DOLLAR TREE Equity Valuation & Analysis

Transcription

1 DOLLAR TREE Equity Valuation & Analysis [June 02, 2007] Arun Chauhan Jacob Caldwell Maegan Farrris Matt Ramirez Phillip Adcock - 0 -

2 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 62 Business 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

3 Executive Summary Investment Recommendation: Overvalued, Sell 6/1/07 DLTR NasdaqGS(6/1/07) - $42.41 EPS Forecast 52 week range: $ $ Initial Revenue: (1/31/2007) $ Revised Market Capitalization (yahoo.finance) $4.36B Shares Outstanding $99.66M Ratio comparison DLTR DG FDO NDN 3-mth Avg Daily Trading Volume: 1,275,050 Trailing P/E Percent Institutional Ownership: 94% Forward P/E Book Value per Share: (Equity/Shares) $11.72 PEG ROE:.16 P/B ROA:.11 Valuations Estimates Cost of Capital est. R2 Beta Ke Actual Price (6/1/07): $ Month Ratio Based Valuations 6-Month Trailing P/E Year Forward P/E Year PEG Year P/B Kd P/EBITDA WACC 15.9% P/FCF EV/EBITDA Altman Z-Score Intrinsic Valuations Initial Revised Free Cash Flows Initial Residual Income Revised LR ROE AEG

4 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 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

5 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 - 4 -

6 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 - 5 -

7 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

8 Company Overview Business & Industry Analysis 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 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 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 - 7 -

9 (Dollar Tree 10-K 2006). This demonstrates that the company acknowledges the importance of growth in their industry and is implementing new expansion plans Assets $1, $1, $1, $1, $1, Sales $ $2, $3, $3, $3, 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 Industry Overview The retail industry is large. Hence, it can be broken down into many subindustries 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 - 8 -

10 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 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 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: - 9 -

11 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

12 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 ( 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 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 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% Dollar Tree Dollar General Familiy Dollar 99 Cent Only 20.00% 10.00% 0.00% Year

13 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

14 Market Share (# of Stores) Year: Dollar Tree Family Dollar NA Dollar General Cent Only NA Dollar General 47% 99 Cent Only 1% Dollar Tree 17% Family Dollar 35% Dollar General 47% 99 Cent Only 1% Dollar Tree 17% Family Dollar 35% Dollar General 47% 99 Cent Only 1% Dollar Tree 17% Family Dollar 35% Dollar General 46% 99 Cent Only 1% Dollar Tree 18% Family Dollar 35% 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

15 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

16 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 ( 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 ( 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

17 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

18 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

19 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

20 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 ( 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

21 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 ( Brand preference among customers helps to set Dollar Tree apart from its competitors

22 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 ( 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

23 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 ( 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 (

24 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

25 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)

26 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

27 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 $3, $2, $3, $3, $ Year No. Of Stores Net Sales (in millions) $ $ 2, $ 3, $ 3, $ 3, 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 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 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

28 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

29 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

30 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 Accounting Policy Strategy Significant Effect to Net Income? Significant Effect to Balance Sheet? Operating Leases Aggressive Yes Yes Intangible Assets Aggressive No Yes 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

31 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 K, Dollar Tree K, Dollar General K, Family Dollar K, 99 Cent Only K). Capitalization of Operating Leases using a 8% Discount Rate Year T PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance * (Discount Rate calculated from This table shows our operating lease schedule. The Dollar Tree 10-K discloses these lease payments up to the year From this year on it discloses that the remaining value of the leases totals million. For this value we decreased it back by a percentage matching the decrease in payments from 2007 to The sum of the payments of 2012 to 2021 equals the 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

32 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 K, Dollar General K, Family Dollar K, 99 Cent Only 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 K, Dollar General K, Family Dollar K, 99 Cent Only K)

33 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

34 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 Dollar Tree 99 Cents Only Family Dollar Dollar 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

35 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 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

36 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. ( Asset Turnover (Sales/Assets) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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

37 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. ( 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 Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised Change in CFFO/NOA (0.10) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised (0.20) 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

38 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 (0.20) (0.40) (0.60) (0.80) (1.00) (1.20) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised CFFO/OI Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised

39 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 Family Dollar Dollar Tree Dollar General 99 Cent Only Store

40 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 $14.6M in the year However, this increase can be justified by the 138 Deal$ 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

41 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

42 Current Ratio Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Industry 2.82 Current Ratio Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 Dollar Tree s is slightly above average at 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

43 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) Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Industry 1.03 Quick Asset Ratio (Acid-Test) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 Dollar Tree is just above average at This lets analysts and potential investors know that Dollar Tree is able to pay its current

44 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 Dollar Tree N/A N/A N/A N/A N/A N/A 99 Cents Only 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 Dollar Tree N/A N/A N/A N/A N/A N/A 99 Cents Only 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

45 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 ( Inventory Turnover Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Inventory Turnover Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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

46 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 This shows that Dollar Tree is less than the industry average with 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

47 Days Supply of Inventory Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 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 days. Dollar Tree is a little bit above average with day average. This tells analysts that it takes Dollar Tree, on average, 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. (

48 Working Capital Turnover Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Working Capital Turnover Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 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 Dollar General has had ups and down in this area, but have steadily improved since The industry average is Dollar Tree is just below average at 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

49 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

50 Gross Profit Margin Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 ( The bigger the number, the better it is for the company

51 Operating Profit Margin Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Operating Profit Margin Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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

52 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Net Profit Margin Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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

53 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Asset Turnover Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised Dollar Tree s Asset Turnover ratio went from 2.31 in 2002 to 2.16 in 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

54 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) Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

55 Return On Assets (ROA) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised Dollar Tree went from a 17% return in 2002 to an 11% return in 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 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

56 Return On Equity (ROE) Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General Return On Equity (ROE) Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised Dollar Tree went from a 24% return in 2002 down to a 16% return in 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 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

57 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

58 Debt To Equity Ratio Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

59 Times Intrest Earned Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 Dollar Tree Dollar Tree Revised Cents Only Family Dollar Dollar General

60 Debt Service Margin Dollar Tree 99 Cents Only Family Dollar Dollar General Dollar Tree Revised 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 Internal Growth Rate 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

61 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 Sustainable Growth Rate 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 Cash to Cash Cycle

62 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 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

63 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. Actual Forcasted Forecasted Income Statement Average Assume (In millions, except per share data) Net sales $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, % $ 4, $ 4, $ 5, $ 6, $ 6, $ 7, $ 8, $ 9, $ 11, $ 12, Cost of sales 1, , , , , , , , , , , , , , , , Gross profit , , , , % Selling, general and administrative expenses , % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, Operating income % $ $ $ $ $ $ $ $ $ $ Interest income Interest expense (7.19) (5.99) (7.49) (9.20) (15.50) (16.50) Income before income taxes % $ $ $ $ $ $ $ $ $ $ Provision for income taxes Net income $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ $ In preparing our forecasts for Income Statement, we noticed a trend which Dollar Tree s Income Statements had followed from 2001 till 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 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 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

64 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. Actual Forcasted Forecasted Balance Sheet Average Assume (In millions, except per share data) ASSETS Current assets: Cash and cash equivalents Short-term investments % $ $ $ $ $ $ $ $ $ $ Merchandise inventories , , , , , , , Deferred tax assets Prepaid expenses and other current assets Total current assets % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 3, $ 3, Property, plant and equipment, net % $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, Intangibles, net % $ $ $ $ $ $ $ $ $ $ Other assets, net % $ $ $ $ $ $ $ $ $ $ Total Non Current Assets % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, TOTAL ASSETS $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, $ 4, $ 4, $ 5, $ 5, $ 6, LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt Accounts payable % $ $ $ $ $ $ $ $ $ $ Other current liabilities Income taxes payable Total current liabilities % $ $ $ $ $ $ $ $ $ $ Long-term debt, excluding current portion Deferred tax liabilities Other liabilities Total Non Current Liablities % $ $ $ $ $ $ $ $ $ $ Total liabilities $ $ $ $ $ $ $ $ $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, Shareholders' equity: Common stock, par value $ ,000,000 shares authorized, 99,663,580 and 106,552,054 shares issued and outstanding at February 3, 2007 and January 28, 2006, respectively Additional paid-in capital Unearned Compensation 0.00 (0.12) Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) Retained earnings , , $ 1, $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 4, $ 4, $ 5, Total shareholders' equity $ $ $ 1, $ 1, $ 1, $ 1, % $ 1, $ 1, $ 2, $ 2, $ 2, $ 3, $ 3, $ 4, $ 4, $ 5, Total Shareholders' Equity and Total Liablities Error Check $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - (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

65 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 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: Therefore, Asset Turnover = (Sales/Total Assets) 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

66 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. Actual Forcasted Forcasted Cash Flow Statement Average Assume (In millions) Net income (loss) % $ $ $ $ $ $ $ $ $ $ Depreciation & amortization (Gain) loss on disposal of property & equip Cumulative effect of change in acctg princ Change in lease loss Chng in fair val of non-hedging int rate swap (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt Provision of deferred income taxes (6.22) (21.50) (21.90) Tax benefit of stock option exercises Stock based compensation expense Other non-cash adjustments to net income Merchandise inventories (37.79) (61.19) (61.17) (89.84) (6.20) Prepaid expenses & other current assets (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) $ $ $ $ 8.91 $ 9.98 $ $ $ $ $ Income taxes payable (10.81) (3.37) Other current liabilities (6.41) Other liabilities (0.75) Total adjustments Net cash flows from operating activities $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1, $ 1, $ 1, Capital expenditures (121.57) (136.13) (227.32) (181.78) (139.25) (175.30) % $ (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 , 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 Settlement of merger-related contingencies 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 Principal payments under long-term debt & cap (0.60) Proceeds from revolving credit facilities 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 Tax benefit of stock options exercised Net cash flows from financing activities $ (1.77) $ $ (35.54) $ $ (170.33) $ (202.90) Net incr (decr) in cash & cash equivalents (68.62) (40.70) Cash & cash equivs at beginning of year $ $ $ $ $ $ Cash & cash equivalents at end of year $ $ $ $ $ $ Cash paid for interest, net of amount capital Cash paid for income taxes (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

67 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

68 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,

69 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= (.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

70 Dollar Tree Current Liabilites Weight Rate Value Weighted Rate Current Portion of Long Term Debt % Accounts Payable % Other Current liabilites % Income Taxes Payable % Total Current Liabilites Long Term Debt, excluding current portion % Deffered tax liabilites % Other Liabilites % Total Liabilites Kd= 5.475% After Tax Kd= 3.559% Shareholdres Equity Ke= % Market Value of Equity 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

71 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) Family Dollar (FDO) Cent Only (NDN) (Outlier) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price 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

72 Remark P/E (Forecast) Price/Earning Dollar Tree (DLTR) Dollar General (DG) Family Dollar (FDO) Cent Only (NDN) (Outlier) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price 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 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. Therefore, Dollar Tree s Forecast P/E = Industry Average P/E Dollar Tree s P = Industry Average P/B * Dollar Tree s E = * 1.85 Dollar Tree s current selling price is per share. The price according to the calculation of forward P/E ratio is 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

73 Remark P/B Price/Book Value Dollar Tree (DLTR) Dollar General (DG) Family Dollar (FDO) Cent Only (NDN) (Outlier) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price We computed this ratio and got an industry average of 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: Therefore, Dollar Tree s P/B = Industry Average P/B Dollar Tree s P = Industry Average P/B * Dollar Tree s B = 3.89 * ( / ) We got the Book Value of Dollar Tree from their latest (2007) published 10-K. Dollar Tree s current selling price is The Price of Dollar Tree according to our calculation using the P/B ratio is $ 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

74 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) Family Dollar (FDO) Cent Only (NDN) (Outlier) - Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) 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) Dollar Tree (DLTR) Dollar General (DG) Family Dollar (FDO) Cent Only (NDN) (Outlier) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price

75 We computed the P.E.G. for the industry and averaged it to get a result of 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: Therefore, Dollar Tree s P/ (E/G) = Industry Average P.E.G. 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) Family Dollar (FDO) Cent Only (NDN) (Outlier) (4.5338) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price

76 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 = * When we completed our computation the price we got for Dollar Tree is $ 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) Family Dollar (FDO) Cent Only (NDN) (Outlier) (4.5338) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price Free Cash Flows is calculated as: FCF = CFFO +(-) CFFI

77 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: Therefore, Dollar Tree s P/FCF = Industry Average P/FCF Dollar Tree s P = Industry Average P/FCF * Dollar Tree s FCF 7.20 =.1178 * Our result showed that the Dollar Tree s price based on this valuation method should be $ 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) Dollar Tree (DLTR) Dollar General (DG) Family Dollar (FDO) Cent Only (NDN) (Outlier) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) DLTR - Share Price

78 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 $ 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

79 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 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

80 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 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

81 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 ROE Ke

82 ROE Growth 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 Observed Price: $42.41 Annual AEG Change in RI

83 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 Z-score Financial Uncertainty >3 Good Financial Standing The Z-Score is calculated by using the following formula: 1.2 (Working Capital/Total Assets) (Retained Earnings/ Total Assets) (EBIT/Total Assets) +.6 (Market Value of Equity/Total Liabilities) (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

84 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 $ 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

85 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 Observed Price- $42.41 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

86 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: Growth Ke Observed Price- $42.41 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 Observed Price- $

