What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-18 compared with 2021-03-19 · 122 added, 147 removed, 296 unchanged (48% 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.

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

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

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

enhancing cleaning protocols, designating one hour each day for our elderly customers to shop our stores with limited crowds, implementing social distancing measures, providing personal protective equipment (e.g., gloves, masks and hand sanitizer) for employees, providing employee temperature checks at our distribution facilities, installing plexiglass barriers at registers, providing paid time off for those who received a COVID-19 diagnosis, or who were required to care for an immediate family or household member who received a COVID-19 diagnosis, and providing a one-time payment for hourly frontline employees who receive a complete COVID-19 vaccination.

In early March 2020, we began seeing heightened demand from customers, particularly for consumable products such as paper, food and cleaning products, which continued throughout 2020, although with some variability as to the volume and product mix.

Beginning in April, we also saw a significant increase in demand in many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix shift into non-consumable categories in the remainder of 2020.

Also beginning in early March 2020, many new customers began shopping with us for their everyday essential needs, and we are working to retain them going forward.

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

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

To address the increased demand, we increased our hiring of new store associates in March and April of 2020, and have worked and continue to work with suppliers to incorporate new items in stores to meet the essential needs of customers while addressing certain product shortages and vendor allocation limitations, some of which we expect to persist through at least the first half of 2021.

We believe that this increased customer demand significantly benefited our results of operations, and in particular, sales, gross profit, operating income and net income for fiscal 2020.

Although we incurred additional payroll related expenses throughout fiscal 2020, including employee appreciation bonuses of approximately $167 million, increased distribution and transportation costs, and other costs to meet the significant customer demand and to protect the health and safety of our employees and customers, these costs were more than offset by the incremental sales.

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

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

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

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

In addition to the items described above, we expect the current adverse global economic conditions

caused by the COVID-19 pandemic to continue in at least the near term, potentially resulting in continued elevated unemployment, reduced economic activity, and capital markets volatility.

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

As a result, the quarterly cadence of our results of operations, which varied from historical patterns in fiscal 2020, may continue to do so in fiscal 2021.

The COVID-19 (coronavirus) pandemic continues to have a widespread impact on the global economy as well as our business, customers, suppliers, and other business partners.

As an essential business in all locations where we operate, our stores have generally remained open to serve our customers.

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

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 changes in consumer demand (whether higher or lower) in certain product categories (or overall), supply chain interruptions or disruptions, increased distribution and transportation costs, increased product costs and increased payroll expenses.

We also may experience adverse effects on our business, results of operations and cash flows from a recessionary economic environment that may occur after the COVID-19 pandemic and government response thereto and their effects on the economy has moderated.

As a result, the quarterly cadence of our results of operations, which has varied from historical patterns during the pandemic, may continue to do so in fiscal 2022.

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.

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

Executive Overview

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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.

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

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

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

and global trade policy, and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program (“SNAP”), unemployment benefits, economic stimulus payments, and the child tax credit.

In fiscal 2020 and 2021, our customers were affected both positively and negatively by many of these factors in connection with the pandemic and its associated impacts.

We continue to monitor the potential impact of reductions in SNAP benefits and unemployment benefit programs, as well as changes in the payments of the child tax credit, although these programs did not result in a material impact on our business or financial results in fiscal 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, such as that which we experienced in 2021 and continue to experience as further discussed below.

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 (as discussed above under “Impact of COVID-19”), we continue to expect some sales mix challenges to persist, and we expect the trend toward consumables will resume in 2021 and beyond.

Several of our initiatives, including certain of those discussed

below, are intended to address these mix challenges;

This trend did not occur in fiscal 2020 or the first quarter of fiscal 2021, as we 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 during those periods.

Beginning in the second quarter of fiscal 2021 and continuing thereafter, we began to see some reversion toward the prior mix trends.

We continue to expect some sales mix challenges to persist and that 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;

however, there can be no assurances that these efforts will be successful.

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

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

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

Additionally, DG Pickup, which is a buy online, pickup in-store initiative aimed at offering another convenient access point for customers, is now available in more than 17,000 stores across the chain.

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

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

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

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

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

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

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

Our goal is to operate up to 50 pOpshelf locations by the end of fiscal 2021.

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

By the end of fiscal 2021, we plan to complete our initial rollout of DG Fresh distribution facilities, which will serve all stores across the chain.

We have also experienced a shift in customer behavior toward trip consolidation, as customers shopped our stores less frequently in fiscal 2020 and 2021 than in fiscal 2019 but had a larger average transaction amount.

We have seen a continuation of these general trends toward trip consolidation and larger transaction amount, and there can be no assurance that our sales growth initiatives will be effective at reversing them.

In addition, we believe our sales have been negatively impacted as a result of supply chain disruptions, primarily due to lower merchandise in-stock levels in our stores.

We continue to implement and invest in certain strategic initiatives that we believe will help drive profitable sales growth, both with new and existing customers, and capture long-term growth opportunities.

Such opportunities include providing our customers with additional shopping access points and even greater convenience by leveraging and developing digital tools and technology, such as our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience.

Additionally, we launched a partnership with a third party delivery service during 2021, which is now available in more than 10,700 stores, and we also continue to grow our DG Media Network, which is our platform for connecting brand partners with our customers to drive even greater value for each.

Further, our non-consumables initiative, which offers a new, differentiated and limited assortment that will change throughout the year, continues to contribute to improved overall sales and gross margin performance in stores where it has been deployed.

We significantly expanded the number of stores with either the full or the “lite” version of our non-consumables initiative offering in 2021 and plan to complete the rollout in the vast majority of our Dollar General stores by the end of fiscal 2022.

Additionally, in 2020, we introduced pOpshelf, a unique retail concept that incorporates certain of the lessons learned from the non-consumables initiative 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.

At the end of fiscal 2021, we operated 55 standalone pOpshelf locations and 25 pOpshelf store-within-a-store concepts within existing Dollar General Market stores.

Our goal is to operate approximately 155 pOpshelf locations, as well as

approximately 50 pOpshelf store-within-a-store concepts, by the end of fiscal 2022.

We believe this concept represents a significant growth opportunity, and are targeting approximately 1,000 stores by the end of fiscal 2025.

In the second quarter of fiscal 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 2021, driven by higher in-stock levels and the introduction of new products in select stores.

In addition, DG Fresh benefitted gross profit in 2021 through improved initial markups on inventory purchases, which were partially offset by increased distribution and transportation costs.

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

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

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

DG Fresh now wholly or partially serves essentially all stores across the chain, and we expect the overall net benefit to our financial results to continue throughout 2022.

Moving forward, we plan to focus on additional 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 2021, we opened 1,050 new stores, remodeled 1,752 stores, and relocated 100 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.

In 2022, we plan to open approximately 1,110 new stores (including planned pOpshelf stores and up to ten stores in Mexico), remodel approximately 1,750 stores, and relocate approximately 120 stores, for a total of 2,980 real estate projects.

We expect stores in Mexico, which will represent our first store locations outside the United States, to open in the second half of 2022.

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

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

We expect store format innovation to allow us to capture additional growth opportunities within our existing markets.

We recently introduced two new larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and expect the 8,500 square foot format, along with our existing Dollar General Plus format of a similar size, to become our base prototypes for the majority of new stores, replacing our traditional 7,300 square foot format and higher-cooler count Dollar General Traditional Plus format.

The larger formats allow for expanded high-capacity-cooler counts;

an extended queue line;

and a broader product assortment, including the non-consumable initiative, 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.

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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.

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.

These and the other strategic initiatives discussed above will require us to incur upfront expenses for which there may not be an immediate return in terms of sales or enhanced profitability.

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

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

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

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

We are also deploying “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 completed first phase of Fast Track involved sorting process optimization within our non-refrigerated distribution centers, as well as increased shelf-ready packaging, to allow for greater store-level stocking efficiencies, while the ongoing second phase involves adding a self-checkout option, which we plan to have in up to 11,000 stores by the end of fiscal 2022.

These and the other strategic initiatives discussed above have required and 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 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 experienced incremental payroll, distribution and transportation costs related to the COVID-19 pandemic and its associated impacts.

We continue to experience materially higher supply chain costs and, in some instances, shipping delays, as a result of shipping capacity shortages, port congestion and labor shortages.

We expect continued inflationary pressures due to higher input costs and higher fuel prices will continue to affect us as well as our vendors and customers, including higher commodity, transportation and other costs, all of which may result in continued pressure to our operating results, and their duration is unknown.

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 increased costs, 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 throughout 2020.

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

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in 2021.

We expect to continue our share repurchase activity and to pay quarterly cash dividends for the foreseeable future, subject to Board discretion and approval.

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

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

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

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

The 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.

Average 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.

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● Net sales in 2021 increased 1.4% over 2020.

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

Sales in same-stores decreased 2.8%, primarily due to a decrease in customer traffic.

Average sales per square foot in 2021 were $262.

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

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

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

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

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

● Our gross profit rate decreased by 16 basis points due primarily to higher transportation costs and a greater LIFO provision.

● SG&A as a percentage of sales increased by 96 basis points primarily due to increases in retail labor and store occupancy costs .

● Operating profit decreased 9.4% to $3.22 billion in 2021 compared to $3.55 billion in 2020.

● Interest expense increased by $7.1 million in 2021 primarily due to higher average outstanding debt balances.

● The decrease in the effective income tax rate to 21.7% in 2021 from 22.0% in 2020 was due primarily to increased income tax benefits associated with federal tax credits.

● We reported net income of $2.40 billion, or $10.17 per diluted share, for 2021 compared to net income of $2.66 billion, or $10.62 per diluted share, for 2020.

● We generated approximately $3.88 billion of cash flows from operating activities in 2020, an increase of 73.2% compared to 2019.

● We generated approximately $2.87 billion of cash flows from operating activities in 2021, a decrease of 26.1% compared to 2020.

● Inventory turnover was 4.4 times, and inventories increased 1.4% on a per store basis compared to 2020.

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Accounting Periods.

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

The following text contains references to years 2021, 2020, and 2019, which represent fiscal years ended January 28, 2022, January 29, 2021, and January 31, 2020, respectively.

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

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

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

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

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

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% of net sales

Other (income) expense

% of net sales

Income before income taxes

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Diluted earnings per share

The net sales increase in 2021 was primarily due to sales from new stores, partially offset by a decrease in same-store sales of 2.8% compared to 2020 as well as the impact of store closures.

In 2021, our 16,954 same-stores accounted for sales of $32.4 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 each of our product categories, with the largest percentage decrease in the apparel category.

The net sales increase in 2020 reflects a same-store sales increase of 16.3% compared to 2019.

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

The net sales increase in 2019 reflects a same-store sales increase of 3.9% compared to 2018.

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

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

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

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

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

Gross Profit.

In 2021, gross profit increased by 0.9%, and as a percentage of net sales decreased by 16 basis points to 31.6% compared to 2020.

Increased transportation costs, a greater LIFO provision which was driven by higher product costs, increased inventory damages and higher distribution costs each contributed to the decrease in the gross profit rate.

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

In 2021, consumables and non-consumables sales increased at approximately the same rate when compared to 2020.

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

A reduction in markdowns as a percentage of net sales and higher initial

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

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

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

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

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

These factors were partially offset by increased distribution and transportation costs which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic, and discretionary employee bonus expense.

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

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

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

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

These factors were partially offset by increased distribution and transportation costs which were impacted by increased volume, some of which was attributable to the COVID-19 pandemic, and discretionary employee bonus expense.

We believe the effect of the COVID-19 pandemic on consumer behavior had a significant positive effect on net sales, and also had a positive effect on our gross profit in 2020.

SG&A as a percentage of net sales was 22.2% in 2021 compared to 21.2% in 2020, an increase of 96 basis points.

The primary expenses that were higher as a percentage of net sales in 2021 were retail labor, store occupancy costs, depreciation and amortization, employee benefits, utilities, and workers’ compensation and general liability expenses, partially offset by reductions in discretionary employee bonus and other miscellaneous COVID-related expenses and incentive compensation expenses.

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

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

Although we incurred certain incremental costs associated with the COVID-19 pandemic, including discretionary employee bonus expense, they were more than offset by the significant increase in net sales during the period as discussed above.

Among the expenses that were a lower percentage of net sales in 2020 were retail labor, store occupancy costs, utilities, and depreciation and amortization.

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

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

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

Interest Expense .

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

Interest expense increased $7.1 million to $157.5 million in 2021 compared to 2020, and increased $49.8 million to $150.4 million in 2020 compared to 2019 primarily due to higher average outstanding debt balances in connection with the issuance of debt in the first quarter of 2020.

The majority of our debt is fixed rate debt.

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

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

Other (income) expense .

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

Income Taxes .

The effective income tax rate for 2021 was 21.7% compared to a rate of 22.0% for 2020 which represents a net decrease of 0.3 percentage points.

The effective income tax rate was lower in 2021 primarily due to increased income tax benefits associated with federal tax credits partially offset by a higher state effective tax rate compared to 2020.

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

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

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

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

Off Balance Sheet Arrangements

We are not party to any material off balance sheet arrangements.

Effects of Inflation

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

In 2021, 2020 and 2019, we experienced increases in product costs due in part to the COVID-19 pandemic and its effect on the global economy, particularly to the global supply chain, and tariffs on certain items imported from China.

Liquidity and Capital Resources

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During the past three years, we have generated an aggregate of approximately $9.0 billion in cash flows from operating activities and incurred approximately $2.9 billion in capital expenditures.

During that period, we expanded the number of stores we operate by 2,643, representing growth of approximately 18%, and we remodeled or relocated 4,069 stores, or approximately 28% of the stores we operated as of the beginning of the three-year period.

During that period, we expanded the number of stores we operate by 2,760, representing growth of approximately 18%, and we remodeled

or relocated 4,756 stores, or approximately 31% of the stores we operated as of the beginning of the three-year period.

In 2022, we intend to continue our current strategy of pursuing store growth, remodels and relocations.

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

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

Our balance of cash and cash equivalents was impacted by our issuance of senior unsecured notes in April 2020 as we sought to strengthen liquidity as a result of uncertainty created by the COVID-19 pandemic.

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

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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 fiscal 2021, we anticipate potential combined borrowings under the Revolving Facility and CP Notes to be a maximum of approximately $600 million outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

For fiscal 2022, we anticipate potential combined borrowings under the Revolving Facility and CP Notes to be a maximum of approximately $1.5 billion outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

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.

Effective December 2, 2021, we amended and extended our Revolving Facility, which consists of a $2.0 billion senior unsecured revolving credit facility of which up to $100.0 million is available for the issuance of letters of credit and which is scheduled to mature on December 2, 2026.

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 Revolving Facility includes customary LIBOR replacement provisions.

The applicable interest rate margin for borrowings as of January 28, 2022 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

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As of January 28, 2022, the facility fee rate was 0.11%.

The applicable interest rate margins for borrowings, the facility fees and the

letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on our long-term senior unsecured debt ratings.

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

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

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Commercial Paper

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

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

We may issue the CP Notes from time to time in an aggregate amount not to exceed $2.0 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 January 28, 2022, our consolidated balance sheet reflected outstanding unsecured CP Notes of $54.3 million.

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

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

and our ability

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

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

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

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

Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments as of January 29, 2021 (in thousands):

Future Cash Requirements

The following table summarizes significant estimated future cash requirements under our various contractual obligations and other commitments at January 28, 2022, in total and disaggregated into current (<1 year) and long-term (1 or more years) obligations (in thousands):

Payments Due by Period

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Purchase obligations(d)

Total contractual obligations and commercial commitments (e)

Total contractual obligations and commercial commitments

(a) Represents obligations for interest payments on long-term debt and includes projected interest on variable rate long-term debt using 2021 year end rates and balances.

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

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

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of January 28, 2022), the CP Notes (which had a balance of $54.3 million as of January 28, 2022, and which amount is net of $181 million held by a wholly-owned subsidiary), interest rate swaps being accounted for as fair value hedges, and the balance of an outstanding tax increment financing of $1.9 million.

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

As these obligations do not have scheduled maturities, these amounts represent undiscounted estimates based upon actuarial assumptions.

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(d) Purchase obligations include legally binding agreements for software licenses and support, supplies, fixtures, and merchandise purchases (excluding such purchases subject to letters of credit).

(e) We have potential payment obligations associated with uncertain tax positions that are not reflected in these totals.

We are currently unable to make reasonably reliable estimates of the period of cash settlement with the taxing authorities for the $7.5 million of reserves for uncertain tax positions.

Share Repurchase Program

Our common stock repurchase program had a total remaining authorization of approximately $2.13 billion at January 28, 2022.

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

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

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On March 16, 2022, the Board of Directors declared a quarterly cash dividend of $0.55 per share which is payable on or before April 19, 2022 to shareholders of record of our common stock on April 5, 2022.

We paid quarterly cash dividends of $0.36 per share in 2020.

quarterly cash dividends of $0.42 per share in 2021.

Although the Board currently expects to continue regular quarterly cash dividends, the declaration and amount of future cash dividends are subject to the Board’s sole discretion and will depend upon, among other factors, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board may deem relevant in its sole discretion.

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Efficient management of our inventory has been and continues to be an area of focus for us.

We utilize supply chain finance programs whereby qualifying suppliers may elect at their sole discretion to sell our payment obligations to designated third party financial institutions.

While the terms of these agreements are between the supplier and the financial institution, the supply chain finance financial institutions allow the participating suppliers to utilize our creditworthiness in establishing credit spreads and associated costs.

As of January 28, 2022, the amount due to suppliers participating in these supply chain finance programs was $328.2 million.

As described in Note 7 to the consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments.

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Cash flows from operating activities.

Cash flows from operating activities were $2.87 billion in 2021, which represents a $1.01 billion decrease compared to 2020.

As noted above, the COVID-19 pandemic resulted in significantly increased sales, gross profit, and operating income in 2020, and our net income decreased $255.8 million in 2021 compared to 2020.

Changes in accounts payable resulted in a $98.7 million increase in our working capital in 2021 compared to a $745.6 million increase in 2020, due primarily to the timing of receipts and payments.

Changes in accrued expenses resulted in a $37.3 million decrease in our working capital in 2021 compared to a $388.6 million increase in 2020, due primarily to the timing of accruals and payments for payroll taxes and incentive compensation.

Changes in merchandise inventories resulted in a $550.1 million decrease in our working capital in 2021 which was similar to the decrease of $575.8 million in 2020 as described in greater detail below.

Changes in income taxes in 2021 compared to 2020 are primarily due to the timing of payments for income taxes.

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

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

The increased sales, gross profit, and operating income driven by the COVID-19 pandemic contributed to the increase in net income of $942.5 million in 2020 over 2019.

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

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

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

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

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

Changes in accounts payable resulted in a $428.6 million increase in 2019 compared to a $375.2 million increase in 2018, due primarily to the timing of receipts and payments which was partially impacted by certain changes in payment terms.

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

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

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

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 increased by 7% in 2021, by 12% in 2020 and by 14% in 2019.

Inventory levels in the consumables category increased by $455.6 million, or 15%, in 2020, by $371.9 million, or 14%, in 2019, and by $320.9 million, or 14% in 2018.

Inventory levels in the consumables category decreased by $1.8 million, or 0%, in 2021, increased by $455.6 million, or 15%, in 2020, and increased by $371.9 million, or 14% in 2019.

The seasonal category increased by $177.8 million, or 20%, in 2021, by $35.7 million, or 4%, in 2020, and by $127.3 million, or 17%, in 2019.

The home products category increased by $230.0 million, or 45%, in 2021, by $66.3 million, or 15%, in 2020, and by $82.8 million, or 23%, in 2019.

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

The apparel category decreased by $39.2 million, or 10%, in 2021, increased by $12.9 million, or 3%, in 2020, and decreased by $2.1 million, or 1%, in 2019.

Cash flows from investing activities .

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

$217 million for distribution and transportation-related projects;

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

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

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

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

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Cash flows from financing activities .

In 2021, net commercial paper borrowings increased by $54.3 million.

and we had no borrowings or repayments under the Revolving Facility.

We repurchased 12.1 million shares of our common stock at a total cost of $2.5 billion and paid cash dividends of $392.2 million.

In 2020, net proceeds from the issuance of the 2030 Senior Notes and 2050 Senior Notes totaled $1.5 billion, net commercial paper borrowings decreased by $425.2 million, and borrowings and repayments under the Revolving Facility were $300.0 million each.

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

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

of $175.0 million.

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

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

Critical Accounting Policies and Estimates

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Merchandise inventories are stated at the lower of cost or market (“LCM”) with cost determined using the retail last in, first out (“LIFO”) method.

We use the retail inventory method (“RIM”) to calculate gross profit and the resulting valuation of inventories at cost, which are computed utilizing a calculated cost-to-retail inventory ratio at an inventory department level.

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

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

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

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

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

Provisions are made for these liabilities on an undiscounted basis.

Provisions are made for these

liabilities on an undiscounted basis.

Certain of these liabilities are based on actual claim data and estimates of incurred but not reported claims developed using actuarial methodologies based on historical claim trends, which have been and are anticipated to continue to be materially accurate.

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Lease Accounting .

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis