What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-26 compared with 2021-05-27 · 136 added, 115 removed, 190 unchanged (57% of the section changed)

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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.

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

In addition, the pandemic has contributed to, and may continue to contribute to, financial results that differ significantly from our historical results and seasonal variations that are significantly different from our historical patterns.

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

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.

Beginning in April 2020, demand significantly increased for many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix shift into non-consumable categories, which continued through the first quarter of 2021, although this trend began to reverse in the second quarter of 2021.

We believe these buying patterns were influenced in part by the economic stimulus payments and enhanced unemployment benefits.

We also have been acquiring new customers since the beginning of the pandemic, and we are pleased with the retention rates.

Finally, general trends in customer behavior toward trip consolidation, and purchases of larger average basket amounts, which began in 2020 as customers shopped our stores less frequently than in 2019, have continued in 2021.

Heightened customer demand and the shifts in customer behavior significantly benefited our results of operations, and in particular, sales, gross profit, operating income and net income, for fiscal 2020 and the first and second quarters of 2021.

We anticipate a less favorable overall net impact of the pandemic to operating income and net income for fiscal 2021 than fiscal 2020 primarily due to the moderating positive impact to our net sales and the impacts that the phase out of various economic stabilization efforts such as economic stimulus payments and enhanced unemployment benefits may have on our customers.

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, including changing consumer demand (whether higher or lower) in certain product categories;

supply chain constraints, delays and interruptions (including product shortages and vendor allocation issues);

increased distribution and transportation costs;

increased payroll expenses;

and increased costs in an effort to maintain safe work and shopping environments.

Our operating environment during COVID-19 remains very fluid, and developments in this environment, including additional government economic stabilization efforts or actions, or the failure to take such efforts or actions, may materially impact our business, results of operations and financial condition.

As a result, the quarterly cadence of our results of operations may continue to vary from historical patterns for an extended period of time.

Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, including its duration;

the duration and intensity of new variants;

the availability, adoption rates and effectiveness of vaccines;

the extent and duration of any government response efforts, programs and benefits;

and impact on employment trends, consumer behavior and the supply chain, 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 are the largest discount retailer in the United States by number of stores, with 17,683 stores located in 46 states as of July 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.

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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 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”.

and global trade policy, 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 half of 2021, our customers experienced impacts from many of these factors, as detailed above under “Impact of COVID-19”.

We are monitoring the potential impact of changes to SNAP benefits and unemployment benefit programs, as well as the monthly payments of the child tax credit, all of which may impact our customers during the second half of 2021.

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;

as well as cost inflation in frequently purchased household products.

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

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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.

This trend did not occur in 2020 or the first quarter of 2021 (as discussed above under “Impact of COVID-19”), though we did begin to see some reversion toward the prior mix trends beginning in the second quarter of 2021.

We continue to expect some sales mix challenges to persist, and we expect the mix trend reversion toward consumables will continue.

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

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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.

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

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

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

Additionally, 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, DG Pickup, which is a buy online, pickup in-store initiative, is now available in more than 17,000 stores across the chain.

Further, our non-consumables initiative, which offers a new, differentiated and limited assortment that will change throughout the year, is contributing

to improved overall sales and gross margin performance in stores where it has been deployed.

We plan to significantly expand the number of stores with the full or “lite” version of our non-consumables initiative offering in 2021, and to complete our initial rollout of the non-consumables initiative in the vast majority of our Dollar General stores 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.

At the end of the second quarter of 2021, we operated 16 standalone pOpshelf locations and two pOpshelf store-within-a-store offerings within existing Dollar General Market stores.

Our goal is to operate up to 50 pOpshelf locations, as well as up to 25 pOpshelf store-within-a-store offerings by the end of fiscal 2021.

In the second quarter of 2021, we completed 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.

DG Fresh contributed to our strong sales performance in the first half 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 half of 2021 through improved initial markups on inventory purchases, which were partially offset by increased distribution and transportation costs.

DG Fresh now serves essentially all stores across the chain, and we expect the overall net benefit to our financial results to continue throughout 2021.

Moving forward, we plan to focus on further optimization of the distribution footprint and product assortment within DG Fresh to further drive profitable sales growth.

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.

In the first half of 2021, we opened 530 new stores, remodeled 1,020 stores, and relocated 58 stores.

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.

We 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.

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 the majority of 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.

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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.

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.

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

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.

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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.

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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.

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 labor availability, increases in minimum wage rates and increases in

property rents.

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.

We have experienced incremental payroll, distribution and transportation costs related to the COVID-19 pandemic and its associated impacts.

Labor shortages and shipping capacity shortages continue to pressure our business, resulting in significantly higher supply chain costs and shipping delays in some instances.

