Dollar General vs. Dollar Tree: Financial Analysis and Comparison

Alan Witt

Allen Gitelman

David Abbott

Charles Scarafile

Hussna Javed

Suny Polytechnic

Chapter 1: Alan Witt Page 1-45 of the text

The companies selected for this analysis are Dollar General and Dollar Tree, both listed on the S&P 500. They are direct competitors, with nearly identical business models and names, and thus are excellent candidates for comparison.

SWOT REPORT: Dollar General

• Strengths
  • An everyday low price model ($10 and below) targeted at fixed income and low income families allows Dollar General to compete in a crowded marketplace by expanding their client pool at the bottom end while still providing an attractive value proposition to customers in the higher income brackets (Dollar General Corporation, 2020, pp 6-9). Dollar General has been expanding their stores for the past 3 years (p. 6) and has a presence in 45 states (p. 4), which allows them to reach a wide consumer base. Their low footprint and thus lower operating costs also allow them to expand into rural, urban, and suburban communities alike where big-box stores are not easily reachable (p. 5). This allows them to have a closer relationship and a “convenience” factor with the communities they serve.
• Weaknesses
  • The limited selection of goods that Dollar General provides can be a problem in situations where consumers are looking for a more comprehensive shopping experience. That limited selection also increases their reliance on suppliers, which in turn leaves them vulnerable to potential problems with the supply chain (p. 13). Dollar General Corporation also has invested in their own private brands, and that carries the risk of failure if the brands do not do well (p. 16). Finally, the balance of products carried by Dollar General makes their business seasonal to an extent, which makes them vulnerable to adverse events in the fourth quarter (p. 17).
• Opportunities
  • With the resumption of business activities in multiple states coupled with still-record unemployment numbers, Dollar General is well positioned to pick up a greater number of new customers due to its low cost. Consumers who are newly budget conscious due to furloughs, temporary or still permanent layoffs, or merely due to the economic shock of the lockdowns could easily be enticed through good marketing to buy cheaper products at a decent quality. Dollar General’s national scope means that it is positioned to start capturing that value at a greater clip than smaller, more local discount stores.
• Threats
  • The covid-19 pandemic has severely reduced consumption, and big box stores offer a more “all in one” experience that reduces the amount of locations and stores consumers need to conduct a shopping run before self isolating. The pandemic also threatens a portion of their supply chain from China, and potential political retribution on that country by the Trump administration could strain Dollar General’s imports further (p. 14).
  • Outside of the pandemic, the discount store market is highly competitive, and constant differentiation is needed to maintain Dollar General’s position.

SWOT REPORT: Dollar Tree

• Strengths
  • The acquisition of Family dollar (and the maintenance of that brand instead of absorbing them under dollar tree) allows for diversification of Dollar Tree’s strategy (Dollar Tree Inc., 2020, p. 7). Specifically, it opens up higher quality merchandise at a higher price point (and potentially better price margins), and thus widens the potential consumer base and profits. It also insulated Dollar Tree from reputational losses, as a loss to the Dollar Tree brand would not necessarily tarnish the Family Dollar brand.
• Weaknesses
  • The Dollar Tree side of the brand imports 40- 42% of their merchandise, making them especially vulnerable to disruptions in the global supply chain (pp. 11-12). Family Dollar also has invested in their own private brands, and that carries the risk of failure if the brands do not do well (p. 14). The debt from the acquisition of Family Dollar is a long term weakness on multiple levels, limiting the agility of Dollar Tree (p. 17).
• Opportunities
  • With the resumption of business activities in multiple states coupled with still-record unemployment numbers, Dollar General is well positioned to pick up a greater number of new customers due to its low cost. Consumers who are newly budget conscious due to furloughs, temporary or still permanent layoffs, or merely due to the economic shock of the lockdowns could easily be enticed through good marketing to buy cheaper products at a decent quality.
• Threats
  • The covid-19 pandemic has severely reduced consumption, and big box stores offer a more “all in one” experience that reduces the amount of locations and stores consumers need to conduct a shopping run before self isolating.
  • Outside of the pandemic, the discount store market is highly competitive, and constant differentiation is needed to maintain Dollar Tree’s position.

Project Questions

1) What accounting standards are used, U.S. GAAP, IFRS, or other?

Both companies refer to the GAAP accounting standards in their 10-K filings, and their formats follow GAAP as well (Dollar General Corporation, 2020, p. 36; Dollar Tree Inc., 2020, p. 47).

2) What is the date of the most recent fiscal year‑end?

Dollar General ends their fiscal year on January 31st (Dollar General Corporation, 2020, p. 1).

Dollar Tree ends their fiscal year on February 1st (Dollar Tree Inc., 2020, p. 1)

3) Determine the relative proportion of short‑ and long‑term assets.

On their consolidated balance sheet, Dollar General has 22.68% current assets and 77.32 % of their assets in the long term category, including intangible assets (Dollar General Corporation, 2020, p. 43). Excluding goodwill and other intangible assets, net, the proportions change to 29.95% short term, 70.05% long term.

On their consolidated balance sheet, Dollar Tree has 21.81% current assets and 84.16 % of their assets in the long term category, including intangible assets (Dollar Tree Inc., 2020, p. 44). Excluding goodwill and other intangible assets, net, the proportions change to 29.46% short term, 70.54% long term.

4) Determine the relative proportion of liabilities and equity.

On their consolidated balance sheet, Dollar General’s proportions of liabilities to equity are 70.64% liabilities to 29.36% equity (Dollar General Corporation, 2020, p. 43). This is consistent with other retail stores that have a relatively stable cash flow, such as Target (Easton et al., 2018, p. 1-13).

On their consolidated balance sheet, Dollar Tree’s proportions of liabilities to equity are 68.05% liabilities to 31.95% equity (Dollar Tree Inc., 2020, p. 44). This is consistent with other retail stores that have a relatively stable cash flow, such as Target (p. 1-13).

5) Calculate the return on assets (ROA) for the most recent year.

Using the consolidated numbers, Dollar General Corporation (2020) has a 9.51% ROA for the most recent year (p. 43).

Using the consolidated numbers, Dollar Tree Inc. (2020) has a 5% ROA for the most recent year (pp. 42-44)

6) Disaggregate ROA into the two component parts as shown in Exhibit 1.7. Compare the numbers/ratios for each company.

Dollar General’s numbers when disaggregated are as follows:

• Profit margin: 6.17%
• Productivity: 1.54

Dollar Tree’s numbers when disaggregated are as follows:

• Profit margin: 3.5%
• Productivity: 1.43

Comparison:

• Dollar General outperforms Dollar Tree on productivity in terms of asset turnover, and Dollar General’s profit margin is almost double that of Dollar Tree, indicating either higher sales of high margin items or a generally better portfolio of assets overall.

7) Find the companies’ audit reports. Who are the auditors? Are any concerns raised in the reports?

Dollar General Corporation’s (2020) auditing firm is Ernst & Young LLP (p. 42). They reported no issues, although they discussed two complex accounting matters that required many judgement calls, specifically the adoption of a new lease standard and the evaluation of self-insurance liability (p. 42).

Dollar Tree Inc.’s (2020) auditing firm is KPMG LLP (p. 41). They reported no issues, although they discussed two complex accounting matters that required many judgement calls, specifically the carrying value of goodwill and Family Dollar’s trade name and the evaluation of self-insurance liability (p. 40).

8) Do the audit reports differ significantly from the one for Under Armour in this module?

They both had a slightly more organized setup, where the UA account in the book was essentially a single undifferentiated narrative (Easton et al., 2018, p. 1-30). In particular, both went into detail on some difficult accounting matters that required judgement calls as separate named sections of their report, where the UA account did something similar with the internal controls using a different wording but integrated it into the body of the report. Otherwise, there were no significant differences.

Chapter 2: Charles

This information is provided in detail on page 2-37 of the text.

1. Balance Sheet Analysis- Dollar Tree Inc.

Appendix A-

 When first looking at Dollar Tree Inc’s balance sheet, one of the main things that catches an investor’s eyes are its decrease in cash and short term investments over the last several years. Short term investments are usually a way for companies to safely hold cash while it waits for a future use of it. Short term investments are usually used to convert into cash within five years or less. The decrease in short term investments by Dollar Tree Inc over the last several years could raise a red flag for an investor. The largest assets on their Balance Sheet are property, plant  and equipment. This is understandable since Dollar Tree has thousands of stores through the United States. The owners of the company currently finance over 32.95% of the assets of the company, which is a large amount for a company of Dollar Tree’s size. For liabilities, Dollar Tree has a large amount of long term debt, which mainly consists of non-convertible debt. This is a red flag for an investor as well, since these liabilities are basically sitting in their balance sheet, and will not be able to be converted into cash in the future. The last red flag that can be seen on their balance sheet is the decrease in accounts payable over the last several years. This shows that they have been laying off employees and closing stores.

2. Income Statement Analysis- Dollar Tree Inc.

Appendix B-

Dollar Tree’s income statement is very interesting, especially from an investor’s point of view. Dollar Tree’s sales/revenue growth percentage has decreased significantly in the last few years. Even though it may seem bad at first, their cost of goods sold percentage has increased significantly over the past several years. This could possibly show that they have been increasing their profit margins, but selling less due to the increase of product prices. Net Income has also decreased over the past few years, but looking at the balance sheet you can see that it could be due to the fact that they have been investing income into avenues. Two other unusual things that cause red flags when looking at Dollar Trees income statement, are it’s generally high interest expense rates, and they don’t  have any foreign income tax. Dollar Tree’s profitability has stayed the same over the last few years, but is predicted to increase this year due to the amount of necessities it sells, and the need of necessities due to the Covid-19 virus.

3. Statement of Cash Flows Analysis- Dollar Tree Inc.

Dollar Tree’s statement of cash flow answers many questions from the income statement and balance sheet. First of all, both the operating cash flows and the operating cash flow growth rates have been positive and have been also increasing over the past 4-5 years. Operating cash flow was less than net income, but net income for the past 4-5 years has been significantly increasing. Looking back to the income statement and balance sheet, you can see that they have not been investing money back into new investments, and do not have many new short investments either. This is shown on the cash flow statement, with a decreasing in over 56% in investments over the past 2-3 years. This could be a red flag to investors, since Dollar Tree should be reinvesting money back into new investments. On the other hand, DOllar Tree may not be investing in new investments because they are financing solely instead. The statement of cash flows shows that the financing growth rate has increased over 56% in the past 1-2 years. Dollar Tree’s cash flows do not raise any major red flags, but if you look back through past years, they change their investment strategies many times, and investors may want to take notice of this.

4. Market Capitalization- Dollar Tree Inc.

Based on the current stock market, the most recent amount of outstanding shares for Dollar Tree Inc., is 237 million, and the going price for one share is $93.73. If you multiply this out, Dollar Tree Inc’s market capitalization is $22.22 Billion. From an investor’s standpoint, Dollar Tree Inc, would be considered a large cap company, since their cap is over 10 billion dollars. When compared to the total equity of  6.2 Billion, the market cap is well above the total equity of the company.

1. Balance Sheet Analysis- Dollar General Inc.

Appendix C

Dollar General Inc. has many large assets on their balance sheet which include plant, property, and equipment, and also stored inventory and also finished goods. Unlike Dollar Tree Inc, Dollar General Inc, seems to have more stored inventory on hand and also has much more short term investments and cash in their balance sheet. This is good from an investing standpoint because it shows their potential to turn their investments into more cash, and even more inventory for their stores. On the liabilities side, they have several large liabilities including accounts payable and long term debt. Long term debt could raise a red flag for investors, but accounts payable most likely involves the large amount of money owed to its thousands of employees working everyday. Twenty five percent of its assets are financed by its owners, while almost 75 percent of its assets are financed by non owners and or stockholders.

2. Income Statement Analysis- Dollar General Inc.

Appendix D-

Unlike Dollar Tree Inc., Dollar General Inc’s sales growth has been steadily increasing over the past several years along with the costs of goods sold. From an investor’s standpoint, they haven’t been increasing their profit margins like Dollar Tree Inc, but have continued to sell more products anyways. Along with these increases, their Net Income has been also steadily increasing over the past several years. Investors may contribute this to their constant short term investments and short term cash increases, unlike Dollar Tree Inc, whose short term investments have been decreasing in the past several years. The largest expense for Dollar General over the last several years is their SG&A expense, which is any expense relating to selling any goods and or products. This is explanatory since their sales have increased significantly.

3. Statement of Cash Flows Analysis- Dollar General Inc.

            The first thing to notice when looking at Dollar General’s cash flow statements, is the positive increases in operating cash flow and operating cash flow growth over the last several years. THis can be directly related to the increase of sales and cost of goods sold. Also, Net Income was larger than the net operating cash flow, which is great from an investor’s standpoint. Oddly enough, Dollar General has had a decrease in investments over the last several years like Dollar Tree, even though they have increasing short term investments in their balance statement. They could be possibly saving up short term cash to make a major investment. On the other hand, financing growth has occurred, in small amounts, where Dollar Tree had much larger increases.

4. Market Capitalization- Dollar General Inc.

The current stock price of Dollar General Inc. is $187.86, and there are 252 million shares that are outstanding. The total market capitalization of Dollar General is 43.67 billion dollars, which is much higher than Dollar Tree Inc. Just like Dollar Tree Inc. though, they are considered a large company since their market capitalization is well above 10 billion U.S. dollars. Lastly, their market capitalization is well above their equity of 6.3 billion dollars.

Chapter 4: Hussna

Dollar General is more profitable, as is demonstrated by its trend in return on equity, which is showing a steady increase over the last three years, its net operating profit margin (even though it’s decreasing, however that will be discussed in a moment), and its net operating asset turnover.

Return on Equity (ROE) relates net income to the average stockholder’s equity from the balance sheet and measures return from the perspective of the company’s stockholders. It measures how much net income is earned relative to the equity invested by shareholders. It reflected company performance which is measured by return on assets and how assets are financed through the relative use of liabilities and equity. ROE is higher when there’s more debt and less equity, but while using more debt and less equity results in higher ROE, the greater debt indicates higher risk for the company.  A rising return on equity suggests that a company is increasing its profit generation without needing as much capital and also indicates how well a company’s management utilizes shareholder capital. A falling return on equity indicates a less efficient use of equity capital.

Dollar Tree

The ROE for Dollar Tree by year ended is as follows:

Year Ended Feb. 3, 2018  29.31%

Year Ended Feb. 2, 2019  -24.81%

Year Ended Feb. 1, 2020  27.27%

Dollar General

The ROE for Dollar General by year ended is as follows:

Year Ended Feb. 2, 2018        26.69%

Year Ended Feb. 1, 2019        25.34%

Year Ended Jan. 31, 2020      26.11%

Looking at the last three years for each company, Dollar General and Dollar Tree generally have similar Return on Equity percentages; with the exception of Dollar Tree having a negative ROE of -24.81% for the year ended February 1, 2019. This negative ROE indicates that Dollar Tree was financially stressed at the time, as is additionally indicated by the negative sales for that year ended. Dollar General has slightly lower ROE percentages as compared to Dollar Tree, which indicates the company has more debt than Dollar Tree, putting it in a slightly less financially risky position. The industry average of ROE for retail for 1Q2020 20.73% : Dollar Tree and Dollar General are actually leveraging debt less than the industry average. Dollar General is better positioned, as its return on equity has steadily increased over time .

Net Operating Profit Margin shows how much operating profit the company earns from each sales dollar; a higher net operating profit margin is preferable. Looking at the last three years for each company, Dollar General and Dollar Tree generally have similar Net Operating Profit Margin percentages; however Dollar General’s performance has been more consistent than that of Dollar Tree’s. Looking at the 2020 year so far, Dollar General made a profit of 6.40% for each dollar of sales, as compared to Dollar Tree, which only earns 3.94%; that’s almost double what Dollar Tree generates per dollar of sales. Both are in similar industries, however Dollar General was more profitable than Dollar Tree, has Dollar Tree has an overall lower Net Operating Profit Margin for the the years ended  2019 and 2020; a significant driver in the decrease in Dollar Tree’s Net Operating Profit Margin was its negative sales in the year ended February 2019.

Dollar Tree

NOPM for all three years by year ended is as follows:

Year Ended Feb. 3, 2018   8.53%

Year Ended Feb. 2, 2019   2.28%

Year Ended Feb. 1, 2020   3.94%

Dollar General

NOPM for all three years by year ended is as follows:

Year Ended Feb. 2, 2018   6.83%

Year Ended Feb. 1, 2019   6.45%

Year Ended Jan. 31, 2020  6.40%

Net Operating Asset Turnover measures the productivity of a company’s net operating assets, and it provides insights into the level of sales the company realizes from each dollar invested in the company’s net operating assets; generally speaking a higher Net Operating Asset Turnover Ratio is more favorable. Looking at the last three years for each company, Dollar General and Dollar Tree have drastically different Net Operating Asset Turnover ratios, with Dollar Tree having larger returns for all three years. For the year ended February 2020, Dollar Tree realizes $1.90 in sales for each dollar of net operating assets.

Dollar Tree

NOAT for all three years by year ended is as follows:

Year Ended Feb. 3, 2018   2.58

Year Ended Feb. 2, 2019   2.93

Year Ended Feb. 1, 2020   1.90

Dollar General

NOAT for all three years by year ended is as follows:

Year Ended Feb. 2, 2018   2.645

Year Ended Feb. 1, 2019   0.008

Year Ended Jan. 31, 2020  0.004

Net operating profit margin is affected by: the level of gross profit, level of operating expenses, and the level of competition. Management of gross profit requires effective management of product pricing and the cost to make or buy the products sold. Companies have to monitor operating expenses and overhead, and all of this is affected by the level of competitiveness in the industry. The objective is to make the net operating asset turnover as high as possible without affecting revenues and profitability. It can be increased by increasing sales for a given level of investment in operating assets or by reducing the amount of operating assets needed to generate a dollar of sales, or both. Reducing operating working capital is usually easier than reducing long-term net operating assets. Long term operating assets are harder to reduce but can be by alliances, outsourcing, etc. Companies with lower net operating asset turnover have to achieve a higher NOPM to be profitable; generally speaking companies with low profit margins tend to have high asset turnover and those with high profit margins have low asset turnover due to pricing strategy.

As financial statement users, it’s important to use measures that capture risk; to put it simply it’s important to understand how liquid and how solvent a company is. Liquidity refers to cash availability and how quickly a company can raise cash on short notice. The tables below are the ratios for Dollar Tree and Dollar General that will help us to understand which company is more liquid and which company is more solvent. Both tables utilized financial information from statements as of the last three years:

Two of the most common ratios used to assess liquidity are the current and quick ratios; both of them link required near-term payments to cash available in the near future,

A current ratio greater than 1.0 implies positive working capital; both working capital and the current ratio ignore cash flows from future sales or other sources and only consider existing balance sheet data. Generally, companies prefer a higher current ratio, but an excessively high current ratio demonstrates inefficient asset use. A current ratio less than 1.0 isn’t always bad because of the following reasons: a cash and carry company with fewer account receivables can have fewer current assets (indicated by a low current ratio), but large operating cash inflows that ensure sufficient liquidity, or a company can efficiently manage it working capital by minimizing receivables and inventories and maximizing payables. The aim of the current ratio is to see if a company is having or is likely to have difficulty in managing its short term obligations.

Looking at the above tables, Dollar Tree’s current ratio rapidly increased from the year  ended Feb 3, 2018 to the year ended February 2, 2019, however decreased from the year ended Feb 2, 2019 to the year ended Feb 1, 2020. There are several factors that could be drivers behind  a decrease in the current ratio. Dollar Tree’s current ratio’s decline can be attributed to its increase of $250 million in short term debt (2019 was $0) and its decrease of current assets, which dropped from $4,293.30 million to $4,269.40; an overall decrease of $23 million. Dollar General’s current ratio rapidly increased from the year ended Feb 2, 2018 to the year ended February 1, 2019, however showed now change from the year ended Feb 1, 2019 to the year ended Jan 31, 2020. Dollar General’s current ratios suggest that it is better able to manage its short term obligations.

The quick ratio reflects a company’s ability to meet its current liabilities without liquidating inventors and is a more rigid test of liquidity than the current ratio. It’s not uncommon for a company’s quick ratio to be less than 1.9; but any large, rapid  increases or decreases should be monitored. Looking at the above tables, Dollar Tree’s quick ratio rapidly increased from the year ended Feb 3, 2018 to the year ended February 2, 2019, however decreased from the year ended Feb 2, 2019 to the year ended Feb 1, 2020. Similar to its current ratio, Dollar Tree’s decline in its quick ratio from the year ended Feb 2, 2019 to the year ended Feb 3, 2020 can be attributed to ts decrease of current assets, which dropped from $4,293.30 million to $4,269.40; an overall decrease of $23 million. Dollar General’s quick ratio has shown a steady decrease for the last three years from the year ended Feb 2, 2018 to the year ended Jan 31, 2020. Dollar General’s lower quick ratios don’t necessarily negate its ability to meet its current liabilities, as it may have negotiated fast payment/ cash from customers and long terms from suppliers. However, given that its quick ratio is so much lower than its current ratio, its apparent that its

Solvency refers to a company’s ability to meet its debt obligations, both periodic interest payments and the repayment of the principal amount borrowed. Solvency is important because if a company is insolvent, it fails. There are two general ways to measure solvency: the first approach is to use balance sheet data and assess the proportion of capital raised from creditors. The second approach to use income statement data and assess the profit generated relative to debt payment obligations. The liabilities to equity ratio is a useful tool for the first type of solvency analysis because it helps to display how reliant a company is on creditor financing compared with equity financing. A variant of this ratio is a company’s long term debt divided by its equity, which is an approach that assumes that current liabilities are repaid from current assets. This is called self liquidation, and it assumes that creditors and stockholders need to only focus on the relative proportion of long-term capital.

The second type of solvency analysis compares profits to liabilities, and it assesses how much operating profit is available to cover debt obligations. The time interest earned ratio reflects the operating income available to pay interest expense, based on the underlying assumption that only interest needs to be paid because the principal will be refinanced. The higher the ratio is, the less there is risk of default.

Looking at the above tables, Dollar Tree’s liabilities to equity ratio increased consistently from the year ended Feb 3, 2018 through the year ended Feb 1, 2020. Dollar General’s liabilities to equity ratio experienced a minor decrease from the year ended Feb 2, 2018 to the year ended February 1, 2019, however increased from from the year ended Feb 1, 2019 to the year ended Jan 31, 2020.Both companies’ current ratios for the years ended January 31, 200 and February 1, 2020 are above the industry average, which as of 4Q2019 is .08 and as of 1Q2020 is .08.  Dollar General has the highest liabilities to equity ratio as of the year ended 2020 which indicates it is more solvent than Dollar Tree.

Lastly, looking at the above tables, the trend in Dollar General’s times interest earned ratio from the year ended Feb 2, 2018 to the year ended Jan 31, 2020 indicates that it is better able to meet its interest obligations because its earnings are significantly greater than its annual interest obligations. However, in Dollar General’s case, it is important for management to evaluate whether this high ratio is driven by sizable earnings or an undesirable low level of leverage/misallocation of earnings that could be used for better investment opportunities which would provide a higher rate of return. To summarize, Dollar Tree is more liquid however Dollar General is more solvent.

Chapter 5: Charles

Ongoing Project Outline-

This information is provided in detail on page 5-50 of the text.

1. Revenue Recognition

Dollar General Inc.- Horizontal Analysis of Revenue-

Going back two years to 2018, and using it as the baseline year, revenue was 23.734 billion dollars and it increased to 25.625 billion dollars in 2019. When using the percentage change formula, Dollar General’s revenue increased 9.22 percent in over one year. This year the predicted revenue so far is 27.754 million which is an 8.40 percent increase again. This is a solid trend for Dollar General.

Dollar Tree Inc.- Horizontal Analysis of Revenue-

For Dollar Tree Inc., I used 2018 as a baseline year as well, and the total revenue in 2018 was 22.246 billion dollars. The revenues for the next two years are 22.823 and 23.611 billion dollars respectively. From 2018 to 2019 Dollar Tree Inc had a 2.60 percent increase in revenue and a 3.45 percent  increase in revenue from 2019 to 2020. Even though it isn’t as much as Dollar General, it is still a solid trend as well for Dollar Tree Inc.

Current Economic Environment Trends/ External Factors

Due to being in the same market, both Dollar Tree Inc., and Dollar General, have similar revenue trends. Especially in this year due to the pandemic known as covid-19. Both chains sell necessities such as toilet paper and household items. Even though both stores are doing well now, this year is projected to increase in revenue but not as much as previous years, as you can see in the calculations above. This is due to external factors that are appropriate due to everything going on in the world right now. Neither company’s revenue analysis shows any inappropriate changes in revenue.

10-K Form Assessments-

Dollar Tree Inc. – The 10-K form allows a company to explain themselves at the end of a financial period. The management of Dollar Tree Inc., explains that this year changes in revenue are due to the covid virus, the integration of family dollar not paying off as quickly as it should, and 4 new multimillion dollar distribution centers throughout the country. These are small things that have a large impact on their changes in revenue that the public eye usually is not aware of unless they happen to look at the 10-K statement forms.

Dollar General Inc. – Just like Dollar Tree Inc., Dollar General Inc., reports that their changes in revenue over the last few years is due to the covid 19 virus pandemic, and the change in transportation costs increases and the income tax increase.

1. Accounts Receivable

            Sales- Dollar General Inc., and Dollar Tree Inc., –

Both companies deal with everyday consumers in small markets. Even though there is a mix of cash and credit, it is primary credit that they are collecting under the  accounts receivable section of both of their balance sheets. This is not necessarily a bad thing for either company, but it takes them longer to get paid this way rather than just collecting cash. Especially in a technological driven Country like the one we live in today, most people use credit and not many people use cash anymore.

Accounts Receivables Size- Dollar General Inc., and Dollar Tree Inc., –

Over the past three to four years, Dollar Tree Inc has had increases in their accounts receivable while Dollar General Inc has had decreases in their accounts receivable. For Dollar Tree Inc, this shows that more consumers and or customers paid in cash and this directly increased cash in their balance statement. For Dollar General Inc., this shows that many people were paying on credit much more frequently than with cash. This isn’t necessarily a bad thing, but it drained cash from the company’s. The average time to turn a credit into a debit is 30-60 days, especially with these larger organizations.

Accounts Receivables Turnover Ratios- Both Companies-

Dollar General’s accounts receivable turnover ratio from 2020, this year, is 362.67 or 36.2 billion, when Dollar Tree Inc’s accounts receivable turnover ratio is 208.39 or 20.8 billion.

1. Operating Expenses-

After dividing several of the values on Dollar Tree’s income statement by total revenue, we found many interesting things. First of all, the Cost of Goods Sold is equal to about 60% of the overall revenue of the company. This is well above average for a company of Dollar Tree’s Size. The next thing that is interesting from an investor’s point of view, is the fact that, Dollar Tree’s net income is only about 3.5% of it’s total revenue. After everything is taken out for operating expenses and taxes, they are only left with around 3.5% of it’s total revenue for the whole year.

1. Accounting Quality

Chapter 6: David Abbott

Ongoing Project Outline-This information is provided in detail on page 6-42 of the text.

1. Inventory
   1. Dollar Tree has approximately 90% of their inventory from their distribution centers and their sister company Family Dollar has about 73% of their inventory from their distribution centers (From 10-K).
2. Tangible Assets
3. Restructuring Activities

Chapter 7: Allen Gitelman

Ongoing Project Outline-

This information is provided in detail on page 7-48 of the text.

1. Accrued Liabilities

1. • Dollar Tree Inc.’s (2020) – Accrued liabilities includes the following components in the value of millions: Current portion of long-term debt – 250, Current portion of operating lease liabilities – 1,279.30, Accounts payable – 1,336.50, Income taxes payable – 62.7, Other current liabilities  – 618, Total current liabilities – 3,546.50
   • Dollar General Corporation’s (2020) – Accrued liabilities includes the following components in the value of millions: Current portion of long-term obligations -555, Current portion of operating lease liabilities – 9,648.05, Accounts Payable – 2,860.68, Accrued expenses and other – 7,091.56, Income taxes payable – 8.36, Total current liabilities – 4,543.56 (Dollar General Corporation, 2020, pp 43-45).

1. Accrued liabilities. Accrued liabilities arise from ordinary operations and provide interest-free financing.

• Are operating liabilities large for the companies? Compare common-size amounts. What proportion of total liabilities are operating?

Dollar Tree: DLTR’s accounts payable are 1,336.5m. They make up approximately 6.8% of DLTR’s assets and 10% of their liabilities. Operating liabilities are not large for a company of this size.

Dollar General: Dollar Generals’ accounts payable are 2,860.6m. They make up approximately 12.5% of Dollar General’s assets and 17% of their liabilities. While operating liabilities make up a larger portion of assets and liabilities for Dollar General as compared to DLTR, they are not large for a company of this size.

• What are the companies’ main operating liabilities?

Operating Liabilities are typically short term, non-interest bearing liabilities that result from normal business operations. These include accounts payable, accrued expenses and income tax payable.

Dollar Tree

Accounts Payable: 1,336.5m

Income Tax Payable: 62.7m

Total: 1,399.2m

Dollar General:

Accounts Payable: 2,860m

Accrued Expenses and Other: 709.2

Income Tax Payable: 8.4m

Total: 3,577.6m

• Are there substantial contingencies? What gives rise to these? Read the footnote and determine whether the company has recorded a liability on its balance sheet for these contingencies.

Dollar Tree: At February 1, 2020, DLTR had approximately $136.9 million in standby letters of credit that serve as collateral for its large-deductible insurance programs. Additionally, they have surety bonds worth $69.3m that cover utility payments and self-insured insurance programs.

DLTR is a defendant in an FDA action as well as various wage dispute arbitrations procedures. They do not believe that the results of these actions are material.  All of these contingences are included on the balance sheet.

Dollar General: Dollar General carries approximately $131m in self insurance reserves. Additionally, during 2019 they accrued approximately $31m worth of expenses for probable losses in connection with litigation. These expenses are included in their balance sheet but the company has not disclosed where (ie, as a part of “Accrued Expenses and Other” or as part of “Other Liabilities”. The company does not consider its contingent liabilities to be substantial.

1. Short and Long-Term Debt

1. • Dollar Tree Inc.’s (2020) -Long-Term Debt, net (excluding current portion) includes the following components in the value of millions: 3,522.20 and for (2019) 4,265.30.  Long-term debt has increased from 2020 to 2019.

Short term debt value includes – 250.

1. • Dollar General Corporation’s (2020) -Long-Term Debt obligations include the following components in the value of millions: 2,911.44 and for (2019) 2,862.74.  Long-term debt has decreased from 2020 to 2019.

Short term debt value includes – 555.

2. Short and Long‑Term Debt. Examine the debt footnote and consider the following questions.

• What is the common-size debt and how does that compare to published industry averages? Common-size baseline = (total assets / total assets)

Dollar Tree has approximately $3,800m in debt. Debt makes up 20% of their assets (22% of their tangible assets). Total liabilities make up 68% of their assets (75% of their tangible assets).

Dollar General has approximately 2,911m in debt. Debt makes up 13% of their assets (16% of their tangible assets). Total liabilities make up 70% of their assets (87% of their tangible assets).

• What types of debtdoes the company have? Is it publicly traded? Are there bank loans? Other types of debt?

Dollar Tree: As of February1, 2020, DLTR’s debt consists of $300m of 5% Senior notes due 2021, $250.0 million of Senior Floating Rate Notes due April 2020; $1,000m of 3.7% Senior notes due 2023, $1b of 4% notes due 2025, $1.25b of 4.2% notes due 2028.

The senior notes are bonds. The company has a $1.25b revolving credit facility (loan) but has not drawn upon it.

Dollar General: As of February 1, 2020, Dollar General’s debt consists of $899m of 3.25% Senior notes due April 2023; $499m of 4.15% Senior Notes due Nov 2025, $599m 3.875 Senior notes due April 2027 and $499 of 4.125% Senior Notes due May 2028. Additionally, the company has approximately$425m of unsecured credit notes that carry a weighted average borrowing rate of 1.7%.

The senior notes are bonds. The company has a  revolving credit facility (loan) but has not drawn upon it.

• When does the debt mature? Determine if there is a large proportion due in the next year or two. If so, can the company refinance given its current level of debt?

Dollar Tree: DLTR’s Notes are scheduled to mature in 2020, 2021, 2023, 2025 and 2028.  The Revolving Credit Facility matures on April 19, 2023. The company can likely easily refinance or repay their upcoming maturities. However, COVID-19 may provide increased uncertainty for the company

Dollar General: Dollar General’s notes expire in 2023, 2025, 2027 and 2028. Dollar General does not need to worry about their ability to refinance the loans for at least another 18 months.

• What is the average interest rate on debt? Compare it to the coupon rates reported.

Dollar Tree: DLTR’s average interest rate on debt is 4%. Dollar Tree has the following notes outstanding.

Dollar General: Dollar General’s average interest rate on debt is 3.5%. Dollar Tree has the following notes outstanding:

• Read the footnote and the MD&A to see if there are any debt covenants and whether the company is in compliance.

Dollar Tree – As of February 1, 2020, the company was in compliance with its debt covenants.

Dollar General – As of January 31, 2020, the company was in compliance with all such covenants.

• If the company has publicly traded debt, determine its current price. Sharp drops in bond prices could indicate a deterioration in the company’s credit quality.

Neither company has any publicly traded debt for which I was able to get a quote.

1. Credit Ratings

1. • Dollar Tree Inc.’s (2020) – Credit ratings are not included in the 10-K form.
   • Dollar General Corporation’s (2020) – Credit ratings include the following components: The senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and the commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Current credit ratings, as well as future rating agency actions, could (i) impact the ability to finance operations on satisfactory terms; (ii) affect  financing costs; and (iii) affect  insurance premiums and collateral requirements necessary for  self-insured programs. There can be no assurance that they will maintain or improve current credit ratings.

3. Credit Ratings. Find the companies’ credit ratings at two or three ratings agencies’ websites.

• What are the credit ratings and how do they compare across the agencies? Are the two companies similarly rated?

Dollar Tree – S&P= BBB/Moody’s= Baa3 ()

Dollar General – S&P= BBB/Moody’s= Baa2 ()

Both are “lower medium grade” rating descriptions, with “Dollar Tree” having a slightly higher Moody’s credit rating.  Both compare by falling into the investment-grade rating description category.

• Have the ratings changed during the year? If so, why?

Dollar Tree –  Moody’s Investors Service (“Moody’s”) changed Dollar Tree on September 23, 2019, Inc.’s (“Dollar Tree”) outlook to positive from stable and affirmed its Baa3 senior unsecured rating. Moody’s also affirmed the Baa3 rating of Family Dollar Stores, Inc. legacy notes and changed the outlook for Family Dollar Stores, Inc. to positive from no outlook.

Why? “Dollar Tree’s strong operating performance and cash flow generation coupled with debt prepayments and improved performance of the Family Dollar banner demonstrates that management initiatives are working and the Family Dollar turnaround is gaining momentum”, Moody’s Vice President Mickey Chadha stated. “The change in outlook to positive reflects the consistent and sustained improvement in credit metrics through increased EBITDA generation and debt prepayments and our expectation that metrics will remain strong with Debt/EBITDA sustained below 3.0x and EBIT/interest around 5.0x in the next 12 months”, Chadha further stated. (2019)

Dollar General –  On April 1, 2020 Moody’s Investors Service, (“Moody’s”) assigned a Baa2 rating to Dollar General Corporation’s (“Dollar General”) proposed new senior unsecured notes. The outlook remains stable.

• Are the companies on a credit watch or a downgrade list?

No

• If possible, find a credit report online and read it to gain a better understanding of the companies’ creditworthiness.

Dollar Tree – Dollar Tree’s Baa3 senior unsecured rating reflects the company’s sizable scale and its fixed and multi-price point product offerings. Moody’s views the dollar store sector favorably and expects that it will continue to grow given its low price points and convenient locations especially for cash constrained consumers. The ratings also reflect Moody’s expectation that the company’s financial policies will be balanced and will support its investment grade profile while maintaining lease adjusted debt/EBITDA at or below 3.0 times. Ratings are also supported by the company’s excellent liquidity. Dollar tree has minimal exposure to the continuing structural shift in retail towards e-commerce as the treasure hunt shopping that the company’s stores offer can’t be replicated online. The average ticket for a dollar store is around $10 and the lower ticket items are uneconomical for e-commerce vendors to compete with given the cost of shipping.(2020)

Dollar General – Dollar General’s Baa2 rating reflects its strong market position as a leading dollar-store chain in the U.S., its solid credit metrics, and our view that the dollar store sector is well positioned relative to other retail channels given its low price points and relative resistance to economic cycles albeit still very highly competitive operating environment. The credit profile also reflects Dollar General’s balanced and prudent financial policy and the company’s good liquidity profile supported by healthy free cash flow generation and its adequate cash balances. Negatives include geographic concentration in the south and increased competition from other discount formats. (2020)

• Calculate the ratios in Exhibit 7.6 for your firms. Compare the ratios to those for firms with similar credit ratings. Do the credit ratings for the firms seem reasonable?

Dollar Tree – Moody’s Average Baa 10.3% (Easton et. al, 2018, p.7-22)

Dollar General – Moody’s Average Baa 10.3% (Easton et. al, 2018, p.7-22)

Standard and Poor’s lists both Dollar Tree and Dollar General with a credit rating of “BBB”, which “exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken its financial commitments on the obligation. ().  These are reasonable ratings.

Chapter 8: Allen Gitelman

Ongoing Project Outline- This information is provided in detail on page 8-52 of the text.

1. Contributed Capital – particularly highlights the common stock

• Dollar Tree Inc.’s (2020) – Contributed capital includes the following components in the value of millions for values of contributed capital, earned capital and converted securities. Common stock, par value $0.01; 600,000,000 shares authorized, 236,726,563 and 238,081,664 shares issued and outstanding at February 1, 2020 and February 2, 2019,  respectively – 2.4; Additional paid-in capital – 2,454.40, Accumulated other comprehensive loss – (39.8), Retained earnings – 3,837.80, Total shareholders’ equity – 6,254.80, Total liabilities and shareholders’ equity – 19,574.60

1. • Dollar General Corporation’s (2020) – Contributed capital includes the following components in the value of millions for values of contributed capital, earned capital and converted securities. Common stock; $0.875 par value, 1,000,000 shares authorized, 251,936 and 259,511 shares issued and outstanding at January 31, 2020 and February 1, 2019, respectively – 2.2 ,444;  Additional paid-in capital – 3,322.53, Accumulated other comprehensive loss – (-3.14), Retained earnings – 3,162.66, Total shareholders’ equity – 6,702.50, Total liabilities and shareholders’ equity – 22,825.08.
   • This is a rolling total from previous years of consolidated statements of  shareholders equity.

1. Contributed Capital. Use the balance sheet and the statement of stockholders’ equity to determine how the company has structured its equity.

• What proportion of assets are financed with equity?

Received by dividing total shareholders’ equity by the total assets of the company.

Dollar Tree – 6,254,800,000/19,574,600,000 = 31.95%

Dollar General – 6,702,500,000/22,825,084,000 = 29.36%

• What classes of equity does the company have? What transactions occurred during the year?

Dollar Tree: DLTR only has one class of equity: Common stock, par value $0.01 with 600,000,000 shares authorized and 236,726,563 issued and outstanding as of Feb 1, 2020. While  the company has the right to issue Preferred Stock, they do not have any preferred shares outstanding.

DLTR repurchased $200m of common stock during the year ending Feb 1, 2020. During the year the Company also issued and recognized expenses related to the fair value of restricted stock units (RSUs) and stock options. The fair value of RSUs was determined using the closing price of the Company’s common stock on the date of the grant. The fair value of stock option grants was estimated on the date of grant using the Black-Scholes option pricing model. The Company accounts for forfeitures when they occur.

Dollar General: Dollar General only has one class of equity: Common stock, par value $0.01 with 1,000,000,000 shares authorized and 251,936,312 issued and outstanding as of Feb 1, 2020. While  the company has the right to issue Preferred Stock, they do not have any preferred shares outstanding.

Dollar General repurchased  $1.2b of common stock during the year ending Jan 31, 2020. During the year the Company also issued and recognized expenses related to the fair value of restricted stock units (RSUs) and stock options. The fair value of RSUs was determined using the closing price of the Company’s common stock on the date of the grant. The fair value of stock option grants was estimated on the date of grant using the Black-Scholes option pricing model. The Company accounts for forfeitures when they occur.

• Does the company have treasury stock? Read the MD&A and the footnotes to determine the main reason for holding treasury stock. Assess the treasury stock transactions during the year. How much was spent and/or received? What did the company do with the proceeds? Compare the average price paid for treasury shares to the current stock price.

During the fiscal year ending Feb 1, 2020 DLTR repurchased $200m worth of common stock at an average price of $101.65. The proceeds were used to re-buy shares from shareholder. DLTR’s shares are currently trading at $88. This represents a loss of $25m.

During the fiscal year ending Jan 31, 2020 Dollar General repurchased $1.2b worth of common stock at an average price of $144.58. The proceeds were used to re-buy shares from shareholder. DG’s shares are currently trading at $188.78. This represents a gain of $336m.

• Does the company use share-based compensation? What types of plans are used? What was the magnitude of the compensation? What is the magnitude of the outstanding (unvested) options and/or shares? Compare the level of treasury shares to outstanding (unvested) options and / or shares.

Dollar Tree – The Company recognizes expense for all share-based payments to employees and non-employee directors based on their fair values. Total stock-based compensation expense for 2019, 2018 and 2017 was $61.4 million, $63.3 million and $65.8 million, respectively.

The type of plans used are restricted stock units (RSUs).  Magnitude of shares were 1,100,000.  The levels of treasury shares comparison is the same.

Dollar General – At January 31, 2020, the total unrecognized compensation cost related to unvested stock-based awards was $76.1 million with an expected weighted average expense recognition period of 2.1 years.  The weighted average grant date fair value per share of restricted stock units granted was $117.20, $93.16 and $70.90 during 2019, 2018 and 2017, respectively.  The type of plans used are restricted stock-units (RSAs).  Magnitude of shares were common stock authorized for grant under the Plan is 31,142,858.  No treasury stock was issued, but had 251,941,312  shares of common stock outstanding as of March 12, 2020.

• Compute the market capitalization of the firms and compare to the book value of equity. Find an online source for the average market-to-book ratio for the industry and see where the firms fit. Follow up on anything unusual.

Tangible Book Value (sometimes also referred to as Book Value) is Total Assets less Liabilities and Intangible Assets.

Dollar Tree: The current market cap of DLTR is $21b while its tangible book value is $4.3b. Its market cap: tangible book is 4.88:1

DLTR’s book value, including intangibles is $6,254.8 so their market cap:book is 3.35:1.

Dollar General: The current market cap of Dollar General is $48b while its tangible book value is $2.3b. Its market cap: tangible book is 20.3:1

Dollar Generals book value, including intangibles is $6.7b so their market cap: book is 7.15:1.

1. Earned Capital – retained earnings

1. • Dollar Tree Inc.’s (2020)- Earned capital includes the following components in the value of millions for net income:Dollar General Corporation’s (2020) – Earned capital includes the following components in the value of millions for net income: 3,837.8
   • Dollar General Corporation’s (2020)- Earned capital includes the following components in the value of millions for net income: 3,162.7

2. Earned Capital. Recall that the least costly form of financing is internal—that is, plowing earned profits (and cash) into new investments is a low-cost means to grow the company and return even more to stockholders.

• How profitable were the companies? Compare return on equity for the three-year period and determine causes for major differences over time and between companies.

Dollar Tree – Net income/shareholder’s equity

2019- 827,000,000/5,642,900,000 = 14.66%

2018 – -1,590,800,000/71,823,000 = -22.14%

2017 – 1,714,300,000/5,389,500,000 = 31.81%

The major difference over time for Dollar Tree was attributed to goodwill impairments of 313.0 and 2,727.0 in 2020 and 2019, respectively. Other differences include a significantly reduced interest expense in 202 (208 less than in 2019 and 139.7 less than 2018). Additionally, provisions for taxes were -10.3 in 2018 while 281.8 and 271.7 in 2019 and 2020.

Dollar General – Net income/shareholders equity

2019 – 1,712,600,000/6,417,400,000 = 26.69%

2018 – 1,589,500,000/6,125,800,000 = 25.95%

2017 – 1,539,000,000/5,406,300,000 = 28.47%

Dollar General’s net income has been significantly stable over the last 5 years.

• Review accumulated other comprehensive income and determine the main components of that account. How did AOCI change during the year?

Dollar Tree: Some of Dollar Tree’s subsidiaries are located in international markets and use non-US currencies.  Dollar Tree’s Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive loss. Other Comprehensive Income was -1.5, -6 and 5.3 in 208, 2019 and 2020.

Dollar General: During 2019, Dollar General booked other comprehensive income attributed to settlement of derivatives associated with its issuance of long term debt in 2013. Additionally, Dollar General had a reclassification of $.9m as a result of the Tax Cuts and Jobs Act.

• Did the companies pay cash dividends? Compute the dividend payout and the dividend yield for all three years and compare them.

Dollar Tree:Dollar Tree does not pay dividends and anticipates that substantially all of their cash flow from operations in the foreseeable future will be retained for the development and expansion of the business, repayment of indebtedness and the repurchase of stock. They do not anticipate paying dividends on their common stock in the foreseeable future. Accordingly, there is no dividend yield.

Dollar General: The Company paid quarterly cash dividends of $0.32 per share in 2019. On March 11, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.36 per share, which is payable on or before April 21, 2020 to shareholders of record on April 7, 2020.

• Did the company have any stock splits or pay stock dividends?

Dollar Tree and Dollar General did not have any stock splits in the last 3 years. Dividends are described above.

1. Convertible Securities – Consists of bonds and preferred stocks.

1. • Dollar Tree Inc.’s (2020) – Convertible securities are not included in the 10-K form.  No preferred shares are issued and outstanding at February 1, 2020 and February 2, 2019.
   • Dollar General Corporation’s (2020) – Convertible securities are not included in the 10-K form.

3. Convertible Securities. Read the debt footnote to determine if the company has any convertible securities.

• What types of convertible securities are outstanding?

Dollar Tree and Dollar General do not have any convertible debt.

• Are these securities substantive? To assess this, consider their common size and their effect on diluted earnings per share.

Not Applicable for DLTR and DG

• Did the company have any convertible transactions during the year? If yes, determine the effect on the balance sheet and income statement.

Both Dollar Tree and Dollar General had RSU, PSU and/or stock options that were converted or convertible to common stock. The values were not material.

Chapter 9: David Abbott

Ongoing Project Outline-

This information is provided in detail on page 9-53 of the text.

1. Investments in Marketable Securities
2. Investments with Significant Influence
3. Investments with Control

Chapter 10: Hussna

Dollar Tree

Yes, the company leases the majority of its stores and expects to continue doing so as they expand. Their method is to typically have a short initial lease term that’s generally five years, that also has the option to be extended.  However, there are , in some cases we have initial lease terms of seven to fifteen years. We believe this leasing strategy enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions. As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.”

What types of assets are leased?

“The Company’s lease portfolio primarily consists of leases for its retail store locations and it also leases vehicles and trailers, as well as distribution center space and equipment. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets; the Company recognizes expenses for these leases on a straight-line basis over the lease term. For leases with an initial term in excess of 12 months, operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the committed lease term at the lease commencement date.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate in determining the present value of future lease payments. Inputs to the calculation of the Company’s incremental borrowing rate include the valuations and yields of its outstanding senior notes and their credit spread over comparable U.S. Treasury rates, adjusted to a collateralized basis by estimating the credit spread improvement that would result from an upgrade of one rating. The Company has real estate leases that typically include payments related to non-lease components, such as common area maintenance, as well as payments for real estate taxes and insurance which are not considered components of the lease. These payments are generally variable and based on actual costs incurred by the lessor. These costs are expensed as incurred as variable lease costs and excluded for the purpose of calculating the right-of-use asset and lease liability. A smaller number of real estate leases contain fixed payments for common area maintenance, real estate taxes and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use asset and lease liability. In addition, certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. These payments are expensed as incurred as variable lease costs. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive financial covenants.”

What proportion of leases are capital (finance) versus operating?

All leases are operating

Has the company adopted the new standard for leases? If not, use the rate from above to approximate the amount that would have been included in the balance sheet had the operating leases been capitalized.

Yes, they have — “In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” and subsequent amendments, which replaced existing lease accounting guidance in GAAP and requires lessees to recognize right-of-use assets and corresponding lease liabilities on the balance sheet for all in-scope leases with a term of greater than 12 months and requires disclosure of certain quantitative and qualitative information pertaining to an entity’s leasing arrangements. The Company adopted the standard as of February 3, 2019, using the optional effective date transition method provided by accounting pronouncement, ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and recorded a cumulative effect adjustment to beginning retained earnings. The Company’s reporting for the comparative prior periods presented in the consolidated financial statements continues to be in accordance with ASC 840, “Leases (Topic 840).” The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, permitted the Company to carry forward the historical lease classification for leases that commenced before the effective date of the new standard. The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Adoption of the standard resulted in the recognition of Operating lease right-of-use assets and Operating lease liabilities of $6.2 billion and $6.1 billion, respectively, and a reduction to Retained earnings of $65.3 million, net of tax, as of February 3, 2019. The Operating lease right-of-use assets recorded at transition include the impact of net favorable lease rights of approximately $210.0 million, accrued rent, net of prepaid rent of approximately $108.0 million, lease incentives of approximately $67.0 million and the impairment of right-of-use assets recognized in retained earnings as of February 3, 2019 of approximately $96.0 million. The adoption of the standard did not have a material impact on the Company’s consolidated statements of operations or consolidated statements of cash flows.”

