What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-31 compared with 2023-06-01 · 116 added, 94 removed, 197 unchanged (52% of the section changed)

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We are the largest discount retailer in the United States by number of stores, with 19,488 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.

states and Mexico as of August 4, 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.

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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.

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 have continued to be pressured by the impact of these events and the overall macroeconomic environment.

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.

These priorities include:

We introduced an updated strategic framework in 2023 that is intended to sharpen our strategic focus in four keyways:

1) winning in rural, 2) extending our reach, 3) fueling our growth, and 4) being people powered.

We call this strategy “DG Forward,” and it is focused on the combination of execution and innovation.

Underlying this framework are our long-term operating priorities, which include:

1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our diverse teams through development, empowerment and inclusion.

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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.

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 both higher shrink and inventory damages in the first half of 2023 and anticipate shrink will continue to pressure our results through the duration of 2023, primarily due to higher inventory levels.

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.

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;

Our sales mix has continued to shift toward consumables in recent quarters, and this trend continued in the first half of 2023.

While we expect some sales mix challenges to persist through at least the duration of 2023, certain of our initiatives are intended to address them;

however, there can be no assurances that these efforts will be successful.

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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.

At the end of the second quarter of 2023, we operated 190 standalone pOpshelf locations.

Recognizing the impact of the ongoing macroeconomic pressures on the pOpshelf customer and shopping occasion, we (1) previously announced our planned reduction in pOpshelf openings in 2023, and now plan to operate approximately 230 pOpshelf locations by the end of the fiscal year;

and (2) are continuing to re-evaluate 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.

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 and gross margin performance since we completed the initial rollout in 2021.

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.

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

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.

In the second quarter of 2023, we opened a total of 215 new stores, remodeled 614 stores, and relocated 20 stores.

Reflecting the previously announced 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.

Our updated goal is to operate up to 10 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 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.

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 in 2023, 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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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.

We had more than 1,800 tractors in our fleet at the end of the second 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 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.

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.

In fiscal 2023, we now plan to invest an additional $50 million in retail labor, primarily through labor hours, bringing the total investment in fiscal year 2023 to approximately $150 million, to further enhance our store standards and compliance efforts as well as the customer and associate experience in our stores.

A portion of this investment was made in the first half of the fiscal year.

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

In addition to our planned labor investment in 2023, we expect to take additional actions in the third and fourth quarters to improve execution in our supply chain and stores and better serve our customers.

Most significantly, we plan to accelerate the pace of our inventory reduction efforts, including additional promotional markdowns primarily on certain non-consumable products to return to more optimal inventory levels sooner than we believe the current pace would deliver.

We expect these actions and investments will negatively impact operating profit by up to $170 million in 2023 but will further strengthen our position to drive growth and serve our customers.

While we believe the growth rate of inflation is moderating, we expect some 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 the macroeconomic inflationary pressures result in a recessionary environment, we may experience adverse effects on our business, results of operations and cash flows.

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.

In addition, the Department of Education’s COVID-19 pandemic student loan forbearance program is scheduled to end in September 2023, with payments expected to resume in October 2023.

The potential impact on our customer and our business is unknown, and we can make no assurance that it will not be material.

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 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 further enhance shareholder returns, we have continued to pay quarterly cash dividends.

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

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

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

Same-store sales are calculated based upon 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 2023 first quarter results of operations, compared to the 2022 first quarter, and our financial condition at May 5, 2023, are set forth below.

Highlights of our 2023 second quarter results of operations, compared to the 2022 second quarter, and our financial condition at August 4, 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 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.

● Net sales increased 3.9% to $9.80 billion driven by new stores and sales in same-stores which decreased 0.1%.

Average sales per square foot for all stores over the 53-week period ended August 4, 2023 were $272.

● Gross profit, as a percentage of net sales, was 31.1% in the 2023 period and 32.3% in the 2022 period, a decrease of 126 basis points, primarily reflecting lower inventory markups and increased shrink, markdowns, and inventory damages.

● SG&A expense, as a percentage of net sales, was 24.0% in the 2023 period compared to 22.6% in the 2022 period, an increase of 136 basis points, primarily due to higher retail labor, utilities, and depreciation and amortization as a percentage of net sales.

● Operating profit decreased 24.2% to $692.3 million in the 2023 period compared to $913.4 million in the 2022 period.

● Interest expense increased by $41.2 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 .

● The effective income tax rate for the 2023 period was 22.9% compared to a rate of 22.1% for the 2022 period primarily due to a higher state effective tax rate.

● Net income was $468.8 million, or $2.13 per diluted share, in the 2023 period compared to net income of $678.0 million, or $2.98 per diluted share, in the 2022 period.

● 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.

Highlights of the year-to-date period of 2023 include:

● Cash generated from operating activities was $726.7 million for the 2023 period, a decrease of $221.3 million, or 23.3%, from the comparable 2022 period.

● Total cash dividends of $258.9 million, or $1.18 per share, were paid during the 2023 period, compared to $249.5 million, or $1.10 per share, in the comparable 2022 period.

● Inventory turnover was 3.7 times on a rolling four-quarter basis.

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

On a per store basis, inventories at August 4, 2023 increased by 3.4% compared to the balances at July 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 May 5, 2023.

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 August 4, 2023.

Results of Operations

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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.

References to the second quarter accounting periods for 2023 and 2022 contained herein refer to the 13-week accounting periods ended August 4, 2023 and July 29, 2022, respectively.

The nature of our business is somewhat seasonal.

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

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:

The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2023 and 2022, and the dollar and percentage variances among those periods:

13 Weeks Ended

26 Weeks Ended

(amounts in millions, except

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Diluted earnings per share

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.

13 WEEKS ENDED AUGUST 4, 2023 AND JULY 29, 2022

The net sales increase in the 2023 period was primarily due to sales from new stores partially offset by a same-store sales decrease of 0.1% compared to the 2022 period and the impact of store closures.

For the 2023 period, there were 18,325 same-stores, which accounted for sales of $9.4 billion.

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

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

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

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

Gross Profit.

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.

For the 2023 period, gross profit decreased by 0.1%, and as a percentage of net sales decreased by 126 basis points to 31.1%, compared to the 2022 period, driven primarily by lower inventory markups and 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 while non-consumables sales decreased, which also contributed to the decrease in the gross profit rate.

Partially offsetting the factors which decreased our overall gross profit rate were a lower LIFO provision and decreased transportation costs.

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

SG&A was 24.0% as a percentage of net sales in the 2023 period compared to 22.6% in the comparable 2022 period, an increase of 136 basis points.

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.

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

Interest Expense .

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Income Taxes.

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.

The effective income tax rate for the 2023 period was 22.9% compared to a rate of 22.1% for the 2022 period, which represents a net increase of 0.8 percentage points.

The tax rate for the 2023 period was higher than the comparable 2022 period primarily due to a higher state effective tax rate and an increase in the valuation allowance against foreign net operating losses.

26 WEEKS ENDED AUGUST 4, 2023 AND JULY 29, 2022

The net sales increase in the 2023 period was primarily due to sales from new stores, as well as a same-store sales increase of 0.7% compared to the 2022 period, partially offset by the impact of store closures.

For the 2023 period, there were 18,325 same-stores which accounted for sales of $18.3 billion.

The increase in same-store sales primarily reflects an increase in average transaction amount driven by higher average item retail prices 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 2023 period, gross profit increased by 3.7%, and as a percentage of net sales decreased by 48 basis points to 31.4%, compared to the 2022 period, driven primarily by increased shrink, markdowns, and inventory damages and lower inventory markups.

In addition, consumables sales increased while non-consumables sales decreased in the current year, which also contributed to the decrease in the gross profit rate.

These factors were partially offset by a lower LIFO provision and decreased transportation costs.

Selling, General & Administrative Expenses.

SG&A was 23.9% as a percentage of net sales in the 2023 period compared to 22.7% in the comparable 2022 period, an increase of 116 basis points.

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

Interest Expense .

Interest expense increased by $84.6 million to $167.4 million in the 2023 period primarily due to higher outstanding debt balances and higher interest rates.

Income Taxes.

The effective income tax rate for the 2023 period was 22.3% compared to a rate of 22.0% for the 2022 period which represents a net increase of 0.3 percentage points.

The tax rate for the 2023 period was higher than the comparable 2022 period primarily due to a reduced tax benefit from stock-based compensation in the 2023 period when compared to the 2022 period.

Liquidity and Capital Resources

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.

At August 4, 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”), $6.9 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 August 4, 2023, we had total consolidated outstanding long-term obligations of $7.3 billion and no short-term borrowings.

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

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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.

The applicable interest rate margin for borrowings as of August 4, 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 May 5, 2023, the facility fee rate was 0.11%.

As of August 4, 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.

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.

As of August 4, 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.

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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.

As of August 4, 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.

As of August 4, 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 $1.5 billion at

August 4, 2023.

As of August 4, 2023 , under the 364-Day Revolving Facility, we had no outstanding borrowings and borrowing availability of $750.0 million.

At August 4, 2023, we had combined availability under the Facilities of $2.3 billion.

In addition, as of August 4, 2023 we had outstanding letters of credit of $43.2 million which were issued pursuant to separate agreements.

On June 7, 2023, the Company issued $500.0 million aggregate principal amount of 5.20% senior notes due 2028 (the “July 2028 Senior Notes”), net of discount of $0.1 million and $1 billion aggregate principal amount of 5.45% senior notes due 2033 (the “2033 Senior Notes”), net of discount of $1.6 million.

The July 2028 Senior Notes are scheduled to mature on July 5, 2028 and the 2033 Senior Notes are scheduled to mature on July 5, 2033.

Interest on the July 2028 Senior Notes and the 2033 Senior Notes is payable in cash on January 5 and July 5 of each year, commencing on January 5, 2024.

The Company incurred $12.4 million of debt issuance costs associated with the issuance of the July 2028 Senior Notes and the 2033 Senior Notes.

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 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.

As of August 4, 2023, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $0.3 billion, which had a weighted average borrowing rate of 5.4%.

CP Notes totaling $201.5 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet at August 4, 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 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”).

In June 2023, we issued $500.0 million aggregate principal amount of 5.20% senior notes due 2028 (the “July 2028 Senior Notes”), net of discount of $0.1 million, which are scheduled to mature on July 5, 2028, and $1.0 billion aggregate principal amount of 5.45% senior notes due 2033 (the “2033 Senior Notes”), net of discount of $1.6 million, which are scheduled to mature on July 5, 2033.

Collectively, the 2024 Senior Notes, 2025 Senior Notes, April 2027 Senior Notes, November 2027 Senior Notes, 2028 Senior Notes, July 2028 Senior Notes, 2030 Senior Notes, 2032 Senior Notes, 2033 Senior Notes, 2050 Senior Notes, and 2052 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”).

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

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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.

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.

Interest on the July 2028 Senior Notes and 2033 Senior Notes is payable in cash on January 5 and July 5 of each year, commencing on January 5, 2024.

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

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Current Financial Condition / Recent Developments

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 inventory balance represented approximately 53% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of August 4, 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 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.

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 26-week periods ended August 4, 2023 and July 29, 2022, respectively.

Cash flows from operating activities.

Cash flows from operating activities were $726.7 million in the 2023 period, which represents a $221.3 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 merchandise inventories resulted in a $817.0 million decrease in the 2023 period as compared to a decrease of $1.5 billion 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 $107.8 million increase in the 2023 period compared to a $622.3 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 $247.5 million in the 2023 period compared to the 2022 period.

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.

Changes in income taxes in the 2023 period compared to the 2022 period are primarily due to the income tax estimates and 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 11% in the 2023 period compared to an increase of 24% in the 2022 period.

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:

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

Changes in our four inventory categories for the 2023 period compared to the 2022 period were as follows:

consumables increased by 23% compared to a 16% increase;

seasonal increased 1%

compared to a 13% increase;

seasonal decreased 2% compared to a 37% increase;

home products decreased by 9% compared to a 51% increase;

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

and apparel increased by 2% compared to unchanged.

Cash flows from investing activities .

Significant components of property and equipment purchases in the 2023 period included the following approximate amounts:

$153 million for improvements, upgrades, remodels and relocations of existing stores;

$308 million for improvements, upgrades, remodels and relocations

of existing stores;

$229 million for distribution and transportation-related capital expenditures;

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and $22 million for information systems upgrades and technology-related projects.

The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period.

During the 2022 period, we opened 466 new stores and remodeled or relocated 1,127 stores.

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

Capital expenditures for 2023 are currently projected to be approximately $1.6 billion to $1.7 billion.

We anticipate funding 2023 capital requirements with a combination of some or all of the following:

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Cash flows from financing activities .

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

During the 2023 period, we had proceeds from the issuance of long-term debt of $1.5 billion.

Net commercial paper borrowings decreased by $1.2 billion in 2023 and increased by $1.0 billion in 2022.

Also during the 2023 and 2022 periods, we paid cash dividends of $258.9 million and $249.5 million, respectively.

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

During the 2022 period, we repurchased 4.9 million shares of our common stock at a total cost of $1.1 billion.

Share Repurchase Program

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

As of August 4, 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.

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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 unaudited 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis