Dollar Tree 2006 Annual Report Download - page 25

Inventory valuation methods require certain sig-
nificant management estimates and judgments, includ-
ing estimates of future merchandise markdowns and
shrink, which significantly affect the ending inventory
valuation at cost as well as the resulting gross mar-
gins. The averaging required in applying the retail
inventory method and the estimates of shrink and
markdowns could, under certain circumstances, result
in costs not being recorded in the proper period.
We estimate our markdown reserve based on the
consideration of a variety of factors, including, but
not limited to, quantities of slow moving or seasonal,
carryover merchandise on hand, historical markdown
statistics and future merchandising plans. The accura-
cy of our estimates can be affected by many factors,
some of which are outside of our control, including
changes in economic conditions and consumer buying
trends. Historically, we have not experienced signifi-
cant differences in our estimated reserve for mark-
downs compared with actual results.
Our accrual for shrink is based on the actual,
historical shrink results of our most recent physical
inventories adjusted, if necessary, for current eco-
nomic conditions. These estimates are compared to
actual results as physical inventory counts are taken
and reconciled to the general ledger. Our physical
inventory counts are generally taken between January
and September of each year; therefore, the shrink
accrual recorded at February 3, 2007 is based on
estimated shrink for most of 2006, including the
fourth quarter. We have not experienced significant
fluctuations in historical shrink rates beyond 10 to
15 basis points in our Dollar Tree stores for the last
two years. However, we have sometimes experienced
higher than typical shrink in acquired stores in the
year following an acquisition. We periodically adjust
our shrink estimates to address these factors as they
become apparent.
Our management believes that our application
of the retail inventory method results in an inventory
valuation that reasonably approximates cost and
results in carrying inventory at the lower of cost or
market each year on a consistent basis.
DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 23
Accrued Expenses
On a monthly basis, we estimate certain expenses
in an effort to record those expenses in the period
incurred. Our most material estimates include domes-
tic freight expenses, self-insurance programs, store-
level operating expenses, such as property taxes and
utilities, and certain other expenses. Our freight and
store-level operating expenses are estimated based on
current activity and historical trends and results. Our
workers’ compensation and general liability insurance
accruals are recorded based on actuarial valuations
which are adjusted annually based on a review
performed by a third-party actuary. These actuarial
valuations are estimates based on historical loss devel-
opment factors. Certain other expenses are estimated
and recorded in the periods that management
becomes aware of them. The related accruals are
adjusted as management’s estimates change.
Differences in management’s estimates and assump-
tions could result in an accrual materially different
from the calculated accrual. Our experience has been
that some of our estimates are too high and others are
too low. Historically, the net total of these differences
has not had a material effect on our financial condi-
tion or results of operations.
Income Taxes
On a quarterly basis, we estimate our required
income tax liability and assess the recoverability of
our deferred tax assets. Our income taxes payable
are estimated based on enacted tax rates, including
estimated tax rates in states where our store base is
growing applied to the income expected to be taxed
currently. The current tax liability also includes a lia-
bility for resolution of tax uncertainties. Management
assesses the recoverability of deferred tax assets based
on the availability of carrybacks of future deductible
amounts and management’s projections for future
taxable income. We cannot guarantee that we will
generate taxable income in future years. Historically,
we have not experienced significant differences in our
estimates of our tax accrual. In 2006 and 2005, we
recognized approximately $0.7 million and $1.5
million, respectively, of tax benefits related to the
resolution of tax uncertainties in certain states.