87 ROE Growth Observed Price- $42.41 ROE Ke Observed Price- $42.41 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:

88 Ke Growth Observed Price- $42.41 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 Change in RI Revised Z-Score Dollar Tree Z-score revised Z-score 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

89 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

90 Forecasted Balance Sheet Unrevised Based on Actual Balance Sheets Dollar Tree Stores Inc. Actual Forcasted Forecasted Balance Sheet Average Assume (In millions, except per share data) ASSETS Current assets: Cash and cash equivalents Short-term investments % $ $ $ $ $ $ $ $ $ $ Merchandise inventories , , , , , , , Deferred tax assets Prepaid expenses and other current assets Total current assets % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 3, $ 3, Property, plant and equipment, net % $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, Intangibles, net % $ $ $ $ $ $ $ $ $ $ Other assets, net % $ $ $ $ $ $ $ $ $ $ Total Non Current Assets % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, TOTAL ASSETS $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, $ 4, $ 4, $ 5, $ 5, $ 6, LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt Accounts payable % $ $ $ $ $ $ $ $ $ $ Other current liabilities Income taxes payable Total current liabilities % $ $ $ $ $ $ $ $ $ $ Long-term debt, excluding current portion Deferred tax liabilities Other liabilities Total Non Current Liablities % $ $ $ $ $ $ $ $ $ $ Total liabilities $ $ $ $ $ $ $ $ $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, Shareholders' equity: Common stock, par value $ ,000,000 shares authorized, 99,663,580 and 106,552,054 shares issued and outstanding at February 3, 2007 and January 28, 2006, respectively Additional paid-in capital Unearned Compensation 0.00 (0.12) Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) Retained earnings , , $ 1, $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 4, $ 4, $ 5, Total shareholders' equity $ $ $ 1, $ 1, $ 1, $ 1, % $ 1, $ 1, $ 2, $ 2, $ 2, $ 3, $ 3, $ 4, $ 4, $ 5, Total Shareholders' Equity and Total Liablities Error Check $ - $ - $ - $ - $ - $ - $ - $ - $ - $

91 Dollar Tree Balance Sheet Forecast (Common Size) ASSETS Current 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 % % % % % % LIABILITIES AND SHAREHOLDERS' EQUITY Current 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 % % % % % % Shareholders' equity: Common stock, par value $ ,000,000 shares authorized, 99,663,580 and 106,552,054 shares issued and outstanding at February 3, 2007 and 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 % % % % % %

92 Forecasted Balance Sheet with Capital Lease Corrections Based on actual Balance Sheets Dollar Tree Stores Inc. Actual Forcasted Balance Sheet Forcast with Capital Lease Average Assume (In millions, except per share data) ASSETS Current assets: Cash and cash equivalents Short-term investments % $ $ $ $ $ $ $ $ $ $ Merchandise inventories , , , , , , , Deferred tax assets Prepaid expenses and other current assets Total current assets % $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, $ 3, Capital Lease Rights Property, plant and equipment, net % $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, Intangibles, net % $ $ $ $ $ $ $ $ $ $ Other assets, net % $ $ $ $ $ $ $ $ $ $ Total Non Current Assets % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, TOTAL ASSETS $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 3, $ 3, $ 3, $ 3, $ 4, $ 4, $ 4, $ 5, $ 5, $ 6, LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt Accounts payable % $ $ $ $ $ $ $ $ $ $ Other current liabilities Income taxes payable Total current liabilities % $ $ $ $ $ $ $ $ $ $ Capital Lease Obligation $ $ $ $ $ $ $ $ $ $ Long-term debt, excluding current portion Deferred tax liabilities Other liabilities Total Non Current Liablities % $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total liabilities $ $ $ $ $ $ $ 1, $ 1, $ 1, $ 1, $ $ $ $ $ $ Shareholders' equity: Common stock, par value $ ,000,000 shares authorized, 99,663,580 and 106,552,054 shares issued and outstanding at February 3, 2007 and January 28, 2006, respectively Additional paid-in capital Unearned Compensation 0.00 (0.12) Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) Retained earnings , , $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, $ 4, $ 5, $ 5, Total shareholders' equity $ $ $ 1, $ 1, $ 1, $ 1, % $ 1, $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, $ 4, $ 5, $ 5, Total Shareholders' Equity and Total Liablities Error Check (0.00) (0.00) 0.00 (0.00)

93 Actual Years Balance Sheet with Capital Lease Corrections Dollar Tree Stores Inc. Actual Balance Sheet Forcast with Capital Lease (In millions, except per share data) ASSETS Current assets: Cash and cash equivalents Short-term investments Merchandise inventories Deferred tax assets Prepaid expenses and other current assets Total current assets Capital Lease Rights Property, plant and equipment, net Intangibles, net Other assets, net Total Non Current Assets , , , , TOTAL ASSETS $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt Accounts payable Other current liabilities Income taxes payable Total current liabilities Capital Lease Obligation Long-term debt, excluding current portion Deferred tax liabilities Other liabilities Total Non Current Liablities , , Total liabilities $ $ $ $ 1, $ 1, $ 1, Shareholders' equity: Common stock, par value $ ,000,000 shares authorized, 99,663,580 and 106,552,054 shares issued and outstanding at February 3, 2007 and January 28, 2006, respectively Additional paid-in capital Unearned Compensation 0.00 (0.12) Accumulated other comprehensive income (loss) (0.38) (1.37) (0.97) (0.29) Retained earnings , , Total shareholders' equity $ $ $ 1, $ 1, $ 1, $ 1, Total Shareholders' Equity and Total Liablities $ 1, $ 1, $ 1, $ 2, $ 2, $ 2,

94 Forecasted Income Statement based on Actual Income Statement Dollar Tree Stores Inc. Actual Forcasted Forecasted Income Statement Average Assume (In millions, except per share data) Net sales $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, % $ 4, $ 4, $ 5, $ 6, $ 6, $ 7, $ 8, $ 9, $ 11, $ 12, Cost of sales 1, , , , , , , , , , , , , , , , Gross profit , , , , % Selling, general and administrative expenses , % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, Operating income % $ $ $ $ $ $ $ $ $ $ Interest income Interest expense (7.19) (5.99) (7.49) (9.20) (15.50) (16.50) Income before income taxes % $ $ $ $ $ $ $ $ $ $ Provision for income taxes Net income $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ $

95 Forecasted Income Statement with Capital Lease Corrections Dollar Tree Stores Inc. Actual Forcasted I.S. Forecast with Capital Lease Revision Average Assume (In millions, except per share data) Net sales $ 1, $ 2, $ 2, $ 3, $ 3, $ 3, % $ 4, $ 4, $ 5, $ 6, $ 6, $ 7, $ 8, $ 9, $ 11, $ 12, Cost of sales 1, , , , , , , , , , , , , , , , Gross profit , , , , % Selling, general and administrative expenses , % $ 1, $ 1, $ 1, $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 3, Adding Back Operating Lease Expense Less Capital Lease Depreciation Expense Adjustment Operating income % $ $ $ $ $ $ $ $ $ $ Capital Lease Interest Expense $ $ $ $ $ $ $ 6.74 $ 4.06 $ 2.43 $ 1.45 Interest income Interest 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 $ $ $ $ $ $ Income before income taxes % $ $ $ $ $ $ $ $ $ $ Provision for income taxes Net income With Leases Capitalized $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ $ Net Income Under Operating Lease Treatment $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 $ $ $ $

96 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 administrative expenses 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%

97 Forecasted Statement of Cash Flows Dollar Tree Stores Inc. Actual Forcasted Forcasted Cash Flow Statement Average Assume (In millions) Net income (loss) % $ $ $ $ $ $ $ $ $ $ Depreciation & amortization (Gain) loss on disposal of property & equip Cumulative effect of change in acctg princ Change in lease loss Chng in fair val of non-hedging int rate swap (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt Provision of deferred income taxes (6.22) (21.50) (21.90) Tax benefit of stock option exercises Stock based compensation expense Other non-cash adjustments to net income Merchandise inventories (37.79) (61.19) (61.17) (89.84) (6.20) Prepaid expenses & other current assets (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) $ $ $ $ 8.91 $ 9.98 $ $ $ $ $ Income taxes payable (10.81) (3.37) Other current liabilities (6.41) Other liabilities (0.75) Total adjustments Net cash flows from operating activities $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1, $ 1, $ 1, Capital expenditures (121.57) (136.13) (227.32) (181.78) (139.25) (175.30) % $ (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 , 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 Settlement of merger-related contingencies 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)

98 Forecasted Statement of Cash Flows with Capital Lease Corrections Dollar Tree Stores Inc. Actual Forcasted Cash Flow Statement with Capital Lease Average Assume (In millions) Net income (loss) % $ $ $ $ $ $ $ $ $ $ Depreciation & amortization (Gain) loss on disposal of property & equip Cumulative effect of change in acctg princ Change in lease loss Chng in fair val of non-hedging int rate swap (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt Provision of deferred income taxes (6.22) (21.50) (21.90) Tax benefit of stock option exercises Stock based compensation expense Other non-cash adjustments to net income Merchandise inventories (37.79) (61.19) (61.17) (89.84) (6.20) Prepaid expenses & other current assets (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) $ $ (23.91) $ (19.75) $ (15.13) $ (8.89) $ (1.22) $ 5.78 $ $ $ Income taxes payable (10.81) (3.37) Other current liabilities (6.41) Other liabilities (0.75) Total adjustments Net cash flows from operating activities $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1, $ 1, Capital expenditures (121.57) (136.13) (227.32) (181.78) (139.25) (175.30) % $ (269.63) $ (280.72) $ (293.28) $ (304.10) $ (314.12) $ (330.07) $ (358.14) $ (395.74) $ (441.58) $ (495.17) 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 , 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 Settlement of merger-related contingencies Net cash flows from investing activities $ (121.47) $ (173.82) $ (267.36) $ (315.41) $ (235.51) $ (190.70) 83.00% $ (324.85) $ (338.21) $ (353.34) $ (366.39) $ (378.46) $ (397.68) $ (431.50) $ (476.80) $ (532.03) $ (596.59) Distributions paid Proceeds from long-term debt Principal payments under long-term debt & cap (0.60) Proceeds from revolving credit facilities 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 Tax benefit of stock options exercised Net cash flows from financing activities $ (1.77) $ $ (35.54) $ $ (170.33) $ (202.90) Net incr (decr) in cash & cash equivalents (68.62) (40.70) Cash & cash equivs at beginning of year $ $ $ $ $ $ Cash & cash equivalents at end of year $ $ $ $ $ $ Cash paid for interest, net of amount capital Cash paid for income taxes

99 Statement of Cash Flows Dollar Tree Stores Inc. Actual Cash Flow Statement with Capital Lease (In millions) Net income (loss) Depreciation & amortization (Gain) loss on disposal of property & equip Cumulative effect of change in acctg princ Change in lease loss Chng in fair val of non-hedging int rate swap (0.89) (1.06) (0.76) - Extraord (gain) loss early extinguish of debt Provision of deferred income taxes (6.22) (21.50) (21.90) Tax benefit of stock option exercises Stock based compensation expense Other non-cash adjustments to net income Merchandise inventories (37.79) (61.19) (61.17) (89.84) (6.20) Prepaid expenses & other current assets (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) Income taxes payable (10.81) (3.37) Other current liabilities (6.41) Other liabilities (0.75) Total adjustments Net cash flows from operating activities $ $ $ $ $ $ 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 , 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 Settlement of merger-related contingencies Net cash flows from investing activities $ (121.47) $ (173.82) $ (267.36) $ (315.41) $ (235.51) $ (190.70) Distributions paid Proceeds from long-term debt Principal payments under long-term debt & cap (0.60) Proceeds from revolving credit facilities 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 Tax benefit of stock options exercised Net cash flows from financing activities $ (1.77) $ $ (35.54) $ $ (170.33) $ (202.90) Net incr (decr) in cash & cash equivalents (68.62) (40.70) Cash & cash equivs at beginning of year $ $ $ $ $ $ Cash & cash equivalents at end of year $ $ $ $ $ $ Cash paid for interest, net of amount capital Cash paid for income taxes

100 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 % -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% 100% 100% 100% 100% Capital expenditures % 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% % % % Proceeds from sales of short-term investments 0.00% -9.49% % % % % 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 % % % % % % Distributions paid Proceeds from long-term debt Principal payments under long-term debt & cap (0.60) Proceeds from revolving credit facilities 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 Tax benefit of stock options exercised Net cash flows from financing activities $ (1.77) $ $ (35.54) $ $ (170.33) $ (202.90) Net incr (decr) in cash & cash equivalents (68.62) (40.70) Cash & cash equivs at beginning of year $ $ $ $ $ $ Cash & cash equivalents at end of year $ $ $ $ $ $ Cash paid for interest, net of amount capital Cash paid for income taxes

101 Method of Comparables Remark P/E (Trailing) P/E (Forecast) P/B D/P P.E.G. P/EDITDA P/(FCF per share) Price/Earning Price/Earning Price/Bookvalue Divident/Price (P/E)/(1-Year Growth Rate) Price/EDITBA Price/Free Cash Flows (Enterprise value) /(EBITDA) Dollar Tree (DLTR) Dollar General (DG) Family Dollar (FDO) Cent Only (NDN) (Outlier) (4.5338) (4.5338) Industry Average without DLTR n NDN Dollar Tree Current Selling Price (Jun 1, 2007) P/E (Traling) P/E (Forecast) P/B D/P N/A P.E.G P/EDITDA P/FCF Enterprise Value/EBITDA Cents Only Free Cash Flow (million) FCF = CFFO+(-)CFFI Close Price (Jun 1, 2007) 14.2 EBITDA 4.1 (million) Dollar General Free Cash Flow (million) Close Price (Jun 1, 2007) EBITDA (million) Divident (2006) $0.10 Family Dollar Free Cash Flow (million) Close Price (Jun 1, 2007) EBITDA (million) Divident (2006) $

102 Intrinsic Valuation Free Cash Flows WACC(BT) Kd Ke Earnings Dividends Book Value Cash From Operations Cash Outflows from Investing Activities Book Value of Debt and Preferred Stock Annual Free Cash Flow PV Factor PV of Free Cash Flows Total PV of Annual Free Cash Flows Continuing (Terminal) Value Perpetuity Sensitivity Analysis PV of Terminal Value Perpetuity Value of Firm $ 18, Book Value of Liabilities Estimated Market Value of Equity $18, Number of Shares Estimated Price per Share (End of Fiscal Year) $ Estimated Price per Share (June 1, 2007) Observed Share Price $42.41 $48.77 $36.05 Undervalued Initial WACC 0.14 Fairly-Valued Perpetuity Growth Rate (g) 0.13 Overvalued

103 Intrinsic Valuation Residual Income WACC(BT) Kd Ke Earnings Dividends Book Value Actual EPS "Normal" (Benchmark) Earnings Residual Income (Annual) PV Factor PV of Annual Residual Income Total PV of Annual Residual Income % Continuing (Terminal) Value Perpetuity PV of Terminal Value Perpetuity % Initial Book Value of Equity % Estimated Price per Share (end of 2006) % Implied Share Price at June 1, Observed Share Price Undervalued Initial Cost of Equity (You Derive) 0.13 Fairly-Valued Perpetuity Growth Rate (g) -0.2 Overvalued

104 Intrinsic Valuation Residual Income Perpetuity Book Value of Equity 192 Long Run Return on Equity Long Run Growth Rate in Equity Cost of Equity Estimated Price per Share (end of Fiscal Year) 4 Estimated Price per Share (June 1, 2007) 4.36 Observed Share Price $42.41 WACC(BT) Kd Ke Earnings Dividends Book Value 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 ROE Ke Ke ROE Growth Overvalued Fairly-Valued Undervalued

105 AEG Valuation WACC(AT) Kd Ke Earnings Dividends Book Value 1167 Cash From Operations Cash Investments Core Perpetuity Component Forecast EPS DRIP income Cumulative Dividend Income "Normal" Annual Income (Benchmark) Annual AEG adjustment PV Factor PV of YBY AEG Total PV YBY of AEG Value of AEG PER Present value of AEG perp added to core Ke Total adjusted t+1 Perp g Capitalization Rate (Ke) Value of Equity Estimated Value at 31 Jan $ Growth 0% Obeserved Share Price at June 1, 2007 $ Overvalued Fairly-Valued Undervalued Annual AEG Change in RI Annual RI

106 Free Cash Flows (Revised) WACC(BT) Kd Ke Earnings Dividends Book Value 1167 Cash From Operations Cash Outflows from Investing Activities Book Value of Debt and Preferred Stock Annual Free Cash Flow PV Factor PV of Free Cash Flows Total PV of Annual Free Cash Flows Continuing (Terminal) Value Perpetuity Sensitivity Analysis PV of Terminal Value Perpetuity Value of Firm $ 5, Book Value of Liabilities Estimated Market Value of Equity $4, Number of Shares Estimated Price per Share (End of Fiscal Year) $ Estimated Price per Share (June 1, 2007) Observed Share Price $42.41 $48.77 $36.05 Undervalued Initial WACC Fairly-Valued Perpetuity Growth Rate (g) 0.12 Overvalued

107 Residual Income (Revised) WACC(BT) Kd Ke Earnings Dividends Book Value Actual EPS "Normal" (Benchmark) Earnings Residual Income (Annual) PV Factor PV of Annual Residual Income Total PV of Annual Residual Income % Continuing (Terminal) Value Perpetuity PV of Terminal Value Perpetuity % Initial Book Value of Equity % Estimated Price per Share (end of 2006) % Implied Share Price at June 1, Observed Share Price Undervalued Initial Cost of Equity (You Derive) Fairly-Valued Perpetuity Growth Rate (g) 0 Overvalued

108 Long Run ROE (Revised) Book Value of Equity 1167 Long Run Return on Equity Long Run Growth Rate in Equity Cost of Equity Estimated Price per Share (end of Fiscal Year) 16 Estimated Price per Share (June 1, 2007) Observed Share Price $42.41 WACC(BT) Kd Ke Earnings Dividends Book Value 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 ROE Ke Ke ROE Growth Overvalued Fairly-Valued Undervalued

109 AEG (REVISED) WACC(AT) Kd Ke Earnings Dividends Book Value 1167 Cash From Operations Cash Investments Core Perpetuity Component Forecast Earnings DRIP income Cumulative Dividend Income "Normal" Annual Income (Benchmark) Annual AEG adjustment PV Factor PV of YBY AEG Total PV YBY of AEG Value of AEG PER Present value of AEG perp added to core Ke Total adjusted t+1 Perp g Capitalization Rate (Ke) Value of Equity Estimated Value at 31 Jan $ Growth 0% Obeserved Share Price at June 1, 2007 $ Overvalued Fairly-Valued Undervalued Annual AEG Change in RI Annual RI

110 3 Month Months Beta R^2 72 months months months months months Months Months Beta R^2 72 months months months months months Years Months Beta R^2 72 months months months months months Year Months Beta R^2 72 months months months months months Year Months Beta R^2 72 months months months months months

111 SUMMARY OUTPUT 3 Month Published Beta: 0.8 Months Beta R^2 Regression Statistics 72 months Rf Multiple R months Rm R Square months Adjusted R Square months CAPM = (.07) Standard Error months CAPM Observations 72 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 48 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 36 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square E-05 Adjusted R Square Standard Error Observations 24 ANOVA df SS MS F Significance F Regression E E Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

112 SUMMARY OUTPUT 6 Months Published Beta: 0.8 Months Beta R^2 Regression Statistics 72 months Rf Multiple R months Rm R Square months Adjusted R Square months Standard Error months CAPM = (.07) Observations 72 CAPM ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 48 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 36 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 24 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

113 SUMMARY OUTPUT 2 Years Published Beta: 0.8 Months Beta R^2 Regression Statistics 72 months Rf Multiple R months Rm R Square months Adjusted R Square months CAPM = (.07) Standard Error months CAPM Observations 72 ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 48 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 36 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 24 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

114 SUMMARY OUTPUT 5 Year Published Beta: 0.8 Months Beta R^2 Regression Statistics 72 months Multiple R months MRP R Square months Rf Adjusted R Square months Standard Error months CAPM = (.07) Observations 72 CAPM ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 48 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 36 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 24 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

115 SUMMARY OUTPUT 10 Year Published Beta: 0.8 Months Beta R^2 Regression Statistics 72 months Multiple R months MRP R Square months Rf Adjusted R Square months Standard Error months CAPM = (.07) Observations 72 CAPM ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression E-07 Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable E SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 48 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 36 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 24 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

116 2001 Lease Schedule 2001 i 0.08 Avg on Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance i 1.08 Avg Total Sum Check int Rate dep Lease Schedule 2002 i 0.08 Avg on 1675 Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment i 1.08 Avg Total Sum Check int Rate dep

117 2003 Lease Schedule i 0.08 Avg on Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance i 1.08 Avg Total Sum Check int Rate dep Lease Schedule 2004 i 0.08 Avg on Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance i 1.08 Avg Total Sum Check int Rate dep

118 2005 Lease Schedule i 0.08 Avg on Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance i 1.08 Avg Total Sum Check int Rate dep Lease Schedule 2006 i 0.08 Avg on Year t PMT Beginning Balance Interest Expense Payment PV Factor PV Payment Ending Balance i 1.08 Avg Total Sum Check int Rate dep

119 References: 1. Dollar Tree Stores Inc. 10-K 2007, 2006, 2005, 2004, 2003, missionstatement.dollartree.com Cents Only 10-K , 2006, 2005, 2004, Dollar General Corp 10-K 2007, 2006, 2005, 2004, Family Dollar Stores 10-K 2007, 2006, 2005, 2004, Money Central ( 8. Yahoo! Finance ( cnn ( 11. Find Articles ( 12. Business Analysis & Valuation - Third Edition by Palepu, Healy, and Bernard. 13. Dollar Stores Feel the Pinch (wsj.com) Cindy Perman Dec 12, Financial Statement Analysis handout 17. Dollar General, Family Dollar, 99 Cent Only, Dollar Tree 10-Q s