Dollar Tree 2010 Annual Report Download - page 27

Management’s Discussion And Analysis
Of Financial Condition And Results Of Operations
Infl ation and Other Economic Factors
Our ability to provide quality merchandise at a
fi xed price and on a profi table basis may be subject
to economic factors and infl uences that we cannot
control. Consumer spending could decline because
of economic pressures, including unemployment and
rising fuel prices. Reductions in consumer confi dence
and spending could have an adverse effect on our
sales. National or international events, including war
or terrorism, could lead to disruptions in economies
in the United States or in foreign countries where we
purchase some of our merchandise. These and other
factors could increase our merchandise costs and other
costs that are critical to our operations, such as ship-
ping and wage rates.
Shipping Costs. Currently, trans-Pacifi c shipping
rates are negotiated with individual freight lines and
are subject to fl uctuation based on supply and demand
for containers and current fuel costs. We can give no
assurances as to the fi nal actual rates for 2011, as we are
in the early stages of our negotiations.
Minimum Wage. In 2007, legislation was enacted
that increased the Federal Minimum Wage from $5.15
an hour to $7.25 an hour over a two year period with
the fi nal increase being enacted in July 2009. As a result,
our wages increased in 2009 and through the fi rst
half of 2010; however, we partially offset the increase
in payroll costs through increased productivity and
continued effi ciencies in product fl ow to our stores.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the
normal course of our business, including the impact
of interest rate changes and diesel fuel cost changes.
We may enter into interest rate or diesel fuel swaps to
manage exposure to interest rate and diesel fuel price
changes. We do not enter into derivative instruments
for any purpose other than cash fl ow hedging and we
do not hold derivative instruments for trading purposes.
Interest Rate Risk
We use variable-rate debt to fi nance certain of our
operations and capital improvements. These obliga-
tions expose us to variability in interest payments due
to changes in interest rates. If interest rates increase,
interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. We believe
it is benefi cial to limit the variability of our interest
payments.
To meet this objective, we entered into deriva-
tive instruments in the form of interest rate swaps
to manage fl uctuations in cash fl ows resulting from
changes in the variable-interest rates on a portion of
our $250.0 million term loan. The interest rate swaps
reduce the interest rate exposure on these variable-rate
obligations. Under the interest rate swaps, we pay the
bank at a fi xed-rate and receive variable-interest at a
rate approximating the variable-rate on the obliga-
tion, thereby creating the economic equivalent of
a fi xed-rate obligation. We entered into two $75.0
million interest rate swap agreements in March 2008
to manage the risk associated with the interest rate
fl uctuations on a portion of our $250.0 million vari-
able rate term loan.
DOLLAR TREE, INC. ♦ 2010 Annual Report 25