Dollar Tree 2008 Annual Report Download - page 25

DOLLAR TREE, INC. • 2008 ANNUAL REPORT 23
ing method that has been widely used in the retail
industry and results in valuing inventories at lower of
cost or market when markdowns are taken as a reduc-
tion of the retail value of inventories on a timely basis.
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 margins.
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 accuracy
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 significant dif-
ferences in our estimated reserve for markdowns com-
pared with actual results.
Our accrual for shrink is based on the actual, his-
torical shrink results of our most recent physical
inventories adjusted, if necessary, for current economic
conditions. These estimates are compared to actual
results as physical inventory counts are taken and rec-
onciled to the general ledger. Our physical inventory
counts are generally taken between January and
September of each year; therefore, the shrink accrual
recorded at January 31, 2009 is based on estimated
shrink for most of 2008, including the fourth quarter.
We have not experienced significant fluctuations in
historical shrink rates beyond approximately 10-20
basis points in our Dollar Tree stores for the last few
years. However, we have sometimes experienced high-
er 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 val-
uation that reasonably approximates cost and results
in carrying inventory at the lower of cost or market
each year on a consistent basis.
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 at least annually based on a review
performed by a third-party actuary. These actuarial
valuations are estimates based on our historical loss
development factors. Certain other expenses are esti-
mated 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 esti-
mated 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.
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 dif-
ferences in our estimates of our tax accrual.
In addition, we have a recorded liability for our
estimate of uncertain tax positions taken or expected
to be taken in our tax returns. Judgment is required in
evaluating the application of federal and state tax laws,
including relevant case law, and assessing whether it is
more likely than not that a tax position will be sus-
tained on examination and, if so, judgment is also