 MRP 0.0700R Square 0.325207365 48 months 1.1831 0.0855 Rf 0.0467Adjusted R Square 0.31556747 36 months 0.7905 0.0371Standard Error 0.086137077 24 months 0.6067 0.0038 CAPM =.0467+1.7187(.07)Observations 72 CAPM 0.1670




SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





5 Year

- 114 -


Regression Statistics 72 months 1.6077 0.3162Multiple R 0.570774424 60 months 1.7209 0.3574 MRP 0.0700R Square 0.325783444 48 months 1.1921 0.0870 Rf 0.0475Adjusted R Square 0.316151779 36 months 0.7963 0.0382Standard Error 0.086100301 24 months 0.6096 0.0043 CAPM =.0475+1.720(.07)Observations 72 CAPM 0.1679




SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





SUMMARY OUTPUT





10 Year

- 115 -

2001 Lease Schedule

i 0.08 Avg. 2007 on 1675 167.5

Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance2001 1 101.8 384.46 30.76 101.85 0.93 94.30 313.372002 2 93.43 313.37 25.07 93.43 0.86 80.10 245.012003 3 80.26 245.01 19.60 80.26 0.79 63.72 184.342004 4 64.2 184.34 14.75 64.20 0.74 47.19 134.902005 5 85.93 134.90 10.79 85.93 0.68 58.48 59.752006 6 38.07 59.75 4.78 38.07 0.63 23.99 26.472007 7 16.86 26.47 2.12 16.86 0.58 9.84 11.722008 8 7.471 11.72 0.94 7.47 0.54 4.04 5.192009 9 3.31 5.19 0.41 3.31 0.50 1.66 2.292010 10 1.466 2.29 0.18 1.47 0.46 0.68 1.012011 11 0.65 1.01 0.08 0.65 0.43 0.28 0.442012 12 0.288 0.44 0.04 0.29 0.40 0.11 0.192013 13 0.127 0.19 0.01 0.13 0.37 0.05 0.072014 14 0.056 0.07 0.01 0.06 0.34 0.02 0.022015 15 0.025 0.02 0.00 0.03 0.32 0.01 0

i 1.08 Avg. 493.9933814 Total 384.46

Sum 68.32538Check 68.318 int 109.54Rate 0.443 dep 384.46

493.99 493.99

2001

2002 Lease Schedule

i 0.08 Avg. 2007 on 1675

Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment2002 1 126.2 509.23 40.74 126.21 0.93 116.862003 2 118.1 423.76 33.90 118.08 0.86 101.242004 3 104 339.58 27.17 103.97 0.79 82.542005 4 82.84 262.77 21.02 82.84 0.74 60.892006 5 141.1 200.96 16.08 141.05 0.68 96.002007 6 53.33 75.98 6.08 53.33 0.63 33.612008 7 20.17 28.73 2.30 20.17 0.58 11.772009 8 7.625 10.86 0.87 7.62 0.54 4.122010 9 2.883 4.10 0.33 2.88 0.50 1.442011 10 1.09 1.55 0.12 1.09 0.46 0.502012 11 0.412 0.58 0.05 0.41 0.43 0.182013 12 0.156 0.22 0.02 0.16 0.40 0.062014 13 0.059 0.08 0.01 0.06 0.37 0.022015 14 0.022 0.03 0.00 0.02 0.34 0.012016 15 0.008 0.01 0.00 0.01 0.32 0.00

i 1.08 Avg. 657.9004774 Total 509.23


657.90 657.90

2002

- 116 -

2003 Lease Schedule

i 0.08 Avg. 2007 on 1675 167.5


i 1.08 Avg. 648.2892653 Total 509.39


648.29 648.29

2003

2004 Lease Schedule

i 0.08 Avg. 2007 on 1675 167.5


i 1.08 Avg. 800.9839099 Total 627.16


800.98 800.98

2004

- 117 -

2005 Lease Schedule

i 0.08 Avg. 2007 on 1675 167.5


i 1.08 Avg. 914.950303 Total 715.15


914.95 914.95

2005

2006 Lease Schedule

i 0.08 Avg. 2007 on 1675 167.5


i 1.08 Avg. 1015.019584 Total 798.38


1015.02 1015.02

2006

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References:

1. Dollar Tree Stores Inc. 10-K – 2007, 2006, 2005, 2004, 2003, 2000

2. missionstatement.dollartree.com

3. 99 Cents Only 10-K - 2007, 2006, 2005, 2004, 2003

4. Dollar General Corp 10-K 2007, 2006, 2005, 2004, 2003

5. Family Dollar Stores 10-K 2007, 2006, 2005, 2004, 2003

6. www.acad.poly.edu

7. Money Central (http://moneycentral.msn.com)

8. Yahoo! Finance (http://finance.yahoo.com

9. www.familydollar.com

10. cnn (http://www.cnn.com)

11. Find Articles (http://wwww.findarticles.com)

12. Business Analysis & Valuation - Third Edition by Palepu, Healy, and

Bernard.

13. Dollar Stores Feel the Pinch (wsj.com) Cindy Perman Dec 12, 2006

14. www.bizwiz.ca/inventory_inventory_ratio

15. http://beginnersinvest.about.com

16. Financial Statement Analysis handout

17. Dollar General, Family Dollar, 99 Cent Only, Dollar Tree 10-Q’s

18. www.investopedia.com

19. www.moneyterms.co

20. www.pages.stern.nyu.edu

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