Dollar Tree 2009 Annual Report Download - page 24

Management’s Discussion And Analysis Of Financial Condition
And Results Of Operations
our฀fuel฀needs฀from฀May฀2010฀through฀January฀2011.฀
These derivative contracts do not qualify for hedge
accounting and therefore all changes in fair value for
these derivatives will be included directly in earnings.
Critical Accounting Policies
The฀preparation฀of฀nancial฀statements฀requires฀the฀
use of estimates. Certain of our estimates require
a฀high฀level฀of฀judgment฀and฀have฀the฀potential฀to฀
have฀a฀material฀effect฀on฀the฀nancial฀statements฀if฀
actual฀results฀vary฀signicantly฀from฀those฀estimates.฀
Following is a discussion of the estimates that we
consider critical.
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial
Statements, inventories at the distribution centers are
stated at the lower of cost or market with cost deter-
mined on a weighted-average basis. Cost is assigned to
store inventories using the retail inventory method on
a weighted-average basis. Under the retail inventory
method, the valuation of inventories at cost and the
resulting gross margins are computed by applying
a calculated cost-to-retail ratio to the retail value of
inventories.฀Since฀our฀inception฀through฀scal฀2009,฀
we have used one inventory pool for this calcula-
tion. Over the years, we have invested in our retail
technology฀systems,฀which฀has฀allowed฀us฀to฀rene฀our฀
estimate of inventory cost under the retail method.
On฀January,฀31,฀2010,฀the฀rst฀day฀of฀scal฀2010,฀we฀
began฀using฀approximately฀30฀inventory฀pools฀in฀our฀
retail inventory calculation. As a result of this change,
we฀expect฀to฀record฀a฀non-cash฀charge฀to฀gross฀prot฀
and a corresponding reduction in inventory, at cost, of
approximately฀$26฀million฀in฀the฀rst฀quarter฀of฀2010.฀
The retail inventory method is an averaging 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 reduction of the retail
value of inventories on a timely basis.
Inventory฀valuation฀methods฀require฀certain฀
signicant฀management฀estimates฀and฀judgments,฀
including estimates of future merchandise markdowns
and฀shrink,฀which฀signicantly฀affect฀the฀ending฀
inventory valuation at cost as well as the resulting gross
margins. The averaging required in applying the retail
Interest on Long-term Borrowings. This amount
represents interest payments on the Credit Agreement
and฀the฀revenue฀bond฀nancing฀using฀the฀interest฀rates฀
for฀each฀at฀January฀30,฀2010.฀
Commitments
Letters of Credit and Surety Bonds.฀In฀
March฀2001,฀we฀entered฀into฀a฀Letter฀of฀Credit฀
Reimbursement and Security Agreement, which
provides฀$121.5฀million฀for฀letters฀of฀credit.฀In฀
December฀2004,฀we฀entered฀into฀an฀additional฀Letter฀of฀
Credit Reimbursement and Security Agreement, which
provides฀$50.0฀million฀for฀letters฀of฀credit.฀Letters฀of฀
credit are generally issued for the routine purchase of
imported฀merchandise฀and฀we฀had฀approximately฀$101.8฀
million of purchases committed under these letters of
credit฀at฀January฀30,฀2010.฀
We฀also฀have฀approximately฀$17.4฀million฀of฀
letters of credit or surety bonds outstanding for our
self-insurance programs and certain utility payment
obligations at some of our stores.
Freight Contracts.฀We฀have฀contracted฀outbound฀
freight services from various carriers with contracts
expiring฀through฀scal฀2013.฀The฀total฀amount฀of฀these฀
commitments฀is฀approximately฀$296.2฀million.฀
Technology Assets.฀We฀have฀commitments฀totaling฀
approximately฀$2.4฀million฀to฀primarily฀purchase฀store฀
technology฀assets฀for฀our฀stores฀during฀2010.
Derivative Financial Instruments
On฀March฀20,฀2008,฀we฀entered฀into฀two฀$75.0฀million฀
interest rate swap agreements. These interest rate swaps
are used to manage the risk associated with interest rate
uctuations฀on฀a฀portion฀of฀our฀$250.0฀million฀variable฀
rate term loan. Under these agreements, we pay interest
to฀nancial฀institutions฀at฀a฀xed฀rate฀of฀2.8%.฀In฀
exchange,฀the฀nancial฀institutions฀pay฀us฀at฀a฀variable฀
rate, which approximates the variable rate on the debt,
excluding the credit spread. These swaps qualify for
hedge฀accounting฀treatment฀and฀expire฀in฀March฀2011.฀
In฀the฀fourth฀quarter฀of฀2009,฀we฀entered฀into฀
fuel derivative contracts with a third party. As a result
of฀these฀contracts,฀we฀have฀xed฀the฀fuel฀price฀on฀2.4฀
million฀gallons฀of฀diesel฀fuel,฀or฀approximately฀25%฀of฀
22฀฀฀DOLLAR฀TREE,฀INC.฀•฀2009฀Annual฀Report