What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-26 compared with 2021-12-02 · 109 added, 160 removed, 170 unchanged (61% of the section changed)

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It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

Impact of COVID-19

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

In addition, the pandemic and its impact have contributed, 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, demand also 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 reversing in the second quarter of 2021 and continued to do so through the third quarter of 2021.

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

Throughout 2020, we acquired new customers and are pleased with the retention rates of these customers.

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 for fiscal 2020 and each of the first three quarters of 2021.

We anticipate a less favorable overall net impact of the pandemic and its effects to operating income and net income for fiscal 2021 versus 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, the failure to take such efforts or actions, or the federal vaccination and testing mandate, 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, benefits or mandates;

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 17,915 stores located in 46 states as of October 29, 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 18,356 stores located in 47 states as of April 29, 2022, 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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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, 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 2020 and the first three quarters 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 reductions in SNAP benefits and unemployment benefit programs, as well as changes in the payments of the child tax credit.

We have not seen a material impact from these changes through the third quarter of 2021, but any or all of these changes may impact our customers during the fourth quarter of 2021 and into 2022.

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, and economic stimulus payments.

We continue to monitor the potential impact of reductions in SNAP benefits, although such reductions did not result in a material impact on our business or financial results in the first quarter of 2022.

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.

as well as cost inflation in frequently purchased household products, such as that which we have continued 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.

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

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

This trend did not occur in 2020 or the first quarter of 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 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 as the mix trend reversion toward consumables has returned to pre-pandemic levels.

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, during 2021 we launched a

partnership with a third party delivery service, which is now available in more than 10,000 stores.

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

We have significantly expanded the number of stores with the full or “lite” version of our non-consumables initiative offering in 2021, and we plan 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.

At the end of the third quarter of 2021, we operated 30 standalone pOpshelf locations and 14 pOpshelf store-within-a-store concepts 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 concepts by the end of fiscal 2021.

We believe this concept represents a significant growth opportunity, as we anticipate opening approximately 100 additional standalone locations in fiscal year 2022, and are targeting approximately 1,000 stores by the end of fiscal year 2025.

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 three quarters 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 three quarters 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, whether in whole or in part, 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.

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

In the first quarter of 2022, we saw a continuation of the trend toward a larger transaction amount, which we believe was driven primarily by inflation, and, to a lesser degree, our merchandising efforts.

In addition, although we believe our sales in recent periods were negatively impacted by the global and domestic supply chain challenges and disruptions discussed further below, primarily in the form of lower merchandise in-stock levels in our stores, we have seen some improvement in our in-stock levels in the first quarter of 2022.

However, these supply chain challenges are ongoing, and there can be no assurance that we will continue to experience improvements in in-stock levels or when in-stock levels will return to historical pre-pandemic levels.

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 was available in approximately 11,000 stores at the end of the first quarter of 2022, and we 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 have significantly expanded the number of stores with either the full or the “lite” version of our non-consumables initiative offering, and plan to complete the rollout in the vast majority of our Dollar General stores by the end of 2022.

Additionally, we are continuing to grow the footprint of 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 the first quarter of 2022, we operated 66 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 2022.

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

Our “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, has positively contributed to our sales performance since we completed the initial rollout in the second quarter of 2021, driven by higher in-stock levels and the introduction of new products in select stores.

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

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 the first three quarters of 2021, we opened 798 new stores, remodeled 1,506 stores, and relocated 82 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.

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

In the second half of 2022, we expect to open up to ten stores in Mexico, representing our first store locations outside the United States.

In the first quarter of 2022, we opened 239 new stores, remodeled 532 stores, and relocated 32 stores.

Although we are seeing inflationary pressures in building costs, we remain on track 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 in 2022.

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 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.

Additionally, the larger formats allow for expanded high-capacity-cooler counts;

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

We are now using two 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 NCI, a larger health and beauty section, and produce in select stores.

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.

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

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

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.

We are continuing to deploy “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 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.

To further optimize our cost structure and facilitate greater operational control within our supply chain, we plan to double the size of our private tractor fleet in 2022.

We had more than 950 tractors in our fleet at the end of the first quarter of 2022, and our goal is to have more than 1,400 tractors in the fleet by the end of 2022.

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 significantly 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 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, 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 increases, among other factors.

In addition, we have experienced challenges such as increased costs and disruptions in our business as a result of various global events, including the COVID-19 pandemic and its associated impacts.

Such challenges include incremental transportation, distribution, and payroll costs, as well as supply chain disruptions.

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 industry 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, resulting in higher commodity, transportation and other costs, all of which may result in continued pressure to our operating results, and their extent and duration are unknown.

To the extent that these inflationary pressures result in a recessionary environment, we may experience adverse effects on our business, results of operations and cash flows.

While we expect some 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.

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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.

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

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in the first quarter of 2022.

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

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Our KPIs include same-store sales, average sales per square foot, and inventory turnover.

Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period.

We include stores that have been remodeled, expanded or relocated in our same-store sales calculation.

Same-store sales are calculated based upon our stores that were open at least 13 full fiscal months and remain open at the end of the reporting period.

We include stores that

have been remodeled, expanded or relocated in our same-store sales calculation.

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

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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.

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

Highlights of our 2021 third quarter results of operations, compared to the 2020 third quarter, and our financial condition at October 29, 2021 are set forth below.

Highlights of our 2022 first quarter results of operations, compared to the 2021 first quarter, and our financial condition at April 29, 2022 are set forth below.

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

● Net sales increased 3.9% to $8.52 billion due to new stores, while sales in same-stores decreased 0.6% primarily reflecting a decrease in customer traffic.

Average sales per square foot for all stores over the 52-week period ended October 29, 2021 was $263.

● Gross profit, as a percentage of net sales, was 30.8% in the 2021 period and 31.3% in the 2020 period, a decrease of 57 basis points, primarily reflecting an increased LIFO provision and increased transportation costs.

● SG&A expense, as a percentage of net sales, was 22.9% in the 2021 period compared to 21.9% in the 2020 period, an increase of 105 basis points, due in part to higher retail labor and store occupancy costs as a percentage of net sales.

● Net sales increased 4.2% to $8.75 billion due to new stores, while sales in same-stores decreased 0.1%.

Average sales per square foot for all stores over the 52-week period ended April 29, 2022 was $260.

● Gross profit, as a percentage of net sales, was 31.3% in the 2022 period and 32.8% in the 2021 period, a decrease of 151 basis points, primarily reflecting an increased proportion of sales of products in our consumables category and an increased LIFO provision.

● SG&A expense, as a percentage of net sales, was 22.8% in the 2022 period compared to 22.0% in the 2021 period, an increase of 78 basis points, primarily due to higher retail labor and store occupancy costs as a percentage of net sales.

● Operating profit decreased 17.9% to $746.2 million in the 2022 period compared to $908.9 million in the 2021 period.

● Interest expense decreased by $0.7 million in the 2022 period.

● The effective income tax rate for the 2021 period was 22.2% compared to a rate of 21.6% for the 2020 period primarily due to a reduced benefit associated with share-based compensation in the 2021 period.

● The effective income tax rate for the 2022 period was 21.8% compared to a rate of 22.0% for the 2021 period, primarily due to the decrease in income before income taxes while rate impacting items remained materially the same.

● Net income was $552.7 million, or $2.41 per diluted share, in the 2022 period compared to net income of $677.7 million, or $2.82 per diluted share, in the 2021 period.

Highlights of the year-to-date period of 2021 include:

● Cash generated from operating activities was $2.23 billion for the 2021 period, a decrease of $1.16 billion, or 34.2%, from the comparable 2020 period.

● Cash generated from operating activities was $449.5 million for the 2022 period, a decrease of $253.5 million, or 36.1%, from the comparable 2021 period due primarily to increased inventory purchases.

● Total cash dividends of $125.3 million, or $0.55 per share, were paid during the 2022 period, compared to $99.8 million, or $0.42 per share, in the comparable 2021 period.

● Inventory turnover was 4.3 times on a rolling four-quarter basis.

On a per store basis, inventories at October 29, 2021 decreased by 0.1% compared to the balances at October 30, 2020.

On a per store basis, inventories at April 29, 2022 increased by 13.3% compared to the balances at April 30, 2021.

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 October 29, 2021.

Readers should refer to the detailed discussion of our results of operations below in the current year period as compared with the prior year period as well as our financial condition at April 29, 2022.

