Dollar Tree 2015 Annual Report Download - page 52

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Commitments
Letters of credit and surety bonds. We are a party to three Letter of Credit Reimbursement and Security Agreements
providing $120.0 million, $110.0 million and $100.0 million, respectively for letters of credit. Letters of credit are generally
issued for the routine purchase of imported merchandise and we had approximately $210.1 million of purchases committed
under these letters of credit at January 30, 2016.
We also have approximately $123.0 million of letters of credit outstanding that serve as collateral for our large-deductible
insurance programs and $47.9 million of surety bonds outstanding primarily for certain utility payment obligations at some of
our stores and self-insured insurance programs. Subsequent to year-end, amounts outstanding for stand-by letters of credit
increased to $183.3 million as of February 10, 2016.
Technology assets. We have commitments totaling approximately $7.0 million to primarily purchase store technology
assets and maintenance for our stores during 2016.
Telecommunication contracts. We have contracted for telecommunication services with contracts expiring in 2020. The
total amount of these commitments is approximately $142.7 million.
Derivative Financial Instruments
In 2015, 2014 and 2013, we were party to fuel derivative contracts with third parties which included approximately 6.6
million, 1.6 million and 2.8 million gallons of diesel fuel, or approximately 36%, 10% and 20% of the Dollar Tree segment's
domestic truckload fuel needs, respectively. These derivative contracts did not qualify for hedge accounting and therefore all
changes in fair value for these derivatives are included in earnings.
Critical Accounting Policies
The preparation of financial 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 financial statements if actual results vary significantly from
those estimates. Following is a discussion of the estimates that we consider critical.
Inventory Valuation
As discussed in "Note 1 - Summary of Significant Accounting Policies" under the caption "Merchandise Inventories" in
"Item 8. Financial Statements and Supplementary Data" beginning on page 48 of this Form 10-K, inventories at the distribution
centers are stated at the lower of cost or market with cost determined 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. The retail inventory method is an averaging method that is 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 significant management estimates and judgments, including 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 differences in
our estimated reserve for markdowns 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 economic conditions and business trends. 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 January 30, 2016 is based on estimated shrink for
most of 2015, including the fourth quarter. We have not experienced significant fluctuations in historical shrink rates beyond
approximately 10-20 basis points in our Dollar Tree segment for the last few years. However, we have sometimes experienced
higher than typical shrink in acquired stores in the year following an acquisition. The amounts recorded in the current year
reflect the Dollar Tree and Family Dollar segments’ historical results. We periodically adjust our shrink estimates to address
these factors as they become apparent.