What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-30 compared with 2023-12-07 · 113 added, 193 removed, 115 unchanged (73% of the section changed)

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We are the largest discount retailer in the United States by number of stores, with 20,149 stores located in 48 U.S.

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.

states and Mexico as of May 3, 2024, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

Our first 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.

Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands.

Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices often at substantial discounts to national brands.

We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.

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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.

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

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).

Our customers were 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 continue to be impacted by the overall macroeconomic environment.

Additionally, our customers continue to experience elevated 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.

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

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

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 been the key drivers of more profitable sales growth and average transaction amount.

Our sales mix has continued to shift toward consumables and 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.

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 and inventory reduction efforts, 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.

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 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 have continued to experience significantly higher inventory shrink.

Although we continue to take actions designed to reduce shrink, we anticipate it will continue to materially pressure our financial results in 2024.

To address shrink challenges, as well as to enhance the overall customer and associate experience in our stores, we continue to implement and refine our self-checkout strategy, including limiting self-checkout to transactions of five items or fewer, and converted some or all self-checkout registers to assisted checkout options in approximately 12,000 stores.

Further, we have invested in retail labor as discussed below and we are implementing plans designed to improve store manager turnover rates.

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

Such opportunities include providing our customers with additional shopping access points and even greater value and convenience by leveraging and developing digital tools and technology, such as our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience.

Such opportunities include providing our customers with a variety of shopping access points and even greater value and convenience by leveraging and developing digital tools and technology, such as our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience.

Additionally, our partnership with a third-party delivery service is available in the majority of our stores, and we continue to grow our DG Media Network, which is our platform for connecting brand partners with our customers to drive even greater value for each.

Further, 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.

Further, we are continuing to evaluate and evolve the pOpshelf concept, including expanding at a more measured pace in the softer discretionary sales environment, and have converted certain pOpshelf stores to Dollar General stores.

pOpshelf is 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 2024, we operated 221 standalone pOpshelf stores.

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, 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.

In the first quarter of 2024, we opened a total of 197 new stores, remodeled 463 stores, and relocated 21 stores.

We have increased the total number of planned real estate projects in fiscal 2024 to 2,435, which reflects a planned decrease in new store openings and a planned increase in store remodels.

We now plan to open approximately 730 new stores (including any new pOpshelf stores or stores in Mexico), remodel approximately 1,620 stores, and relocate approximately 85 stores.

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 are using two larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and consistent with 2023, 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 2024.

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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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 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.

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

We have made significant investments 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.

Significant or rapid increases to federal, and further increases to state or local, minimum wage rates or salary levels could significantly adversely affect our earnings if we are not able to otherwise offset these increased labor costs elsewhere in our business.

Furthermore, in April 2024 the U.S.

Department of Labor announced a final rule that, if implemented, will increase in two phases the minimum salary thresholds required for employees who are exempt from the Fair Labor Standards Act’s overtime requirements.

Such rule is currently the subject of pending legal challenges, the outcome of which is uncertain.

We do not currently expect that such rule, if implemented as currently written, will have a material impact on our financial results in fiscal 2024, but it could materially increase labor costs and potentially have a material negative impact on our operating results beginning in 2025.

We are analyzing our alternatives to address such overtime regulations and the resulting financial impact.

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

Moreover, increases in market interest rates have had a negative impact on our interest expense.

Both inflation and higher interest rates have significantly increased new store opening costs and occupancy costs, and while we continue to have strong new store returns and plan to grow our store base significantly in 2024, these increased costs 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.

We are taking actions designed to reduce our higher than targeted store manager turnover, including through our labor investment and allocation of labor hours, simplifying in-store activities, and reducing excess inventory.

To further enhance shareholder returns, we pay a quarterly cash dividend.

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.

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

As planned, to preserve our investment grade credit rating and maintain financial flexibility, we did not repurchase any shares during 2023 under our share repurchase program and do not plan to repurchase shares during 2024.

We utilize key performance indicators, which are defined below, in the management of our business including same-store sales, average sales per square foot, and inventory turnover.

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

Each of these measures is commonly used by investors in retail companies to measure the health of the business.

Same-store sales.

Same-store sales are calculated based upon our stores that were open at least 13 full fiscal months and remain open at the end of the reporting period.

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

Changes in same-store sales are

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

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

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

As a result, our calculation of same-store sales is not necessarily comparable to similarly titled measures reported by other companies.

Average sales per square foot.

Average sales per square foot is calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters.

Inventory turnover .

Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters.

Each of these measures is commonly used by investors in retail companies to measure the health of the business.

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

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.

Highlights of our 2024 first quarter results of operations, compared to the 2023 first quarter, and our financial condition at May 3, 2024, are set forth below.

Basis points amounts referred to below are equal to 0.01% 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.

● Net sales increased 6.1% to $9.91 billion driven primarily by new stores and a 2.4% increase in same-store sales.

Average sales per square foot for all stores over the 52-week period ended May 3, 2024 were $264.

● Gross profit, as a percentage of net sales, was 30.2% in the 2024 period and 31.6% in the 2023 period, a decrease of 145 basis points, primarily reflecting increased shrink and markdowns, a greater proportion of sales coming from the consumables category, and lower inventory markups.

● SG&A expense, as a percentage of net sales, was 24.7% in the 2024 period compared to 23.7% in the 2023 period, an increase of 97 basis points, primarily due to higher retail labor, depreciation and amortization, and incentive compensation as a percentage of net sales.

● Operating profit decreased 26.3% to $546.1 million in the 2024 period compared to $740.9 million in the 2023 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 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.

● Interest expense, net decreased by $10.6 million in the 2024 period compared to the 2023 period primarily driven by higher cash balances.

● The effective income tax rate for the 2024 period was 23.3% compared to a rate of 21.8% for the 2023 period primarily due to the effect of rate-impacting items on lower earnings before taxes.

● Net income was $363.3 million, or $1.65 per diluted share, in the 2024 period compared to net income of $514.4 million, or $2.34 per diluted share, in the 2023 period.

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

● 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.

● Cash generated from operating activities was $663.8 million for the 2024 period, an increase of $472.7 million, or 247.3%, from the comparable 2023 period.

● Total cash dividends of $129.7 million, or $0.59 per share, were paid during the 2024 period, compared to $129.4 million, or $0.59 per share, in the comparable 2023 period.

● Inventory turnover was 3.8 times on a rolling four-quarter basis.

On a per store basis, inventories at November 3, 2023 decreased by 1.8% compared to the balances at October 28, 2022.

On a per store basis, inventories at May 3, 2024 decreased by 9.5% compared to the balances at May 5, 2023.

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 November 3, 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 May 3, 2024.

Results of Operations

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

The following text contains references to years 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 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 following text contains references to years 2024 and 2023, which represent the 52-week fiscal years ending or ended January 31, 2025 and February 2, 2024, respectively.

References to the first quarter accounting periods for 2024 and 2023 contained herein refer to the 13-week accounting periods ended May 3, 2024 and May 5, 2023, 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 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

The following table contains results of operations data for the first 13-week periods of 2024 and 2023, and the dollar and percentage variances among those periods:

13 Weeks Ended

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% of net sales

Interest expense

% of net sales

Other (income) expense

Interest expense, net

% of net sales

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Diluted earnings per share

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.

13 WEEKS ENDED MAY 3, 2024 AND MAY 5, 2023

The net sales increase in the 2024 period was primarily due to sales from new stores and a same-store sales increase of 2.4% compared to the 2023 period, partially offset by the impact of store closures.

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

The decrease in average transaction amount was driven by a decline in items per transaction and lower average item retail prices.

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

For the 2024 period, there were 19,015 same-stores, which accounted for sales of $9.5 billion.

Gross Profit.

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.

For the 2024 period, gross profit increased by 1.2%, and as a percentage of net sales decreased by 145 basis points to 30.2%, compared to the 2023 period.

The decrease in the gross profit rate was driven primarily by increased shrink and markdowns, a greater proportion of sales coming from the consumables category, and lower inventory markups, partially offset by a lower LIFO provision.

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

SG&A was 24.7% as a percentage of net sales in the 2024 period compared to 23.7% in the comparable 2023 period, an increase of 97 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, 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 .

Interest expense increased by $28.6 million to $82.3 million in the 2023 period primarily due to higher outstanding borrowings and higher interest rates.

Income Taxes.

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 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.

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, 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 .

Interest expense increased by $113.2 million to $249.7 million in the 2023 period primarily due to higher outstanding debt balances and higher interest rates.

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

Interest Expense, net .

Interest expense, net decreased by $10.6 million to $72.4 million in the 2024 period primarily due to higher cash balances.

Income Taxes.

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.

The effective income tax rate for the 2024 period was 23.3% compared to a rate of 21.8% for the 2023 period.

The tax rate for the 2024 period was higher than the comparable 2023 period primarily due to the effect of certain rate-impacting items on lower earnings before taxes and expense attributable to stock-based compensation.

Liquidity and Capital Resources

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.

Our borrowing availability under the Revolving Facility may be effectively limited by our CP Notes as further described below.

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

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

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

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

For 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 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 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 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 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 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.

The credit agreements governing the Facilities contain a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, our (including our subsidiaries’) ability to:

incur additional liens;

sell all or substantially all of our assets;

consummate certain fundamental changes or change in our lines of business;

and incur additional subsidiary indebtedness.

The 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 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 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.

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

We may issue the CP Notes from time to time in an aggregate amount not to exceed $2.0 billion outstanding at any time.

The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of our other unsecured and unsubordinated indebtedness.

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

As of 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.

In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “April 2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027.

In April 2018 we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028.

In April 2020 we issued $1.0 billion aggregate principal amount of 3.5% senior notes due 2030 (the “2030 Senior Notes”) at a discount of $0.7 million, which are scheduled to mature on April 3, 2030, and $500.0 million aggregate principal amount of 4.125% senior notes due 2050 (the “2050 Senior Notes”) at a discount of $5.0 million, which are scheduled to mature on April 3, 2050.

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

In 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.

Interest on the 2025 Senior Notes and the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year.

Interest on the 2030 Senior Notes and the 2050 Senior Notes is payable in cash on April 3 and October 3 of each year.

Interest on the 2024 Senior Notes is payable in cash on March 20 and September 20 of each year 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 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.

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

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

and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.

All of our material borrowing arrangements are described in greater detail in Note 5 to the unaudited condensed consolidated financial statements.

Our borrowing availability under the Revolving Facility may be effectively limited by our CP Notes as further described in Note 5 to the unaudited condensed consolidated financial statements.

For the remainder of fiscal 2024, we anticipate potential combined borrowings under the Revolving Facility and our CP Notes to be a maximum of approximately $500 million outstanding at any one time.

Current Financial Condition / Recent Developments

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 inventory balance represented approximately 48% of our total assets exclusive of operating lease assets, goodwill and other intangible assets as of May 3, 2024.

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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Adverse developments in these matters could materially and adversely affect our liquidity.

Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s.

Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms;

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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 39-week periods ended November 3, 2023 and October 28, 2022, respectively.

The credit ratings for our borrowings are as follows:

Rating Agency

Senior unsecured debt rating

Commercial paper rating

Negative outlook

Standard & Poor’s

Negative outlook

Changes in Cash Flows

Unless otherwise noted, all references to the 2024 and 2023 periods in the discussion of cash flows from operating, investing and financing activities below refer to the 13-week periods ended May 3, 2024 and May 5, 2023, respectively.

Cash flows from operating activities.

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.

Cash flows from operating activities were $663.8 million in the 2024 period, which represents a $472.7 million increase compared to the 2023 period.

Changes in merchandise inventories resulted in a $49.6 million increase in the 2024 period as compared to a decrease of $601.1 million in the 2023 period as further discussed below.

Changes in accrued expenses resulted in a $14.8 million increase in 2024 compared to a $176.8 million decrease in 2023 due primarily to the timing of accruals and payments for incentive compensation and sales tax.

Changes in accounts payable resulted in a $95.7 million decrease in the 2024 period compared to a $116.4 million increase in the 2023 period, due primarily to the timing of inventory receipts and related payments.

Net income decreased $151.1 million in the 2024 period compared to the 2023 period.

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, 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:

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

seasonal decreased 7% compared to a 49% increase;

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

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

Changes in income taxes in the 2024 period compared to the 2023 period are primarily due to the amount of income tax accrued.

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

Total merchandise inventories decreased by 1% in the 2024 period compared to an increase of 9% in the 2023 period.

The decrease in the 2024 period

primarily reflects our focused inventory reduction management efforts.

Percent changes in our four inventory categories for the 2024 period compared to the 2023 period were as follows:

13 Weeks Ended

Increase (decrease)

Home products

Cash flows from investing activities .

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

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

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

$334 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $39 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 2023 period, we opened 690 new stores and remodeled or relocated 1,827 stores.

Significant components of property and equipment purchases in the 2022 period included the following approximate amounts:

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

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

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

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

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

13 Weeks Ended

(amounts in millions, except store count amounts)

Existing stores improvements, upgrades, remodels, and relocations

Distribution and transportation-related capital expenditures

New stores primarily for leasehold improvements, fixtures and equipment

Information systems upgrades and technology-related projects

Total purchases of property and equipment

Remodeled or relocated

During the 2022 period, we opened 734 new stores and remodeled or relocated 1,657 stores .

Capital expenditures for 2024 are currently projected to be approximately $1.3 billion to $1.4 billion.

We anticipate funding 2024 capital requirements with a combination of some or all of the following:

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

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

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

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the construction of new stores;

costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet;

technology and other strategic initiatives;

costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and replacement of certain transportation related assets;

technology initiatives;

as well as routine and ongoing capital requirements.

Cash flows from financing activities .

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

Net commercial paper borrowings decreased by $1.3 billion in 2023 and increased by $0.5 billion in 2022.

Also during the 2023 and 2022 periods, we paid cash dividends of $388.4 million and $372.4 million, respectively.

During the 2022 period, we repurchased 7.1 million shares of our common stock at a total cost of $1.6 billion.

During the 2024 and 2023 periods, we paid cash dividends of $129.7 million and $129.4 million, respectively.

Net borrowings under the 364-Day Revolving Facility increased by $250.0 million in 2023.

Share Repurchase Program

As of November 3, 2023 our common stock repurchase program had a total remaining authorization of approximately $1.38 billion.

As of May 3, 2024 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.

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.

To preserve our investment grade credit rating and maintain financial flexibility, we did not repurchase any shares under this program in the first quarter of 2024 and do not plan to repurchase shares during the remainder of the year.

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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