What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-27 compared with 2020-05-28 · 113 added, 90 removed, 208 unchanged (49% of the section changed)

7 unchanged sentences

In order to serve our employees and customers during this time while prioritizing their well-being, we have taken a variety of actions across our stores, distribution centers and store support center, including (as applicable):

enhancing cleaning protocols, reducing store operating hours, designating one hour each day for our elderly customers to shop our stores with limited crowds, implementing social distancing measures, providing personal protective equipment (e.g., gloves, masks and hand sanitizer) for employees, providing employee temperature checks at our distribution facilities, and installing plexiglass barriers at registers.

In early March, we began seeing heightened demand from customers, particularly for consumable products such as paper, food and cleaning products, which continued throughout the first quarter and into the second quarter, albeit with some variability as to the volume and category mix.

To address the increased demand, we significantly increased our hiring of new store associates, and worked with suppliers to incorporate new items in stores to meet the essential needs of customers while addressing certain product allocation shortages.

We believe that this increased customer demand significantly benefited our first quarter results of operations, and in particular, sales, gross profit, operating income and net income.

Although we incurred additional payroll related expenses, including employee appreciation bonuses of approximately $60 million, increased distribution and transportation costs, as well as other costs to meet the significant demand and to protect the health and safety of our employees and customers, these costs were more than offset by the incremental sales.

During the first quarter of 2020, we temporarily suspended repurchases of common stock under our share repurchase program to evaluate the implications of the COVID-19 pandemic.

Additionally, to further strengthen our liquidity position, we issued $1.5 billion of long-term debt in the form of senior notes, which contributed to our total consolidated cash balance of $2.7 billion at May 1, 2020.

enhancing cleaning protocols, designating one hour each day for our elderly customers to shop our stores with limited crowds, implementing social distancing measures, providing personal protective equipment (e.g., gloves, masks and hand sanitizer) for employees, providing employee temperature checks at our distribution facilities, and installing plexiglass barriers at registers.

In early March, we began seeing heightened demand from customers, particularly for consumable products such as paper, food and cleaning products, which continued throughout the first and second quarters, albeit with some variability as to the volume and category mix.

Toward the end of the first quarter and throughout the second quarter, we also saw a significant increase in demand in many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix shift into non-consumable categories in the second quarter.

From early March through the end of the second quarter, many new customers have begun shopping with us for their everyday essential needs, and we are working to retain them going forward.

To address the increased demand, we increased our hiring of new store associates and have worked and continue to work with suppliers to incorporate new items in stores to meet the essential needs of customers while addressing certain product shortages and vendor allocations which we expect to persist for at least the remainder of the fiscal year in some cases.

We believe that this increased customer demand significantly benefited our first and second quarters’ results of operations, and in particular, sales, gross profit, operating income and net income.

Although we incurred additional payroll related expenses in the first half of fiscal 2020, including employee appreciation bonuses of approximately $73 million, increased distribution and transportation costs, as well as other costs to meet the significant demand and to protect the health and safety of our employees and customers, these costs were more than offset by the incremental sales.

We anticipate these increased expenses will continue throughout fiscal 2020.

We expect to continue to be affected, although the extent and duration is unknown, by the COVID-19 pandemic and its effects on the economy in a variety of ways, potentially including changing consumer demand (whether higher or lower) in certain product categories, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs in an effort to maintain safe work and shopping environments.

Additionally, the vast shutdown of many businesses in the United States has resulted in high levels of unemployment which could have a significant adverse impact on our core customers for an unknown length of time.

The potential effect of economic stabilization efforts, including government stimulus payments and enhanced unemployment benefits, is uncertain.

Additionally, the vast shutdown of many businesses in the United States has resulted in high levels of unemployment, which, along with current and potential school closures, could have a significant adverse impact on our core customers for an unknown length of time.

The potential effect of economic stabilization efforts, including additional government stimulus payments and enhanced unemployment benefits, is uncertain.

In addition to the items described above, we expect the current adverse economic conditions in the U.S.

and abroad caused by the COVID-19 pandemic to continue at least throughout 2020 and possibly longer, potentially resulting in continued elevated unemployment, reduced economic activity, and continued capital markets volatility.

We may experience adverse effects on our business, results of operations and cash flows from a recessionary economic environment that is expected to persist after the COVID-19 pandemic has moderated.

We may experience adverse effects on our business, results of operations and cash flows from a recessionary economic environment that may persist after the COVID-19 pandemic has moderated.

As a result, the quarterly cadence of our results of operations is likely to vary from historical patterns.

Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways.

We will continue to monitor the

rapidly evolving situation, and we will continue to take actions as necessary to serve our employees, customers, communities and shareholders.

We will continue to monitor the rapidly evolving situation, and we will continue to take actions as necessary to serve our employees, customers, communities and shareholders.

Executive Overview

We are the largest discount retailer in the United States by number of stores, with 16,500 stores located in 46 states as of May 1, 2020, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

We are the largest discount retailer in the United States by number of stores, with 16,720 stores located in 46 states as of July 31, 2020, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel.

16 unchanged sentences

In recent years our sales mix has continued to shift slightly toward consumables, and, within consumables, slightly toward lower margin departments such as perishables.

The shift toward lower-margin departments within consumables did not occur to a material extent in the first quarter of 2020, however, it is uncertain at this time whether this will continue.

While we expect some sales mix challenges to persist, certain of our initiatives are intended to address these trends, although there can be no assurance we will be successful in reversing them.

Although this trend did not occur in the first half of 2020 (as discussed above under “Impact of COVID-19”), we continue to expect some sales mix challenges to persist over the long term.

There can be no assurance that our initiatives, including those discussed below, some of which are intended to address these trends, will be successful.

We continue to make progress on and invest in certain strategic initiatives that we believe will help drive profitable sales growth and capture long-term growth opportunities.

As a result of positive early results, we are accelerating our investment and the rollout of certain of these initiatives.

Such opportunities include leveraging existing and developing new digital tools and technology to provide our customers with additional shopping access points and even greater convenience.

This technology includes our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience.

Additionally, we recently launched a pilot of DG Pickup, which is a buy online, pickup in-store initiative aimed at offering another convenient access point for customers.

Our Non-Consumable initiative, or NCI, which is continuing to evolve and help shape our approach to non-consumable categories throughout the chain, offers a new, differentiated and limited assortment that will change throughout the year.

As we extend this initiative more broadly, as well as incorporate certain related merchandising efforts throughout our chain, our goal is to continue to

improve the shopping experience while delivering exceptional value within key areas of our non-consumable categories.

Our goal is to have this offering in approximately 5,000 stores by the end of fiscal 2020.

Additionally, we are continuing to expand the rollout of DG Pickup, which is a buy online, pickup in-store initiative aimed at offering another convenient access point for customers.

Our non-consumables

initiative, or “NCI,” is continuing to evolve and help shape our approach to non-consumable categories throughout the chain, offers a new, differentiated and limited assortment that will change throughout the year.

As we extend this initiative more broadly, as well as incorporate certain related merchandising efforts throughout our chain, our goal is to continue to improve the shopping experience while delivering exceptional value within key areas of our non-consumable categories.

Our goal is to have this offering in over 5,400 stores by the end of fiscal 2020.

We are continuing our rollout of the “DG Fresh” initiative, a self-distribution model for fresh and frozen products that is designed to enhance sales, reduce product costs, improve our in-stock position and enhance item assortment.

5 unchanged sentences

To support our other operating priorities, we remain focused on capturing growth opportunities.

In the first quarter of 2020, we opened 250 new stores, remodeled 481 stores, and relocated 17 stores.

Through the end of the first quarter, the COVID-19 pandemic has not resulted in a delay in our real estate plans, and we do not currently expect any significant delays based on what is currently known to management.

For 2020, we continue to plan to open approximately 1,000 new stores, remodel approximately 1,500 stores, and relocate approximately 80 stores for a total of 2,580 real estate projects.

In the first half of 2020, we opened 500 new stores, remodeled 973 stores, and relocated 43 stores.

Through the end of the second quarter, the COVID-19 pandemic has not resulted in a delay in our real estate plans, and we do not currently expect any significant delays based on what is currently known to management.

For 2020, we continue to plan to open 1,000 new stores, and have increased our remodel and relocation plans to include 1,670 stores, and 110 stores, respectively, for a total of 2,780 real estate projects.

We continue to innovate within our channel and are able to utilize the most productive of our various store formats based on the specific market opportunity.

We expect that our traditional 7,300 square foot store format will continue to be the primary store layout for new stores in 2020.

We continue to expect approximately 1,125 of the planned 1,500 remodels in 2020 to use a higher-cooler-count store format that enables us to offer an increased selection of perishable items, with the traditional store format being the primary store layout for the remainder of the real estate projects.

We expect approximately 75% of the planned 1,670 remodels in 2020 to use a higher-cooler-count store format that enables us to offer an increased selection of perishable items, with the traditional store format being the primary store layout for the remainder of the real estate projects.

Additionally, the majority of both new stores and remodels will incorporate higher-capacity coolers.

1 unchanged sentence

In addition, our smaller format store (less than 6,000 square feet) is expected to allow us to capture growth opportunities in urban areas.

We continue to incorporate lessons learned from our various store formats and layouts into our existing store base with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.

We continue to incorporate lessons learned from our various store formats and layouts into our existing store base.

These lessons contribute to innovation in developing new formats, with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.

We have established a position as a low-cost operator, always seeking ways to reduce or control costs that do not affect our customers’ shopping experiences.

5 unchanged sentences

We have completed the sorting process optimization at all of our non-refrigerated distribution centers.

Additionally, we have launched the self-checkout pilot in a select number of stores.

Additionally, we have introduced self-checkout in a select number of stores.

These and certain other strategic initiatives will require us to incur upfront expenses for which, in some respects, there may not be an immediate or acceptable return in terms of sales or enhanced profitability.

Certain of our operating expenses, such as wage rates and occupancy costs, have continued to increase in recent years, due primarily to market forces.

While we expect these increases to persist, certain of our initiatives and plans are intended to help offset these challenges, although there can be no assurance we will be successful in mitigating them.

We have experienced incremental payroll costs related to the COVID-19 pandemic as discussed above under “Impact of COVID-19”.

While we expect these increases to persist, certain of our initiatives and plans are

intended to help offset these challenges, although there can be no assurance we will be successful in mitigating them.

We have experienced incremental payroll, distribution and transportation costs related to the COVID-19 pandemic as discussed above under “Impact of COVID-19”.

Our employees are a competitive advantage, and we proactively seek ways to continue investing in them.

1 unchanged sentence

We believe our investments in compensation and training for our store managers have contributed to improved customer experience scores, higher sales and improved turnover metrics.

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in the first quarter of 2020.

Although we have temporarily suspended share repurchase activity amid the COVID-19 pandemic, we intend to resume this activity as soon as we deem it is prudent and advisable to do so, which may be as early as the 2020 second quarter, and we intend to pay quarterly cash dividends throughout 2020.

The payment of dividends and any share repurchases above the amount currently authorized each is subject to Board discretion and approval.

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in the second quarter of 2020.

We resumed repurchases under our share repurchase program after temporarily suspending repurchases during the first quarter of 2020 to evaluate the implications of the COVID-19 pandemic.

We intend to continue our share repurchase activity, and to pay quarterly cash dividends, throughout the remainder of 2020, subject to Board discretion and approval.

We utilize key performance indicators (“KPIs”) in the management of our business.

7 unchanged sentences

We use these measures to maximize profitability and for decisions about the allocation of resources.

A continued focus on our four operating priorities as discussed above, coupled with pandemic-related sales and other impacts (more fully discussed below), along with strong cash flow management resulted in solid overall operating and financial performance in the 2020 period as compared to the 2019 period, as set forth below.

Highlights of our 2020 first quarter results of operations compared to the 2019 first quarter and our financial condition at May 1, 2020 are set forth below.

A continued focus on our four operating priorities as discussed above, coupled with pandemic-related sales and other impacts (more fully discussed below), along with strong cash flow management resulted in strong overall operating and financial performance in the 2020 period as compared to the 2019 period, as set forth below.

Highlights of our 2020 second quarter results of operations compared to the 2019 second quarter and our financial condition at July 31, 2020 are set forth below.

Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.

● Net sales increased 24.4% to $8.68 billion.

Sales in same-stores increased 21.7% reflecting increases in average transaction amount and customer traffic.

Average sales per square foot for all stores over the 52-week period ended May 1, 2020 was $249.

● Gross profit, as a percentage of net sales, was 30.7% in the 2020 period and 30.2% in the 2019 period, an increase of 49 basis points, primarily reflecting favorable markdowns and higher initial inventory markups.

● SG&A expense, as a percentage of net sales, was 20.5% in the 2020 period compared to 22.5% in the 2019 period, a decrease of 204 basis points, due in part to lower occupancy, retail labor, and utilities costs as a percentage of net sales.

● Operating profit increased 69.2% to $866.8 million in the 2020 period compared to $512.2 million in the 2019 period.

● Interest expense increased by $4.6 million in the 2020 period primarily due to higher average outstanding debt balances in connection with the issuance of debt during the quarter.

● The effective income tax rate for the 2020 period was 22.2% compared to a rate of 20.8% for the 2019 period primarily due to the increase in pre-tax earnings in the 2020 period compared to the 2019 period, while certain items impacting the rate remained materially the same in amount in both periods.

Sales in same-stores increased 18.8% primarily reflecting a substantial increase in items per transaction.

Average sales per square foot for all stores over the 52-week period ended July 31, 2020 was $260.

● Gross profit, as a percentage of net sales, was 32.5% in the 2020 period and 30.8% in the 2019 period, an increase of 167 basis points, primarily reflecting higher initial inventory markups, a significant increase in sales of non-consumable products, and favorable markdowns.

● SG&A expense, as a percentage of net sales, was 20.4% in the 2020 period compared to 22.5% in the 2019 period, a decrease of 205 basis points, due in part to lower retail labor, occupancy and utilities costs as a percentage of net sales.

● Operating profit increased 80.5% to $1.04 billion in the 2020 period compared to $0.58 billion in the 2019 period.

● Interest expense increased by $14.5 million in the 2020 period primarily due to higher average outstanding debt balances in connection with the issuance of debt in the first quarter of 2020.

● The effective income tax rate for the 2020 period was 21.5% compared to a rate of 22.9% for the 2019 period primarily due to income tax benefits associated with share-based compensation.

● Net income was $787.6 million, or $3.12 per diluted share, in the 2020 period compared to net income of $426.6 million, or $1.65 per diluted share, in the 2019 period.

Highlights of the year-to-date period of 2020 include:

● Cash generated from operating activities was $2.91 billion for the 2020 period, an increase of $1.78 billion over the comparable 2019 period.

1 unchanged sentence

● Inventory turnover was 4.9 times on a rolling four-quarter basis.

On a per store basis, inventories at May 1, 2020 decreased by 5.5% compared to the balances at May 3, 2019.

On a per store basis, inventories at July 31, 2020 decreased by 5.9% compared to the balances at August 2, 2019.

The above discussion is a summary only.

Readers should refer to the detailed discussion of our results of operations below in the current year periods as compared with the prior year periods as well as our financial condition at May 1, 2020.

Results of Operations

2 unchanged sentences

The following text contains references to years 2020 and 2019, which represent the 52-week fiscal years ending or ended January 29, 2021 and January 31, 2020, respectively.

References to the first quarter accounting periods for 2020 and 2019 contained herein refer to the 13-week accounting periods ended May 1, 2020 and May 3, 2019, respectively.

References to the second quarter accounting periods for 2020 and 2019 contained herein refer to the 13-week accounting periods ended July 31, 2020 and August 2, 2019, respectively.

The nature of our business is somewhat seasonal.

3 unchanged sentences

Furthermore, the seasonal nature of our business may affect comparisons between periods.

Consumer behavior driven by the COVID-19 pandemic resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

The following table contains results of operations data for the first 13-week periods of 2020 and 2019, and the dollar and percentage variances among those periods:

Consumer behavior driven by

the COVID-19 pandemic has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2020 and 2019, and the dollar and percentage variances among those periods:

13 Weeks Ended

26 Weeks Ended

(amounts in millions, except

21 unchanged sentences

Diluted earnings per share

13 WEEKS ENDED MAY 1, 2020 AND MAY 3, 2019

13 WEEKS ENDED JULY 31, 2020 AND AUGUST 2, 2019

The net sales increase in the 2020 period reflects a same-store sales increase of 18.8% compared to the 2019 period.

We believe consumer behavior driven by the COVID-19 pandemic had a significant positive effect on net sales and same-store sales.

Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period.

We believe the effect of the COVID-19 pandemic on consumer behavior had a significant positive effect on net sales and same-store sales.

For the 2020 period, there were 15,541 same-stores which accounted for sales of $8.2 billion.

The increase in same-store sales reflects an increase in average transaction amount driven by a significant increase in items per transaction and, to a lesser degree, higher average item retail prices, as well as an increase in customer traffic.

Same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the largest percentage increase in the home products category.

2 unchanged sentences

For the 2020 period, gross profit increased by 31.1%, and as a percentage of net sales increased by 167 basis points to 32.5% compared to the 2019 period.

Higher initial markups on inventory purchases contributed to the increase in the gross profit rate.

In recent years a greater proportion of sales have come from our consumables category, which generally has a lower gross profit rate than our other product categories, creating downward pressure on our overall gross profit rate.

This sales trend was reversed in the second quarter of 2020 as non-consumables sales increased at a higher rate than consumables sales, which added to the increase in the gross profit rate.

It is uncertain at this time whether the reversal of this trend will continue.

A reduction in markdowns as a percentage of net sales also contributed to the increase in the gross profit rate.

These factors were partially offset by increased distribution and transportation costs which were impacted by the COVID-19 pandemic in the form of increased volume and discretionary employee bonus expense.

As noted above, we believe the effect of the COVID-19 pandemic on consumer behavior had a significant positive effect on net sales, and also had a positive effect on gross profit.

Selling, General & Administrative Expenses (“SG&A”).

SG&A was 20.4% as a percentage of net sales in the 2020 period compared to 22.5% in the comparable 2019 period, a decrease of 205 basis points.

Although we incurred certain incremental costs discussed above under “Impact of COVID-19,” they were more than offset by the significant increase in net sales during the quarter as discussed above.

Among the expenses that were a lower percentage of net sales in the current year period were retail labor, occupancy costs, utilities, employee benefits, depreciation and amortization, and taxes and licenses.

These items were partially offset by increased incentive compensation and charitable giving expenses.

We recorded expenses of $31.0 million, or 44 basis points, in the 2019 period reflecting our estimate for the settlement of certain legal matters discussed in Note 7 to the condensed consolidated financial statements.

Interest Expense .

Interest expense increased by $14.5 million to $39.3 million in the 2020 period primarily due to higher average outstanding debt balances in connection with the issuance of debt during the first quarter of 2020.

See Liquidity and Capital Resources.

Income Taxes.

The effective income tax rate for the 2020 period was 21.5% compared to a rate of 22.9% for the 2019 period which represents a net decrease of 1.4 percentage points.

The tax rate for the 2020 period was lower than the comparable 2019 period primarily due to increased tax benefits associated with share-based compensation, partially offset by a lower income tax rate benefit from federal income tax credits due to higher pre-tax earnings in the 2020 period compared to the 2019 period.

In addition, the tax rate in the 2020 period was lower than in the 2019 period due to increased income tax expense associated with prior state law changes that occurred in the 2019 period that did not reoccur in the 2020 period .

26 WEEKS ENDED JULY 31, 2020 AND AUGUST 2, 2019

The net sales increase in the 2020 period reflects a same-store sales increase of 20.2% compared to the 2019 period.

For the 2020 period, there were 15,541 same-stores which accounted for sales of $16.2 billion.

Same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the largest percentage increase in the home products category.

The net sales increase was also positively affected by sales from new stores, modestly offset by sales from closed stores.

Gross Profit.

For the 2020 period, gross profit increased by 30.4%, and as a percentage of net sales increased by 109 basis points to 31.6% compared to the 2019 period.

A reduction in markdowns as a percentage of net sales and higher initial markups on inventory purchases each contributed to the increase in the gross profit rate.

In addition, non-consumables sales increased at a higher rate than consumables sales in the 2020 period, which added to the increase in the gross profit rate.

It is uncertain at this time whether the reversal of this trend will continue.

These factors were partially offset by increased distribution costs which were impacted by the COVID-19 pandemic in the form of increased volume and discretionary employee bonus expense.

In recent years a greater proportion of sales have come from the consumables category, which generally has a lower gross profit rate than our other product categories, creating downward pressure on our overall gross profit rate.

Although this sales trend continued in the first quarter of 2020, we sold a greater proportion of higher margin consumables products in the quarter which largely mitigated this effect in the 2020 period compared to the 2019 period.

As noted above, we believe consumer behavior driven by the COVID-19 pandemic had a significant positive effect on net sales, and likewise had a positive effect on total gross profit dollars.

Selling, General & Administrative Expenses (“SG&A”).

As noted above, we believe the effect of the COVID-19 pandemic on consumer behavior had a significant positive effect on net sales, and also had a positive effect on gross profit.

Selling, General & Administrative Expenses.

SG&A was 20.5% as a percentage of net sales in the 2020 period compared to 22.5% in the comparable 2019 period, a decrease of 204 basis points.

Although we incurred certain incremental costs discussed above under “Impact of COVID-19,” they were more than offset by the significant

increase in net sales during the quarter as discussed above.

Among the expenses that were a lower percentage of net sales in the current year period were occupancy costs, retail labor, utilities, depreciation and amortization, and taxes and licenses.

Among the expenses that were a lower percentage of net sales in the current year period were occupancy costs, retail labor, utilities, depreciation and amortization, taxes and licenses, and employee benefits.

These items were partially offset by increased incentive compensation expenses.

We recorded expenses of $31.0 million, or 23 basis points, in the 2019 period reflecting our estimate for the settlement of certain legal matters discussed in Note 7 to the condensed consolidated financial statements.

Interest Expense .

Interest expense increased by $4.6 million to $30.5 million in the 2020 period primarily due to higher average outstanding debt balances in connection with the issuance of debt during the quarter.

See Liquidity and Capital Resources.

Interest expense increased by $19.1 million to $69.8 million in the 2020 period primarily due to higher outstanding debt balances in connection with the issuance of debt in the 2020 period.

Income Taxes.

The effective income tax rate for the 2020 period was 22.2% compared to a rate of 20.8% for the 2019 period which represents a net increase of 1.4 percentage points.

The tax rate for the 2020 period was higher than the comparable 2019 period primarily due to an increase in pre-tax earnings in the 2020 period compared to the 2019 period while items impacting the effective rate, such as the benefits from stock-based compensation and federal tax credits, remained materially consistent in amount in both the 2020 and 2019 periods.

The effective income tax rate for the 2020 period was 21.8% compared to a rate of 21.9% for the 2019 period which represents a net decrease of 0.1 percentage points.

Liquidity and Capital Resources

At May 1, 2020, we had a $1.25 billion unsecured revolving credit agreement (the “Revolving Facility”), $4.0 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability in the form of commercial paper notes (“CP Notes”) of up to $1.0 billion.

On April 3, 2020 we issued $1.5 billion in senior notes and at May 1, 2020, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $4.0 billion, which primarily includes senior notes.

At July 31, 2020, we had a $1.25 billion unsecured revolving credit agreement (the “Revolving Facility”), $4.0 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability in the form of commercial paper notes (“CP Notes”) of up to $1.0 billion.

On April 3, 2020 we issued $1.5 billion in senior notes and at July 31, 2020, we had total consolidated outstanding long-term obligations of $4.1 billion, most of which was in the form of senior notes.

All of our borrowing agreements are described in greater detail below.

Our borrowing availability under the Revolving Facility may be effectively limited by our CP Notes as further described below.

At May 1, 2020, we had a total consolidated cash balance of $2.7 billion .

The increase in cash and cash equivalents was driven primarily by our issuance of $1.5 billion of senior unsecured notes during the quarter as we sought to strengthen liquidity as a result of the continued uncertainty generated by the COVID-19 pandemic.

The net proceeds of the issuance will be used for general corporate purposes, which may include the repayment of indebtedness.

As the net proceeds were not immediately used for these purposes, the net proceeds were held in cash and cash equivalents as of May 1, 2020.

At July 31, 2020, we had a total consolidated cash balance of $3.0 billion .

The increase in cash and cash equivalents was driven primarily by our issuance of $1.5 billion of senior unsecured notes in April 2020 as we sought to strengthen liquidity as a result of uncertainty created by the COVID-19 pandemic.

We believe our cash flow from operations and existing cash balances, combined with availability under the Revolving Facility, the CP Notes and access to the debt markets will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending, anticipated dividend payments and share repurchases for a period that includes the next twelve months as well as the next several years.

5 unchanged sentences

Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate).

The applicable interest rate margin for borrowings as of May 1, 2020 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of July 31, 2020 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

We must also pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility.

As of May 1, 2020, the facility fee rate was 0.11%.

As of July 31, 2020, the facility fee rate was 0.11%.

The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on our long-term senior unsecured debt ratings.

5 unchanged sentences

The Revolving Facility also contains financial covenants that require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

As of May 1, 2020, we were in compliance with all such covenants.

As of July 31, 2020, we were in compliance with all such covenants.

The Revolving Facility also contains customary events of default.

As of May 1, 2020, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $4.8 million, and borrowing availability of approximately $1.25 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $1.06 billion at May 1, 2020.

In addition, as of May 1, 2020 we had outstanding letters of credit of $44.1 million which were issued pursuant to separate agreements.

As of July 31, 2020, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $4.8 million, and borrowing availability of approximately $1.25 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity

of $1.06 billion at July 31, 2020.

In addition, as of July 31, 2020 we had outstanding letters of credit of $53.9 million which were issued pursuant to separate agreements.

Commercial Paper

As of May 1, 2020, our condensed consolidated balance sheet reflected no outstanding unsecured CP Notes.

As of July 31, 2020, our condensed consolidated balance sheet reflected no outstanding unsecured CP Notes.

CP Notes totaling $181.0 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet.

16 unchanged sentences

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.

Contractual Obligations

The issuance of the 2030 Senior Notes and the 2050 Senior Notes discussed above resulted in changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

The following table summarizes our significant contractual obligations for long-term debt obligations and related interest as of May 1, 2020 (in thousands):

Payments Due by Period

Contractual obligations

Long-term debt obligations

(a) Represents obligations for interest payments on long-term debt and includes projected interest on variable rate long-term debt using rates and balances as of May 1, 2020.

Variable rate long-term debt included in the table above reflects the balance of an outstanding tax increment financing of $4.3 million.

Current Financial Condition / Recent Developments

Our inventory balance represented approximately 40% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of May 1, 2020.

Our inventory balance represented approximately 39% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of July 31, 2020.

Such percentage is lower than we have experienced in recent years and is reflective of changes in consumer behavior and, to a lesser extent, supply chain disruption caused by the COVID-19 pandemic.

9 unchanged sentences

There can be no assurance that we will maintain or improve our current credit ratings.

Unless otherwise noted, all references to the 2020 and 2019 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 13-week periods ended May 1, 2020 and May 3, 2019, respectively.

Unless otherwise noted, all references to the 2020 and 2019 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 26-week periods ended July 31, 2020 and August 2, 2019, respectively.

Cash flows from operating activities.

1 unchanged sentence

Net income increased by $626.5 million in the 2020 period over the 2019 period.

Changes in merchandise inventories resulted in a $567.9 million increase in the 2020 period as compared to a decrease of $14.3 million in the 2019 period and is reflective of the COVID-19 pandemic effects discussed above.

Changes in merchandise inventories resulted in a $284.0 million increase in the 2020 period as compared to a decrease of $321.1 million in the 2019 period and is reflective of the COVID-19 pandemic effects discussed above under “Impact of COVID-19”.

Changes in accounts payable resulted in a $560.9 million increase in the 2020 period compared to a $323.2 million increase in the 2019 period, due primarily to the timing of receipts and payments.

1 unchanged sentence

On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors.

Merchandise inventories decreased by 12% in the 2020 period and were essentially unchanged in the 2019 period, with changes in our four inventory categories as follows:

Merchandise inventories decreased by 6% in the 2020 period and increased by 8% in the 2019 period, with changes in our four inventory categories as follows:

consumables decreased by 1% compared to a 8% increase;

seasonal decreased 13% compared to a 4% decrease;

home products decreased by 18% compared to a 4% decrease;

seasonal decreased 12% compared to a 9% increase;

home products decreased by 13% compared to a 15% increase;

and apparel decreased by 24% compared to a 5% decrease.

13 unchanged sentences

During the 2019 period, we opened 489 new stores and remodeled or relocated 699 stores.

Capital expenditures for 2020 are currently projected to be in the range of $925 million to $975 million.

Capital expenditures for 2020 are currently projected to be in the range of $1.0 billion to $1.1 billion.

We anticipate funding 2020 capital requirements with a combination of some or all of the following:

12 unchanged sentences

Share Repurchase Program

Effective May 1, 2020, our common stock repurchase program had a total remaining authorization of approximately $1.1 billion.

Effective July 31, 2020, our common stock repurchase program had a total remaining authorization of approximately $0.5 billion.

Effective August 26, 2020, our Board of Directors approved an increase in such program of $2.0 billion and at that date, the program had a total remaining authorization of approximately $2.5 billion.

Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions.

The authorization has no expiration date and may be modified or terminated from time to time at the discretion of our Board of Directors.

We temporarily suspended our share repurchase program in an attempt to bolster liquidity in light of the effects of the COVID-19 pandemic and we intend to resume this activity as soon as we deem it is prudent and advisable to do so, which may be as early as the 2020 second quarter.

For more information about our share repurchase program, see Note 9 to the condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis