Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended January 28, 2022. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.
Executive Overview
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. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.
We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years and through a variety of economic cycles. We are mindful that the majority of our customers are value-conscious, and many have low and/or fixed incomes. As a result, we are intensely focused on helping our customers make the most of their spending dollars. Our core customers are often among the first to be affected by negative or uncertain economic conditions and among the last to feel the effects of improving economic conditions, particularly when trends are inconsistent and of an uncertain duration. The primary macroeconomic factors that affect our core customers include unemployment and underemployment rates, wage growth, changes in U.S. 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.
We remain committed to our long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus. These priorities include: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our diverse teams through development, empowerment and inclusion.
We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount. As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through 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.
Historically, sales in our consumables category, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales in our non-consumables categories, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. Prior to 2020, our sales mix had continued to shift toward consumables, and, within consumables, toward lower margin departments such as perishables. 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
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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 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 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. 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 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.
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 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.
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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 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; an extended queue line; and a broader product assortment, including the non-consumable initiative, a larger health and beauty section, and produce in select stores. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base. 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.
We have established a position as a low-cost operator, always seeking ways to reduce or control costs that do not affect our customers’ shopping experiences. We plan to continue enhancing this position over time while employing ongoing cost discipline to reduce certain expenses as a percentage of sales. Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term competitiveness and profitability.
We 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 of our 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 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. 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. 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. 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. 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. 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.
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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 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.
We utilize key performance indicators (“KPIs”) in the management of our business. Our KPIs include same-store sales, average sales per square foot, and inventory turnover. Same-store sales are calculated based upon 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. The method of calculating same-store sales varies across the retail industry. As a result, our calculation of same-store sales is not necessarily comparable to similarly titled measures reported by other companies. Average sales per square foot is calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Each of these measures is commonly used by investors in retail companies to measure the health of the business. We use these measures to maximize profitability and for decisions about the allocation of resources.
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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 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 $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 $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 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 October 28, 2022.
Results of Operations
Accounting Periods . We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31. The following text contains references to years 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.
Seasonality. The nature of our business is somewhat seasonal. Primarily because of sales of Christmas-related merchandise, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods. 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.
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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
2022 vs. 2021
39 Weeks Ended
2022 vs. 2021
(amounts in millions, except
October 28,
October 29,
Amount
%
October 28,
October 29,
Amount
%
per share amounts)
2022
2021
Change
Change
2022
2021
Change
Change
Net sales by category:
Consumables
$
7,664.8
$
6,704.8
$
960.1
14.3
%
$
22,101.1
$
19,695.8
$
2,405.3
12.2
%
% of net sales
80.98
%
78.71
%
79.96
%
77.03
%
Seasonal
942.8
913.9
29.0
3.2
2,991.1
3,054.6
(63.5)
(2.1)
% of net sales
9.96
%
10.73
%
10.82
%
11.95
%
Home products
574.4
551.1
23.3
4.2
1,674.0
1,683.6
(9.6)
(0.6)
% of net sales
6.07
%
6.47
%
6.06
%
6.58
%
Apparel
282.8
348.1
(65.3)
(18.8)
875.7
1,135.0
(259.3)
(22.8)
% of net sales
2.99
%
4.09
%
3.17
%
4.44
%
Net sales
$
9,464.9
$
8,517.8
$
947.1
11.1
%
$
27,642.0
$
25,569.0
$
2,073.0
8.1
%
Cost of goods sold
6,579.7
5,898.4
681.3
11.6
18,970.2
17,456.2
1,513.9
8.7
% of net sales
69.52
%
69.25
%
68.63
%
68.27
%
Gross profit
2,885.2
2,619.4
265.8
10.1
8,671.8
8,112.8
559.0
6.9
% of net sales
30.48
%
30.75
%
31.37
%
31.73
%
Selling, general and administrative expenses
2,149.7
1,953.9
195.8
10.0
6,276.7
5,688.8
587.9
10.3
% of net sales
22.71
%
22.94
%
22.71
%
22.25
%
Operating profit
735.5
665.6
70.0
10.5
2,395.1
2,424.0
(28.9)
(1.2)
% of net sales
7.77
%
7.81
%
8.66
%
9.48
%
Interest expense
53.7
39.2
14.5
36.9
136.5
119.0
17.4
14.6
% of net sales
0.57
%
0.46
%
0.49
%
0.47
%
Other (income) expense
0.4
—
0.4
—
0.4
—
0.4
—
% of net sales
0.00
%
0.00
%
0.00
%
0.00
%
Income before income taxes
681.4
626.4
55.1
8.8
2,258.3
2,305.0
(46.7)
(2.0)
% of net sales
7.20
%
7.35
%
8.17
%
9.01
%
Income tax expense
155.3
139.4
15.9
11.4
501.4
503.2
(1.8)
(0.4)
% of net sales
1.64
%
1.64
%
1.81
%
1.97
%
Net income
$
526.2
$
487.0
$
39.1
8.0
%
$
1,756.9
$
1,801.8
$
(44.9)
(2.5)
%
% of net sales
5.56
%
5.72
%
6.36
%
7.05
%
Diluted earnings per share
$
2.33
$
2.08
$
0.25
12.0
%
$
7.72
$
7.61
$
0.11
1.4
%
13 WEEKS ENDED OCTOBER 28, 2022 AND OCTOBER 29, 2021
Net Sales . 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 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 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 22.7% 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-
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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 $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 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
Net Sales. 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. The increase in same-store sales 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 and a slight decline in customer traffic. 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 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 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.
Selling, General & Administrative Expenses. 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, and repairs and maintenance, partially offset by reductions in incentive compensation, and hurricane-related disaster expenses.
Interest Expense . 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 a reduced tax benefit from stock-based compensation in the 2022 period when compared to the 2021 period.
Liquidity and Capital Resources
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.
We believe our cash flow from operations and existing cash balances, combined with availability under the Revolving Facility, the CP Notes and access to the debt markets, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending, anticipated dividend payments and share repurchases for a period that includes the next twelve months as well as the next several years. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.
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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 $1.7 billion outstanding at any one time.
Revolving Credit Facility
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 credit agreement governing the Revolving Facility includes customary LIBOR replacement provisions. 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 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.
The Revolving Facility contains a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, our (including our subsidiaries’) ability to: incur additional liens; sell all or substantially all of our assets; consummate certain fundamental changes or change in our lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants that require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of October 28, 2022, we were in compliance with all such covenants. The Revolving Facility also contains customary events of default.
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
We may issue the CP Notes from time to time in an aggregate amount not to exceed $2.0 billion outstanding at any time. The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of our other unsecured and unsubordinated indebtedness. We intend to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. 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.
Senior Notes
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 “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. 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
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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 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; and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.
The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.
Current Financial Condition / Recent Developments
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. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.
From time to time, we are involved in various legal matters as discussed in Note 7 to the unaudited condensed consolidated financial statements, some of which could potentially result in material cash payments. Adverse developments in these matters could materially and adversely affect our liquidity.
Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will maintain or improve our current credit ratings.
Unless otherwise noted, all references to the 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 $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,
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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 $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. 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. 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 increased by 2% compared to a 17% decrease.
Cash flows from investing activities . Significant components of property and equipment purchases in the 2022 period included the following approximate amounts: $463 million for improvements, upgrades, remodels and relocations of existing 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. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During the 2022 period, we opened 734 new stores and remodeled or relocated 1,657 stores.
Significant components of property and equipment purchases in the 2021 period included the following approximate amounts: $384 million for improvements, upgrades, remodels and relocations of existing stores; $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 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. We anticipate funding 2022 capital requirements with a combination of some or all of the following: existing cash balances, cash flows from operations, availability under our Revolving Facility and/or the issuance of additional CP Notes. We plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores. Capital expenditures in 2022 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet; technology and other strategic initiatives; as well as routine and ongoing capital requirements.
Cash flows from financing activities . 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 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
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agreements and other factors. The repurchase program has no expiration date and may be modified or terminated from time to time at the discretion of our Board of Directors. For more about our share repurchase program, see Note 9 to the condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2022.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.