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Item 7. Management’s Discussion and Analysis

2023-03-24 compared with 2022-03-18 · 153 added, 146 removed, 272 unchanged (52% of the section changed)

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It also should be read in conjunction with the Cautionary Disclosure Regarding Forward-Looking Statements and the Risk Factors disclosures set forth in the Introduction and in Item 1A of this report, respectively.

Impact of COVID-19

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

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

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

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

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

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

Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways.

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

Executive Overview

We are the largest discount retailer in the United States by number of stores, with 18,190 stores located in 47 states as of February 25, 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 19,147 stores located in 47 U.S.

states and Mexico as of March 3, 2023, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

Our first store in Mexico opened in February of 2023.

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, economic stimulus payments, and the child tax credit.

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

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

Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budgets, such as

rent, healthcare, and fuel prices;

as well as cost inflation in frequently purchased household products, such as that which we experienced in 2021 and continue to experience as further discussed below.

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

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 or extreme weather, such as that discussed below, 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.

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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 effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing, and pricing and markdown optimization.

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, distribution and transportation efficiencies, private brands penetration, global sourcing, and inventory shrink and damage reduction initiatives.

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

Historically, our 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.

During the second half of 2022, we experienced higher inventory damages and shrink than we anticipated.

We believe these increases are due to multiple factors, including the challenging macroeconomic environment, materially higher inventory levels, and, as to damages, Winter Storm Elliott in December.

In addition, we believe some portion of the increase in damages is a residual impact of the warehouse capacity constraints and associated store and supply chain inefficiencies we faced, which are discussed in more detail below.

While we anticipate shrink and damages may continue to pressure our results through the first half of 2023, we believe we are taking actions that we believe will reduce the impact of these challenges to our business as we move throughout the year.

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 fiscal 2020 or the first quarter of fiscal 2021, as we saw a significant increase in demand in many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix shift into non-consumable categories during those periods.

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

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

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 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.

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

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

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

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

In 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, respectively.

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, in the second half of 2022, we experienced 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 more than 10,700 stores, and we also continue to grow our DG Media Network, which is our platform for connecting brand partners with our customers to drive even greater value for each.

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

Additionally, in 2020, we introduced pOpshelf, a unique retail concept that incorporates certain of the lessons learned from the non-consumables initiative in a differentiated format that is focused on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods.

We have completed the rollout in the vast majority of our Dollar General stores.

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 fiscal 2022, we operated 140 standalone pOpshelf locations and 40 pOpshelf store-within-a-store concepts within existing Dollar General Market stores.

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

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

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

In the second quarter of fiscal 2021, we completed our rollout of the “DG Fresh” initiative, a self-distribution model for frozen and refrigerated products that is designed to reduce product costs, enhance item assortment, improve our in-stock position, and enhance sales.

DG Fresh contributed to our strong sales performance in 2021, driven by higher in-stock levels and the introduction of new products in select stores.

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

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.

We believe this concept represents a significant growth opportunity and are targeting nearly 300 standalone pOpshelf stores by the end of fiscal 2023, and approximately 1,000 stores by the end of fiscal 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.

DG Fresh now wholly or partially serves essentially all stores across the chain and has benefitted gross profit through improved initial markups on inventory purchases, which were partially offset by increased distribution and transportation costs.

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.

We also have a health initiative, branded as “DG Well Being”, with the goal of increasing access to basic healthcare products, and ultimately services over time, particularly in rural communities.

The initial focus of this initiative is a significantly expanded health product assortment in certain stores, primarily those in our larger formats.

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

In 2021, we opened 1,050 new stores, remodeled 1,752 stores, and relocated 100 stores.

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

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

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

In fiscal 2022, we opened a total of 1,039 new stores, remodeled 1,795 stores, and relocated 127 stores.

In fiscal 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 opened our first store in Mexico in the first quarter of fiscal 2023.

Our goal is to operate approximately 20 stores in Mexico by the end of 2023, all of which 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 recently introduced two new larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and expect the 8,500 square foot format, along with our existing Dollar General Plus format of a similar size, to become our base prototypes for the majority of new stores, replacing our traditional 7,300 square foot format and higher-cooler count Dollar General Traditional Plus format.

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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Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term competitiveness and profitability.

We are also deploying “Fast Track”, an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor efficiencies within our stores.

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

We are continuing to deploy “Fast Track,” an initiative aimed at further enhancing our convenience proposition and in-stock position as well as creating labor efficiencies within our stores.

The completed portion of the 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 current focus involves adding a self-checkout option, which we now have in the majority of our stores.

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 more-than-doubled the size of our private tractor fleet in 2022 to more than 1,600 tractors.

We plan to continue expanding the size of our fleet to drive additional savings, and our goal is to have more than 2,000 tractors in the fleet by the end of fiscal 2023.

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

Further federal, state and/or local minimum wage increases could have a material negative impact on our operating expenses, although the magnitude and timing of such impact is uncertain.

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

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

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

While we expect these challenges to

persist, certain of our initiatives and plans are intended to help offset these challenges;

however, they are somewhat dependent on the scale and timing of the increased costs, among other factors.

In 2023, we plan to make an investment of approximately $100 million to further enhance our store standards and compliance efforts as well as the customer and associate experience in our stores, primarily through incremental labor hours.

We believe these investments will also elevate consistency of experience in our stores, and amplify the potential of our strategic initiatives, while driving greater on-shelf availability and market share gains.

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 experienced some

unanticipated delays in acquiring additional temporary warehouse space sufficient for our inventory needs, which caused delays and inefficiencies within our internal supply chain in the second half of fiscal 2022.

These challenges 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.

We have made significant progress in acquiring additional temporary and permanent warehouse capacity and plan to add a significant amount of additional warehouse capacity in fiscal 2023.

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

In addition, while we believe the growth rate 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.

Certain of our initiatives and plans are intended to help offset these inflation-driven challenges;

however, they are somewhat dependent on the scale and timing of any 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.

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 2021.

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in 2022, and our Board of Directors recently increased the quarterly cash dividend, beginning with the dividend to be paid on or before April 25, 2023.

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

During the fourth quarter of 2022, Winter Storm Elliott significantly impacted our operations during the month of December, resulting in negative impacts to customer traffic, sales growth and associated gross margin, as well as incremental damages and repairs and maintenance expense.

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 stores that were open at least 13 full fiscal months and remain open at the end of the reporting period.

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.

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

A continued focus on our four operating priorities as discussed above, coupled with pandemic-related sales and other impacts (additional discussion below) and strong cash flow management resulted in strong overall operating and financial performance in 2021 as compared to 2020, as set forth below.

A continued focus on our four operating priorities as discussed above, and other impacts as discussed below, resulted in the following overall operating and financial performance in 2022 as compared to 2021.

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

● Net sales in 2022 increased 10.6% over 2021.

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

Average sales per square foot in 2021 were $262.

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

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

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

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

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

Sales in same-stores increased 4.3%, primarily due to an increase in average transaction amount.

Average sales per square foot in 2022 were $273, including a $5 contribution from the 53 rd week.

● The gross profit rate decreased by 37 basis points due primarily to an increased LIFO provision and a greater proportion of lower margin consumables sales.

● SG&A as a percentage of sales increased by 25 basis points primarily due to increases in utilities, retail labor, and repairs and maintenance.

● Operating profit increased 3.3% to $3.33 billion in 2022 compared to $3.22 billion in 2021.

● Interest expense increased by $53.7 million in 2022 primarily due to higher average borrowings and higher interest rates.

● The change in the effective income tax rate to 22.5% in 2022 from 21.7% in 2021 was primarily due to decreased income tax benefits associated with stock-based compensation compared to 2021 .

● We reported net income of $2.42 billion, or $10.68 per diluted share, for 2022 compared to net income of $2.40 billion, or $10.17 per diluted share, for 2021.

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Accounting Periods.

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

The following text contains references to years 2022, 2021, and 2020, which represent fiscal years ended February 3, 2023, January 28, 2022, and January 29, 2021, respectively.

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

Fiscal years 2021, 2020 and 2019 were each 52-week accounting periods.

Fiscal year 2022 was a 53-week accounting period and fiscal years 2021 and 2020 were 52-week accounting periods.

Seasonality .

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

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

The following table contains results of operations data for fiscal years 2022, 2021 and 2020, and the dollar and percentage variances among those years.

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% of net sales

Other (income) expense

% of net sales

Income before income taxes

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Diluted earnings per share

The net sales increase in 2022 was primarily due to sales from new stores, and an increase in same-store sales of 4.3% compared to 2021, partially offset by the impact of store closures.

In 2022, our 17,886 same-stores accounted for sales of $35.3 billion.

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

Same-store sales decreased in each of our product categories except consumables, with the largest percentage decrease in the apparel category.

Net sales for the 53 rd week of 2022 totaled $678.1 million.

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

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Same-store sales decreased in each of our product categories, with the largest percentage decrease in the apparel category.

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

In 2020, our 16,050 same-stores accounted for sales of $31.9 billion.

The increase in same-store sales reflects an increase in average transaction amount driven by a significant increase in items per transaction and, to a lesser degree, higher average item retail prices, which were offset in part by a decline in customer traffic.

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

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

Gross Profit.

In 2022, gross profit increased by 9.3%, and as a percentage of net sales decreased by 37 basis points to 31.2% compared to 2021.

A greater LIFO provision which was driven by higher product costs, a higher proportion of lower margin consumables sales, and increases in inventory markdowns, damages and shrink each contributed to the decrease in the gross profit rate.

These factors were partially offset by higher inventory markups and improvements in transportation costs.

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

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

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

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

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

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

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

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

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

SG&A as a percentage of net sales was 22.4% in 2022 compared to 22.2% in 2021, an increase of 25 basis points.

The primary expenses that were higher as a percentage of net sales in 2022 were utilities, retail labor, and repairs and maintenance, partially offset by incentive compensation expenses and store occupancy costs.

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

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

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

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

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

In addition, we recorded expenses of $31.0 million in 2019 reflecting our estimate for the settlement of significant legal matters.

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

Interest Expense .

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

The majority of our debt is fixed rate debt.

Interest expense increased $53.7 million to $211.3 million in 2022 compared to 2021 and increased $7.1 million to $157.5 million in 2021 compared to 2020 primarily due to higher outstanding borrowings and higher interest rates.

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

Income Taxes .

The effective income tax rate for 2022 was 22.5% compared to a rate of 21.7% for 2021 which represents a net increase of 0.8 percentage points.

The effective income tax rate was higher in 2022 primarily due to decreased income tax benefits associated with stock-based compensation compared to 2021.

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

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

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

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

Effects of Inflation

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

In 2022 and 2021, we experienced increases in product costs due in part to higher rates of inflation, particularly to the global supply chain as well as our own internal supply chain.

In 2022, higher rates of inflation affected the costs of building materials and certain of our other capital costs.

Liquidity and Capital Resources

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During the past three years, we have generated an aggregate of approximately $8.7 billion in cash flows from operating activities and incurred approximately $3.7 billion in capital expenditures.

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

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

During that period, we expanded the number of stores we operate by 2,826, representing growth of approximately 17%, and we remodeled or relocated 5,554 stores, or approximately 34% of the stores we operated as of the beginning of the three-year period.

In 2023, we intend to continue our current strategy of pursuing store growth, remodels and relocations.

At January 28, 2022, we had a $2.0 billion unsecured revolving credit agreement (the “Revolving Facility”), $4.0 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $2.0 billion.

At January 28, 2022, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $4.2 billion, most of which was in the form of senior notes.

At February 3, 2023, we had a $2.0 billion unsecured revolving credit agreement (the “Revolving Facility”), $750.0 million 364-day unsecured revolving credit facility (the “364-Day Revolving Facility”), $5.4 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $2.0 billion.

At February 3, 2023, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $7.0 billion, most of which was in the form of senior notes.

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

Our borrowing availability under the Revolving Facility may be effectively limited by our commercial paper notes (“CP Notes”) as further described below.

Our borrowing availability under the Revolving Facility may be effectively limited by our commercial paper notes (“CP Notes”) as further described

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

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

We believe our cash flow from operations, and our existing cash balances, combined with availability under the Revolving Facility, 364-Day Revolving Facility, CP Notes and access to the debt markets, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending and anticipated dividend payments for a period that includes the next twelve months as well as the next several years.

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

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

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

Revolving Credit Facility

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

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

The Revolving Facility includes customary LIBOR replacement provisions.

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

For fiscal 2023, we anticipate potential combined borrowings under the Revolving Facility, 364-Day Revolving Facility, and CP Notes to be a maximum of approximately $2.0 billion outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

Revolving Credit Facilities

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) Adjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10%) or (b) a base rate (which is usually equal to the prime rate).

The applicable interest rate margin for borrowings as of February 3, 2023 was 1.015% for Adjusted Term SOFR 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 January 28, 2022, the facility fee rate was 0.11%.