As we move through 2021, we expect continued inflationary pressures due to higher input costs will continue to affect us as well as our vendors, including higher commodity, transportation and other costs, all of which may result in continued pressure to our operating results.

While we expect these challenges 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.

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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.

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

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

The method of calculating same-store sales varies across the retail industry.

As a result, our calculation of same-store sales is not necessarily comparable to similarly titled measures reported by other companies.

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.

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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 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.

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, which were enhanced by increased consumer demand, as discussed above under “Impact of Covid-19”.

Highlights of our 2021 second quarter results of operations compared to the 2020 second quarter and our financial condition at July 30, 2021 are set forth below.

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

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Sales in same-stores decreased 4.7% 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.

Average sales per square foot for all stores over the 52-week period ended July 30, 2021 was $265.

● Gross profit, as a percentage of net sales, was 31.6% in the 2021 period and 32.5% in the 2020 period, a decrease of 80 basis points, primarily reflecting increased transportation costs and an increased LIFO provision.

● SG&A expense, as a percentage of net sales, was 21.8% in the 2021 period compared to 20.4% in the 2020 period, an increase of 138 basis points, due in part to higher retail labor and store occupancy costs as a percentage of net sales.

● Operating profit decreased 18.5% to $0.85 billion in the 2021 period compared to $1.04 billion in the 2020 period.

● Interest expense increased by $0.1 million in the 2021 period.

● The effective income tax rate for the 2021 period was 21.4% compared to a rate of 21.5% for the 2020 period primarily due to a greater impact of permanent income tax differences in the 2021 period.

● Net income was $637.0 million, or $2.69 per diluted share, in the 2021 period compared to net income of $787.6 million, or $3.12 per diluted share, in the 2020 period.

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

● Cash generated from operating activities was $1.32 billion for the 2021 period, a decrease of $1.59 billion, or 54.7%, from the comparable 2020 period.

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● Inventory turnover was 4.6 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.

On a per store basis, inventories at July 30, 2021 increased by 13.7% compared to the balances at July 31, 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

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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.

References to the second quarter accounting periods for 2021 and 2020 contained herein refer to the 13-week accounting periods ended July 30, 2021 and July 31, 2020, respectively.

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,

vary by quarter.

Expenses, and to a greater extent operating profit, vary by quarter.

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

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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:

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 second 13-week periods and the 26-week periods of 2021 and 2020, and the dollar and percentage variances among those periods:

13 Weeks Ended

26 Weeks Ended

(amounts in millions, except

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Diluted earnings per share

13 WEEKS ENDED APRIL 30, 2021 AND MAY 1, 2020

13 WEEKS ENDED JULY 30, 2021 AND JULY 31, 2020

The net sales decrease in the 2021 period was primarily due to a same-store sales decrease of 4.7% 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.

We believe 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, particularly in the 2020 period in our non-consumable categories, which affects the comparisons between periods.

For the 2021 period, there were 16,488 same-stores which accounted for sales of $8.2 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.

The decrease in same-store sales primarily reflects a decline in customer traffic, partially offset by an increase in average transaction amount which was driven by higher average item retail prices.

Same-store sales declined in all categories with the largest percentage decrease 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

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.

For the 2021 period, gross profit decreased by 2.9%, and as a percentage of net sales decreased by 80 basis points to 31.6%, compared to the 2020 period.

Increased transportation costs and an increased LIFO provision contributed to the decrease in the gross profit rate.

In recent years a greater percentage of our 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 began to reverse in the second quarter of 2020 and continued each subsequent quarter through the first quarter of 2021, as non-consumables sales increased at a higher rate than consumables sales.

In relative terms, the mix of sales shifted back to consumables in the current year period, which also contributed to the decrease in the gross profit rate, along with an increase in inventory damages.

These factors were partially offset by higher inventory markups and a reduction in inventory shrink as a percentage of net sales.

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.

SG&A was 21.8% as a percentage of net sales in the 2021 period compared to 20.4% in the comparable 2020 period, an increase of 138 basis points, which was primarily impacted by the reduction in net sales in the 2021 period.

The primary expenses that were a greater percentage of net sales in the current year period were retail labor, store occupancy costs, employee benefits, depreciation and amortization, utilities, workers’ compensation and general liability expenses, and taxes and licenses, partially offset by lower incentive compensation expense.

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.

Interest expense increased by $0.1 million to $39.4 million in the 2021 period.

Income Taxes.

The effective income tax rate for the 2021 period was 21.4% compared to a rate of 21.5% for the 2020 period which represents a net decrease of 0.1 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.

The tax rate for the 2021 period was lower than the comparable 2020 period primarily due to a greater impact of permanent differences resulting from a decrease in pre-tax income for the 2021 period compared to the 2020 period.

26 WEEKS ENDED JULY 30, 2021 AND JULY 31, 2020

The net sales decrease in the 2021 period reflects a same-store sales decrease of 4.7% compared to the 2020 period.

For the 2021 period, there were 16,488 same-stores which accounted for sales of $16.2 billion.

The decrease in same-store sales reflects a decline in customer traffic partially offset by an increase in average transaction amount which was driven by higher average item retail prices.

Same-store sales decreased in all categories, with the largest percentage decrease in the consumables 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 1.5%, and as a percentage of net sales increased by 62 basis points to 32.2% compared to the 2020 period.

Higher inventory markups, a lower inventory shrink rate and a reduction in markdowns as a percentage of net sales each contributed to the increase in the gross profit rate.

In addition, consumables sales decreased while non-consumables sales increased in the current year period, which also contributed to the increase in the gross profit rate.

These factors were partially offset by increased transportation costs, an increased LIFO provision, and increased inventory damages.

Selling, General & Administrative Expenses.

SG&A was 21.9% as a percentage of net sales in the 2021 period compared to 20.5% in the comparable 2020 period, an increase of 144 basis points, which was primarily impacted by the reduction in net sales.

The primary expenses that were a higher percentage of net sales in the current year period were retail labor, store occupancy costs, depreciation and amortization, utilities, taxes and licenses, workers’ compensation and general liability expenses, employee benefits and administrative compensation (driven by share-based compensation), partially offset by lower incentive compensation expense.

Interest Expense .

Interest expense increased by $10.0 million to $79.8 million in the 2021 period primarily due to higher outstanding debt balances in connection with the issuance of debt in the 2020 period.

Income Taxes.

The effective income tax rate for the 2021 period was 21.7% compared to a rate of 21.8% for the 2020 period which represents a net decrease of 0.1 percentage points.

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.

At July 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 July 30, 2021, we had total consolidated outstanding long-term obligations of $4.2 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.

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.

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

The applicable interest rate margin for borrowings as of April 30, 2021 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of July 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%.

As of July 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.

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and incur additional subsidiary indebtedness.

The Revolving Facility also contains financial covenants that require the

maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

As of April 30, 2021, we were in compliance with all such covenants.

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

As of July 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.

As of July 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 $1.05 billion at July 30, 2021.

In addition, as of July 30, 2021 we had outstanding letters of credit of $53.4 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.

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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 July 30, 2021, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $18.4 million, which had a weighted average interest rate of 0.15%.

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

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.

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.

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”).

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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 inventory balance represented approximately 52% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of July 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.

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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;

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

Unless otherwise noted, all references to the 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.

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 26-week periods ended July 30, 2021 and July 31, 2020, respectively.

Cash flows from operating activities.

Cash flows from operating activities were $1.32 billion in the 2021 period, which represents a $1.59 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.

Net income decreased $123.3 million in the 2021 period compared to the 2020 period.

Changes in merchandise inventories resulted in a $80.0 million decrease in the 2021 period as compared to an increase of $284.0 million in the 2020 period as further discussed below.

Changes in accounts payable resulted in a $245.4 million decrease in the 2021 period compared to a $560.9 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 accrued expenses and other liabilities resulted in a $25.5 million decrease in the 2021 period compared to an $273.2 million increase in the 2020 period, due in part to the timing of regular and discretionary incentive compensation accruals and payments.

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;

Inventory levels in the 2020

period were lower than we had experienced in prior recent years and is reflective of changes in consumer behavior and, to a lesser extent, supply chain disruption caused by the onset of the COVID-19 pandemic.

In addition, we strategically accelerated certain inventory purchases during the 2021 period, particularly in select non-consumable categories, in anticipation of the supply chain constraints discussed above.

Total merchandise inventories increased by 1% in the 2021 period and decreased by 6% in the 2020 period, with changes in our four inventory categories as follows:

consumables increased by 1% compared to a 1% decrease;

seasonal decreased 1% compared to a 12% decrease;

home products decreased by 3% compared to a 18% decrease;

home products increased by 14% compared to a 13% decrease;

and apparel decreased by 15% compared to a 24% decrease.

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$248 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;

$126 million for distribution and transportation-related capital expenditures;

$125 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $19 million for information systems upgrades and technology-related projects.

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

plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores.

We 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;

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

Net commercial paper borrowings were unchanged in the 2021 period and decreased by $425.2 million in the 2020 period.

Net commercial paper borrowings increased by $18.4 million 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.

Also during the 2021 and 2020 periods, we repurchased 8.3 million and 3.6 million shares of our common stock at a total cost of $1.7 billion and $0.7 billion, respectively, and paid cash dividends of $198.1 million and $180.3 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.

As of July 30, 2021 our common stock repurchase program had a total remaining authorization of approximately $0.98 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.

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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.

For more 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis