Dollar Tree Inc Summary Ticker DLTR Price 34.3 Beta 1.05 52-Week High 42.

2 52-Week Low 20.72 Shares Outstanding 90.43M Market Cap 3.1B Volume 1.83M Average Volume (3M) 2.32M

Dollar Stores and the Economy

Brief Company Overview

Dollar Tree was founded and is located in Chesapeake, Virginia. Its first store opened in 1986. They are a discount retail store that has promised its customers to keep all of their products priced at $1 at their Dollar Tree locations. The subsidiaries of Dollar Tree Inc. include Dollar Tree, Deal$, and Dollar Bills. There are roughly 3,400 stores located in 48 states.

Sales Growth during 2001 recession ('00-03), yr avg. Dollar Tree Family Dollar 99 Cent Only 20.02% 14.64% 27.17%

Sales Growth during normal time ('04-07), yr avg. 11.02% 9.53% 9.19%

Recommendation: Buy a Full Position (1100 Shares)

Has outperformed the S &P 500 and is set to continue this performance The dollar stores sector thrive in hostile economic conditions, DLTR is the Best of Breed DLTR is an attractively valued even in our most conservative estimates

$ "The entire essence of America is the hope to first make money -- then make money with money -- then make lots of money with lots of money." -- Paul Erdman $

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Table of Contents
Summary....1 Table of Contents.......2 Company Overview.. 3 Dollar Tree History....3 Recent News..4 Management...4 Competition...5 Investor Relations..6 SWOT Analysis.....7 Porters Five Forces...7-8 Macroeconomy......8-9 Industry Trends....9-10 Ownership and Insider Activity...11 Analyst Opinions......12 Are we overweighed in retail stocks? A historical comparison...13 Financial Ratios....14 17 Pro Formal Income Statement..18 Pro Formal Methodology.18 Pro Forma Scenarios...19-20 PE Valuation...20-21 Recommendation.....21 Income Statement.....22 Balance Sheet...23 Statement of Cash Flows..24 5 luc luong canh tranh

http://www.docstoc.com/docs/83738475/Porters-Five-Forces-for-Consumer-Durable-Industry http://www.investopedia.com/features/industryhandbook/porter.asp#axzz1ZtCemnI2 http://www.quickmba.com/strategy/porter.shtml ( web ngoai) http://www.google.com/books?hl=vi&lr=&id=Cc3S1fDxlfEC&oi=fnd&pg=PA183&dq=Porter %E2%80%99s+Five+Forces+of+retailing&ots=sojJzfs9f&sig=GlTSBhOxZQZoRzC8x6_0yme8mQY#v=onepage&q=Porter%E2%80%99s %20Five%20Forces%20of%20retailing&f=false

Hammond, Lou, Mumuni, Nguyen

DLTR

Hammond, Lou, Mumuni, Nguyen

DLTR

Company Overview
Dollar Tree Inc. operates a variety discount store that provides housewares, toys, seasonal items, food, health, and beauty aids, and books. There are roughly 3,400 store locations in 48 states. Their stores are located in high traffic areas. The company does not mind being located near malls, shopping centers, or grocers because customers can find great value in Dollar Tree stores that cannot be found elsewhere. Roughly 40% of their goods are imported from abroad, mainly from China. Their goal is to continue to find new locations along with adding more square footage to their stores. They have been adding refrigerated sections, currently available at about a third of all stores, to add more variety of the goods they can offer to their customers.

Within their Dollar Tree and Dollar Bills locations, all of their goods are priced at $1. Although their products are sold at a dollar, they believe in still providing value to their customers. Customer satisfaction is still very important to them.1

In 2006 Dollar Tree acquired Deal$. This subsidiary of their company allows them to price their goods above a dollar. They are trying to refine this multi-price model. They believe it will give more value and more convenience to their customers. They believe Deal$ will appeal to more customers. In fact, during the 2Q for 2008, the Deal$ stores outperformed the original stores. They are very excited to see the variety of goods they will not be able to offer at slightly higher prices. 2

In 2007, Dollar Tree launched dollartreedirect.com. This website allows customers to purchase large quantities of goods while still being provided the value. This website is very appealing especially for those customers who need a lot of one item, such as teachers or restaurant owners. 3

Dollar Tree History4

1986 - The first Dollar Tree opened in Dalton, Georgia 1995 - Dollar Tree became a public company and was traded on the Nasdaq 1996 - Acquired Dollar Bills stores, 136 stores 1998 - Acquired 98-Cent Clearance Centers in California 1999 - Merged with Only $One stores which was based in New York 2000 -2001- Acquired Dollar Express, Inc., 136 stores in six Mid-Atlantic states
1 2

http://premium.hoovers.com/subscribe/ http://seekingalpha.com/article/92926-dollar-tree-inc-f2q08-qtr-end-08-02-08-earnings-call-transcript?source=feed 3 http://premium.hoovers.com/subscribe/ 4 www.dollartree.com

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2002 - Topped $2 billion in sales 2003 - Acquired Greenbacks based in Salt Lake City, Utah 2004 - Exceeded $3 billion in sales 2006 - Acquired Deal$ stores, 138 stores

In Recent News
October 7, 2008 J.P. Morgan upgrades Dollar Tree from neutral to overweight. 5 August 27, 2008 Dollar Tree posted 15% increase in their fiscal second quarter net income which can be attributed to their sales growth 6 June 24, 2008 Dollar Tree recalls 470,000 Chinese made glue guns because they short circuited and started to smoke. 7 December 20, 2008 Forbes names Dollar Tree one of the Best Big Companies in 2008.

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www.barrons.com www.wsj.com 7 www.reuters.com

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Management8
Bob Sasser CEO since 2004, President since 2001, served on the Board of Directors since 2004 James E. Fothergill Chief People Officer Allan Goldman Senior Vice President, Deal$ Stores James A. Gorry, III General Counsel and Corporate Secretary Raymond K. Hamilton Chief Information Officer David E. Hensley Senior Vice President, Store Operations Gary M. Philbin Chief Operating Officer since March 2007 Robert H. Rudman Chief Merchandising Officer since June 2003 Stephen W. White- Chief Logistics Officers

Competition9
Family Dollar

Family Dollar was founded in 1959 and is now the nations second leading dollar store. The company has more than 6,500 stores in 44 states. Their stores sell food, health and beauty products, household products, clothing, shoes, and linens. They try to locate themselves in neighborhoods near their low and middle income consumers. Due to competition from such establishments as Wal-Mart, Family Dollar has had to shift some of its pricing strategies, and at the same time has increased the number of brand names their stores offer. Although they already have 6,500 stores, they continue to expand their presence.

99 Cent Only
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99 Cent Only stores sell their merchandise for 99 cents or less. They currently operate 280 stores, mainly located in Southern California, central California, Las Vegas, Phoenix and Texas. The company wants to continue to expand their operations, and they plan on selling select name-brand products which include Colgate-Palmolive, Johnson & Johnson, and Kellogg.

Wal-Mart Wal-Mart is the #1 retailer in the world. The company operates 975 discount stores, 2,800 supercenters, and 590 warehouse stores (Sams Club). Their discounted products include food, clothing, electronics, health and beauty products, sporting goods, entertainment and toys. One of their newer strategies is their Marketside stores. These stores will compete with local neighborhood grocery stores. They are also the third-largest drug retailer behind Walgreen and CVS. And to stay connected to their customers, they sell their goods online at Walmart.com where they also provide upgraded merchandise to keep up with competition.

Dollar General Dollar General is the #1 dollar store. It operates roughly 8,200 stores in about 35 states. They like to locate their stores in smaller towns where they are away from other giant discount stores. And because of such locations, they do not advertise. When they do decide to locate in big cities, they do so in lowerincome neighborhoods. In 2007 Dollar General was taken private by affiliates of JJR and Goldman Sachs.

Investors Relations Interview

1.) Dollar Tree seems to benefit from the current trend of customers trading down in this unfavorable economic condition, can you give more specifics on this? Dollar tree is in an ideal position for the time. We do not have metrics capable of accurately determine which customers are trading down, but we do believe they represent a significant number. I believe were seeing people that would not have shopped with us in the past come into our stores. 2.) What role does the Deal$ store concept have in Dollar Trees long-term plan? This has not been publicly addressed, so I can not give you much details. I can only tell you that our company is currently in the learning and refining stage.

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3.)

How does the company protect itself from diesel prices? Dollar Tree is able to manage through many factors, and diesel prices are having an impact on not only us and our customers. There are 9 distribution centers place strategically around the U.S. Trucks are tightly packed, there are back hauls, and these distribution centers help to mitigate fuel expenses. This, we believe, is one of our core competencies. Dollar Tree is not investing in futures or any other forms of hedging.

4.)

What can you say about your new store opening strategy? Does the company focus on areas with proven customer base or areas without the presence of competitors? Dollar Tree positions its stores where middle-America is shopping. Metrics are used of where these areas are, but cannot be disclosed. Dollar Trees core customers are females, married with children with a household income below $50,000. Dollar Tree provides not only necessities but also want. We believe our goods are worth more the $1 list price, and our customers know value when they see it. Our value shopping concept is an alternative to the big box retails. Dollar Tree locates stores where there is good foot traffic. The company does not mind being located near grocers and one-stop stores especially with how much gas costs these days. We believe everyone will benefit from this.

5.)

Which companies does Dollar Tree see as its main competitors: dollar stores, grocers, or one-stop stores? We dont really have any direct competition. There is no one who sells at a single price point like we do. These retailers may have dollar in their name, but they sell most everything at higher prices.

6.)

Does Dollar Tree have an advantage to their bulk selling segment? This is a benefit to the stores mainly. It is there to save time for both the customer and the store.

7.)

How has the company cut down on SG&A expense? Expense control is not a new concept to us. Dollar Tree is run very efficiently, out of necessity really because we cannot raise prices. We are very cost conscious. We employ reverse auction when negotiating with suppliers, there is a lot of purchasing power due to the number of stores, we constantly seek and incorporate ideas from employees on how to help maintain expense.

8.)

How has the credit squeeze affected new store openings? New stores are 100% owned and self funded from free cash flow.

9.)

Dollar Trees stock price was severely beat down at the end of last year? Why explanations can you give for this? If I could explain this we would all be rich on the beach.

10.)

Is there seasonality to Dollar Tree sales? There is some seasonality to Dollar Trees sales. Any change in season and actual holidays are important to Dollar Tree. During the winter holidays especially, we tend to hire more part-time workers.

Hammond, Lou, Mumuni, Nguyen

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SWOT Analysis
Strengths Dollar Tree stay true to their image and actually price all their goods at a dollar. All others competitors, even the dollar stores, have multiple levels of pricing, most of which are higher than $1. Customers know what to expect when they shop in Dollar Tree stores. They have promised their customers of selling goods at $1 and because they must maintain this price point, they run their company efficiently. Financials in general are very strong. They tend to be better than peers or comparable with the best of them.

Weaknesses Their days sale in inventory is somewhat weak compared to their competition. However they are steadily improving their asset management. Over the past few years, debt to equity ratio has been increasing.

Opportunities With current economic conditions, it is many consumers are trading down and try to obtain necessities in the cheapest way possible. Dollar Trees corporate strategy to add more offerings in basic consumables put them in a perfect position to benefit from this trend. Dollar Tree recently acquired Deal$, which allows the company to market products at slightly higher prices without compromising brand image. Also offering great values to customer, Deal$ is more likely to stay relevant when the economy eventually recover. Deal$ has outperformed the original stores in the 2Q of 2008 in every single sales metric. Dollar Tree is still strategizing on how to best utilize this acquisition, but when they expands this subsidiary, success is imminent. The company wants to continue to grow their refrigerated/freezer product line. This has potential for adding to profits as it provides more variety to customers. Dollar Tree has recently started accepting major credit cards, and its value proposition becomes accessible to more customers.

Threats

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The company imports 40% of its goods from overseas which exposes them to currency exchange risk. Sales and profits may be hurt as competitors aggressively cut prices, as retailers scramble to maintain market share.

Porters Five Forces

Supplier Power Dollar Tree does not have to worry about much supplier power because they make agreements with Chinese supplier a year in advance. Therefore, if prices do increase, they have time to find a new supplier to supply the good. Barriers to Entry There are no laws or regulations for stores to open up next to Dollar Tree with a similar pricing model, but its not easy to source products at a low enough price to make any profit. Therefore, barriers to entry are significant. Buyer Power There is not much buyer power due to the fact that Dollar Tree sells its products at one set price. Threat of Substitutes Due to recent economic conditions, Dollar Tree has been able to provide the substitute for those that are trading down. However, when economic conditions recover, those customers that were trading down may go back to the name brand products. Degree of Rivalry Dollar Tree faces much rivalry from other discount stores, especially with the current economic situation. However, Dollar Tree has made sure to remain at their $1 price point. This will help to beat the competition since many dollar stores sell products for more than a dollar.

Macroeconomic Conditions
Trends and Outlooks: Contrary to the message sent by our class macroeconomist last month, the U.S. economy is facing a critical downturn. The crisis, which emerged August 2008 when central banks initial liquidity injection into the market failed to prevent the first bank -failures, stems from the biggest housing and credit bubble in history. House price, on average, has come down by a fifth 10 and shows no sign of bottoming; mortgages written on the assumption of appreciating real estate become credit loss. Thanks to widespread securitization of lending, accelerated home foreclosures rate not only affect the primary lenders but also trigger a domino effect throughout the financial systems. Banks worldwide wrote-down almost $600 billion, mortgage giants Fannie Mae and Freddie Mac were taken over by the U.S. government, the Treasury and the Federal Reserve System started pumping trillions of dollar into the market via rescue packages. The recent extreme volatility in common stock prices is in no small part a byproduct of the governments reactive interventions. An efficient market values consistency and transparency at the top. For example, equities barely budge immediately after the announcement of anticipated rate cuts; the change has been reflected in stock prices weeks if not months beforehand. The market like economic leaders who seem to be on top of things while gutsy enough to stick to principles. But when the government decided it should save Bear Stearns but not Lehman Brothers, voted for buying bad assets one day then called for equity injection the next, people dont know what to make of long term policies. Hence the violent 1,000 point one day swings we have witnessed in the Dow Jones Index in the past few weeks.
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"A Survey of the World Economy: When Fortune Frowned." The Economist 09 Oct. 2008.

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Historically stock prices have been a leading indicator of business cycles; the lag between fluctuations in the S&P 500 index and changes in the real economy has been, on average, 6 months. What this means is that, if stock prices have already bottomed out in October (or so we hope), the current downturn will find its trough in the 2nd quarter of 2009. More likely, it will be a few months before the intended effect of government measures find its way into market pricing, and the US economy will pick up before the end of 2009. Fed chairman Ben Bernanke recently hinted at another rate cut, even though the Fed Funds rate is already at 1.5% compared to 5.25% before the financial crisis. The key rate is likely to stay at, or below this abnormally low level until the end of this downturn because (a) economic growth is still

slowing down, (b) low interest rates will hopefully increase credit availability to businesses and households, and (c) inflationary pressures subside as crude oil completed a round trip and came back to the $70-80 range, its price in 2006.
Importance to DLTR: Retail sales are directly tied to consumer spending and thus highly correlated to the well-being of the economy. When people lose their jobs (unemployment rate expected to reach 6.2% in September, the highest level since June 2003), fail to make mortgage payments, and see parts of their wealth as well as retirement portfolio evaporate (the S&P dropped nearly 40% through October 10), they have no choice but reduce spending. In September, retail sales sank 1.2%. But, DLTR is a different animal. As we will show later in this report, its bottom lines actually benefit from the economic downturn. Moreover, cost of diesel necessary for truck operation trucks represents a significant cost to DLTR, decreasing gas price is a significant boost in this regard.

Industry Trends
General Merchandise Stores (Discounters) is classified as a Mature and Cyclical industry, with aggregate sales highly correlated to real GDP growth. Within this industry, however, results greatly vary from company to company. DLTR operates in the extreme value retail (or deep discount) sub-industry, which is believed to be one of the fastest growing retail sectors in the United States11. Further bucking the classification of general retailing, this sub industry has been anything but cyclical. Deep discount retails has historically performed exceptionally well during periods of economic distress. Below is side-by-side sales growth comparison of the 3 largest publicly traded extreme value retailers during normal period and the previous economic downturn (usually referred to as the 2001 recession).

Dollar Stores and the Economy Sales Growth during 2001 recession ('00-03), yr avg. Dollar Tree Family Dollar 99 Cent Only
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Sales Growth during normal time ('04-07), yr avg. 11.02% 9.53% 9.19%

20.02% 14.64% 27.17%

99 Cents Only Stores Annual Report

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Retailers compete heavily on low prices Budget shoppers can accept limited breadth and depth of product offerings if it results in lower prices. As such, core assortments of consumables tend to be the same from store to store. 12 DLTRs flagship Dollar Tree Stores concept turns its very name into a comparative advantage: it is actually the only chain in the dollar stores segment to price all products at $1. Impact on DLTR: Positive Heavily favors retailers with strong supply control and/or private labels Lower prices force companies to reduce costs, and companies with strong control over suppliers or strong stable of private labels (made in house or privately contracted, not available elsewhere) have a significant moat; DLTR has both. Management makes commitments with Chinese suppliers more than 1 year in advance, margin on imported products consistently beat previous targets. 13 If costs increase, they change the product, change the resource or drop the item entirely and replace it with something else. Much of discretionary-purchase offerings at DLTR (seasonal merchandise, home furnishing etc.) are under labels sold exclusively at Dollar Tree Stores. Doing this helps bypass one major margin-taking agent (compare store-brand tissue to Kleenex tissue) Impact on DLTR: Positive Economic headwinds and focused marketing broadens discount stores customer appeal As U.S. consumers increasingly turn their attention to the dim economic prospects, they tighten wallet string, spend more time searching for deals, and look for ways cut trim the fat in their shopping budget. The status symbol becomes how much you can save. In this condition, consumables" - food, beverages and other basic household necessities available at deep discount become more and more attractive. Historically, Dollar Tree wasn't in the grocery business; it was less focused on consumables than were competitors Dollar General and Family Dollar. The acquisition of Dollar Express in 2000 helped it gain experience with the frozen food business. And since 2005, the chain has been adding refrigerators and freezers chain-wide. Their chilled offerings include shredded cheese, hot dogs, frozen waffles and seafood, and that is on top of canned vegetable, breakfast treats, sandwich bags, and condiments available at nearby aisles. Some stores even have small ovens with cookies and muffins, charming customers with the aroma. In recent months, discounters have increased marketing activities as well as regularly hold treasure hunts, widely advertised deals that create buzz before customers even visit stores. Dollar Tree itself had a special promotion in which steak is available for a dollar a pound. Impact on DLTR: Positive In part due to luck, in part due corporate strategy, management has brought Dollar Tree to the perfect position to benefit from the current market.

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Standard & Poors NetAdvantage General Merchandise Store Industry Summary Fiscal 2nd quarter Earnings Call Transcript, http://seekingalpha.com/article/92926-dollar-tree-inc-f2q08-qtr-end08-02-08-earnings-call-transcript?source=feed&page=6

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For its most recent quarter, Dollar Tree Inc. reported a 6.5 percent increase in comparable-store sales.

Ownership and Insider Activities14

Ownership Breakdown: DLTR (as of 10/19/08)

Large Block Holder Type

Number

Institutions

332

Total Number of Shares Held 90.43 M

Mutual Fund

597

% of Shares Owned by all Large Block Holders 100.00%

Other Major

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Total Number of Large Block Holders

945

Institutional investors own almost all of DLTR outstanding shares. The four largest shareholders are Barclays Global Investors, Cramer Rosenthal McGlynn, Fidelity, Vanguard, all big names in the asset management industry. Insider Trading

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AOL Money & Finance

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Insider shares sold have outnumbered insider shares purchased in recent months. In normal market condition, this imbalance might trigger a red flag; however, the current condition is anything but normal, and we have seen a large amount of equity assets being converted to cash on a market-wide basis.

Analyst Opinions15
Average brokerage recommendation is Moderate Buy.

Analyst Ratings Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 5 3 3 4 Moderate Buy 1 1 1 1 Hold 3 5 5 5 Moderate Sell 0 0 0 0 Strong Sell 0 0 0 0 Mean Rec. 1.78 2.22 2.22 2.10

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MSN Money Central, data provided by Zacks Investment Research

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Analysts have been favorable towards DLTR in recent months. No sell recommendation was recorded. Barrons featured a Buy report on Dollar Tree Stores in its October 20 issue. 16

Theres no point in buying it at the other store if I can get it here for a dollar, Alisha Wilson17

Are We Overweighed in Retail Stocks? A Historical Comparison

Correlation between current holdings, 6/2001 to 10/2008 DLTR SPY SWY TSCDY_PK DLTR 1 SPY 0.378357 1 SWY 0.295504 0.372639 1 TSCDY_P K 0.373768 0.899164 0.190347 1

Correlation between current holdings, 5/2003 to 10/2008 DLTR SHLD SPY SWY TSCDY_PK DLTR 1 SHLD 0.57445 1 SPY -0.460682 0.8804 1 0.51989 SWY 0.020041 4 0.660897 1 TSCDY_P -0.458602 0.91077 0.925251 0.528725 1
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"Research Reports." Barron's 20 Oct. 2008: M10.

http://hamptonroads.com/2008/10/tough-times-it-pays-stretch-dollar-far-you-can

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It occurred to our group that after the potential purchase of DLTR shares, the SMF portfolio might just Extended DuPont Profit Margin TATO Equity Multiplier ROE 2001 2002 2003 2004 2005 2006 2007 6.19% 6.64% 6.34% 5.77% 5.12% 4.84% 4.74% 2.20 2.09 1.89 1.74 1.89 2.12 2.37 1.38 1.31 1.46 1.54 1.53 1.60 1.81 18.89% 18.08% 17.50% 15.48% 14.84% 16.44% 20.37% Dollar Tree Industry Family Dollar 99 Cent Only Wal-Mart Profit Margin 4.74% 1.07% 3.55% 0.24% 3.40% TATO 2.37 0.89 2.60 1.85 2.29 Equity Multiplier 1.81 6.00 2.23 1.23 2.66 ROE 20.37% 5.71% 20.67% 0.55% 20.68% qualify as overweighed in the retail sector; a full position in DLTR and existing SWY and SHLD holdings would amount to roughly 13% of the total investment fund. At the time of writing this report, the purchase of a full position in Tesco ADR is being considered, this would raise our retail weighing to almost 20%, or one fifth of the fund value. So we decided to compare historic stock prices of DLTR to other retail holdings. Closing price at the first day of each month represents a data point. Similar to what we have done in estimating earnings, a 8 year time horizon is used to reflect stock performances in the 2001 economic downturn. A 6 year range is also considered, as SHLD went public in May 2003. A correlation value of 1 means the two stocks in consideration are perfectly positive correlated (a 1% increase in share price of A will likely mean a 1% increase in share price of B). Vice versa, a correlation value of -1 means perfect negative correlation. As you can see in the two tables above, DLTR does not appear highly correlated with any of our current retail holdings. Please note that we also included SPY in this comparison; correlation in pricing between DLTR and SPY appear very low, and even negative in the 6 year time horizon. This observation reinforces our argument that DLTR is not GDP-bound as other retail stocks, and has a good chance of benefiting from a tumultuous economy. 2000 7.20% 2.26 1.44 23.45%

Financial Ratios18
Extended DuPont Looking at the last complete fiscal year for Dollar Tree compared to the Industry and three of its top competitors, Dollar Tree has a profit margin 1% higher than all the rest and a Return on Equity (ROE) which is minimally different than that of Family Dollar which is arguably its biggest competitor amongst dollar stores and Wal-Mart which is the discount retail king. If you look at the past history for Dollar Tree despite a declining profit margin (which is still higher than that of its competitors) the ROE has
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Dollar Tree Annual Report

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maintained a steady level and has made a nice jump in the past two fiscal years. The profit margin decrease is due to a shift in corporate policy to increase sales in everyday consumables which have a lower profit margin away from higher margin seasonal goods. Liquidity

Liquidity Current Ratio Quick Ratio

2000 2.74 1.26

Current Ratio Quick Ratio

2001 2002 2003 2004 2.80 3.47 2.73 3.29 1.32 1.74 0.74 1.20 Dollar Family Tree Industry Dollar 1.94 1.48 1.36 0.36 0.66 0.42

2005 3.19 1.24 99 Cent Only 2.59 1.30

2006 2.50 0.92

2007 1.94 0.36

Wal-Mart 0.81 0.21

Dollar Tree has consistently been a fairly liquid company. However liquidity has been dropping in the past few years. The drop is due to a drop in current assets while current liabilities went up. The Quick Ratio drop was more significant because while current assets went down inventories went up and caused this ratio was low. Despite the drop in the ratios, they are still right in line with the Industry Average and better than that of Family Dollar and Wal-Mart. The Quick Ratio is a little low but still higher than that of Wal-Mart and barely lower than that of Family Dollar. Part of this decrease in current assets was a drop in cash that is partially attributed to a share buyback that was accomplished without increasing long-term debt.

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Profitability

Profitability Operating Margin Operating Margin Gross Margin Gross Margin Profit Margin Profit Margin ROA ROA ROE ROE

Dollar 2000 2001 Tree 12.03% 10.26% 7.79% 37.01% 36.03% 34.44% 7.20% 6.19% 4.74% 16.28% 13.64% 11.26% 23.45% 18.89% 20.37%

Industry 2002 10.90% 1.71% 36.41% 8.06% 6.64% 1.07% 13.85% 2.33% 18.08% 5.71%

Family 99 Cent Wal-Mart 2003 2004 2005 2006 2007 Dollar Only 10.49% 9.39% 8.35% 7.83% 7.79% 5.69% -0.53% 5.87% 36.17% 35.59% 34.54% 34.19% 34.44% 33.98% 38.43% 23.50% 6.34% 5.77% 5.12% 4.84% 4.74% 3.55% 0.24% 3.40% 12.00% 10.05% 9.67% 10.25% 11.26% 9.25% 0.45% 7.79% 17.50% 15.48% 14.84% 16.44% 20.37% 20.67% 0.55% 20.68%

Along with Profit Margin being higher than the industry average and competitors, the Gross Margin, Operating Margin, and Return on Assets (ROA) are all higher. Gross Margin has been relatively steady in the past four years only dropping by approximately 1.2% but gained some of that back in the past fiscal year. Operating Margin dropped minimally in the past fiscal year but despite this drop it still higher than all of the competition. Overall this is a profitable company compared to the industry and its competitors. Debt Management

Debt Management D/E Ratio Times Interest Earned Equity Multiplier

2000 0.4 4 26.5 2 1.4 4

2001 0.38 37.96 1.38 Dollar Tree 0.81 19.59 1.81

2002 0.3 1 56.9 7 1.3 1

2003 0.4 6 35.3 4 1.4 6

2004 0.54 28.88 1.54

Industry -

Family Dollar 1.23 23.15 2.23

2005 2006 2007 0.5 0.8 3 0.60 1 20.6 19.5 0 19.36 9 1.5 1.8 3 1.60 1 99 Cent Only Wal-Mart 0.23 0.84 1.23 1.61 11.97 2.66

D/E Ratio Times Interest Earned Equity Multiplier

The Debt to Equity ratio has been rising every year, which is some cause for concern but is still lower than that of Family Dollar and Wal-Mart. Also it has good Interest Coverage due to Times Interest Earned which is pretty high but not as high as it has been in previous years. Equity Multiplier is right in line with the D/E ratio and has been increasing but is still low relative to the competition other than 99 Cent Only which is not as large as Dollar Tree or Family Dollar.

Asset Management

Asset Management Total Asset Turnover Fixed Asset Turnover

2000 2.2 6 7.9 8

2001 2.20 7.1 2

2002 2.09 6.76

2003 1.8 9 4.5 7

2004 1.74 4.56

2005 1.89 4.98

2006 2.12 5.55

2007 2.3 7 5.7 1

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Days Sales in Inventory

88.7 9

85.1 2 Dollar Tree 2.37 5.71 84.14 4.34 -

88.13 Industry 0.89 -

107. 36

111.5 7 Family Dollar 2.60 6.44

94.73 99 Cent Only 1.85 4.18 68.29

84.54

84.1 4

Wal-Mart 2.29 3.99 44.82 8.14 3.56

Total Asset Turnover Fixed Asset Turnover Days Sales in Inventory Inventory Turnover Avg. Collection Period

86.22 3.03 17.76 4.23 -

5.34 0.65

Asset Management is one area where Dollar Tree is just average compared to its competitors, it still is better than the industry. Days Sales in Inventory has been progressively getting better which indicates that they are selling more because Inventory has been increasing but Days Sales in Inventory is decreasing which means that they are getting rid of Inventory faster. Also Total and Fixed Asset Turnover have been getting better in the same time period, which means they are getting more money for their assets now than they were 2 years ago.

Comparable Stores Sales Growth and Other Industry-specific Metrics 2000 Comp. store Sales Growth Number of Stores 5.70% 1729 2001 0.10% 1975 2002 1% 2263 DLTR 2003 2.90% 2513 2004 0.50% 2735 2005 0.80% 2914 2006 4.60% 3219 2007 2.70% 3411 19

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Stores Growth Dollar Tree $ 4,243 7.79% 3411 161.00 2.70%

14.23 %

14.58 %

11.05 %

8.83% 99 Cent Only $ 1,199 0.53% 265 208.00 2.40%

6.54% WalMart $374,690 5.87% 7262 798.91 1.60%

10.47 %

5.96%

Sales ($M) Operating Margin Number of Stores Sales per Sq. Ft. Comp. store Sales Growth

Dollar General $ 9,169 2.70% 8260 160.88

Family Dollar $ 6,834 5.50% 6430 150.86 0.90%

Comparable store sales, often referred to as same-store sales or comps, measure sales growth at stores that have been open for more than one year. It more closely track organic growth than Sales by not taking into account revenue growth due to new store openings. As such, comps gained wide acceptance among industry analysts and has made its way into retailers annual reports as well as monthly press announcements. Breaking DLTR sales growth into organic expansion and new store openings, we found the same anticyclical development observed earlier: growth was at a very high level during tough economic times, then trended downward and picked up again recently. Compared to competitors (we were able to retrieve some data for the privately-traded Dollar General for this segment), DLTR outperformed its peers by comfortable margins in all sales metrics. There are two exceptions, both in Sales per Sq. Ft., in no small part to difference in business models. 99 Cent Only operates a limited number high volume stores, and has such low prices they barely make any profits; WalMart gets more than half of its revenue from supermarket and Sams Club stores, where its sells big ticket items like home electronics or furniture.

Pro Forma Income Statement

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Dollar Tree Millions of $US Revenues Growth is Revenue Cost of Sales Gross Margin Gross Margin % Operating Expenses SGA as % of Revenue Operating Income Operating Income Margin Interest Expense, Net EBT EBT Margin Less: Taxes Tax Rate Earnings Earnings per Share Shares Outstanding

2007 Full Year $4,243 6.88% $2,782 $1,461 34.44% $1,131 26.65% $330 7.79% -$10 $320 7.54% $119 37.02% $202 $2.24 90

2008 1Q08 $1,051 7.79% $695 $356 33.89% $287 27.29% $69 6.60% -$2 $68 6.45% $25 36.14% $43 $0.48 90 2Q08 $1,093 12.54% $730 $363 33.21% $301 27.54% $62 5.67% -$2 $60 5.50% $22 36.61% $38 $0.42 90 3Q08 $1,098 10.00% $721 $377 34.31% $292 26.64% $84 7.67% -$4 $80 7.33% $30 37.00% $51 $0.56 90 4Q08 $1,454 12.00% $937 $518 35.58% $387 26.64% $130 8.95% -$17 $113 7.75% $42 37.00% $71 $0.79 90 Full Year $4,696 10.69% $3,083 $1,613 34.35% $1,267.6 0 26.99% $346 7.36% -$25 $321 6.84% $118 36.74% $203 $2.25 90 1Q09 $1,230 17.00% $817 $413 33.55% $328 26.64% $85 6.92% -$2 $83 6.78% $31 37.00% $53 $0.58 90 2Q09 $1,279 17.00% $852 $426 33.34% $341 26.64% $86 6.71% -$2 $84 6.56% $31 37.00% $53 $0.59 90 3Q09 $1,284 17.00% $844 $441 34.31% $342 26.64% $98 7.67% -$4 $95 7.37% $35 37.00% $60 $0.66 90 4Q09 $1,702 17.00% $1,096 $606 35.58% $453 26.64% $152 8.95% -$18 $135 7.91% $50 37.00% $85 $0.94 90

2009 Full Year $5,494 17.00% $3,609 $1,885 34.31% $1,463.5 6 26.64% $422 7.67% -$25 $397 7.22% $147 37.00% $250 $2.77 90

2010 Full Year $6,593 20.00% $4,331 $2,262 34.31% $1,756.2 7 26.64% $506 7.67% -$25 $480 7.29% $178 37.00% $303 $3.35 90

2011 Full Year $7,488 13.58% $4,919 $2,569 34.31% $1,994.74 26.64% $574 7.67% -$26 $549 7.33% $203 37.00% $346 $3.83 90

Pro Forma Methodology

Revenue Due to seasonal fluctuations of retail sales, revenues are calculated on a quarterly basis. Revenue growth is based on previous historical performance and future economic expectations. Cost of Sales To calculate cost of sales, we took the three year average percentage of revenue. Cost of sales is calculated at the quarter level to show seasonality during the year. Interest Expense Interest expense is calculated as 1.5% growth per quarter. General and Administrative Expenses General and administrative expenses are fixed at 26.6% of revenue, which is the three year historical average. Taxes We assume a 37% income tax for the company for the next few years, which is comparable to historical rates.

Pro Forma Scenarios

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Most Likely PE The most likely scenario assumes the US has entered into a recession. We are comparing this case to the tech bust in 2001 and the recession up through the beginning of 2003. During this time, DLTR traded between 16.27x and 30.56x earnings, with an average of 23.41x earnings. However, due to the recent collapse in equity prices, we decided to deflate the average PE during the last recession by averaging it with the average PE from the last three years. Revenue In the most likely scenario, revenue growth for third and fourth quarter is 10% and 12%, based on recent company guidance and seasonality. In 2009, we expect economic problems to worsen. A burdened middle and low class will trade down to cheaper products offered at Dollar Tree. As a result, were expecting revenue to grow 17% in 2009 and 20% in 2010. DLTR experienced similar growth in 2002 and 2003 during the economic downturn. In 2011, we applied the five year composite growth rate of 13.58% due to uncertain expectations. Margins We have gross margin set at 34.35%. Historically, this number has remained relatively stable. This is the average of the last three years, and we expect it to remain the same. Pessimistic View PE For the pessimistic view, we assume the market makes a swift recovery in 2009. Consumers start to trade up from dollar stores and investors are less than enthusiastic about Dollar Tree. We are comparing this case with the bull market in 2003 when the US was coming out of a recession. During this period, DLTR traded between 12.8x and 25x, with an average of 20x. We feel that for a company that grows in a recession, it should be able to maintain its current PE ration of 14x. Revenue In this scenario, we expect to lose sales to stores carrying superior products, as customers trade up on their purchases, causing growth to slow to 12% and 11% in 2009 and 2010. In 2011, we applied the five year composite growth rate of 13.58% due to uncertain expectations. Margins Gross margin contracts 150 basis points to historical lows.

Optimistic View PE

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Under this scenario, economic conditions worsen beyond current expectations. Consumers are coming under greater financial constraints and trade down on consumer durables. During the worst throws of the 2001 recession, DLTR traded at 30.5x earnings. To account for current equity pricings, we deflated this ratio to 23.41x. Revenue Sales growth increases 18% for 2009 and 22% for 2010. Margins The optimistic view assumes a 125 basis point increase in gross margin.

PE Valuation
2008 Given the recent problems in financial markets, we feel that there is only limited possibility for significant economic improvement. Moreover, in the next few months, we expect the market to continue on its downward trend with a slight risk of drastic deterioration. Therefore, we have attributed a probability of 25% for an economic rebound, which is the pessimistic view, and a probability of 15% for the optimistic scenario, which assumes a much worse macroeconomic outlook than the market is currently experiencing. Finally, we feel there is a probability of 60% that the market will continue into the recession. Therefore, the three month target price is $41.74 at February 2 nd, 2009, which provides a 17.58% gain from the current price of $34.30.

Weight EPS PE Price Target Price

Pessimistic 0.25 1.98 14.00 27.72 6.93

2008 Likely 0.60 2.25 19.33 43.50 26.10 $41.74

Optimistic 0.15 2.48 23.41 58.06 8.71

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2009 We see 2009 continuing into the recession. Though still seeing limited hope of a speedy turnaround for the economy, we feel that if given time, there is some chance that the economy could rebound. We also think there is a lowered chance of further economic damage, as the actions of the FED start to make their mark on the economy. Accordingly, we have raised our pessimistic weight to 35% and kept our probability of optimistic at 15%. Thus, we expect a target price of $47.43 at the end of fiscal year 2009, which is 25% above the current price of $34.40, surpassing the 15% margin of safety. 2009 Likely 0.50 2.77 19.33 53.55 26.77 $47.43

Weight EPS PE Price Target Price

Pessimistic 0.35 2.08 14.00 29.12 10.19

Optimistic 0.15 2.98 23.41 69.76 10.46

We would like to stress the conservative nature of our forecast as we have (1) deflated the historical PE multiple to reflect current market pricing, and (2) adjusted our weighting towards the pessimistic case.

Recommendation
Any keen observers of the financial market will tell you that one cannot accurately predict movements of stock prices with regularity, and efforts to time the market are only futile. One can only try to get the best out of available information, and that means hours and hours of research on companies and financial statements. Safe to say we did just that, 95% of the ratios you see in this report were calculated by our own hands using information retrieved from earnings call transcripts, 10-K and 8-K filings, with the latter

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as far back as 2000. Our group are confident in recommending SMF purchase a full position (1,100 shares) of DLTR, for the following 2 reasons: In the short/medium term, or till this economic downturn and the initial recovery phase are over (prediction range from end of 2009 to early 2011), the dollar stores sector is set to thrive and outperform our benchmark, the S&P 500, or its proxy, SPY shares. Dollar Tree Inc., as the best run company in this subindustry, should see its stock beat the market by a wide margin. In the long term, 3 years or longer (it is worth noting that SMF rarely holds a stock that long, probably due to annual change in student managers), the likely development of Deal$ stores will help Dollar Tree Inc. stay relevant with the times.

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DOLLAR TREE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Year Year Ended Ended Ended February February January 2, 3, 28, 2008 2007 2006 $ $ $ 4,242.6 3,969.4 3,393.9 2,781.5 2,612.2 2,221.5 1,461.1 1,357.2 1,172.4 1,130.8 330.3 6.7 (17.2 ) 319.8 118.5 $ Net income $ Basic net income per share (Note 7) $ Diluted net income per share (Note 7) 2.09 2.10 $ 1.85 201.3 $ 1.86 $ 1.60 $ 192.0 $ 1.61 1,046.4 310.8 8.6 (16.5 ) 302.9 110.9 $ 173.9 888.5 283.9 6.8 (15.5 ) 275.2 101.3

(In millions, except per share data) Net sales Cost of sales (Note 4) Gross profit Selling, general and administrative expenses (Notes 8 and 9) Operating income Interest income Interest expense (Notes 5 and 6) Income before income taxes Provision for income taxes (Note 3)

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DOLLAR TREE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

(In millions, except share data) ASSETS Current assets: Cash and cash equivalents Short-term investments Merchandise inventories Deferred tax assets (Note 3) Prepaid expenses and other current assets Total current assets Property, plant and equipment, net (Note 2) Goodwill (Note 10) Other intangibles, net (Notes 2 and 10) Deferred tax assets (Note 3) Other assets, net (Notes 2, 8 and 11)

February 2, February 3, 2008 2007

$ 40.6 40.5 641.2 17.3 49.2 788.8 743.6 133.3 14.5 38.7 68.8 $ TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: $ Current portion of long-term debt (Note 5) Accounts payable Other current liabilities (Note 2) Income taxes payable Total current liabilities Long-term debt, excluding current portion (Note 5) Income taxes payable, long-term (Note 3) Deferred tax liabilities (Note 3) Other liabilities (Notes 6 and 8) Total liabilities Commitments, contingencies and subsequent events (Notes 1,4,5 and 6) Shareholders' equity (Notes 6, 7 and 9): Common stock, par value $0.01. 300,000,000 shares authorized, 89,784,776 and 99,663,580 shares issued and outstanding at February 2, 2008 and February 3, 2007, respectively Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity 18.5 200.4 143.6 43.4 405.9 250.0 55.0 88.4 799.3 1,787.7

$ 85.0 221.8 605.0 10.7 45.4 967.9 715.3 133.3 13.3 52.4 $ 1,882.2

$ 18.8 198.1 132.0 43.3 392.2 250.0 1.5 70.8 714.5

0.9 0.1 987.4 988.4

1.0 0.1 1,166.6 1,167.7

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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$ 1,787.7

$ 1,882.2

DOLLAR TREE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended February 2, 2008 $ Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for deferred income taxes Tax benefit of stock option exercises Stock based compensation expense Other non-cash adjustments to net income Changes in assets and liabilities increasing (decreasing) cash and cash equivalents: Merchandise inventories Other assets Accounts payable Income taxes payable Other current liabilities Other liabilities Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Purchase of short-term investments Proceeds from maturities of short-term investments Purchase of restricted investments Proceeds from maturities of restricted investments Purchase of Deal$ assets, net of cash acquired of $0.3 Acquisition of favorable lease rights Net cash used in investing activities Cash flows from financing activities: Principal payments under long-term debt and capital lease obligations Borrowings from revolving credit facility Repayments of revolving credit facility Payments for share repurchases Proceeds from stock issued pursuant to stock-based compensation plans Tax benefit of stock options exercised Net cash used in financing activities Net increase (decrease) in cash and cash equivalents 201.3 159.3 (46.8 ) 11.3 8.0 (36.2 ) (4.4 ) 2.3 46.9 8.7 16.9 367.3 Year Ended February 3, 2007 $ 192.0 159.0 (21.9 ) 6.7 5.1 (6.2 ) (19.8 ) 53.7 1.6 31.8 10.8 412.8 $ 173.9 140.7 (21.5 ) 1.2 2.4 5.6 38.9 (5.5 ) 11.4 8.0 (6.4 ) 16.4 365.1 Year Ended January 28, 2006

(In millions) Cash flows from operating activities:

(189.0 ) (1,119.2 ) 1,300.5 (99.3 ) 90.9 (6.6 ) (22.7 )

(175.3 ) (1,044.4 ) 1,096.6 (84.5 ) 75.2 (54.1 ) (4.2 ) (190.7 )

(139.2 ) (885.5 ) 822.8 (69.4 ) 39.5 (3.7 ) (235.5 )

(0.6 ) 362.4 (362.4 ) (473.0 ) 71.6 13.0 (389.0 ) (44.4 )

(0.6 ) (248.2 ) 40.3 5.6 (202.9 ) 19.2

(0.6 ) (180.4 ) 10.7 (170.3 ) (40.7 )

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Cash and cash equivalents at beginning of year $ Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Cash paid for: $ Interest $ Income taxes

85.0 $ 40.6

65.8 $ 85.0

106.5 65.8

$ 18.7 $ 109.5 125.5 14.9

$ 11.8 $ 113.9

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