Quantify the effect that capitalizing the operating leases would have on the following financial items and ratios for each company: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), and measures of financial leverage, liquidity, and solvency.

2. Pensions. Read the pension footnote to determine whether the company has defined benefit obligations.

What is the funded status of the pension and other benefits plans?

Is the underfunded or overfunded obli-gation substantial? Compare between the companies.

Are the plans substantial to the company?

How much pension expense does each company report in its income statement?

Is this a substantial amount?

Compare the cash paid into the plan assets to the amounts paid to retirees.

Assess the cash flow implica-tions of the company’s future payment obligations. The point is to determine whether the company will be able to meet its obligations as they come due. 3. Income Tax Disclosures and Strategies. Examine the income tax expense and deferred tax assets and liabilities.

Analyze the footnotes and assess the company’s effective tax rate. Is it a consistent rate? If not, do the fluctuations seem reasonable?

Do the deferred tax assets and liabilities seem appropriate given the company’s industry?

Is there a valuation allowance? If so, how big is it relative to total deferred tax assets? Has the valuation allowance changed markedly during the year? This might indicate income shifting

Dollar General

Does the company use leases?

What types of assets are leased?

What proportion of leases are capital (finance) versus operating?

Are leases a substantial component of overall financing?

Determine the discount rate implicit in the company’s capital leases

Has the company adopted the new standard for leases? If not, use the rate from above to approximate the amount that would have been included in the balance sheet had the operating leases been capitalized.

Is the missing amount economically important?

Quantify the effect that capitalizing the operating leases would have on the following financial items and ratios for each company: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), and measures of financial leverage, liquidity, and solvency.

2. Pensions. Read the pension footnote to determine whether the company has defined benefit obligations.

What is the funded status of the pension and other benefits plans?

Is the underfunded or overfunded obli-gation substantial? Compare between the companies.

Are the plans substantial to the company?

How much pension expense does each company report in its income statement?

Is this a substantial amount?

Compare the cash paid into the plan assets to the amounts paid to retirees.

Assess the cash flow implica-tions of the company’s future payment obligations. The point is to determine whether the company will be able to meet its obligations as they come due. 3. Income Tax Disclosures and Strategies. Examine the income tax expense and deferred tax assets and liabilities.

Analyze the footnotes and assess the company’s effective tax rate. Is it a consistent rate? If not, do the fluctuations seem reasonable?

Do the deferred tax assets and liabilities seem appropriate given the company’s industry?

Is there a valuation allowance? If so, how big is it relative to total deferred tax assets? Has the valuation allowance changed markedly during the year? This might indicate income shifting

Chapter 12: Alan Witt

Ongoing Project Outline-

This information is provided in detail on page 12-68 of the text.

1. Forecasting Preliminaries: Begin with the adjusted set of financial statements that reflect the company’s net operating assets and its operating income that we expect to persist into the future. This requires that we exclude one-time items and adjust other items to reflect anticipated levels of ongoing activities.
2. Model Assumptions and Inputs
   1. Dollar General: In terms of sales numbers, Dollar General Corporation (2020) does not anticipate injury to their distribution chains, but there is some uncertainty about the effect of COVID-19 on the sales side of things (p. 13). As per the SWOT analysis, Dollar General’s low price point is likely to make people more inclined to shop there if the unemployment rate continues to to be poor, which should serve as a countervailing force. Given the overall drop in commerce due to the shutdown of effectively ⅓ of the year (with a potential new spike of cases down the line), sales growth for the fiscal year ending in early 2021 will be multiplied by 1/2 as a rough estimate. This assumes the price point with counteract injury from the shutdown and allow for a swift recovery, while still acknowledging the potential risks of future lockdowns, lingering economic effects, etc. This estimate is bolstered by the industry report for All Other General Merchandise Stores (2020), which found that Dollar Stores specifically saw growth throughout the great recession and thus are resistant to, if not bolstered by, economic downturns (sec. 3).

19. The company provides no guidance on its 10-k other than to acknowledge the uncertainty inherent in the current period due to Covid-19.

1. Forecast the Income Statement
2. Forecast the Balance Sheet
3. Forecast the Statement of Cash Flows

 Chapter 13: Karen

Ongoing Project Outline-

This information is provided in detail on page 13-39 of the text.

1. Model Assumptions and Inputs
2. Model Estimation
3. Interpretations

References (Alan Witt)

All Other General Merchandise Stores. (2020). In Encyclopedia of American Industries. Farmington Hills, MI: Gale. https://proxy.geneseo.edu:3914/essentials/article/GALE%7CCGZFCD256084954/4ad2d93c2a48967170ba301be6dc1360?u=geneseo

Dollar General Corporation. (2020, January 31). Form 10-K. https://www.sec.gov/ix?doc=/Archives/edgar/data/29534/000155837020002915/dg-20200131x10ka41072.htm

Dollar Tree Inc. (2020, February 1). Form 10-K. https://www.sec.gov/ix?doc=/Archives/edgar/data/935703/000093570320000006/dltr-2020x02x01x10k.htm

Easton, P. D., Halsey, R. F., McAnally, M. L., Hartgraves, A., & Morse, W. J. (2018). Financial & Managerial Accounting for MBAs, 5^th ed. [electronic edition]. Cambridge Business Publishers. https://mybusinesscourse.com/

References (Allen Gitelman)

Dollar Store Report – June 2019. (2019, June 06). Retrieved from https://www.qreadvisors.com/reports/dollar-store-report-june-2019/

Dollar Tree TENANT OVERVIEW. (n.d.). Retrieved from https://www.netleaseadvisor.com/tenant/dollar-tree/

Dollar General TENANT OVERVIEW. (n.d.). Retrieved from https://www.netleaseadvisor.com/tenant/dollar-general-2/

Moody’s changes Dollar Tree outlook to positive. (2019, September 23). Retrieved from https://www.moodys.com/research/Moodys-changes-Dollar-Tree-outlook-to-positive–PR_410390

Moody’s rates Dollar General’s proposed new notes Baa2. (2020, April 02). Retrieved from https://www.moodys.com/research/Moodys-rates-Dollar-Generals-proposed-new-notes-Baa2–PR_421769

Moody’s announces completion of a periodic review of ratings of Dollar Tree, Inc. (2020, April 29). Retrieved from https://www.moodys.com/research/Moodys-announces-completion-of-a-periodic-review-of-ratings-of–PR_420747

Moody’s announces completion of a periodic review of ratings of Dollar General Corporation. (2020, April 29). Retrieved from https://www.moodys.com/research/Moodys-announces-completion-of-a-periodic-review-of-ratings-of–PR_420746

Standard & Poor’s: Americas. (n.d.). Retrieved from https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352

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