Results of Operations

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We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31.

The following text contains references to years 2021 and 2020, which represent the 52-week fiscal years ending or ended January 28, 2022 and January 29, 2021, respectively.

References to the third quarter accounting periods for 2021 and 2020 contained herein refer to the 13-week accounting periods ended October 29, 2021 and October 30, 2020, respectively.

The following text contains references to years 2022 and 2021, which represent the 53-week fiscal year ending February 3, 2023 and the 52-week fiscal year ended January 28, 2022, respectively.

References to the first

quarter accounting periods for 2022 and 2021 contained herein refer to the 13-week accounting periods ended April 29, 2022 and April 30, 2021, respectively.

The nature of our business is somewhat seasonal.

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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 third 13-week periods and the 39-week periods of 2021 and 2020, and the dollar and percentage variances among those periods:

13 Weeks Ended

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 13-week periods of 2022 and 2021, and the dollar and percentage variances among those periods:

13 Weeks Ended

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Diluted earnings per share

13 WEEKS ENDED OCTOBER 29, 2021 AND OCTOBER 30, 2020

13 WEEKS ENDED APRIL 29, 2022 AND APRIL 30, 2021

The net sales increase in the 2022 period was primarily due to sales from new stores, partially offset by a same-store sales decrease of 0.1% compared to the 2021 period as well as the impact of store closures.

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.

We believe the effect of the U.S.

government’s response to the COVID-19 pandemic, including economic stimulus legislation, affected consumer behavior and had a positive effect on net sales in the 2021 period, which affects the comparisons between periods.

For the 2022 period, there were 17,159 same-stores which accounted for sales of $8.3 billion.

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 increased in the consumables and home products categories, and declined in the apparel and seasonal categories, with the largest percentage decrease in the apparel category.

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

Same-store sales increased in the consumables category, and declined in the apparel, seasonal and home products categories, with the largest percentage decrease in the apparel category.

Gross Profit.

For the 2021 period, gross profit increased by 2.0%, and as a percentage of net sales decreased by 57 basis points to 30.8%, compared to the 2020 period.

An increased LIFO provision and increased transportation costs were key factors contributing 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 early in 2020 and continued 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 second and third quarters of 2021, which also contributed to the decrease in the gross profit rate in the current period, 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.

For the 2022 period, gross profit decreased by 0.6%, and as a percentage of net sales decreased by 151 basis points to 31.3%, compared to the 2021 period.

For the past several 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.

However, beginning in early 2020 and continuing through early 2021, our non-consumables sales increased at a higher rate than consumables sales, altering the sales mix between consumables and non-consumables categories.

Since that time, our sales growth and mix have shifted back to consumables, which contributed to the decrease in the gross profit rate in the current period.

In addition, an increased LIFO provision, increased transportation costs, an increase in markdowns as a percentage of sales and increased distribution costs were key factors contributing to the decrease in the gross profit rate along with an increase in inventory damages.

These factors were partially offset by higher inventory markups.

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

SG&A was 22.8% as a percentage of net sales in the 2022 period compared to 22.0% in the comparable 2021 period, an increase of 78 basis points.

The primary expenses that were a greater percentage of net sales in the current year period were retail labor, store occupancy costs, depreciation and amortization, repairs and maintenance, employee benefits and supplies, partially offset by a reduction in miscellaneous COVID-related expenses.

Interest Expense .

Interest expense decreased by $1.1 million to $39.2 million in the 2021 period.

Income Taxes.

The effective income tax rate for the 2021 period was 22.2% compared to a rate of 21.6% for the 2020 period which represents a net increase of 0.6 percentage points.

The tax rate for the 2021 period was higher than the comparable 2020 period primarily due to a reduced benefit associated with share-based compensation, an increase in uncertain tax positions and changes in the state effective tax rate, partially offset by a greater benefit associated with federal tax credits .

39 WEEKS ENDED OCTOBER 29, 2021 AND OCTOBER 30, 2020

The net sales increase in the 2021 period was primarily due to sales from new stores, partially offset by a same-store sales decrease of 3.3% compared to the 2020 period as well as the impact of store closures.

For the 2021 period, there were 16,711 same-stores which accounted for sales of $24.2 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 apparel category.

Gross Profit.

For the 2021 period, gross profit increased by 1.6%, and as a percentage of net sales increased by 22 basis points to 31.7%, 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, non-consumables sales increased at a greater rate than consumables sales 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, increased inventory damages and higher distribution costs.

Selling, General & Administrative Expenses.

SG&A was 22.2% as a percentage of net sales in the 2021 period compared to 20.9% in the comparable 2020 period, an increase of 133 basis points.

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, workers’ compensation and general liability expenses, employee benefits, and taxes and licenses, partially offset by a reduction in miscellaneous COVID-related expenses and lower incentive compensation expense.

The primary expenses that were a greater percentage of net sales in the current year period were retail labor, store occupancy costs, depreciation and amortization and utilities, partially offset by reductions in incentive compensation and winter storm related disaster expenses.

Interest Expense .

Interest expense increased by $8.9 million to $119.0 million in the 2021 period primarily due to higher outstanding debt balances in connection with the issuance of debt in the 2020 period.

Interest expense decreased by $0.7 million to $39.7 million in the 2022 period primarily due to lower interest rates.

Income Taxes.

The effective income tax rate for the 2021 and 2020 periods was 21.8%.

The tax rate for the 2021 period was equal to the comparable 2020 period primarily due to changes in the state effective tax rate and a reduced benefit associated with share-based compensation, offset by a greater benefit associated with federal tax credits.

The effective income tax rate for the 2022 period was 21.8% compared to a rate of 22.0% for the 2021 period which represents a net decrease of 0.2 percentage points.

The tax rate for the 2022 period was lower than the comparable 2021 period primarily due to a decrease in pre-tax earnings in the 2022 period compared to the 2021 period while rate impacting items, such as the benefits from stock-based compensation and federal tax credits, remained materially the same in amount in both the 2022 and 2021 periods.

Liquidity and Capital Resources

At October 29, 2021, we had a $1.25 billion unsecured revolving credit agreement (the “Revolving Facility”), $4.0 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability in the form of commercial paper notes (“CP Notes”) of up to $1.0 billion.

At October 29, 2021, we had total consolidated outstanding long-term obligations of $4.1 billion, most of which was in the form of senior notes.

At April 29, 2022, we had a $2.0 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 $2.0 billion.

At April 29, 2022, we had total consolidated outstanding long-term obligations, including current portion, of $4.8 billion, most of which was in the form of senior notes.

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

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

However, our ability to

maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control.

However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control.

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

For the remainder of fiscal 2021, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $600 million outstanding at any one time.

For the remainder of fiscal 2022, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $1.5 billion outstanding at any one time.

Revolving Credit Facility

On September 10, 2019, we entered into the Revolving Facility consisting of a $1.25 billion senior unsecured revolving credit facility of which up to $175.0 million is available for the issuance of letters of credit and which is scheduled to mature on September 10, 2024.

Our Revolving Facility 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 applicable interest rate margin for borrowings as of October 29, 2021 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of April 29, 2022 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 October 29, 2021, the facility fee rate was 0.11%.

As of April 29, 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.

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

As of October 29, 2021, we were in compliance with all such covenants.

As of April 29, 2022, we were in compliance with all such covenants.

The Revolving Facility also contains customary events of default.

As of October 29, 2021, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $1.9 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 October 29, 2021.

In addition, as of October 29, 2021 we had outstanding letters of credit of $49.8 million which were issued pursuant to separate agreements.

We are currently seeking to amend the Revolving Facility to, among other things, increase the amount that may be borrowed to $2.0 billion and extend the maturity date to December 2026.

There can be no assurance that this amendment will be implemented on the terms currently proposed, or at all.

As of April 29, 2022, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $1.3 million, and borrowing availability of approximately $2.0 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $1.0 billion at April 29, 2022.

In addition, as of April 29, 2022 we had outstanding letters of credit of $46.8 million which were issued pursuant to separate agreements.

Commercial Paper

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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 October 29, 2021, our condensed consolidated balance sheet reflected no outstanding unsecured CP Notes.

As of April 29, 2022, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $759.6 million, which had a weighted average borrowing rate of 0.65%.

CP Notes totaling $242.0 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet.

In connection with the proposed amendment to the Revolving Facility described above, we are also currently seeking to amend our commercial paper program to increase the amount of CP Notes that may be issued thereunder to $2.0 billion.

There can be no assurance that this amendment will be implemented on the terms currently proposed, or at all.

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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Current Financial Condition / Recent Developments

Our inventory balance represented approximately 51% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of October 29, 2021.

Our inventory balance represented approximately 54% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of April 29, 2022.

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

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

Adverse developments in those actions could materially and adversely affect our liquidity.

Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s, respectively.

As discussed in Note 7 to the unaudited condensed consolidated financial statements, we are involved in various legal matters, some of which could potentially result in material cash payments.

Adverse developments in these matters could materially and adversely affect our liquidity.

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 39-week periods ended October 29, 2021 and October 30, 2020, respectively.

Unless otherwise noted, all references to the 2022 and 2021 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 13-week periods ended April 29, 2022 and April 30, 2021, respectively.

Cash flows from operating activities.

Cash flows from operating activities were $2.23 billion in the 2021 period, which represents a $1.16 billion decrease compared to the 2020 period.

Cash flows from operating activities were $449.5 million in the 2022 period, which represents a $253.5 million decrease compared to the 2021 period.

Changes in merchandise inventories, resulted in a $538.9 million decrease in the 2022 period as compared to an increase of $135.7 million in the 2021 period, representing a significant contributor to the reduction in cash flows from operating activities as further discussed below.

Changes in accounts payable resulted in a $172.1 million increase in the 2022 period compared to a $295.2 million decrease in the 2021 period, due primarily to the timing of inventory receipts and payments.

Changes in accrued expenses and other liabilities resulted in a $116.4 million decrease in the 2022 period compared to a $136.7 million decrease in the 2021 period.

Net income decreased $125.1 million in the 2022 period compared to the 2021 period.

Changes in merchandise inventories resulted in a $160.1 million decrease in the 2021 period as compared to a decrease of $352.3 million in the 2020 period as further discussed below.

Changes in accounts payable resulted in a $61.8 million decrease in the 2021 period compared to a $919.8 million increase in the 2020 period, due primarily to the timing of inventory receipts and payments.

Changes in accrued expenses and other liabilities resulted in a $36.9 million increase in the 2021 period compared to an $357.3 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.

Changes in income taxes in the 2022 period compared to the 2021 period are primarily due to lower accruals for income taxes due to lower pre-tax earnings and the timing of payments for income taxes.

On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors.

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.

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 increased by 7% in the 2020 period, with changes in our four inventory categories as follows:

consumables decreased by 4% compared to an 11% increase;

seasonal increased 9% compared to a 1% increase;

home products increased by 34% compared to an 8% increase;

and apparel decreased by 17% compared to a 6% decrease.

Total merchandise inventories increased by 8% in the 2022 period and decreased by 3% in the 2021 period, with changes in our four inventory categories as follows:

consumables increased by 5% compared to an 1% decrease;

seasonal increased 13% compared to a 6% decrease;

home products increased by 23% compared to a 3% decrease;

and apparel was unchanged compared to a 10% decrease.

Cash flows from investing activities .

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Capital expenditures for 2022 are currently projected to be in the range of $1.4 billion to $1.5 billion.

Such projection is higher than in recent years due in part to inflationary pressure on commodity prices affecting certain of our capital costs.

We anticipate funding 2022 capital requirements with a combination of some or all of the following:

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Cash flows from financing activities .

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

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

There were no borrowings or repayments under the Revolving Facility during the 2021 period, and such borrowings and repayments in the 2020 period were $300.0 million each.

Net commercial paper borrowings increased by $705.3 million in the 2022 period and were unchanged in the 2021 period.

Also during the 2022 and 2021 periods, we repurchased 3.4 million and 5.0 million shares of our common stock at a total cost of $0.7 billion and $1.0 billion, respectively, and paid cash dividends of $125.3 million and $99.8 million, respectively.

Share Repurchase Program

As of October 29, 2021 our common stock repurchase program had a total remaining authorization of approximately $0.62 billion.

Effective December 1, 2021, our Board of Directors authorized a $2.0 billion increase to such program which resulted in a total remaining authorization of approximately $2.62 billion under the program at such date.

As of April 29, 2022 our common stock repurchase program had a total remaining authorization of approximately $1.38 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis