What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-29 compared with 2024-05-30 · 64 added, 50 removed, 178 unchanged (39% of the section changed)

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We are the largest discount retailer in the United States by number of stores, with 20,345 stores located in 48 U.S.

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

states and Mexico as of August 2, 2024, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

Our first stores in Mexico opened in 2023.

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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, inflation, wage growth, changes in U.S.

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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 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 first quarter of 2024.

Our customers continue to feel constrained in the current macroeconomic environment and 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).

Furthermore, certain of our customers have reported that they are relying on credit cards to purchase basic household items.

Accordingly, we expect our customers’ spending to continue to be pressured overall and particularly in our non-consumables categories.

As a result of this pressure, we anticipate a heavier promotional environment in the second half of 2024, which could have an impact on our sales and margin results.

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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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.

Our sales mix has continued to shift toward consumables, which currently constitutes a historically high proportion of our

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

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

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 experience significant levels of inventory shrink.

Although we continue to take actions designed to reduce shrink, including refinement of our self-checkout strategy, and believe these actions are starting to positively impact the trend, we anticipate shrink will nonetheless materially pressure our fiscal 2024 full-year financial 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 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.

Further, we continue to evaluate and evolve the pOpshelf concept, in light of the softer discretionary sales environment, and have continued to convert 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.

At the end of the second quarter of 2024, we operated 229 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.

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We also remain focused on capturing growth opportunities.

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.

In the second quarter of 2024, we opened a total of 213 new stores, remodeled 478 stores, and relocated 25 stores.

In fiscal 2024 we plan to open approximately 730 new stores (including any 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.

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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.

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 do not currently expect that such rule will have a material impact on our financial results in fiscal 2024, but if implemented as currently written, 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.

While we believe the overall growth rate of inflation is continuing to moderate, ongoing 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.

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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 higher than targeted store manager turnover, including through our labor investment and allocation of labor hours, simplifying in-store activities, and reducing excess inventory.

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

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

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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.

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.

Highlights of our 2024 second quarter results of operations, compared to the 2023 second quarter, and our financial condition at August 2, 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 4.2% to $10.21 billion driven primarily by new stores and a 0.5% 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.

Average sales per square foot for all stores over the 52-week period ended August 2, 2024 were $263.

● Gross profit, as a percentage of net sales, was 30.0% in the 2024 period and 31.1% in the 2023 period, a decrease of 112 basis points, primarily reflecting increased markdowns and damages, a greater proportion of sales coming from the consumables category and increased shrink.

● SG&A expense, as a percentage of net sales, was 24.6% in the 2024 period compared to 24.0% in the 2023 period, an increase of 57 basis points, primarily due to higher retail labor, depreciation and amortization, and store occupancy costs as a percentage of net sales.

● Operating profit decreased 20.6% to $550.0 million in the 2024 period compared to $692.3 million in the 2023 period.

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● Net income was $374.2 million, or $1.70 per diluted share, in the 2024 period compared to net income of $468.8 million, or $2.13 per diluted share, in the 2023 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.

Highlights of the year-to-date period of 2024 include:

● Cash generated from operating activities was $1.653 billion for the 2024 period, an increase of $926.0 million, or 127.4%, from the comparable 2023 period.

● Total cash dividends of $259.5 million, or $1.18 per share, were paid during the 2024 period, compared to $258.9 million, or $1.18 per share, in the comparable 2023 period.

● Inventory turnover was 3.9 times on a rolling four-quarter basis.

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

On a per store basis, inventories at August 2, 2024 decreased by 11.0% compared to the balances at August 4, 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 May 3, 2024.

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 2, 2024.

Results of Operations

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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.

References to the second quarter accounting periods for 2024 and 2023 contained herein refer to the 13-week accounting periods ended August 2, 2024 and August 4, 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 first 13-week periods of 2024 and 2023, and the dollar and percentage variances among those periods:

The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2024 and 2023, and the dollar and percentage variances among those periods:

13 Weeks Ended

26 Weeks Ended

(amounts in millions, except

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Diluted earnings per share

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

13 WEEKS ENDED AUGUST 2, 2024 AND AUGUST 4, 2023

The net sales increase in the 2024 period was primarily due to sales from new stores and a same-store sales increase of 0.5% 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.

The increase in same-store sales primarily reflects a 1.0% increase in customer traffic, partially offset by a 0.5% decrease in average transaction amount.

The decrease in average transaction amount was driven by lower average item retail prices.

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

For the 2024 period, there were 19,201 same-stores, which accounted for sales of $9.8 billion.

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For the 2024 period, gross profit increased by 0.5%, and as a percentage of net sales decreased by 112 basis points to 30.0%, 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.

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

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

SG&A was 24.6% as a percentage of net sales in the 2024 period compared to 24.0% in the comparable 2023 period, an increase of 57 basis points.

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.

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

Interest Expense, net .

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The effective income tax rate for the 2024 period was 22.3% compared to a rate of 22.9% 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.

The tax rate for the 2024 period was lower than the comparable 2023 period primarily due to the effect of certain rate-impacting items, such as federal tax credits, on lower earnings before taxes.

26 WEEKS ENDED AUGUST 2, 2024 AND AUGUST 4, 2023

The net sales increase in the 2024 period was primarily due to sales from new stores and a same-store sales increase of 1.4% compared to the 2023 period, partially offset by the impact of store closures.

The increase in same-store sales primarily reflects a 2.6% increase in customer traffic, partially offset by a 1.1% 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 19,201 same-stores which accounted for sales of $19.3 billion.

Gross Profit.

For the 2024 period, gross profit increased by 0.9%, and as a percentage of net sales decreased by 128 basis points to 30.1%, compared to the 2023 period, driven primarily by increased shrink, increased markdowns, a greater proportion of sales coming from the consumables category and increased inventory damages, partially offset by a lower LIFO provision.

Selling, General & Administrative Expenses.

SG&A was 24.6% as a percentage of net sales in the 2024 period compared to 23.9% in the comparable 2023 period, an increase of 76 basis points.

The primary expenses that were a higher percentage of net sales in the current year period were retail labor, depreciation and amortization, technology-related expenses and store occupancy costs.

Interest Expense, net .

Interest expense, net decreased by $26.8 million to $140.6 million in the 2024 period primarily due to higher cash balances.

Income Taxes.

The effective income tax rate for the 2024 period was 22.8% compared to a rate of 22.3% for the 2023 period which represents a net increase of 50 percentage points.

The tax rate for the 2024 period was higher than the comparable 2023 period primarily due to an increase in the state effective rate and expense from stock-based compensation offset by the effect of certain rate-impacting items, such as federal tax credits, on lower earnings before taxes in the 2024 period.

Liquidity and Capital Resources

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Current Financial Condition / Recent Developments

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.

Our inventory balance represented approximately 46% of our total assets, exclusive of operating lease assets, goodwill and other intangible assets, as of August 2, 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, as discussed below.

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

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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.

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 26-week periods ended August 2, 2024 and August 4, 2023, respectively.

Cash flows from operating activities.

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.

Cash flows from operating activities were $1.653 billion in the 2024 period, which represents a $926.0 million increase compared to the 2023 period.

Changes in merchandise inventories resulted in a $23.4 million decrease in the 2024 period as compared to a decrease of $817.0 million in the 2023 period as further discussed below.

Changes in accounts payable resulted in a $306.3 million increase in the 2024 period compared to a $107.8 million increase in the 2023 period, due primarily to the timing of inventory receipts and related payments.

Changes in accrued expenses resulted in a $109.8 million increase in 2024 compared to a $12.4 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 $245.7 million in the 2024 period compared to the 2023 period.

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

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

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.

Total merchandise inventories were flat in the 2024 period compared to an increase of 11% in the 2023 period.

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

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During the 2024 and 2023 periods, we paid cash dividends of $259.5 million and $258.9 million, respectively.

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

During the 2023 period, we had proceeds from the issuance of long-term debt of $1.5 billion, and net commercial paper borrowings decreased by $1.2 billion.

Share Repurchase Program

As of May 3, 2024 our common stock repurchase program had a total remaining authorization of approximately $1.38 billion.

As of August 2, 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 quarter of 2024 and do not plan to repurchase shares during the remainder of the year.

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

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.

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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