As of February 3, 2023, 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:

We entered into the 364-Day Revolving Facility on January 31, 2023, which will expire on January 30, 2024.

At February 3, 2023, the 364-Day Revolving Facility had no outstanding borrowings.

Borrowings under the 364-Day Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our option, either (a) Adjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10%) or (b) a base rate (which is usually equal to the prime rate).

We are also required to pay a facility fee to the lenders under the 364-Day Revolving Facility for any used and unused commitments.

As of February 3, 2023, the applicable interest rate margin for Adjusted Term SOFR loans was 1.035% and the facility fee rate was 0.09% per annum.

The applicable interest rate margins for borrowings and the facility fees under the 364-Day Revolving Facility are subject to adjustment from time to time based on our long-term senior unsecured debt ratings.

The Revolving Facility and the 364-Day Revolving Facility contain a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, our (and 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;

sell all or substantially all of the our assets;

consummate certain fundamental changes or change in the 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 January 28, 2022, we were in compliance with all such covenants.

The Revolving Facility also contains customary events of default.

As of January 28, 2022, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $1.9 million, and borrowing availability of $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 $1.76 billion at January 28, 2022.

In addition, as of January 28, 2022 we had outstanding letters of credit of $48.6 million which were issued pursuant to separate agreements.

The Revolving Facility and the 364-Day Revolving Facility also contain financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

As of February 3, 2023, we were in compliance with all such covenants.

Both facilities also contain customary events of default.

As of February 3, 2023, we had no outstanding borrowings, no outstanding letters of credit, and borrowing availability of $2.0 billion under the Revolving Facility that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute liquidity of $0.3 billion.

As of February

3, 2023, under the 364-Day Revolving Facility, we had no outstanding borrowings and borrowing availability of $750 million.

At February 3, 2023 we had combined availability under the credit facilities of $1.0 billion.

In addition, we had outstanding letters of credit of $39.7 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 January 28, 2022, our consolidated balance sheet reflected outstanding unsecured CP Notes of $54.3 million.

As of February 3, 2023, our consolidated balance sheet reflected outstanding unsecured CP Notes of $1.5 billion.

CP Notes totaling $230.8 million were held by a wholly-owned subsidiary and therefore are not reflected in the consolidated balance sheets.

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

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.

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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, 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 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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Future Cash Requirements

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

The following table summarizes significant estimated future cash requirements under our various contractual obligations and other commitments at February 3, 2023, in total and disaggregated into current (<1 year) and long-term (1 or more years) obligations (in thousands):

Payments Due by Period

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Total contractual obligations and commercial commitments

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

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

(a) Represents obligations for interest payments on long-term debt and includes projected interest on variable rate long-term debt using 2022 yearend rates and balances.

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of February 3, 2023), the 364-Day Revolving Facility (although such facility had a balance of zero as of February 3, 2023), the CP Notes (which had a balance of $1.5 billion as of February 3, 2023, and which amount is net of $230.8 million held by a wholly-owned subsidiary), and interest rate swaps being accounted for as fair value hedges.

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

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Share Repurchase Program

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

Our common stock repurchase program had a total remaining authorization of approximately $1.38 billion at February 3, 2023.

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

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Other Considerations

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

quarterly cash dividends of $0.42 per share in 2021.

In March 2023, the Board of Directors declared a quarterly cash dividend of $0.59 per share which is payable on or before April 25, 2023 to shareholders of record of our common stock on April 11, 2023.

We paid quarterly cash dividends of $0.55 per share in 2022.

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

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

Our inventory balance represented approximately 53% of our total assets exclusive of operating lease assets, goodwill, and other intangible assets as of February 3, 2023.

Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year as discussed further below.

Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise.

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

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

As of February 3, 2023, the amount due to suppliers participating in these supply chain finance programs was $300.9 million.

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

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Cash flows from operating activities.

Cash flows from operating activities were $1.98 billion in 2022, which represents a $881.3 million decrease compared to 2021.

Changes in merchandise inventories resulted in a $1.7 billion decrease in our working capital in 2022 compared to the decrease of $550.1 million in 2021 as described in greater detail below.

Changes in other noncash losses resulted in a $530.5 million increase as compared to a $191.0 million increase in 2021 primarily due to an increase in the LIFO provision.

Changes in accounts payable resulted in a $194.7 million decrease in our working capital in 2022 compared to a $98.7 million increase in 2021, due primarily to the timing of inventory receipts and related payments.

Changes in accrued expenses resulted in a $25.4 million decrease in our working capital in 2022 compared to a $37.3 million decrease in 2021, due primarily to the timing of accruals and payments for freight, payroll taxes and incentive compensation.

Changes in income taxes in 2022 compared to 2021 are primarily due to the timing of payments for income taxes.

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

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

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

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

Changes in accounts

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

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

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

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

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

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

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

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

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

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

Merchandise inventories increased by 20% in 2022, by 7% in 2021 and by 12% in 2020.

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

The 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.

Inventory levels in the consumables category increased by $367.8 million, or 11%, in 2022, decreased by $1.8 million, or 0%, in 2021, and increased by $455.6 million, or 15% in 2020.

The seasonal category increased by $455.5 million, or 42%, in 2022, by $177.8 million, or 20%, in 2021, and by $35.7 million, or 4%, in 2020.

The home products category increased by $315.4 million, or 43%, in 2022, by $230.0 million, or 45%, in 2021, and by $66.3 million, or 15%, in 2020.

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

The apparel category increased by $7.8 million, or 2%, in 2022, decreased by $39.2 million, or 10%, in 2021, and increased by $12.9 million, or 3%, in 2020.

Cash flows from investing activities .

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

$217 million for distribution and transportation-related projects;

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

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

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

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

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We anticipate funding 2023 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 senior notes and CP Notes.

existing cash balances, cash flows from operations, availability under our Revolving Facility and 364-Day Revolving Facility and/or the issuance of additional senior notes and CP Notes.

We plan to continue to invest in store growth and development of approximately 1,050 new stores and approximately 2,120 stores to be remodeled or relocated.

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Cash flows from financing activities .

During the 2022 period we had proceeds from the issuance of long-term debt of $2.3 billion, and our repayments of long-term debt totaled $911.3 million.

Net commercial paper borrowings increased by $1.4 billion and we had no borrowings or repayments under the Revolving Facility or the

364-Day Revolving Facility.

We repurchased 11.6 million shares of our common stock at a total cost of $2.7 billion and paid cash dividends of $493.7 million.

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

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

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

In 2020, net proceeds from the issuance of long-term debt totaled $1.5 billion, net commercial paper borrowings decreased by $425.2 million, and borrowings and repayments under the Revolving Facility were $300.0 million each.

We repurchased 12.3 million shares of our common stock at a total cost of $2.5 billion and paid cash dividends of $355.9 million.

In 2019, we had a net increase in consolidated commercial paper borrowings of $58.3 million and had no borrowings or repayments under the Revolving Facility.

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

Critical Accounting Policies and Estimates

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The amount and timing of markdowns may vary significantly from year to year.

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

We perform physical inventories in a significant majority of our stores on an annual basis.

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

This accrual is calculated as a percentage of sales at each retail store, at a department level, based on the store’s most recent historical shrink rate.

This accrual is

calculated as a percentage of sales at each retail store, at a department level, based on the store’s most recent historical shrink rate.

To the extent that subsequent physical inventories yield different results than the estimated accrual, our effective shrink rate for a given reporting period will include the impact of adjusting to the actual results.

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

Provisions are made for these

liabilities on an undiscounted basis.

Provisions are made for these liabilities on an undiscounted basis.

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

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The application of this valuation model involves assumptions that are judgmental in the valuation of stock options, which affects compensation expense related to these options.

These assumptions include the term that the options are expected to be outstanding, the historical volatility of our stock price, applicable interest rates and the dividend yield of our stock.

These assumptions include the term that

the options are expected to be outstanding, the historical volatility of our stock price, applicable interest rates and the dividend yield of our stock.

Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of share-based awards.

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however, if our estimates differ materially from actual experience, we may be required to record additional expense or reductions of expense, which could be material to our future financial results.

Fair Value Measurements.

Accounting standards for the measurement of fair value of assets and liabilities establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Therefore, Level 3 inputs are typically based on an entity’s own assumptions, as there is little, if any, related market activity, and thus require the use of significant judgment and estimates.

Currently, we have no assets or liabilities that are valued based solely on Level 3 inputs.

Our fair value measurements are primarily associated with our outstanding debt instruments.

We use various valuation models in determining the values of these liabilities.

We believe that in recent years these methodologies have produced materially accurate valuations.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis