What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-07 compared with 2023-08-31 · 111 added, 116 removed, 197 unchanged (54% of the section changed)

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We are the largest discount retailer in the United States by number of stores, with 19,726 stores located in 48 U.S.

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.

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

Our first two stores in Mexico opened in 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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As a result, we are intensely focused on helping our customers make the most of their spending dollars.

Our customers continue to feel constrained in the current macroeconomic environment, and accordingly we expect their spending to continue to be pressured, particularly in our non-consumables categories.

Our core customers are often among the first to be affected by negative or uncertain economic conditions and among the last to feel the effects of improving economic conditions, particularly when trends are inconsistent and of an uncertain duration.

The primary macroeconomic factors that affect our core customers include unemployment and underemployment rates, wage growth, changes in U.S.

and global trade policy, 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 have continued to be pressured by the impact of these events and 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, albeit at moderating levels, as further discussed below.

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

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:

and global trade policy, and changes in U.S.

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

Our customers have continued to be impacted by the elimination of the emergency allotment of SNAP benefits and lower tax refunds resulting from the elimination of COVID-related stimulus programs, each of which occurred in the first quarter of 2023, and by the overall macroeconomic environment.

Additionally, our customers continue to experience higher 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).

In addition, the Department of Education’s COVID-19 pandemic student loan forbearance program ended in September 2023, and payment obligations generally resumed in October 2023.

The impact of this program’s conclusion on our customer and our business has not been material, although we can make no assurance that it will not be material in the future.

Finally, significant unseasonable or unusual weather patterns or extreme weather can impact customer shopping behaviors, although we did not identify any such impact to any significant degree in the third quarter.

We remain committed to our long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus.

These priorities include:

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

We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount.

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

In the third quarter of 2023, while the average transaction amount decreased, our customer traffic was positive for the first time in four quarters.

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, 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;

Our sales mix continues to shift toward consumables, which is currently at historic highs.

Certain of our initiatives are intended to address this sales mix trend;

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

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

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

We continued to experience higher damages in the first half of 2023, as well as higher shrink in the first three quarters of 2023, and we anticipate shrink will continue to pressure our results.

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.

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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 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.

Further, as noted below, 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 third quarter of 2023, we operated 205 standalone pOpshelf locations, and now plan to operate approximately 215 pOpshelf locations by the end of the fiscal year.

In addition, we plan to open approximately 30 pOpshelf stores in fiscal 2024.

Although we continue to move at a measured pace with this concept in the softer discretionary sales environment, we believe this concept presents a significant long-term growth opportunity.

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.

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 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 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 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.

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

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

We also remain focused on capturing growth opportunities.

In the third quarter of 2023, we opened a total of 263 new stores, remodeled 545 stores, and relocated 44 stores.

We plan to open approximately 990 new stores in the United States (including both Dollar General and pOpshelf stores), remodel approximately 2,000 stores, and relocate approximately 120 stores, for a total of 3,110 real estate projects in 2023.

We opened our first two stores in Mexico in 2023 and have reduced our 2023 Mexico store opening goal, now aiming to operate up to 5 stores in Mexico by the end of 2023, all of which are incremental to our planned 990 new store openings.

In 2024, we plan to open approximately 800 new stores (including approximately 30 pOpshelf stores and approximately 15 stores in Mexico), remodel approximately 1,500 stores, and relocate approximately 85 stores, for a total of 2,385 real estate projects.

We expect store format innovation to allow us to capture additional growth opportunities within our existing markets as we continue to utilize the most productive of our various Dollar General store formats based on the specific market opportunity.

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 and 2024, 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 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 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 1,800 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.

From time to time, our strategic initiatives, including without limitation those discussed above, have required and may 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 further expanded our private fleet in 2023 from 1,600 tractors at the end of fiscal 2022 to more than 2,000 tractors at the end of the third quarter 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 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 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.

Further federal, state and/or local minimum wage increases or changes to salary levels required for certain overtime-exempt positions, such as those currently proposed by the Department of Labor, could have a material negative impact on our operating expenses, although the magnitude and timing of such impact is uncertain.

Furthermore, we have invested approximately $100 million through the first three quarters of fiscal 2023 of our planned full year $150 million investment in retail labor, primarily through labor hours, to further enhance our store standards, including on-shelf availability, and compliance efforts as well as the customer and associate experience in our stores.

In addition to our planned labor investment in 2023, we are taking additional actions to support our customers, stores and distribution centers.

Most significantly, we are accelerating the pace of our inventory reduction efforts, including additional promotional markdowns, in an effort to return to more optimal inventory levels sooner than we believe the current pace would deliver.

We expect these investments in retail labor, markdowns, and other areas to negatively impact operating profit by up to $270 million in 2023.

While we believe the growth rate of inflation is moderating, we expect some continued inflationary pressures will continue to affect our operating results and our vendors and customers.

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

Further, both inflation and higher interest rates have significantly increased new store opening costs and occupancy costs, which have negatively impacted our projected new store returns and influenced our 2024 new store growth plans.

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.

We are taking actions designed to reduce our store manager turnover, which was higher than targeted as of the end of the third quarter, including making efforts to simplify in-store activities and reduce excess inventory, and optimally allocating the aforementioned labor hours in our stores.

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.

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.

The declaration and amount of future dividends are subject to Board discretion and approval, although we currently expect to continue paying quarterly cash dividends.

As planned, to preserve our investment grade credit rating and maintain financial flexibility, we did not repurchase any shares during the first three quarters of 2023 under our share repurchase program and do not plan to repurchase shares during the fourth quarter of 2023.

The repurchase authorization has no expiration date, and future repurchases will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt agreements, cash requirements, excess debt capacity, results of operations, financial condition and other factors.

We utilize key performance indicators (“KPIs”) in the management of our business.

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We include stores that have been remodeled, expanded or relocated in our same-store sales calculation.

Changes in same-store sales are calculated based on the comparable 52 calendar weeks in the current and prior years.

Changes in same-store sales are

calculated based on the comparable 52 calendar weeks in the current and prior years.

The method of calculating same-store sales varies across the retail industry.

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

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.

Highlights of our 2023 third quarter results of operations, compared to the 2022 third quarter, and our financial condition at November 3, 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 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.

● Net sales increased 2.4% to $9.69 billion driven by new stores, partially offset by sales in same-stores which decreased 1.3%.

Average sales per square foot for all stores over the 53-week period ended November 3, 2023 were $270.

● Gross profit, as a percentage of net sales, was 29.0% in the 2023 period and 30.5% in the 2022 period, a decrease of 147 basis points, primarily reflecting increased shrink, lower inventory markups, and increased markdowns.

● SG&A expense, as a percentage of net sales, was 24.5% in the 2023 period compared to 22.7% in the 2022 period, an increase of 183 basis points, primarily due to higher retail labor, depreciation and amortization, and repairs and maintenance as a percentage of net sales.

● Operating profit decreased 41.1% to $433.5 million in the 2023 period compared to $735.5 million in the 2022 period.

● Interest expense increased by $28.6 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 was 22.9% compared to a rate of 22.1% for the 2022 period primarily due to a higher state effective tax rate.

● The effective income tax rate for the 2023 period was 21.3% compared to a rate of 22.8% for the 2022 period primarily due to an increased benefit from rate-impacting items caused by lower earnings before taxes.

● Net income was $276.2 million, or $1.26 per diluted share, in the 2023 period compared to net income of $526.2 million, or $2.33 per diluted share, in the 2022 period.

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.

● Cash generated from operating activities was $1.4 billion for the 2023 period, an increase of $193.8 million, or 15.5%, from the comparable 2022 period.

● Total cash dividends of $388.4 million, or $1.77 per share, were paid during the 2023 period, compared to $372.4 million, or $1.65 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 August 4, 2023 increased by 3.4% compared to the balances at July 29, 2022.

On a per store basis, inventories at November 3, 2023 decreased by 1.8% compared to the balances at October 28, 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 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 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.

References to the third quarter accounting periods for 2023 and 2022 contained herein refer to the 13-week accounting periods ended November 3, 2023 and October 28, 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 second 13-week periods and the 26-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 third 13-week periods and the 39-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 AUGUST 4, 2023 AND JULY 29, 2022

13 WEEKS ENDED NOVEMBER 3, 2023 AND OCTOBER 28, 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 1.3% compared to the 2022 period and the impact of store closures.

The decrease in same-store sales primarily reflects a decrease in average transaction amount partially offset by an increase in customer traffic.

The decrease in average transaction amount was driven by a decline in items per transaction partially offset by higher average item retail prices.

Same-store sales decreased in the consumables, apparel, home products and seasonal categories.

For the 2023 period, there were 18,537 same-stores, which accounted for sales of $9.3 billion.

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 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.

For the 2023 period, gross profit decreased by 2.5%, and as a percentage of net sales decreased by 147 basis points to 29.0%, compared to the 2022 period, driven primarily by increased shrink, lower inventory markups, and increased markdowns.

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

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SG&A was 24.5% as a percentage of net sales in the 2023 period compared to 22.7% in the comparable 2022 period, an increase of 183 basis points.

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.

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, rent, professional fees, and other services purchased, including debt and credit card transaction fees, 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 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.

The effective income tax rate for the 2023 period was 21.3% compared to a rate of 22.8% for the 2022 period, which represents a net decrease of 1.5 percentage points.

The tax rate for the 2023 period was lower than the comparable 2022 period primarily due to increased benefits from federal employment tax credits and an increased benefit to the effective tax rate from rate-impacting items caused by lower earnings before taxes in the 2023 period offset by a higher state effective tax rate.

39 WEEKS ENDED NOVEMBER 3, 2023 AND OCTOBER 28, 2022

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

Same-store sales primarily reflects an increase in average transaction amount offset by a decrease in customer traffic.

The increase in average transaction amount was driven by an increase in higher average item retail prices partially offset by a decrease in items per transaction.

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

For the 2023 period, there were 18,537 same-stores which accounted for sales of $27.5 billion.

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.

For the 2023 period, gross profit increased by 1.6%, and as a percentage of net sales decreased by 81 basis points to 30.6%, compared to the 2022 period, driven primarily by increased shrink and markdowns, lower inventory markups, and increased inventory damages.

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.

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 was 24.1% as a percentage of net sales in the 2023 period compared to 22.7% in the comparable 2022 period, an increase of 138 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.

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, rent, other services purchased, including debt and credit card transaction fees, professional fees, and utilities, partially offset by a decrease in incentive compensation.

Interest Expense .

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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.

The effective income tax rate for the 2023 period was 22.1% compared to a rate of 22.2% for the 2022 period which represents a net decrease of 0.1 percentage points.

The tax rate for the 2023 period was lower than the comparable 2022 period primarily due to a reduced benefit from stock-based compensation and a higher state effective income tax rate offset by an increased benefit to the effective tax rate from rate-impacting items caused by lower earnings before taxes in the 2023 period.

Liquidity and Capital Resources

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.

At November 3, 2023, we had a $2.0 billion senior unsecured revolving credit facility (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 November 3, 2023, we had total consolidated outstanding long-term obligations of $6.4 billion and current borrowings of $750 million.

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

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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 2023, we anticipate potential combined borrowings under the Facilities and our CP Notes to be a maximum of approximately $1.0 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 $750.0 million 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.

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

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 August 4, 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 November 3, 2023 was 1.015% for Adjusted Term SOFR borrowings and 0.015% for base-rate borrowings.

We must also pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility.

As of August 4, 2023, the facility fee rate was 0.11%.

As of November 3, 2023, the facility fee rate was 0.11%.

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

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

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

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 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.

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

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

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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 August 4, 2023, we were in compliance with all such covenants.

As of November 3, 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 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.

As of November 3, 2023, we had no outstanding borrowings, no outstanding letters of credit, and borrowing availability of $2.0 billion under the Revolving Facility that , due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $1.6 billion at November 3, 2023.

As of November 3, 2023 , under the 364-Day Revolving Facility, we had no outstanding borrowings and borrowing availability of $750.0 million.

At November 3, 2023 , we had combined availability under the Facilities of $2.4 billion.

In addition, as of November 3, 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.

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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 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.

As of November 3, 2023, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $198.1 million, which had a weighted average borrowing rate of 5.4%.

CP Notes totaling $197.7 million were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet at November 3, 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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Current Financial Condition / Recent Developments

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 inventory balance represented approximately 52% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of November 3, 2023.

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

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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 26-week periods ended August 4, 2023 and July 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 39-week periods ended November 3, 2023 and October 28, 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.

Cash flows from operating activities were $1.4 billion in the 2023 period, which represents a $193.8 million increase compared to the 2022 period.

Changes in merchandise inventories resulted in a $661.6 million decrease in the 2023 period as compared to a decrease of $1.9 billion in the 2022 period, representing a significant use of cash from operating activities in both periods as further discussed below.

Changes in other noncash losses resulted in a $79.0 million increase as compared to a $365.5 million increase in the 2022 period, primarily due to a smaller increase in the LIFO provision in the 2023 period.

Changes in accounts payable resulted in a $108.8 million increase in the 2023 period compared to a $377.5 million increase in the 2022 period, due primarily to the timing of inventory purchases, receipts and payments.

Net income decreased $497.4 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 tax estimates and timing of the payments.

Changes in income taxes in the 2023 period compared to the 2022 period are primarily due to the timing and amount of income tax 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 27% in the 2022 period.

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

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

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

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home products decreased by 17% compared to a 58% increase;

and apparel increased by 2% compared to unchanged.

and apparel increased by 6% compared to 2% increase.

Cash flows from investing activities .

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

$308 million for improvements, upgrades, remodels and relocations

of existing stores;

$462 million for improvements, upgrades, remodels and relocations of existing stores;

$390 million for distribution and transportation-related capital expenditures;

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

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

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

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

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

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Share Repurchase Program

As of August 4, 2023 our common stock repurchase program had a total remaining authorization of approximately $1.38 billion.

As of November 3, 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 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.

To preserve our investment grade credit rating and maintain financial flexibility, we did not repurchase any shares under this program in the first three quarters of 2023 and do not plan to repurchase shares during the fourth quarter of 2023.

The repurchase program 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis