What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-03 compared with 2020-08-27 · 113 added, 107 removed, 214 unchanged (51% of the section changed)

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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):

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.

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, installing plexiglass barriers at registers, and providing paid time off for those who received a COVID-19 diagnosis, or who were required to care for an immediate family or household member who received a COVID-19 diagnosis.

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, second, and third quarters, albeit with some variability as to the volume and product mix.

Beginning in April, 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 and third quarters.

Beginning in early March, many new customers began shopping with us for their everyday essential needs, and we are working to retain them going forward.

We have also seen a shift in customer behavior toward trip consolidation, as customers are shopping our stores less frequently than in the same period in 2019, but purchasing a larger average basket amount.

To address the increased demand, we increased our hiring of new store associates in March and April, 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 allocation limitations 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 results of operations, and in particular, sales, gross profit, operating income and net income for each of the first three quarters of fiscal 2020.

Although we incurred additional payroll related expenses in each of the first three quarters of fiscal 2020, including employee appreciation bonuses of approximately $99 million, increased distribution and transportation costs, as well as other costs to meet the significant customer demand and to protect the health and safety of our employees and customers, these costs were more than offset by the incremental sales.

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, 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 capital markets volatility.

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.

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

The potential for additional economic stabilization efforts, including additional government stimulus payments and enhanced unemployment benefits and the effects thereof, are uncertain.

In addition to the items described above, we expect the current adverse global economic conditions caused by the COVID-19 pandemic to continue at least throughout 2020 and likely longer, potentially resulting in continued elevated unemployment, reduced economic activity, and capital markets volatility.

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 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 16,720 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 are the largest discount retailer in the United States by number of stores, with 16,979 stores located in 46 states as of October 30, 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.

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The primary macroeconomic factors that affect our core customers include the unemployment and underemployment rates, wage growth, changes in U.S.

and global trade policy (including price increases from tariffs), and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program.

and global trade policy (including price increases resulting from the imposition of tariffs), and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program.

Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget, such as rent, healthcare and fuel prices.

Finally, significant unseasonable or unusual weather patterns can impact customer shopping behaviors.

We remain committed to the following long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus:

1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.

We remain committed to our long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus.

These priorities include:

1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our diverse teams through development, empowerment and inclusion.

We recently fine-tuned our fourth operating priority, which previously was “investing in our people as a competitive advantage,” to more fully express our values and beliefs and to more closely align with the investments we continue to make in the development of our people.

We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount.

As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing, and pricing and markdown optimization.

Several of our sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.

Historically, our sales of consumables, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales of non-consumables, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount.

Several of our strategic and other sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.

Historically, our sales in our consumables category, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales in our non-consumables categories, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount.

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

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.

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

Several of our initiatives, including certain of those discussed below, are intended to address these mix challenges;

however, there can be no assurances that these efforts 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.

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 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.

By the end of fiscal 2020, we plan to operate up to ten DG Fresh distribution facilities, which will serve approximately 14,000 stores.

Additionally, DG Pickup, which is a buy online, pickup in-store initiative aimed at offering another convenient access point for customers, is now available in essentially all of our stores across the chain.

Our non-consumables initiative, or “NCI,” offers a new, differentiated and limited assortment that will change throughout the year.

NCI is continuing to evolve and help shape our approach to non-consumables categories throughout the chain, and is contributing to improved sales and gross margin performance in the stores where it is offered.

As we extend this initiative more broadly, as well as incorporate certain related merchandising efforts throughout our chain, our goal is to provide our customers with a broader, even more relevant non-consumables merchandise assortment, while continuing to deliver exceptional value within key areas of our non-consumables categories.

Our updated goal is to have this offering in over 5,600 stores by the end of fiscal 2020.

Additionally, we have recently introduced pOpshelf, a unique retail concept that incorporates lessons learned from NCI in a differentiated format that is focused on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods.

Our goal is to open approximately 30 pOpshelf locations by the end of fiscal 2021.

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

By the end of fiscal 2020, we plan to operate up to ten DG Fresh distribution facilities, which will serve more than 14,000 stores.

DG Fresh has benefitted gross profit in 2020 through improved initial markups on inventory purchases, which have been partially offset by increased distribution and transportation costs.

We expect this net benefit to continue in the near term as we continue the rollout.

As a result of positive early results, we accelerated our investment in and the rollout of DG Pickup, NCI, and DG Fresh.

Tariffs on products from China, as applied to both our direct imports and domestic purchases, have not had a net material impact on our financial results.

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

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.

In the first three quarters of 2020, we opened 780 new stores, remodeled 1,425 stores, and relocated 76 stores.

Through the end of the third quarter of 2020, the COVID-19 pandemic has not resulted in delays that have materially impacted 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, remodel 1,670 stores, and relocate 110 stores, for a total of 2,780 real estate projects.

In our fiscal 2021 year, we plan to open approximately 1,050 new stores, remodel approximately 1,750 stores, and relocate approximately 100 stores, for a total of 2,900 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 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.

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

We expect approximately 75% of our planned remodels in both 2020 and 2021 to feature our higher-cooler-count store format that enables us to offer an increased selection of perishable items.

Additionally, the majority of real estate projects in both 2020 and 2021 will incorporate higher-capacity coolers.

The acceleration of remodels in 2020 and the increased usage of the higher-cooler-count formats is expected to allow us to capture additional growth opportunities within our existing markets.

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Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term profitability.

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

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

We also have launched “Fast Track”, an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor productivity within our stores.

The first phase of Fast Track involved sorting process optimization within our distribution centers, as well as increased shelf-ready packaging, to allow for greater store-level stocking efficiencies, followed by the second-phase pilot of a self-checkout option in a limited number of stores.

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

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.

We completed the sorting process optimization at all of our non-refrigerated distribution centers in 2019.

Additionally, we are continuing to add self-checkout capabilities in more stores each quarter.

These and the other strategic initiatives discussed above will require us to incur upfront expenses for which, in some respects, there may not be an immediate 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, 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.

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

Our diverse teams are a competitive advantage, and we proactively seek ways to continue investing in their development.

Our goal is to create an environment that attracts and retains talented personnel, particularly at the store level, because employees who are promoted from within our company generally have longer tenures and are greater contributors to improvements in our financial performance.

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 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.

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

We expect to continue our share repurchase activity and to pay quarterly cash dividends throughout the remainder of 2020.

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

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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 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.

A continued focus on our four operating priorities as discussed above, coupled with pandemic-related sales and other impacts (additional discussion 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 third quarter results of operations compared to the 2019 third quarter and our financial condition at October 30, 2020 are set forth below.

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

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Sales in same-stores increased 12.2% 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.

Average sales per square foot for all stores over the 52-week period ended October 30, 2020 was $266.

● Gross profit, as a percentage of net sales, was 31.3% in the 2020 period and 29.5% in the 2019 period, an increase of 178 basis points, primarily reflecting favorable markdowns, higher initial inventory markups, and an increase in sales of products in our non-consumable categories.

● SG&A expense, as a percentage of net sales, was 21.9% in the 2020 period compared to 22.5% in the 2019 period, a decrease of 62 basis points, due in part to lower store occupancy, utilities, and retail labor costs as a percentage of net sales.

● Operating profit increased 57.3% to $773.1 million in the 2020 period compared to $491.4 million in the 2019 period.

● Interest expense increased by $16.0 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.

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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.

● Cash generated from operating activities was $3.38 billion for the 2020 period, an increase of $1.72 billion, or 103.7%, over the comparable 2019 period.

● Total cash dividends of $268.6 million, or $1.08 per share, were paid during the 2020 period, compared to $246.8 million, or $0.96 per share, in the comparable 2019 period.

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

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

On a per store basis, inventories at October 30, 2020 increased by 5.9% compared to the balances at November 1, 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 July 31, 2020.

Results of Operations

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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 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.

References to the third quarter accounting periods for 2020 and 2019 contained herein refer to the 13-week accounting periods ended October 30, 2020 and November 1, 2019, respectively.

The nature of our business is somewhat seasonal.

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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:

The following table contains results of operations data for the third 13-week periods and the 39-week periods of 2020 and 2019, and the dollar and percentage variances among those periods:

13 Weeks Ended

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Diluted earnings per share

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

13 WEEKS ENDED OCTOBER 30, 2020 AND NOVEMBER 1, 2019

The net sales increase in the 2020 period reflects a same-store sales increase of 12.2% compared to the 2019 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.

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

For the 2020 period, there were 15,798 same-stores which accounted for sales of $7.8 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, which were slightly offset by a decline 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.

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For the 2020 period, gross profit increased by 24.4%, and as a percentage of net sales increased by 178 basis points to 31.3%, compared to the 2019 period.

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

A reduction in markdowns as a percentage of net sales and 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.

This sales trend was reversed in the second and third quarters 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.

A reduction in inventory shrink 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.

As noted above, we believe the

effect of the COVID-19 pandemic on consumer behavior had a positive effect on net sales, and also had a positive effect on gross profit.

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

SG&A was 21.9% as a percentage of net sales in the 2020 period compared to 22.5% in the comparable 2019 period, a decrease of 62 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.

Although we incurred certain incremental costs discussed above under “Impact of COVID-19,” they were more than offset by the 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 store occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance, and employee benefits costs.

These items were partially offset by increases in incentive compensation costs and hurricane-related expenses.

Interest Expense .

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The effective income tax rate for the 2020 period was 21.6% compared to a rate of 21.7% for the 2019 period which represents a net decrease of 0.1 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 tax rate for the 2020 period was lower than the comparable 2019 period primarily due to increased tax benefits associated with share-based compensation and a larger income tax rate benefit from state taxes, 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.

39 WEEKS ENDED OCTOBER 30, 2020 AND NOVEMBER 1, 2019

The net sales increase in the 2020 period reflects a same-store sales increase of 17.5% compared to the 2019 period.

For the 2020 period, there were 15,798 same-stores which accounted for sales of $23.9 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.

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SG&A was 20.9% as a percentage of net sales in the 2020 period compared to 22.5% in the comparable 2019 period, a decrease of 158 basis points.

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.

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 period as discussed above.

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

These items were partially offset by increased incentive compensation expenses and hurricane-related expenses.

We recorded expenses of $31.0 million 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 .

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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.

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 and a greater income tax rate benefit from state taxes, 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.

Liquidity and Capital Resources

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.

At October 30, 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 October 30, 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 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.

At October 30, 2020, we had a total consolidated cash balance of $2.2 billion .

Our balance of cash and cash equivalents was impacted 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.

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Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.

For the remainder of fiscal 2020, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $300 million outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

For the remainder of fiscal 2020, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $300 million outstanding at any one time.

Revolving Credit Facility

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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 July 31, 2020 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of October 30, 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 July 31, 2020, the facility fee rate was 0.11%.

As of October 30, 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.

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

As of October 30, 2020, we were in compliance with all such covenants.

The Revolving Facility also contains customary events of default.

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.

As of October 30, 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 October 30, 2020.

In addition, as of October 30, 2020 we had outstanding letters of credit of $75.5 million which were issued pursuant to separate agreements.

Commercial Paper

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

As of October 30, 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.

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Interest on the 2025 and 2028 Senior Notes is payable in cash on May 1 and November 1 of each year.

Interest on the 2030 and 2050 Senior Notes is payable in cash on April 3 and October 3 of each year, commencing on October 3, 2020.

Interest on the 2030 and 2050 Senior Notes is payable in cash on April 3 and October 3 of each year, and commenced on October 3, 2020.

We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture.

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Current Financial Condition / Recent Developments

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.

Our inventory balance represented approximately 45% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of October 30, 2020.

Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year.

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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 26-week periods ended July 31, 2020 and August 2, 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 39-week periods ended October 30, 2020 and November 1, 2019, respectively.

Cash flows from operating activities.

Cash flows from operating activities were $3.38 billion in the 2020 period, which represents a $1.72 billion increase compared to the 2019 period.

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

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”.

As noted above, the COVID-19 pandemic has resulted in increased sales and gross profit, which contributed to the increase in net income of $835.2 million in the 2020 period over the 2019 period.

Changes in merchandise inventories resulted in a $352.3 million decrease in the 2020 period as compared to a decrease of $401.0 million in the 2019 period.

Changes in accounts payable resulted in a $919.8 million increase in the 2020 period compared to a $425.4 million increase in the 2019 period, due primarily to the timing of receipts and payments.

Changes in accrued expenses and other liabilities resulted in a $357.3 million increase in the 2020 period compared to a $108.9 million increase in the 2019 period, due in part to increased accruals for incentive compensation and taxes (other than taxes on income).

Changes in income taxes in the 2020 period compared to the 2019 period are primarily due to the timing of payments for income taxes and increased accruals for income tax expense due to higher pre-tax earnings in the 2020 period.

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 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 12% compared to a 9% increase;

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

Merchandise inventories increased by 7% in the 2020 period and increased by 10% in the 2019 period, with changes in our four inventory categories as follows:

consumables increased by 11% compared to a 10% increase;

seasonal increased 1% compared to a 12% increase;

home products increased by 8% compared to a 21% increase;

and apparel decreased by 6% compared to a 9% decrease.

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$219 million for improvements, upgrades, remodels and relocations of existing stores;

$68 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment;

$124 million for distribution and transportation-related capital expenditures;

$123 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment;

and $40 million for information systems upgrades and technology-related projects.

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In the 2020 period, net proceeds from the issuance of the 2030 Senior Notes and 2050 Senior Notes totaled $1.5 billion.

Net commercial paper borrowings decreased by $425.2 million in the 2020 period and decreased by $280.7 million in the 2019 period.

Net commercial paper borrowings decreased by $425.2 million in the

2020 period and decreased by $90.8 million in the 2019 period.

Borrowings and repayments under the Revolving Facility during the 2020 period were $300.0 million each, and there were no such borrowings or repayments in the 2019 period.

Also during the 2020 and 2019 periods, we repurchased 3.6 million and 3.0 million shares of our common stock at a total cost of $664.6 million and $385.0 million, respectively, and paid cash dividends of $180.3 million and $165.1 million, respectively.

Also during the 2020 and 2019 periods, we repurchased 8.0 million and 5.6 million shares of our common stock at a total cost of $1.57 billion and $0.79 billion, respectively, and paid cash dividends of $268.6 million and $246.8 million, respectively.

Share Repurchase Program

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.

Effective October 30, 2020 our common stock repurchase program had a total remaining authorization of approximately $1.58 billion.

Under the authorization, repurchases may be made from time to time in open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions.

The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt agreements and other factors.

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

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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