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Item 7. Management’s Discussion and Analysis

2021-03-19 compared with 2020-03-19 · 169 added, 136 removed, 274 unchanged (53% of the section changed)

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It also should be read in conjunction with the Cautionary Disclosure Regarding Forward-Looking Statements and the Risk Factors disclosures set forth in the Introduction and in Item 1A of this report, respectively.

Impact of COVID-19

The COVID-19 (coronavirus) pandemic has resulted in widespread and continuing impacts on the global economy and has affected our business, as well as our customers, suppliers, and other business partners.

We have been classified as an essential business in all locations where we operate, and as such, our stores have generally remained open to serve our customers.

In responding to the pandemic and its effects, our priority has been the health and safety of our employees and customers.

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, 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, 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, and providing a one-time payment for hourly frontline employees who receive a complete COVID-19 vaccination.

In early March 2020, we began seeing heightened demand from customers, particularly for consumable products such as paper, food and cleaning products, which continued throughout 2020, although 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 remainder of 2020.

Also beginning in early March 2020, 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 shopped our stores less frequently than in the same period in 2019, but purchased a larger average basket amount.

We have seen a continuation of these general trends toward trip consolidation and larger basket size.

To address the increased demand, we increased our hiring of new store associates in March and April of 2020, 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, some of which we expect to persist through at least the first half of 2021.

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 fiscal 2020.

Although we incurred additional payroll related expenses throughout fiscal 2020, including employee appreciation bonuses of approximately $167 million, increased distribution and transportation costs, and 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.

The overall net impact of the pandemic to operating income and net income in 2021 may be less favorable due to the moderating positive impact to our net sales and our anticipation that some of these incremental costs, particularly those related to health and safety measures, will continue into 2021.

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, and/or significant operating limitations imposed upon, 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 other government assistance 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 in at least the near term, 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, which varied from historical patterns in fiscal 2020, may continue to do so in fiscal 2021.

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

Executive Overview

We are among the largest discount retailers in the United States by number of stores, with 16,368 stores located in 45 states as of February 28, 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 17,266 stores located in 46 states as of February 26, 2021, 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.

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.

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.

In 2020, our customers experienced impacts to many of these factors, as detailed above under “Impact of COVID-19”.

Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budgets, 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 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.

Our sales mix has continued to shift slightly toward consumables, and, within consumables, slightly toward lower margin departments such as perishables.

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.

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.

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.

Prior to 2020, our sales mix had continued to shift toward consumables, and, within consumables, toward lower margin departments such as perishables.

Although this trend did not occur in 2020 (as discussed above under “Impact of COVID-19”), we continue to expect some sales mix challenges to persist, and we expect the trend toward consumables will resume in 2021 and beyond.

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, both with new and existing customers, and capture long-term growth opportunities.

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.

Additionally, our refreshed approach to our non-consumable product offerings has been implemented in approximately 2,400 stores as of the end of 2019.

This merchandising strategy, 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.

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.

We currently operate five DG Fresh distribution facilities, which served more than 6,000 stores as of February 28, 2020.

Tariffs on products from China, as applied to both our direct imports and domestic purchases, did not have a net material impact on our financial results in 2019.

We believe we can mitigate the potential sales and margin impact of such increased tariffs on our financial results in 2020 through various sourcing, merchandising and pricing efforts.

However, as noted above, changes in trade policy that result in higher prices for our customers may negatively impact their budgets, and consequently, their spending, and additional increases in tariff rates or expansion of products subject to tariffs may have a more significant impact on our future business.

There can be no assurance we will be successful in our efforts to mitigate the impacts of existing or future tariffs in whole or in part, including but not limited to any impacts on customer spending .

We have limited insight into the extent to which our business may be impacted by the COVID-19 coronavirus outbreak, and there are many unknowns.

While we currently expect delays in the receipt of certain goods in 2020 as a result of this outbreak, we do not currently anticipate a material impact to our financial results in 2020 due to these delays.

Further delays in the receipt of goods, or other unanticipated impacts to our supply chain, including on direct imports or goods purchased domestically, our stores or our customers, could have a more significant impact on our future business (including sales), and we are continuing to monitor this evolving situation.

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

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 more than 17,000 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 overall 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.

Additionally, as we expand this offering, we plan to incorporate the full NCI set in certain stores as well as an “NCI Lite” version in others so as to reach a greater number of stores and customers more quickly.

The NCI Lite version incorporates the majority of the NCI assortment, but without the footprint and display changes in the store.

We plan to significantly expand the number of stores with either the full NCI or NCI Lite version in 2021, with a goal of more than 11,000 stores by the end of fiscal 2021.

Additionally, we recently introduced pOpshelf, a unique retail concept that incorporates certain of the 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 operate up to 50 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 2021, we plan to complete our initial rollout of DG Fresh distribution facilities, which will serve all stores across the chain.

DG Fresh contributed to our strong sales performance in 2020, driven by higher in-stock levels and the introduction of new products in select stores.

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

We expect this net benefit to continue in 2021 as we proceed with the rollout.

Tariffs on products from China, as applied to both our direct imports and domestic purchases, did not have a net material impact on our financial results in 2020, and we do not expect a net material impact in 2021.

As noted above, changes in trade policy that result in higher prices for our customers may negatively impact their budgets, and consequently, their spending, and additional increases in tariff rates or expansion of products subject to tariffs may have a more significant impact on our future business.

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

In 2020, we opened 1,000 new stores, remodeled 1,670 stores, and relocated 110 stores.

For 2020, we 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.

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.

The COVID-19 pandemic has not materially delayed our real estate plans, and, based on information currently known to management, we do not expect any significant delays in 2021.

For 2021, we plan to open approximately 1,050 new stores (including any pOpshelf 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 Dollar General 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 2021.

We 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 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.

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.

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.

To support our new store growth and drive productivity, we have continued to make investments in our traditional distribution center network for non-refrigerated merchandise.

We began shipping from our distribution centers in Longview, Texas and Amsterdam, New York in January 2019 and December 2019, respectively.

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

In addition, the majority of these and other real estate projects in 2021 will also

incorporate high-capacity coolers.

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

We have also recently introduced two new larger format stores (one at approximately 8,500 square feet and the other at approximately 9,500 square feet), which allows us to further expand our offering and our ability to serve our customers.

Beginning later in 2021, we expect the 8,500 square-foot concept, along with our existing Dollar General Plus format of a similar size, to become our base prototypes for nearly all new stores moving forward, replacing our traditional 7,300 square foot store format and higher-cooler count Dollar General Traditional Plus format.

The innovation in store formats is expected to allow us to capture additional growth opportunities within our existing markets.

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.

We plan to continue enhancing this position over time while employing ongoing cost discipline to reduce certain expenses as a percentage of sales.

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

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.

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

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,” some of which are expected to continue in 2021.

We also have launched “Fast Track”, an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor efficiencies 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 launched the self-checkout pilot 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.

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

Additionally, we expect to continue to add self-checkout capabilities in additional stores throughout 2021.

These and the other strategic initiatives discussed above will require us to incur upfront expenses for which 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, including increases in minimum wage rates.

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.

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

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.

In addition, federal, state and/or local minimum wage increases could have a material negative impact on our operating expenses, although the magnitude and timing of such impact, and our ability to mitigate (whether in whole or in part), depends on the scale and timing of the mandated increases, among other factors.

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, develops, and retains talented personnel, particularly at the store manager 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 throughout 2020.

In 2020, we intend to continue our share repurchase activity, and to pay quarterly cash dividends, subject to Board discretion and approval.

In 2021, we expect to continue our share repurchase activity and to pay quarterly cash dividends, subject to Board discretion and approval.

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

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Changes in same-store sales are calculated based on the comparable 52 calendar weeks in the current and prior years.

Net sales per square foot is calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters.

the fiscal year, and the end of each of our three interim fiscal quarters.

Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters.

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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 strong cash flow management and share repurchases resulted in solid overall operating and financial performance in 2019 as

compared to 2018, as 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) and strong cash flow management resulted in strong overall operating and financial performance in 2020 as compared to 2019, as set forth below.

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

● Net sales in 2020 increased 21.6% over 2019.

Sales in same-stores increased 3.9%, primarily due to increases in average transaction amount and customer traffic.

Average sales per square foot in 2019 were $237 compared to $231 in 2018.

● Our gross profit rate increased by 14 basis points due primarily to higher initial markups on inventory purchases.

● SG&A increased by 9 basis points primarily reflecting our estimate for the settlement of certain legal matters .

Sales in same-stores increased 16.3%, primarily due to increases in average transaction amount.

Average sales per square foot in 2020 were $273.

● Our gross profit rate increased by 117 basis points due primarily to lower markdowns as a percentage of sales and higher initial markups on inventory purchases.

● SG&A as a percentage of sales decreased by 106 basis points primarily due to our significant increase in 2020 sales, partially offset by incremental costs related to COVID-19 .

● Operating profit increased 54.4% to $3.55 billion in 2020 compared to $2.30 billion in 2019.

● The increase in the effective income tax rate to 22.2% in 2019 from 21.1% in 2018 was due primarily to changes in state income tax laws and income tax benefits arising from the Tax Cuts and Jobs Act in 2018 that did not reoccur in 2019.

● Interest expense increased by $49.8 million in 2020 primarily due to higher average outstanding debt balances in connection with the issuance of debt in the first quarter of 2020.

● The decrease in the effective income tax rate to 22.0% in 2020 from 22.2% in 2019 was due primarily to income tax benefits associated with share-based compensation.

● We reported net income of $2.66 billion, or $10.62 per diluted share, for 2020 compared to net income of $1.71 billion, or $6.64 per diluted share, for 2019.

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Accounting Periods.

The following text contains references to years 2019, 2018, and 2017, which represent fiscal years ended January 31, 2020, February 1, 2019, and February 2, 2018, respectively.

The following text contains references to years 2020, 2019, and 2018, which represent fiscal years ended January 29, 2021, January 31, 2020, and February 1, 2019, respectively.

Our fiscal year ends on the Friday closest to January 31.

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Results of a period shorter than a full year may not be indicative of results expected for the entire year.

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

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

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 fiscal years 2020, 2019 and 2018, and the dollar and percentage variances among those years.

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In 2020, our 16,050 same-stores accounted for sales of $31.9 billion.

The increase in same-store sales primarily reflects an increase in average transaction amount and customer traffic compared to 2018.

The increase in average transaction amount was driven by higher average item retail prices.

Same-store sales in 2019 increased in each of the consumables, seasonal and home products and apparel categories, compared to 2018.

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 offset in part 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.

The 2020 net sales increase was positively affected by new stores, modestly offset by sales from closed stores.

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In 2019, our 15,209 same-stores accounted for sales of $26.4 billion.

The increase in same-store sales primarily reflects an increase in average transaction amount relative to 2017.

The increase in average transaction amount was driven by higher average item retail prices and to a lesser extent, an increase in average items per transaction, while customer traffic was essentially unchanged.

Same-store sales in 2018 increased in the consumables, seasonal and home products categories, and declined in the apparel category, compared to 2017.

Same-store sales results in 2018 for the three non-consumables categories, when aggregated, were positive.

The increase in same-store sales primarily reflects an increase in average transaction amount and customer traffic compared to 2018.

The increase in average transaction amount was driven by higher average item retail prices.

Same-store sales in 2019 increased in each of the consumables, seasonal and home products and apparel categories, compared to 2018.

The 2019 net sales increase was positively affected by new stores, modestly offset by sales from closed stores.

Of our four major merchandise categories, the consumables category, which generally has a lower gross profit rate than the other three categories, is our largest category and has continued to become a larger percentage

of our total sales.

Because of the impact of sales mix on gross profit, we continually review our merchandise mix and strive to adjust it when appropriate.

Gross Profit.

In 2020, gross profit increased by 26.3%, and as a percentage of net sales increased by 117 basis points to 31.8% compared to 2019.

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 2020, which contributed to the increase in the gross profit rate.

We also experienced a lower rate of inventory shrink in 2020 compared to 2019.

I t is uncertain at this time whether these trends, which differ from our recent historical trends prior to 2020, will continue.

These factors were partially offset by increased distribution and transportation costs which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic, 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 our gross profit.

In 2019, gross profit increased by 8.8%, and as a percentage of net sales increased by 14 basis points to 30.6% compared to 2018.

Higher initial markups on inventory purchases and a lower LIFO provision contributed to the increase in the gross profit rate.

These factors were partially offset by increased distribution and transportation costs, a greater proportion of sales of consumables, which generally have a lower gross profit rate than our other product categories, and sales of lower margin products comprising a higher proportion of consumables sales, as well as a higher rate of inventory shrinkage.

In 2018, gross profit increased by 8.1%, and as a percentage of net sales decreased by 32 basis points to 30.5% compared to 2017.

Higher markdowns, a greater proportion of sales of consumables, which generally have a lower gross profit rate than our other product categories, and sales of lower margin products comprising a higher proportion of consumables sales, as well as increases in transportation costs and an increased LIFO provision reduced the gross profit rate.

These factors were partially offset by an improved rate of inventory shrinkage and higher initial markups on inventory purchases.

SG&A as a percentage of sales was 22.3% in 2019 compared to 22.2% in 2018, an increase of 9 basis points.

We recorded expenses of $31.0 million in 2019 reflecting our estimate for the settlement of significant legal matters discussed in Note 7 to the consolidated financial statements.

SG&A as a percentage of net sales was 21.2% in 2020 compared to 22.3% in 2019, a decrease of 106 basis points.

Although we incurred certain incremental costs discussed above under “Impact of COVID-19,” including discretionary employee bonus expense, 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 2020 were retail labor, store occupancy costs, utilities, and depreciation and amortization.

In addition, we recorded expenses of $31.0 million in 2019 reflecting our estimate for the settlement of significant legal matters.

These items were partially offset by 2020 increases in incentive compensation and hurricane-related expenses.

SG&A as a percentage of sales was 22.3% in 2019 compared to 22.2% in 2018, an increase of 9 basis points, which included the $31.0 million estimate in 2019 for the settlement of significant legal matters.

SG&A in 2019 included a decrease of approximately $22.8 million in hurricane and other disaster-related expenses compared to 2018 as well as an increase in retail labor costs at a rate less than the increase in net sales.

SG&A as a percentage of sales decreased by 1 basis point, rounding to 22.2% in both 2018 and 2017.

The 2018 amounts reflect a reduction in repairs and maintenance expenses which were offset by occupancy costs and depreciation expenses, each of which increased at a rate greater than the increase in net sales.

The 2018 amounts reflect an increase in hurricane and other disaster-related expenses of approximately $14.3 million compared to 2017.

The 2017 amounts include costs of $24.0 million related to the closure of 35 underperforming stores, primarily expenses for remaining lease liabilities.

Interest Expense .

Interest expense increased $0.7 million to $100.6 million in 2019 compared to 2018, and increased $2.8 million to $99.9 million in 2018 compared to 2017.

Interest expense increased $49.8 million to $150.4 million in 2020 compared to 2019, primarily due to higher average outstanding debt balances in connection with the issuance of debt in the first quarter of 2020, and increased $0.7 million to $100.6 million in 2019 compared to 2018.

See the detailed discussion under “Liquidity and Capital Resources” regarding the financing of various long-term obligations.

We had consolidated outstanding variable-rate debt of $430.1 million and $373.3 million as of January 31, 2020 and February 1, 2019, respectively, and the remainder of our outstanding indebtedness as of each of those dates was fixed rate debt.

We had consolidated outstanding variable-rate debt of $3.4 million and $430.1 million as of January 29, 2021 and January 31, 2020, respectively, and the remainder of our outstanding indebtedness as of each of those dates was fixed rate debt.

Other (income) expense .

Other (income) expense in 2018 reflects expenses associated with the voluntary prepayment of our senior unsecured term loan facility, and in 2017 reflects expenses associated with the issuance and refinancing of long-term debt.

Other (income) expense in 2018 reflects expenses associated with the voluntary prepayment of our senior unsecured term loan facility.

Income Taxes .

The effective income tax rate for 2019 was 22.2% compared to a rate of 21.1% for 2018 which represents a net increase of 1.1 percentage points.

The effective income tax rate was higher in 2019 primarily due to an increase in income taxes resulting from changes in state income tax laws and a federal income tax benefit arising from the Tax Cuts and Jobs Act (the “TCJA”) in 2018 that did not reoccur in 2019.

The effective income tax rate for 2020 was 22.0% compared to a rate of 22.2% for 2019 which represents a net decrease of 0.2 percentage points.

The effective income tax rate was lower in 2020 primarily due to increased tax benefits associated with share-based compensation and a larger income tax rate benefit from state taxes offset by a lower income tax rate benefit from federal income tax credits due primarily to higher pre-tax earnings in 2020 compared to 2019.

The effective income tax rate for 2019 was 22.2% compared to a rate of 21.1% for 2018 which represents a net increase of 1.1 percentage points.

The effective income tax rate was higher in 2018 primarily due to the one-time remeasurement of the federal portion of our deferred tax assets and liabilities at 21% in 2017, which was offset by the reduction in the current federal tax rate from 33.7% in 2017 to 21% in 2018.

Our 2017 provision for income taxes reflected an estimate due to the changes in the federal income tax law arising from the TCJA, signed into law on December 22, 2017.

The provisional tax benefit consisted of $310.8 million related to the one-time remeasurement of the federal portion of our deferred tax assets and liabilities at the 21% rate and $24.2 million related to the reduced statutory tax rate of 33.7%, compared to 35% in prior years.

Subsequent to the signing of the TCJA, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.

118 (“SAB 118”), which allowed companies to record provisional amounts during a measurement period not to extend beyond one year after the enactment date while the accounting impact is still under analysis.

In 2018, we concluded our analysis of the accounting impact of the TCJA pursuant to SAB 118 and recorded immaterial adjustments related to our 2017 provision for income taxes.

Off Balance Sheet Arrangements

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In 2020, 2019 and 2018, we experienced increases in product costs due in part to tariffs on certain items imported from China.

We experienced minimal overall commodity cost inflation or deflation in 2017.

Liquidity and Capital Resources

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At January 29, 2021, 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 of up to $1.0 billion.

At January 31, 2020, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $2.9 billion, which includes commercial paper borrowings (“CP Notes”) and senior notes, all of which 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 January 29, 2021, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $4.1 billion, most of which was in the form of senior notes.

All of our material borrowing arrangements are described in greater detail below.

Our borrowing availability under the Revolving Facility may be effectively limited by our commercial paper notes (“CP Notes”) as further described below.

The information contained in Note 5 to the consolidated financial statements contained in Part II, Item 8 of this report is incorporated herein by reference.

At January 29, 2021, we had a total consolidated cash balance of $1.4 billion.

Our balance of cash and cash equivalents was impacted by our issuance 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 our existing cash balances, combined with availability under the Revolving Facility, CP Notes and access to the debt markets, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending and anticipated dividend payments for a period that includes the next twelve months as well as the next several years.

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As of January 29, 2021, 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.

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.

The Revolving Facility contains a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, our (including our subsidiaries’) ability to:

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The Revolving Facility also contains customary events of default.

As of January 31, 2020, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $5.4 million, and borrowing availability of $1.24 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $638.4 million at January 31, 2020.

As of January 29, 2021, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $3.5 million, and borrowing availability of $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 $1.07 billion at January 29, 2021.

In addition, as of January 29, 2021 we had outstanding letters of credit of $77.7 million which were issued pursuant to separate agreements.

Commercial Paper

As of January 31, 2020, our consolidated balance sheet reflected outstanding unsecured CP Notes of $425.2 million classified as long-term obligations due to our intent and ability to refinance these obligations as long-term debt.

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

Under this program, we may issue the CP Notes from time to time in an aggregate amount not to exceed $1.0 billion outstanding at any time.

As of January 29, 2021, our consolidated balance sheet reflected no outstanding unsecured CP Notes.

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

We may issue the CP Notes from time to time in an aggregate amount not to exceed $1.0 billion outstanding at any time.

The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of our other unsecured and unsubordinated indebtedness.

We intend to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time.

As of January 31, 2020, the consolidated outstanding CP Notes had a weighted average borrowing rate of 1.7%.

In April 2013 we issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the “2023 Senior Notes”) at a discount of $2.4 million, which are scheduled to mature on April 15, 2023.

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In April 2018 we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028.

Collectively, the 2023 Senior Notes, 2025 Senior Notes, 2027 Senior Notes and 2028 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so

supplemented and amended, the “Senior Indenture”).

In April 2020 we issued $1.0 billion aggregate principal amount of 3.5% senior notes due 2030 (the “2030 Senior Notes”) at a discount of $0.7 million, which are scheduled to mature on April 3, 2030, and $500.0 million aggregate principal amount of 4.125% senior notes due 2050 (the “2050 Senior Notes”) at a discount of $5.0 million, which are scheduled to mature on April 3, 2050.

Collectively, the 2023 Senior Notes, 2025 Senior Notes, 2027 Senior Notes, 2028 Senior Notes, 2030 Senior Notes and 2050 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”).

Interest on the 2023 Senior Notes and the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year.

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.

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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The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets;

and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

and our ability

and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

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.

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Self-insurance liabilities(b)

Operating lease obligations(c)

Operating lease obligations

Commitments Expiring by Period

Commercial commitments(d)

Commercial commitments(c)

Letters of credit

Purchase obligations(e)

Total contractual obligations and commercial commitments (f)

Purchase obligations(d)

Total contractual obligations and commercial commitments (e)

(a) Represents obligations for interest payments on long-term debt and includes projected interest on variable rate long-term debt using 2020 year end rates and balances.

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of January 31, 2020), the CP Notes (which had a

balance of $425.2 million as of January 31, 2020, which amount is net of $181 million held by a wholly-owned subsidiary), and the balance of an outstanding tax increment financing of $4.9 million.

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of January 29, 2021), the CP Notes (which also had a balance of zero as of January 29, 2021, and which amount is net of $181 million held by a wholly-owned subsidiary), and the balance of an outstanding tax increment financing of $3.4 million.

(b) We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, automobile, and third-party landlord claims exposures.

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Share Repurchase Program

Our existing common stock repurchase program had a total remaining authorization of approximately $1.1 billion at January 31, 2020.

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.

For more detail about our share repurchase program, see Note 11 to the consolidated financial statements.

Our common stock repurchase program had a total remaining authorization of approximately $0.68 billion at January 29, 2021.

Effective March 17, 2021, our Board of Directors authorized a $2 billion increase to such program which resulted in a total remaining authorization of approximately $2.38 billion under the program at such date.

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

For more detail about our share repurchase program, see Part II, Item 5 of this report and Note 11 to the consolidated financial statements contained in Part II, Item 8 of this report.

Other Considerations

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Cash flows from operating activities.

Cash flows from operating activities were $3.88 billion in 2020, which represents a $1.64 billion increase compared to 2019.

As noted above, the COVID-19 pandemic has resulted in increased sales, gross profit, and operating income, which contributed to the increase in net income of $942.5 million in 2020 over 2019.

Changes in accounts payable resulted in a $745.6 million increase in our working capital in 2020 compared to a $428.6 million increase in 2019, due primarily to the timing of receipts and payments.

Changes in accrued expenses resulted in a $388.6 million increase in our working capital in 2020 compared to a $100.3 million increase in 2019, due primarily to increased accruals for compensation and non-income taxes.

Changes in merchandise inventories resulted in a $575.8 million decrease in our working capital in 2020 which was similar to the decrease of $578.8 million in 2019 as described in greater detail below.

Changes in income taxes including an increase in cash paid for income taxes in 2020 compared to 2019 are primarily due to the increase in pre-tax earnings in 2020.

Cash flows from operating activities were $2.24 billion in 2019, which represents a $94.4 million increase compared to 2018.

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In addition, net income increased by $123.1 million in 2019 over 2018.

These items were offset by changes in merchandise inventories

which resulted in a $578.8 million decrease in 2019 as compared to a decrease of $521.3 million in 2018.

items were offset by changes in merchandise inventories which resulted in a $578.8 million decrease in 2019 as compared to a decrease of $521.3 million in 2018.

Changes in income taxes in 2019 compared to 2018 are primarily due to the timing of payments for income taxes.

Cash flows from operating activities were $2.1 billion in 2018, which represents a $341.4 million increase compared to 2017.

Changes in accounts payable resulted in a $375.2 million increase in 2018 compared to a $427.9 million increase in 2017, due primarily to the timing of receipts and payments which was partially impacted by certain changes in payment terms.

In addition, net income increased by $50.5 million in 2018 over 2017.

These items were offset by changes in merchandise inventories which resulted in a $521.3 million decrease in 2018 as compared to a decrease of $348.4 million in 2017.

Changes in income taxes in 2018 compared to 2017 are primarily due to the reduction in the federal income tax rate to 21% from 35% and the timing of payments for income taxes.

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.

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The home products category increased by $66.3 million, or 15%, in 2020, by $82.8 million, or 23%, in 2019, and by $24.0 million, or 7%, in 2018.

The apparel category decreased by $2.1 million, or 1%, in 2019, and increased by $34.7 million, or 10%, in 2018, and by $1.9 million, or 1%, in 2017.

The apparel category increased by $12.9 million, or 3%, in 2020, decreased by $2.1 million, or 1%, in 2019, and increased by $34.7 million, or 10%, in 2018.

Cash flows from investing activities .

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$447 million for improvements, upgrades, remodels and relocations of existing stores;

$217 million for distribution and transportation-related projects;

$149 million for new leased stores, primarily for leasehold improvements, fixtures and equipment;

$271 million for distribution and transportation-related capital expenditures;

$250 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $50 million for information systems upgrades and technology-related projects.

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$289 million for improvements, upgrades, remodels and relocations of existing stores;

$203 million for new leased stores, primarily for leasehold improvements, fixtures and equipment;

$242 million for distribution and transportation-related projects;

$138 million for new leased stores, primarily for leasehold improvements, fixtures and equipment;

and $47 million for information systems upgrades and technology-related projects.

During 2018, we opened 900 new stores and remodeled or relocated 1,165 stores.

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

Capital expenditures during 2021 are projected to be in the range of $1.05 billion to $1.15 billion.

We anticipate funding 2021 capital requirements with a combination of some or all of the following:

existing cash balances, cash flows from operations, availability under our Revolving Facility and/or the issuance of additional senior notes or CP Notes.

existing cash balances, cash flows from operations, availability under our Revolving Facility and/or the issuance of additional senior notes and CP Notes.

We plan to continue to invest in store growth and development of approximately 1,050 new stores and approximately 1,850 stores to be remodeled or relocated.

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Cash flows from financing activities .

In 2020, 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, and borrowings and repayments under the Revolving Facility were $300.0 million each.

We repurchased 12.3 million shares of our common stock at a total cost of $2.5 billion and paid cash dividends of $355.9 million.

In 2019, we had a net increase in consolidated commercial paper borrowings of $58.3 million and had no borrowings or repayments under the Revolving Facility.

We repurchased 8.3 million outstanding shares of our common stock in 2019 at a total cost of $1.2 billion and paid cash dividends of $327.6 million.

In 2018, we had net proceeds from the issuance of the 2028 Senior Notes of $499.5 million, redeemed the 2018 Senior Notes for $400.0 million, and made a principal payment on the Term Facility of $175.0 million.

In 2018, we had net proceeds from the issuance of the 2028 Senior Notes of $499.5 million, redeemed the 2018 Senior Notes for $400.0 million, and made a voluntary prepayment of our senior unsecured term loan facility

of $175.0 million.

We had a net decrease in consolidated commercial paper borrowings in 2018 of $63.3 million and had no borrowings or repayments under the Revolving Facility.

We repurchased 9.9 million outstanding shares of our common stock in 2018 at a total cost of $1.0 billion and paid cash dividends of $306.5 million.

In 2017, we had net proceeds from the issuance of the 2027 Senior Notes of $599.6 million, redeemed the 2017 Senior Notes for $500.0 million, and made a principal payment on the Term Facility of $250.0 million.

We had a net decrease in consolidated commercial paper borrowings in 2017 of $60.3 million and had no borrowings or repayments under the Revolving Facility.

We repurchased 7.1 million outstanding shares of our common stock in 2017 at a total cost of $579.7 million, and paid cash dividends of $282.9 million.

Accounting Standards

In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill.

These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.

Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The amendments should be applied on a prospective basis.

An entity is required to disclose the nature of and reason for the change in accounting principle upon transition.

We do not anticipate a material effect on our consolidated results of operations, financial position or cash flows to result from the adoption of this guidance.

Critical Accounting Policies and Estimates

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We apply the RIM to these departments, which are groups of products that are fairly uniform in terms of cost, selling price relationship and turnover.

RIM will result in valuing inventories at LCM if permanent markdowns are currently taken as a reduction of the retail value of inventories.

The RIM will result in valuing inventories at LCM if permanent markdowns are currently taken as a reduction of the retail value of inventories.

Inherent in the RIM calculation are certain management judgments and estimates that may impact the ending inventory valuation at cost, as well as the gross profit recognized.

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We perform physical inventories in virtually all of our stores on an annual basis.

Due to the COVID-19 pandemic, we were unable to perform physical inventories in our stores from mid-March through mid-May in 2020, which prevented us from completing all of our planned store physical inventories in 2020, the effect of which was immaterial.

We calculate our shrink provision based on actual physical inventory results during the fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory through the end of the fiscal reporting period.

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Insurance Liabilities .

We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, automobile and third-party landlord claim exposures.

We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, automobile and certain third-party landlord claim exposures.

These represent significant costs primarily due to our large employee base and number of stores.

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We adopted new accounting guidance related to leases as of February 2, 2019, using the modified retrospective approach.

Under this approach, existing leases were recorded at the adoption date, and comparative periods were not restated and are presented under previously existing guidance.

Adoption of the leasing standard resulted in right of use operating lease assets and operating lease liabilities of approximately $8.0 billion each as of February 2, 2019.

Significant judgments and estimates were utilized in calculating these initial balances, including the determination of appropriate lease discount rates.

Lease liabilities are recorded at a discount based upon our estimated collateralized incremental borrowing rate which involves significant judgments and estimates.

Factors incorporated into the calculation of lease discount rates include the valuations and yields of our senior notes, their credit spread over comparable U.S.

Treasury rates, and an index of the credit spreads for all North American investment grade companies by rating.

To determine an indicative secured rate, we use the estimated credit spread improvement that would result from an upgrade of one ratings classification by tenor.

Many of our stores are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of up to 15 years with multiple renewal options.

We also have stores subject to shorter-term leases and many of these leases have renewal options.

Certain of our stores have provisions for contingent rentals based upon a percentage of defined sales volume.

We recognize contingent rental expense when the achievement of specified sales targets is considered probable.

We record single lease expense on a straight-line basis over the lease term including any option periods that are reasonably certain to be renewed, commencing on the date that we take physical possession of the property from the landlord which normally includes a period prior to store opening to make necessary leasehold improvements and install store fixtures.

When a lease contains a predetermined fixed escalation of the minimum rent, the related lease expense is recognized on a straight-line basis.

Tenant allowances, to the extent received, are recorded as a reduction of the right of use asset.

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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-K

Item 7. Management’s Discussion and Analysis