What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-01 compared with 2022-08-25 · 105 added, 96 removed, 203 unchanged (50% of the section changed)

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Executive Overview

We are the largest discount retailer in the United States by number of stores, with 18,566 stores located in 47 states as of July 29, 2022, 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 18,818 stores located in 47 states as of October 28, 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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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.

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 (including food), such as that which we have continued to experience as further discussed below.

and global trade policy, and changes to certain government assistance programs (including cost of living adjustments), such as the Supplemental Nutrition Assistance Program (“SNAP”), unemployment benefits, and economic stimulus payments.

Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budgets, such as rent, healthcare, energy and fuel prices, as well as cost inflation in frequently purchased household products (including food), 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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We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount.

As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through pricing and markdown optimization, effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, and global sourcing.

As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through pricing and markdown optimization, effective category management, inventory shrink and damage reduction initiatives, private brands penetration, distribution and transportation efficiencies, and global sourcing.

Several of our strategic and other sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.

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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 reversion toward the historical mix trends.

We continue to expect sales mix challenges to

persist as the mix trend reversion toward consumables has returned to, and now exceeds, pre-pandemic levels.

Beginning in the second quarter of 2021 and continuing

thereafter, we began to see reversion toward the historical mix trends.

We continue to expect sales mix challenges to persist as the mix trend reversion toward consumables returned to pre-pandemic levels in the fourth quarter of 2021 and has exceeded pre-pandemic levels since the first quarter of 2022.

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.

In the first half of 2022, we saw continued growth in average transaction amount, which was driven primarily by inflation, and, to a lesser degree, our merchandising efforts.

In the second quarter of 2022, we experienced slightly positive customer traffic.

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 each of the first and second quarters 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.

In the first three quarters of 2022, we saw continued growth in average transaction amount, which was driven primarily by inflation, and we believe, to a lesser degree, our merchandising efforts.

In the second and third quarters of 2022, we experienced a slight to modest increase in customer traffic.

In addition, although we believe our sales growth in the first half of 2022 was 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 and in the global supply chain environment.

However, we are experiencing what we believe to be temporary warehouse capacity constraints and inefficiencies within our internal supply chain, including unanticipated temporary delays in opening or securing additional storage facilities, all of which is discussed further below.

We continue to implement and invest in certain strategic initiatives that we believe will help drive profitable sales growth with both 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 more than 13,300 of our stores at the end of the second 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.

Additionally, we launched a partnership with a third-party delivery service during 2021, which is now available in the majority of our stores, 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.

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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 second quarter of 2022, we operated 80 standalone pOpshelf locations and 32 pOpshelf store-within-a-store concepts within existing Dollar General Market stores.

Our goal is to operate approximately 150 pOpshelf locations, as well as approximately 40 pOpshelf store-within-a-store concepts, by the end of 2022.

At the end of the third quarter of 2022, we operated 103 standalone pOpshelf locations and 40 pOpshelf store-within-a-store concepts within existing Dollar General Market stores.

Our goal is to operate approximately 150 pOpshelf locations by the end of 2022.

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

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

In the first half of 2022, we opened 466 new stores, remodeled 1,065 stores, and relocated 62 stores.

As a result of ongoing delays in permitting and receipt of construction materials, our new store openings are expected to be in the range of 1,010 to 1,060 (including planned pOpshelf stores and our first stores in Mexico) in 2022.

As a result of the revised new store plans, we now plan to remodel approximately 1,795 stores, and relocate approximately 125 stores, for a total in the range of 2,930 to 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 fourth quarter of 2022.

In the first three quarters of 2022, we opened 734 new stores, remodeled 1,550 stores, and relocated 107 stores.

We now plan to open approximately 1,025 new stores (including planned pOpshelf stores and our first store in Mexico), remodel approximately 1,795 stores, and relocate approximately 125 stores, for a total of 2,945 real estate projects in 2022.

We expect our first store in Mexico to open in the fourth quarter of 2022.

In 2023, we plan to open approximately 1,050 new stores in the United States (including any pOpshelf stores), remodel approximately 2,000 stores, and relocate approximately 120 stores, for a total of 3,170 real estate projects.

We expect to operate up to 35 stores in Mexico by the end of 2023, and all store openings in Mexico in 2023 would be incremental to our planned 1,050 new store openings.

We continue to innovate within our channel and utilize the most productive of our various Dollar General store formats based on the specific market opportunity.

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.

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 continue as 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;

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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 1,100 tractors in our fleet at the end of the second quarter of 2022, and our goal is to have more than 1,400 tractors in the fleet by the end of 2022.

We had more than 1,300 tractors in our fleet at the end of the third 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.

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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 that higher fuel prices will continue to affect us as well as our vendors and customers, resulting in higher commodity, transportation and other costs, including product costs, all of which may result in continued pressure to our operating results, and their extent and duration are unknown.

While we have begun to see some improvement in the overall global supply chain environment, we have experienced some unanticipated delays in acquiring additional temporary warehouse space sufficient for our inventory needs, which has caused delays and inefficiencies within our internal supply chain.

These challenges have resulted in materially higher than anticipated supply chain costs, including detention fees incurred for delays in returning shipping containers and higher temporary storage and transportation costs and labor.

While we anticipate these pressures will result in a continued headwind through at least the remainder of the year, we have made progress in acquiring additional warehouse capacity, and expect to add a significant amount of additional warehouse capacity through the remainder of 2022 and in 2023.

We believe these additional facilities will drive greater efficiencies throughout our supply chain.

In addition, while we believe the effect of inflation is beginning to moderate, we expect continued inflationary pressures in the near term due to higher input costs and that higher energy and fuel prices will continue to affect us as well as our vendors and customers, resulting in higher commodity, transportation and other costs, including product costs, all of which may result in continued pressure to our operating results.

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.

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There can be no assurance that our mitigation efforts will be successful.

Moreover, recent increases in market interest rates could have a material negative impact on our interest expense, both with respect to the credit agreement governing our Revolving Facility and new issuances of commercial paper notes or other indebtedness.

Moreover, recent increases in market interest rates have had a negative impact on our interest expense, both with respect to issuances of commercial paper notes and other indebtedness.

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.

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

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

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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We use these measures to maximize profitability and for decisions about the allocation of resources.

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

Highlights of our 2022 third quarter results of operations, compared to the 2021 third quarter, and our financial condition at October 28, 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 9.0% to $9.43 billion driven by new stores and sales in same-stores, which increased 4.6%.

Average sales per square foot for all stores over the 52-week period ended July 29, 2022 was $263.

● Gross profit, as a percentage of net sales, was 32.3% in the 2022 period and 31.6% in the 2021 period, an increase of 69 basis points, primarily reflecting higher inventory markups.

● SG&A expense, as a percentage of net sales, was 22.6% in the 2022 period compared to 21.8% in the 2021 period, an increase of 82 basis points, primarily due to higher retail labor and repairs and maintenance costs as a percentage of net sales.

● Net sales increased 11.1% to $9.47 billion driven by sales in same-stores which increased 6.8% and new stores.

Average sales per square foot for all stores over the 52-week period ended October 28, 2022 was $266 .

● Gross profit, as a percentage of net sales, was 30.5% in the 2022 period and 30.8% in the 2021 period, a decrease of 27 basis points, primarily reflecting a higher LIFO provision.

● SG&A expense, as a percentage of net sales, was 22.7% in the 2022 period compared to 22.9% in the 2021 period, a decrease of 23 basis points, primarily due to lower retail labor and incentive compensation as a percentage of net sales.

● Operating profit in creased 10.5% to $735.5 million in the 2022 period compared to $665.6 million in the 2021 period.

● Interest expense increased by $3.7 million in the 2022 period driven by higher average borrowings.

● The effective income tax rate for the 2022 period was 22.1% compared to a rate of 21.4% for the 2021 period, primarily due to a reduced benefit from stock-based compensation partially offset by a lower effective state income tax rate .

● Interest expense increased by $14.5 million in the 2022 period driven by higher average borrowings and higher interest rates.

● The effective income tax rate for the 2022 period was 22.8% compared to a rate of 22.2% for the 2021 period, primarily due to a reduced tax benefit from federal tax credits .

● Net income was $526.2 million, or $2.33 per diluted share, in the 2022 period compared to net income of $487.0 million, or $2.08 per diluted share, in the 2021 period.

Highlights of the year-to-date period of 2022 include:

● Cash generated from operating activities was $948.0 million for the 2022 period, a decrease of $369.5 million, or 28.0%, from the comparable 2021 period due primarily to increased inventory purchases.

● Cash generated from operating activities was $1.25 billion for the 2022 period, a decrease of $978.5 million, or 43.9% , from the comparable 2021 period due primarily to increased inventory purchases.

● Total cash dividends of $372.4 million, or $1.65 per share, were paid during the 2022 period, compared to $295.4 million, or $1.26 per share, in the comparable 2021 period.

● Inventory turnover was 4.0 times on a rolling four-quarter basis.

On a per store basis, inventories at July 29, 2022 increased by 25.1% compared to the balances at July 30, 2021.

On a per store basis, inventories at October 28, 2022 increased by 28.4% compared to the balances at October 29, 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 period as compared with the prior year period as well as our financial condition at July 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 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 second quarter accounting periods for 2022 and 2021 contained herein refer to the 13-week accounting periods ended July 29, 2022 and July 30, 2021, 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 third quarter accounting periods for 2022 and 2021 contained herein refer to the 13-week accounting periods ended October 28, 2022 and October 29, 2021, respectively.

The nature of our business is somewhat seasonal.

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

Consumer behavior driven by the COVID-19 pandemic and the U.S.

government’s response thereto, including economic stimulus legislation, has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2022 and 2021, and the dollar and percentage variances among those periods:

In recent years, 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 our historical seasonal sales norms.

The following table contains results of operations data for the third 13-week periods and the 39-week periods of 2022 and 2021, and the dollar and percentage variances among those periods:

13 Weeks Ended

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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

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

The net sales increase in the 2022 period was primarily due to sales from new stores, as well as a same-store sales increase of 4.6% compared to the 2021 period, partially offset by the impact of store closures.

13 WEEKS ENDED OCTOBER 28, 2022 AND OCTOBER 29, 2021

The net sales increase in the 2022 period was due to same-store sales increase of 6.8% compared to the 2021 period and sales from new stores, partially offset by the impact of store closures.

For the 2022 period, there were 17,652 same-stores which accounted for sales of $9.0 billion.

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

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

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

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

Gross Profit.

For the 2022 period, gross profit increased by 11.3%, and as a percentage of net sales increased by 69 basis points to 32.3%, compared to the 2021 period, driven primarily by higher inventory markups which were partially offset by an increased LIFO provision.

Our consumables category generally has a lower gross profit rate than

our other product categories.

In the current period, consumables sales increased at a greater rate than non-consumables sales, which also partially offset the increase in the gross profit rate in the current period, along with increased markdowns, increased transportation costs, increased distribution costs, and an increase in inventory damages.

For the 2022 period, gross profit increased by 10.1%, and as a percentage of net sales decreased by 27 basis points to 30.5%, compared to the 2021 period, driven primarily by an increased LIFO provision.

Our consumables category generally has a lower gross profit rate than our other product categories and in the current period, consumables sales increased at a greater rate than non-consumables sales, which also contributed to the decrease in the gross profit rate, along with increased distribution costs, increased markdowns, higher shrink, and an increase in inventory damages.

Partially offsetting the factors which reduced our overall gross profit rate were higher inventory markups.

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

SG&A was 22.6% as a percentage of net sales in the 2022 period compared to 21.8% in the comparable 2021 period, an increase of 82 basis points.

The primary expenses that were a greater percentage of net sales in the current year period were retail labor, repairs and maintenance, utilities and payroll taxes.

SG&A was 22.7% as a percentage of net sales in the 2022 period compared to 22.9% in the comparable 2021 period, a decrease of 23 basis points.

The primary expenses that were a lower percentage of net sales in the current year period were retail labor, incentive compensation, hurricane-

related disaster expenses, and occupancy costs, which were partially offset by increases in utilities, repairs and maintenance, and travel and training costs.

Interest Expense .

Interest expense increased by $3.7 million to $43.1 million in the 2022 period primarily due to higher outstanding borrowings.

Interest expense increased by $14.5 million to $53.7 million in the 2022 period primarily due to higher outstanding borrowings and higher interest rates.

Income Taxes.

The effective income tax rate for the 2022 period was 22.8% compared to a rate of 22.2% for the 2021 period which represents a net increase of 0.6 percentage points.

The tax rate for the 2022 period was higher than the comparable 2021 period primarily due to a reduced benefit from stock-based compensation partially offset by a lower effective state income tax rate in the 2022 period when compared to the 2021 period.

26 WEEKS ENDED JULY 29, 2022 AND JULY 30, 2021

The net sales increase in the 2022 period was primarily due to sales from new stores, as well as a same-store sales increase of 2.3% compared to the 2021 period, partially offset by the impact of store closures.

The tax rate for the 2022 period was higher than the comparable 2021 period primarily due to a reduced tax benefit from federal tax credits in the 2022 period when compared to the 2021 period.

39 WEEKS ENDED OCTOBER 28, 2022 AND OCTOBER 29, 2021

The net sales increase in the 2022 period was due to sales from new stores, as well as a same-store sales increase of 3.8% compared to the 2021 period, partially offset by the impact of store closures.

For the 2022 period, there were 17,652 same-stores which accounted for sales of $26.3 billion.

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For the 2022 period, gross profit increased by 6.9%, and as a percentage of net sales decreased by 36 basis points to 31.4%, compared to the 2021 period.

An increased LIFO provision, consumables sales increasing at a greater rate than non-consumables sales in the current year period, increased transportation costs, increased markdowns, higher distribution costs and increased inventory damages each contributed to the decrease in the gross profit rate.

An increased LIFO provision, consumables sales increasing at a greater rate than non-consumables sales in the current year period, increased markdowns, higher distribution and transportation costs, increased inventory damages and higher shrink each contributed to the decrease in the gross profit rate.

These factors were partially offset by higher inventory markups.

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SG&A was 22.7% as a percentage of net sales in the 2022 period compared to 22.2% in the comparable 2021 period, an increase of 46 basis points.

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

The primary expenses that were a higher percentage of net sales in the current year period were retail labor, utilities, and repairs and maintenance, partially offset by reductions in incentive compensation, and hurricane-related disaster expenses.

Interest Expense .

Interest expense increased by $3.0 million to $82.8 million in the 2022 period primarily due to higher outstanding debt balances.

Interest expense increased by $17.4 million to $136.5 million in the 2022 period primarily due to higher outstanding debt balances and higher interest rates.

Income Taxes.

The effective income tax rate for the 2022 period was 22.2% compared to a rate of 21.8% for the 2021 period which represents a net increase of 0.4 percentage points.

The tax rate for the 2022 period was higher than the comparable 2021 period primarily due to reduced benefit from stock-based compensation partially offset by a lower effective state income tax rate in the 2022 period when compared to the 2021 period.

The tax rate for the 2022 period was higher than the comparable 2021 period primarily due to a reduced tax benefit from stock-based compensation in the 2022 period when compared to the 2021 period.

Liquidity and Capital Resources

At July 29, 2022, we had a $2.0 billion unsecured revolving credit agreement (the “Revolving Facility”), $4.0 billion aggregate principal amount of outstanding 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 July 29, 2022, we had total consolidated outstanding long-term obligations, including current portion, of $5.2 billion.

At October 28, 2022, we had a $2.0 billion unsecured revolving credit agreement (the “Revolving Facility”), $5.4 billion aggregate principal amount of outstanding 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 October 28, 2022, we had total consolidated outstanding long-term obligations of $6.0 billion.

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

Our borrowing availability under the Revolving Facility may be effectively limited by our CP Notes as further described below.

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.

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.

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The credit agreement governing the Revolving Facility includes customary LIBOR replacement provisions.

The applicable interest rate margin for borrowings as of July 29, 2022 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of October 28, 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 July 29, 2022, the facility fee rate was 0.11%.

As of October 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.

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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 July 29, 2022, we were in compliance with all such covenants.

As of October 28, 2022, we were in compliance with all such covenants.

The Revolving Facility also contains customary events of default.

As of July 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 $0.7 billion at July 29, 2022.

In addition, as of July 29, 2022 we had outstanding letters of credit of $45.9 million which were issued pursuant to separate agreements.

As of October 28, 2022, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $0.3 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 $1.3 billion at October 28, 2022.

In addition, as of October 28, 2022 we had outstanding letters of credit of $43.2 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 July 29, 2022, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $1.1 billion, which had a weighted average borrowing rate of 2.23%.

CP Notes totaling $192.0 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet at July 29, 2022.

As of October 28, 2022, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $0.5 billion, which had a weighted average borrowing rate of 3.6%.

CP Notes totaling $194.0 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet at October 28, 2022.

We expect that short-term interest rates will continue to increase during the remainder of 2022 and, as a result of anticipated higher borrowings, including our increased use of CP Notes and higher short-term interest rates, that interest expense for 2022 will notably increase as compared to 2021.

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

In October 2015 we issued $500.0 million aggregate principal amount of 4.150% senior notes due 2025 (the “2025 Senior Notes”) at a discount of $0.8 million, which are scheduled to mature on November 1, 2025.

In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027.

In April 2018 we issued $500.0 million aggregate principal amount of

4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028.

In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “April 2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027.

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

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

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

In September 2022, we issued $750.0 million aggregate principal amount of 4.25% senior notes due 2024 (the “2024 Senior Notes”), net of discount of $0.7 million, which are scheduled to mature on September 20, 2024, $550.0 million aggregate principal amount of 4.625% senior notes due 2027 (the “November 2027 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on

November 1, 2027, $700.0 million aggregate principal amount of 5.0% senior notes due 2032 (the “2032 Senior Notes”), net of discount of $2.4 million which are scheduled to mature on November 1, 2032, and $300.0 million aggregate principal amount of 5.50% senior notes due 2052 (the “2052 Senior Notes”), net of discount of $0.3 million, which are scheduled to mature on November 1, 2052.

Collectively, the 2024 Senior Notes, 2025 Senior Notes, April 2027 Senior Notes, November 2027 Senior Notes, 2028 Senior Notes, 2030 Senior Notes 2032 Senior Notes, 2050 Senior Notes, and 2052 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”).

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

Interest on the 2025 Senior Notes and the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year.

Interest on the 2030 Senior Notes and the 2050 Senior Notes is payable in cash on April 3 and October 3 of each year.

Interest on the 2025 and 2028 Senior Notes is payable in cash on May 1 and November 1 of each year.

Interest on the 2030 and 2050 Senior Notes is payable in cash on April 3 and October 3 of each year.

Interest on the 2024 Senior Notes is payable in cash on March 20 and September 20 of each year, commencing on March 20, 2023.

Interest on the November 2027 Senior Notes, the 2032 Senior Notes and the 2052 Senior Notes is payable in cash on May 1 and November 1 of each year, commencing on May 1, 2023.

We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture.

Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

In October 2022 we redeemed $900.0 million aggregate principal amount of 3.25% senior notes due 2023 and incurred a loss on redemption of $0.4 million.

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;

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Current Financial Condition / Recent Developments

Our inventory balance represented approximately 56% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of July 29, 2022.

Our inventory balance represented approximately 55% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of October 28, 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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There can be no assurance that we will maintain or improve our current credit ratings.

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 26-week periods ended July 29, 2022 and July 30, 2021, 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 39-week periods ended October 28, 2022 and October 29, 2021, respectively.

Cash flows from operating activities.

Cash flows from operating activities were $948.0 million in the 2022 period, which represents a $369.5 million decrease compared to the 2021 period.

Changes in merchandise inventories, resulted in a $1.5 billion decrease in the 2022 period as compared to a decrease of $80.0 million in the 2021 period, representing a significant contributor to the reduction in cash flows from operating activities as further discussed below.

Cash flows from operating activities were $1.25 billion in the 2022 period, which represents a $978.5 million decrease compared to the 2021 period.

Changes in merchandise inventories resulted in a $1.9 billion decrease in the 2022 period as compared to a decrease of $160.1 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 $377.5 million increase in the 2022 period compared to a $61.8 million decrease in the 2021 period, due primarily to the timing of inventory purchases, receipts and payments.

Changes in accrued expenses and other liabilities resulted in a $22.4 million increase in the 2022 period compared to a $25.5 million decrease in the 2021 period.

Changes in accrued expenses and other liabilities resulted in a $54.1 million increase in the 2022 period compared to a $36.9 million increase in the 2021 period.

Net income decreased $44.9 million in the 2022 period compared to the 2021 period.

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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.

Total merchandise inventories increased by 24% in the 2022 period and increased by 1% in the 2021 period, with changes in our four inventory categories as follows:

consumables increased by 16% compared to a 1% increase;

seasonal increased 37% compared to a 1% decrease;

Total merchandise inventories increased by 27% in the 2022 period compared to an increase of 1% in the 2021 period.

The increase in the 2022 period primarily reflects the impact of product cost inflation, as well as a greater mix of higher-value products, particularly in the home products and seasonal categories, primarily due to the continued rollout of our non-consumables initiative, as well as the earlier receipt of seasonal goods.

Changes in our four inventory categories were as follows:

consumables increased by 16% compared to a 4% decrease;

seasonal increased 49% compared to a 9% increase;

home products increased by 58% compared to a 34% increase;

and apparel was unchanged compared to a 15% decrease.

and apparel increased by 2% compared to a 17% decrease.

Cash flows from investing activities .

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$463 million for improvements, upgrades, remodels and relocations of existing stores;

$210 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

$279 million for distribution and transportation-related capital expenditures;

$254 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $49 million for information systems upgrades and technology-related projects.

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$384 million for improvements, upgrades, remodels and relocations of existing stores;

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

$184 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

$178 million for distribution and transportation-related capital expenditures;

and $33 million for information systems upgrades and technology-related projects.

During the 2021 period, we opened 798 new stores and remodeled or relocated 1,588 stores.

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

Capital expenditures for 2022 are currently projected to be approximately $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.

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Cash flows from financing activities .

Net commercial paper borrowings increased by $1.0 billion in the 2022 period and increased by $18.4 million in the 2021 period.

During the 2022 period we had proceeds from the issuance of long-term debt of $2.3 billion.

Net commercial paper borrowings increased by $0.5 billion in the 2022 period and were unchanged in the 2021 period.

Also during the 2022 and 2021 periods, we repurchased 7.1 million and 9.9 million shares of our common stock at a total cost of $1.6 billion and $2.1 billion, respectively, and paid cash dividends of $372.4 million and $295.4 million, respectively.

Share Repurchase Program

As of July 29, 2022 our common stock repurchase program had a total remaining authorization of approximately $1.03 billion.

Effective August 24, 2022, our Board of Directors authorized a $2.0 billion increase to such program which resulted in a total remaining authorization of approximately $3.03 billion under the program at such date.

As of October 28, 2022 our common stock repurchase program had a total remaining authorization of approximately $2.49 billion.

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

The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt agreements and other factors.

The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt

agreements and other factors.

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

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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