Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended January 29, 2021. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.
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. 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 2020, 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 and the first quarter of 2021. In both 2020 and 2021, we believe this dynamic was due in part to the economic stimulus payments distributed to consumers. Also beginning in early March 2020, many new customers began shopping with us for their everyday essential needs, and we have seen encouraging retention rates of those customers in the months following as we continue to work hard to retain as many as possible. In 2020, we saw a shift in customer behavior toward trip consolidation, as customers shopped our stores less frequently than in 2019, but purchased a larger average basket amount, and these general trends toward trip consolidation and larger basket size have continued in the first quarter of 2021. To address the increased demand, we 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 and the first quarter of 2021. 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 for fiscal 2021 may be less favorable than in 2020 primarily due to the moderating positive impact to our net sales. We anticipate that some of these incremental costs, particularly those related to health and safety measures, will continue into 2021, though to a significantly lesser extent than in 2020.
We expect to continue to be affected, although the extent and duration is unknown, by the COVID-19 pandemic and its effects on the economy in a variety of ways, potentially including changing consumer demand (whether higher or lower) in certain product categories, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs in an effort to maintain safe work and shopping environments. The potential impacts of additional economic stabilization efforts, including additional government stimulus payments and enhanced unemployment benefits and other government assistance and the effects thereof, are uncertain. We may experience adverse effects on our business, results of operations and cash flows from a recessionary economic environment that
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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 the largest discount retailer in the United States by number of stores, with 17,426 stores located in 46 states as of April 30, 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. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.
We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years and through a variety of economic cycles. We are mindful that the majority of our customers are value-conscious, and many have low and/or fixed incomes. As a result, we are intensely focused on helping our customers make the most of their spending dollars. Our core customers are often among the first to be affected by negative or uncertain economic conditions and among the last to feel the effects of improving economic conditions, particularly when trends are inconsistent and of an uncertain duration. 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 resulting from the imposition of tariffs), and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program, unemployment benefits, economic stimulus payments, and the child tax credit. In 2020 and the first quarter of 2021, 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 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 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 or the first quarter of 2021 (as discussed above under “Impact of COVID-19”), we continue to expect some sales mix challenges to persist, and we expect the mix trend toward consumables will eventually resume. 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
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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, 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 same degree of 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. Further, we plan to complete our initial rollout of NCI in our store base by the end of fiscal 2022.
Additionally, in the third quarter of 2020, we 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, as well as up to an additional 25 pOpshelf store-within-a-store offerings in Dollar General Market stores, 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. In an acceleration of our previously announced timing, we now plan to complete our initial rollout of DG Fresh distribution facilities, which will serve essentially all stores across the chain, by the end of the second quarter of 2021. DG Fresh contributed to our strong sales performance in the first quarter of 2021, driven by higher in-stock levels and the introduction of new products in select stores. In addition, DG Fresh benefitted gross profit in the first quarter of 2021 through improved initial markups on inventory purchases, which were partially offset by increased distribution and transportation costs. DG Fresh, which initially launched in January of 2019, is now serving more than 17,000 stores, and we expect the overall net benefit to our financial results to continue throughout 2021 as we complete the initial rollout.
To support our other operating priorities, we remain focused on capturing growth opportunities. In the first quarter of 2021, we opened 260 new stores, remodeled 543 stores, and relocated 33 stores. 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 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 box, 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. Additionally, the larger formats allow for expanded high-capacity-cooler counts; an extended queue line; and a broader product assortment, including NCI, a larger health and beauty section, and produce in select stores. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base. These lessons
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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 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 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 and beyond. 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. Further 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 is uncertain. We have also experienced incremental payroll, distribution and transportation costs related to the COVID-19 pandemic as discussed above under “Impact of COVID-19”. As we move through 2021, rising inflationary pressures due to higher input costs which may affect us as well as our vendors, including higher commodity, transportation and other costs, may result in pressure to our operating results. While we expect these increases to persist, certain of our initiatives and plans are intended to help offset these challenges, however, they are somewhat dependent on the scale and timing of the increases, among other factors. There can be no assurance that our mitigation efforts will be successful.
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 in the first quarter of 2021. We expect to continue our share repurchase activity, and to pay quarterly cash dividends, throughout the remainder of 2021, subject to Board discretion and approval.
We utilize key performance indicators (“KPIs”) in the management of our business. Our KPIs include same-store sales, average sales per square foot, and inventory turnover. Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. We include stores that have been remodeled, expanded or relocated in our same-store sales calculation. 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. 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. Each of these measures is commonly used by investors in retail companies to measure the health of the business. We use these measures to maximize profitability and for decisions about the allocation of resources.
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A continued focus on our four operating priorities as discussed above contributed to our overall operating and financial performance in the 2021 and 2020 periods. The 2021 period was enhanced by what we believe to be government stimulus-related sales in our non-consumable categories, while the 2020 period was enhanced by increased consumer demand, as discussed above under “Impact of Covid-19”.
Highlights of our 2021 first quarter results of operations compared to the 2020 first quarter and our financial condition at April 30, 2021 are set forth below. Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.
● Net sales decreased 0.6% to $8.40 billion. Sales in same-stores decreased 4.6% primarily reflecting a decrease in customer traffic. Average sales per square foot for all stores over the 52-week period ended April 30, 2021 was $269.
● Gross profit, as a percentage of net sales, was 32.8% in the 2021 period and 30.7% in the 2020 period, an increase of 208 basis points, primarily reflecting higher initial inventory markups, favorable markdowns, and an increase in sales of products in non-consumable categories.
● SG&A expense, as a percentage of net sales, was 22.0% in the 2021 period compared to 20.5% in the 2020 period, an increase of 152 basis points, due in part to higher store occupancy, winter storm disaster, and retail labor costs as a percentage of net sales.
● Operating profit increased 4.9% to $908.9 million in the 2021 period compared to $866.8 million in the 2020 period.
● Interest expense increased by $9.9 million in the 2021 period primarily due to higher average outstanding debt balances in the first quarter of 2021.
● The effective income tax rate for the 2021 period was 22.0% compared to a rate of 22.2% for the 2020 period primarily due to increased tax benefits associated with share-based compensation.
● Net income was $677.7 million, or $2.82 per diluted share, in the 2021 period compared to net income of $650.4 million, or $2.56 per diluted share, in the 2020 period.
● Cash generated from operating activities was $0.70 billion for the 2021 period, a decrease of $1.03 billion, or 59.5%, from the comparable 2020 period.
● Total cash dividends of $99.8 million, or $0.42 per share, were paid during the 2021 period, compared to $90.6 million, or $0.36 per share, in the comparable 2020 period.
● Inventory turnover was 4.8 times on a rolling four-quarter basis. On a per store basis, inventories at April 30, 2021 increased by 17.6% compared to the balances at May 1, 2020.
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 April 30, 2021.
Results of Operations
Accounting Periods . We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31. The following text contains references to years 2021 and 2020, which represent the 52-week fiscal years ending or ended January 28, 2022 and January 29, 2021, respectively. References to the first quarter accounting periods for 2021 and 2020 contained herein refer to the 13-week accounting periods ended April 30, 2021 and May 1, 2020, respectively.
Seasonality. The nature of our business is somewhat seasonal. Primarily because of sales of Christmas-related merchandise, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit,
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vary by quarter. 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. Consumer behavior driven by the COVID-19 pandemic and the U.S. government’s response thereto, including economic stimulus legislation 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 first 13-week periods of 2021 and 2020, and the dollar and percentage variances among those periods:
13 Weeks Ended
2021 vs. 2020
(amounts in millions, except
April 30,
May 1,
Amount
%
per share amounts)
2021
2020
Change
Change
Net sales by category:
Consumables
$
6,378.1
$
6,703.4
$
(325.3)
(4.9)
%
% of net sales
75.92
%
79.35
%
Seasonal
1,050.4
917.9
132.5
14.4
% of net sales
12.50
%
10.86
%
Home products
571.3
498.3
73.0
14.7
% of net sales
6.80
%
5.90
%
Apparel
401.1
328.8
72.3
22.0
% of net sales
4.77
%
3.89
%
Net sales
$
8,401.0
$
8,448.4
$
(47.5)
(0.6)
%
Cost of goods sold
5,645.3
5,852.8
(207.5)
(3.5)
% of net sales
67.20
%
69.28
%
Gross profit
2,755.7
2,595.7
160.0
6.2
% of net sales
32.80
%
30.72
%
Selling, general and administrative expenses
1,846.8
1,728.9
117.9
6.8
% of net sales
21.98
%
20.46
%
Operating profit
908.9
866.8
42.1
4.9
% of net sales
10.82
%
10.26
%
Interest expense
40.4
30.5
9.9
32.5
% of net sales
0.48
%
0.36
%
Income before income taxes
868.5
836.3
32.2
3.8
% of net sales
10.34
%
9.90
%
Income tax expense
190.7
185.8
4.9
2.6
% of net sales
2.27
%
2.20
%
Net income
$
677.7
$
650.4
$
27.3
4.2
%
% of net sales
8.07
%
7.70
%
Diluted earnings per share
$
2.82
$
2.56
$
0.26
10.2
%
13 WEEKS ENDED APRIL 30, 2021 AND MAY 1, 2020
Net Sales . The net sales decrease in the 2021 period was primarily due to a same-store sales decrease of 4.6% compared to the 2020 period. We believe consumer behavior driven by government stimulus payments in the 2021 period had a positive effect on net sales and same-store sales in our non-consumable product categories, while the effect of the onset of the COVID-19 pandemic on consumer behavior had a significant positive effect on net sales and same-store sales in the 2020 period, each of which affects the comparisons between periods. For the 2021 period, there were 16,261 same-stores which accounted for sales of $8.0 billion. The decrease in same-store sales primarily reflects a decline in customer traffic, partially offset by an increase in average transaction amount. Same-store sales declined in the consumables category and increased in each of the seasonal, apparel and home products categories, with the largest percentage increase in the apparel category. Net sales were positively affected by sales from new stores, modestly offset by sales from closed stores.
Gross Profit. For the 2021 period, gross profit increased by 6.2%, and as a percentage of net sales increased by 208 basis points to 32.8%, compared to the 2020 period. Higher initial markups on inventory purchases and a reduction in markdowns as a percentage of net sales 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 beginning in the second quarter of 2020 and has continued each subsequent quarter through the first quarter of 2021 as non-consumables sales increased at a higher rate than consumables sales, which added to the increase in the gross profit
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rate. It is uncertain at this time whether the reversal of this trend will continue. 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 transportation costs, which were primarily impacted in the form of higher rates.
Selling, General & Administrative Expenses (“SG&A”). SG&A was 22.0% as a percentage of net sales in the 2021 period compared to 20.5% in the comparable 2020 period, an increase of 152 basis points. Among the expenses that were a greater percentage of net sales in the current year period were store occupancy costs, disaster expenses related to Winter Storm Uri, retail labor, depreciation and amortization, administrative compensation (driven by share-based compensation), utilities, and taxes and licenses.
Interest Expense . Interest expense increased by $9.9 million to $40.4 million in the 2021 period primarily due to higher average outstanding debt balances in connection with the issuance of debt during the first quarter of 2020. See Liquidity and Capital Resources.
Income Taxes. The effective income tax rate for the 2021 period was 22.0% compared to a rate of 22.2% for the 2020 period which represents a net decrease of 0.2 percentage points. The tax rate for the 2021 period was lower than the comparable 2020 period primarily due to increased tax benefits associated with share-based compensation in the 2021 period compared to the 2020 period.
Liquidity and Capital Resources
At April 30, 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 in the form of commercial paper notes (“CP Notes”) of up to $1.0 billion. At April 30, 2021, 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 material borrowing arrangements 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.
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. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. 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 2021, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $500 million outstanding at any one time.
Revolving Credit Facility
On September 10, 2019, we entered into the Revolving Facility consisting of a $1.25 billion senior unsecured revolving credit facility of which up to $175.0 million is available for the issuance of letters of credit and which is scheduled to mature on September 10, 2024.
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 April 30, 2021 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 April 30, 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 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: incur additional liens; sell all or substantially all of our assets; consummate certain fundamental changes or change in our lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants that require the
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maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of April 30, 2021, we were in compliance with all such covenants. The Revolving Facility also contains customary events of default.
As of April 30, 2021, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $2.9 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 $1.07 billion at April 30, 2021. In addition, as of April 30, 2021 we had outstanding letters of credit of $67.9 million which were issued pursuant to separate agreements.
Commercial Paper
As of April 30, 2021, 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. 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.
Senior Notes
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. In October 2015 we issued $500.0 million aggregate principal amount of 4.150% senior notes due 2025 (the “2025 Senior Notes”) at a discount of $0.8 million, which are scheduled to mature on November 1, 2025. In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027. 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. 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. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
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.
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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Current Financial Condition / Recent Developments
Our inventory balance represented approximately 51% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of April 30, 2021. Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.
As described in Note 7 to the unaudited condensed consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity.
Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will maintain or improve our current credit ratings.
Unless otherwise noted, all references to the 2021 and 2020 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 13-week periods ended April 30, 2021 and May 1, 2020, respectively.
Cash flows from operating activities. Cash flows from operating activities were $0.70 billion in the 2021 period, which represents a $1.03 billion decrease compared to the 2020 period. Changes in merchandise inventories resulted in a $135.7 million increase in the 2021 period as compared to an increase of $567.9 million in the 2020 period. Changes in accounts payable resulted in a $295.2 million decrease in the 2021 period compared to a $110.1 million increase in the 2020 period, due primarily to the timing of receipts and payments. Changes in accrued expenses and other liabilities resulted in a $136.7 million decrease in the 2021 period compared to an $81.1 million increase in the 2020 period, largely due to the timing of regular and discretionary incentive compensation accruals and payments. Net income increased $27.3 million in the 2021 period over the 2020 period. Changes in income taxes in the 2021 period compared to the 2020 period are primarily due to 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. Merchandise inventories decreased by 3% in the 2021 period and decreased by 12% in the 2020 period, with changes in our four inventory categories as follows: consumables decreased by 1% compared to a 11% decrease; seasonal decreased 6% compared to a 13% decrease; home products decreased by 3% compared to a 18% decrease; and apparel decreased by 10% compared to a 17% decrease.
Cash flows from investing activities . Significant components of property and equipment purchases in the 2021 period included the following approximate amounts: $126 million for improvements, upgrades, remodels and relocations of existing stores; $74 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores; $66 million for distribution and transportation-related capital expenditures; and $11 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During the 2021 period, we opened 260 new stores and remodeled or relocated 576 stores.
Significant components of property and equipment purchases in the 2020 period included the following approximate amounts: $75 million for improvements, upgrades, remodels and relocations of existing stores; $73 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores; $32 million for distribution and transportation-related capital expenditures; and $12 million for information systems upgrades and technology-related projects. During the 2020 period, we opened 250 new stores and remodeled or relocated 498 stores.
Capital expenditures for 2021 are currently 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 CP Notes. We
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plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores. Capital expenditures in 2021 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet; technology and other strategic initiatives; as well as routine and ongoing capital requirements.
Cash flows from financing activities . 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 were unchanged in the 2021 period and decreased by $425.2 million in the 2020 period. There were no borrowings or repayments under the Revolving Facility during the 2021 period, and such borrowings and repayments in the 2020 period were $300.0 million each. Also during the 2021 and 2020 periods, we repurchased 5.0 million and 0.5 million shares of our common stock at a total cost of $1.0 billion and $63.1 million, respectively, and paid cash dividends of $99.8 million and $90.6 million, respectively.
Share Repurchase Program
As of April 30, 2021 our common stock repurchase program had a total remaining authorization of approximately $1.68 billion. 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 information about our share repurchase program, see Note 9 to the condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended January 29, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.