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Item 2. Management’s Discussion and Analysis

2023-06-01 compared with 2022-12-01 · 132 added, 149 removed, 159 unchanged (64% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 are the largest discount retailer in the United States by number of stores, with 19,294 stores located in 47 U.S.

states and Mexico as of May 5, 2023, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

Our first store in Mexico opened in February 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 (including cost of living adjustments), such as the Supplemental Nutrition Assistance Program (“SNAP”), unemployment benefits, and economic stimulus payments.

and global trade policy, impacts resulting from changes in U.S.

government 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 programs.

In particular, our customers were impacted in the first quarter of 2023 by the elimination of the emergency allotment of SNAP benefits and lower tax refunds resulting from the elimination of COVID-related stimulus programs, and they continued to be pressured by the overall macroeconomic environment.

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.

Finally, significant unseasonable or unusual weather patterns or extreme weather 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 pricing and markdown optimization, effective category management, inventory shrink and damage reduction initiatives, private brands penetration, distribution and transportation efficiencies, and global sourcing.

As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through pricing and markdown optimization, effective category management, 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.

During the second half of 2022, we experienced higher inventory damages and shrink than we anticipated, which we believe was due primarily to 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 was a residual impact of the warehouse capacity constraints and associated store and supply chain inefficiencies we

faced during that time period.

We continued to experience higher shrink and inventory damages in the first quarter of 2023.

We anticipate damages may continue to pressure our results through at least the first half of 2023, and shrink through the duration of 2023.

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

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;

Our sales mix has continued to shift toward consumables in recent quarters.

While we expect some sales mix challenges to persist, certain of our initiatives are intended to address them;

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.

Such opportunities include providing our customers with additional shopping access points and even greater value and 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, our partnership with a third-party delivery service is 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, we are continuing to grow the footprint of pOpshelf, a unique retail concept focused on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods.

At the end of the first quarter of 2023, we operated 164 standalone pOpshelf locations.

Recognizing the impact of the ongoing macroeconomic pressures on the pOpshelf customer and shopping occasion, we have reduced our planned pOpshelf openings in 2023 and plan to operate approximately 230 pOpshelf locations by the end of the fiscal year.

We are also re-evaluating our targeted number of pOpshelf stores by the end of 2025.

We continue to believe this concept represents a significant growth opportunity over the long term.

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 2021, driven by higher in-stock levels and the introduction of new products in select stores over that timeframe.

DG Fresh wholly or partially serves essentially all stores across the chain and has significantly benefitted gross profit.

Moving forward, we plan to focus on additional optimization of the distribution footprint and product assortment within DG Fresh with the goal 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 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.

In the first quarter of 2023, we opened a total of 212 new stores, remodeled 582 stores, and relocated 22 stores.

Reflecting the reduction in planned pOpshelf stores in fiscal 2023, we plan to open approximately 990 new stores in the United States (including any pOpshelf stores), remodel approximately 2,000 stores, and relocate approximately 120 stores, for a total of 3,110 real estate projects.

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

Our goal is to operate up to 20 stores in Mexico by the end of fiscal 2023, all of which would be incremental to our planned 990 new store openings.

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

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

We are now using two larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and expect the 8,500 square foot format, along with our existing Dollar General Plus format of a similar size, to 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 are 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 an enhanced non-consumable offering, 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.

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.

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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 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.

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 continue to 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 continue expanding the size of our private tractor fleet in 2023.

We had more than 1,700 tractors in our fleet at the end of the first quarter of 2023, and our goal is to have more than 2,000 tractors in the fleet by the end of 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.

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.

In fiscal 2023, we plan to make an investment of approximately $100 million, a portion of which was invested in the first quarter, 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, while we believe the growth rate of inflation is moderating, we expect continued inflationary pressures in the near term, which will continue to affect us as well as our vendors and customers and 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.

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.

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

In addition, the failure to raise the United States’ debt ceiling could cause the United States government to default on its payment obligations or result in delayed payments on such obligations.

Such a default or payment delay, and continued uncertainty regarding the United States’ debt ceiling, could have a wide range of significant adverse impacts to the economy, as well as debt and equity markets and market participants, potentially impacting us and/or our customer.

There can be no assurance that the effects of such a failure, or of such a default or payment delay, will not have a material adverse impact on our results of operations or financial condition.

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.

To further enhance shareholder returns, we paid a quarterly cash dividend in the first quarter of 2023.

As planned, we did not repurchase any shares during the first quarter of 2023.

To preserve our investment grade credit rating and maintain financial flexibility, we do not plan to repurchase shares during fiscal 2023.

However, our overall capital allocation priorities remain unchanged, and we expect to continue paying quarterly cash dividends.

The declaration and amount of future dividends are 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.

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.

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.

Highlights of our 2023 first quarter results of operations, compared to the 2022 first quarter, and our financial condition at May 5, 2023, 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 sales increased 6.8% to $9.34 billion driven by new stores and sales in same-stores which increased 1.6%.

Average sales per square foot for all stores over the 53-week period ended May 5, 2023 were $273.

● Gross profit, as a percentage of net sales, was 31.6% in the 2023 period and 31.3% in the 2022 period, an increase of 34 basis points, primarily reflecting higher inventory markups.

● SG&A expense, as a percentage of net sales, was 23.7% in the 2023 period compared to 22.8% in the 2022 period, an increase of 94 basis points, primarily due to higher retail labor and repairs and maintenance as a percentage of net sales.

● Operating profit de creased 0.7% to $740.9 million in the 2023 period compared to $746.2 million in the 2022 period.

● Interest expense increased by $43.4 million in the 2023 period compared to the 2022 period driven by higher average borrowings and higher interest rates.

● The effective income tax rate for the 2023 period remained flat at 21.8% compared to the 2022 period .

● Net income was $514.4 million, or $2.34 per diluted share, in the 2023 period compared to net income of $552.7 million, or $2.41 per diluted share, in the 2022 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.

● Cash generated from operating activities was $191.1 million for the 2023 period, a decrease of $258.4 million, or 57.5%, from the comparable 2022 period due primarily to increased inventory purchases.

● Total cash dividends of $129.4 million, or $0.59 per share, were paid during the 2023 period, compared to $125.3 million, or $0.55 per share, in the comparable 2022 period.

● Inventory turnover was 3.9 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 .

On a per store basis, inventories at May 5, 2023 increased by 14.7% compared to the balances at April 29, 2022.

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.

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 May 5, 2023.

Results of Operations

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

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

References to the third quarter accounting periods for 2022 and 2021 contained herein refer to the 13-week accounting periods ended October 28, 2022 and October 29, 2021, respectively.

The following text contains references to years 2023 and 2022, which represent the 52-week fiscal year ending February 2, 2024 and the 53-week fiscal year ended February 3, 2023, respectively.

References to the first

quarter accounting periods for 2023 and 2022 contained herein refer to the 13-week accounting periods ended May 5, 2023 and April 29, 2022, respectively.

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.

Primarily because of Christmas-related merchandise sales, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit achieved in each of the first three quarters of the fiscal year.

Expenses, and to a greater extent operating profit, vary by quarter.

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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.

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

The following table contains results of operations data for the 13-week periods of 2023 and 2022, and the dollar and percentage variances among those periods:

13 Weeks Ended

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% of net sales

Other (income) expense

% of net sales

Income before income taxes

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Diluted earnings per share

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

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

13 WEEKS ENDED MAY 5, 2023 AND APRIL 29, 2022

The net sales increase in the 2023 period was due to sales from new stores and a same-store sales increase of 1.6% compared to the 2022 period, partially offset by the impact of store closures.

For the 2023 period, there were 18,109 same-stores, which accounted for sales of $8.9 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.

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

For the 2023 period, gross profit increased by 7.9%, and as a percentage of net sales increased by 34 basis points to 31.6%, compared to the 2022 period, driven primarily by higher inventory markups, decreased transportation costs, and a decreased LIFO provision.

Partially offsetting the factors which increased our overall gross profit rate were increased shrink, markdowns, and inventory damages.

Additionally, 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 partially offsets the increase in the gross profit rate.

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-

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

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 23.7% as a percentage of net sales in the 2023 period compared to 22.8% in the comparable 2022 period, an increase of 94 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.

The primary expenses that were a higher percentage of net sales in the current year period were retail labor, repairs and maintenance, and depreciation and amortization, which were partially offset by a decrease in incentive compensation.

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.

Interest expense increased by $43.4 million to $83.0 million in the 2023 period primarily due to higher outstanding borrowings 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.

The effective income tax rate for the 2023 and 2022 periods was 21.8%.

The effective income tax rate remained constant as a result of offsetting changes driven by a lower state effective tax rate and less benefit from stock-based compensation in the 13-week period in 2023 than the comparable 13-week period in 2022.

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.

At May 5, 2023, we had a $2.0 billion senior unsecured revolving credit agreement (the “Revolving Facility”), a $750.0 million 364-day unsecured revolving credit facility (the “364-Day Revolving Facility” and, together with the Revolving Facility, the “Facilities”), $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 May 5, 2023, we had total consolidated outstanding long-term obligations of $7.0 billion and short-term borrowings of $0.3 million.

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.

We believe our cash flow from operations and existing cash balances, combined with availability under the Facilities, 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, if applicable, 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.

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.

For the remainder of fiscal 2023, we anticipate potential combined borrowings under the Facilities and our CP Notes to be a maximum of approximately $2.2 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.

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 May 5, 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 October 28, 2022, the facility fee rate was 0.11%.

As of May 5, 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 May 5, 2023, outstanding borrowings under the 364-Day Revolving Facility totaled $250.0 million.

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 May 5, 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 credit agreements governing the Facilities contain 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;

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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.

The credit agreements governing the F acilities also contain financial covenants that require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

As of May 5, 2023, we were in compliance with all such covenants.

The credit agreements governing each of the Facilities also contain customary events of default.

As of May 5, 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 incremental liquidity of $0.3 billion at May 5, 2023.

As of May 5, 2023 , under the 364-Day Revolving Facility, we had outstanding borrowings of $250.0 million and borrowing availability of $500.0 million.

At May 5, 2023 we had combined availability under the Facilities of $791.0 million.

In addition, as of May 5, 2023 we had outstanding letters of credit of $43.6 million which were issued pursuant to separate agreements.

Commercial Paper

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We intend to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time.

As of October 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.

As of May 5, 2023, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $1.5 billion, which had a weighted average borrowing rate of 5.3%.

CP Notes totaling $204.3 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet at May 5, 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.

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.

In September 2022, we issued $750.0 million aggregate principal amount of 4.25% senior notes due 2024 (the “2024 Senior Notes”), net of discount of $0.7 million, which are scheduled to mature on September 20, 2024, $550.0 million aggregate principal amount of 4.625% senior notes due 2027 (the “November 2027 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on November 1, 2027, $700.0 million aggregate principal amount of 5.0% senior notes due 2032 (the “2032 Senior Notes”), net of discount of $2.4 million which are scheduled to mature on November 1, 2032, and $300.0 million aggregate principal amount of 5.50% senior notes due 2052 (the “2052 Senior Notes”), net of discount of $0.3 million, which are scheduled to mature on November 1, 2052.

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

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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.

Interest on the 2024 Senior Notes is payable in cash on March 20 and September 20 of each year and commenced 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 and commenced on May 1, 2023.

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

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

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

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

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Current Financial Condition / Recent Developments

Our inventory balance represented approximately 55% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of October 28, 2022.

Our inventory balance represented approximately 54% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of May 5, 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.

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

Unless otherwise noted, all references to the 2022 and 2021 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 39-week periods ended October 28, 2022 and October 29, 2021, respectively.

Unless otherwise noted, all references to the 2023 and 2022 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 13-week periods ended May 5, 2023 and April 29, 2022, 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,

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.

Cash flows from operating activities were $191.1 million in the 2023 period, which represents a $258.4 million decrease compared to the 2022 period.

Changes in merchandise inventories resulted in a $601.1 million decrease in the 2023 period as compared to a decrease of $538.9 million in the 2022 period, representing a significant use of cash from operating activities in both periods as further discussed below.

Changes in accounts payable resulted in a $116.4 million increase in the 2023 period compared to a $172.1 million increase in the 2022 period, due primarily to the timing of inventory purchases, receipts and payments.

Changes in accrued expenses and other liabilities resulted in a $176.8 million decrease in the 2023 period compared to a $116.4 million decrease in the 2022 period.

Net income decreased $38.3 million in the 2023 period compared to the 2022 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.

Changes in income taxes in the 2023 period compared to the 2022 period are primarily due to the income taxes due and the timing of the payments.

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 9% in the 2023 period compared to an increase of 8% in the 2022 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.

The increase in the 2023 period primarily reflects our supply chain recovery efforts and the impact of product cost inflation.

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.

consumables increased by 17% compared to a 5% increase;

seasonal increased 1%

compared to a 13% increase;

home products decreased by 6% compared to a 23% increase;

and apparel decreased by 1% compared to a 0% change.

Cash flows from investing activities .

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Capital expenditures for 2023 are currently projected to be approximately $1.6 - $1.7 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 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 CP Notes.

existing cash balances, cash flows from operations, availability under the Facilities, any issuance of additional CP Notes and access to the debt markets.

We plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores.

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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.

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.

During the 2023 period, we had net borrowings under the Facilities of $250.0 million.

Also during the 2023 and 2022 periods, we paid cash dividends of $129.4 million and $125.3 million, respectively.

During the 2022 period, we repurchased 3.4 million shares of our common stock at a total cost of $746.8 million.

Share Repurchase Program

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

As of May 5, 2023 our common stock repurchase program had a total remaining authorization of approximately $1.38 billion.

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

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

agreements and other factors.

The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under the Company’s debt agreements, cash requirements, excess debt capacity, results of operations, financial condition 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.

For more about our share repurchase program, see Note 9 to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.

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.

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 February 3, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis