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Item 7. Management’s Discussion and Analysis

2025-03-21 compared with 2024-03-25 · 148 added, 150 removed, 265 unchanged (53% of the section changed)

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We are the largest discount retailer in the United States by number of stores, with 20,662 stores located in 48 U.S.

states and Mexico as of March 1, 2024, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States.

states and Mexico as of February 28, 2025, 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.

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 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 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 2023.

government policy and assistance programs (including cost of living adjustments), such as SNAP, unemployment benefits, and economic stimulus programs.

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

Our customers continue to feel constrained in the current macroeconomic environment and 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), which we expect will continue to pressure our customers’ spending overall and particularly in our non-consumables categories.

This pressure contributed to a heavier promotional environment in the second half of 2024 compared to the prior year, and we expect a promotional environment in 2025 similar to that in 2024.

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.

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

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

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 and is currently at historic

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, which currently constitutes a historically high proportion of our sales mix.

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 and inventory reduction efforts, distribution and transportation efficiencies, private brands penetration and global sourcing.

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 experienced higher damages in the first half of 2023, as well as significantly higher shrink throughout 2023.

We believe that our shrink results in 2023 were due to a number of factors, including materially higher inventory levels in the first half of the year, store standards and other operational challenges such as self-checkout and store manager turnover, as well as the macroeconomic environment.

As of fiscal year-end, and discussed further below, we have materially reduced inventory levels.

To address challenges presented by self-checkout as well as to enhance the overall customer and associate experience in our stores, we are revising our self-checkout strategy, including limiting self-checkout to transactions of five items or fewer, converting some or all self-checkout registers in approximately 9,000 stores to assisted checkout options, and removing self-checkout from approximately 300 stores.

As discussed further below, we also have invested in retail labor to help drive improved store standards and have plans in place to improve store manager turnover rates.

Throughout 2024, we continued to experience significant levels of inventory shrink and damages.

While we anticipate that both shrink and damages will remain elevated in 2025, particularly when compared to fiscal years immediately preceding fiscal year 2023, we continue to take actions designed to reduce their impact and believe we will make progress in reducing our shrink and damages levels in 2025.

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 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, we are continuing to evaluate and evolve the pOpshelf concept, including expanding at a more measured pace in the softer discretionary sales environment, as well as converting some locations to Dollar General store locations.

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 2023, we operated 216 standalone pOpshelf locations.

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 remain focused on enhancing both the in-store and digital shopping experience, while driving operational efficiency.

Our partnership with a third-party delivery service is available in the majority of our stores, providing added convenience and incremental sales.

Additionally, in September 2024, we partnered with the same third-party provider to fully execute a same-day home delivery offering through our DG app and website in a limited number of stores.

We believe we can significantly expand this offering to additional stores in 2025.

Furthermore, we believe these efforts will contribute to the continued to growth of our DG Media Network, our platform that connects brand partners with our customers.

In 2025, we are expanding our efforts to improve the performance and profitability of our mature stores through the rollout of an incremental remodel program, Project Elevate.

This partial-remodel initiative is designed to refresh and optimize the merchandising in our stores, and in turn, enhance the shopping experience for our customers, while also mitigating future repairs and maintenance expense.

Project Elevate remodels are incremental to our full-remodel program, Project Renovate.

We also remain focused on capturing growth opportunities.

In 2023, we opened a total of 987 new stores, including our first three stores in Mexico, remodeled 2,007 stores, and relocated 129 stores.

In fiscal 2024, we plan to open approximately 800 new stores (including any new pOpshelf stores or 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 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, 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.

In 2024, we opened a total of 725 new stores, including five stores in Mexico, remodeled 1,621 stores, and relocated 85 stores.

In 2025, we plan to open approximately 575 new stores (as well as up to 15 stores in Mexico), fully remodel approximately 2,000 stores through Project Renovate, partially remodel 2,250 stores through Project Elevate, and relocate approximately 45 stores, for a total of 4,885 real estate projects.

During the fourth quarter of 2024, we initiated a store portfolio optimization review of our Dollar General and pOpshelf bannered stores, which involved identifying stores for closure or re-bannering based on an evaluation of individual store performance, expected future performance, and operating conditions, among other factors.

As a result of this review, we plan to close 96 Dollar General stores and 45 pOpshelf stores, and convert an additional six pOpshelf stores to Dollar General stores in the first quarter of 2025.

See Note 12 to the consolidated financial statements for more detail on the store portfolio optimization, impairment and related charges.

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.

In light of the softer discretionary sales environment, we previously converted certain pOpshelf stores to Dollar General stores, and do not believe opening new stores in 2025 is a prudent use of capital.

At the end of 2024, we operated 231 standalone pOpshelf stores.

Following the completion of the pOpshelf store closures and conversions discussed above, we will operate 180 pOpshelf stores.

In addition, we recorded a significant impairment expense to reflect the updated fair value of pOpshelf assets.

We are taking focused action in 2025 to improve the performance of pOpshelf stores, and will continue to evaluate the brand and whether we are seeing the desired impact of these activities and optimization, although there can be no assurances that our efforts will be successful.

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

In 2025 we expect the significant majority of the stores to be predominantly in one of our 8,500 square foot formats.

This format allows 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 always seeking ways to reduce or control costs that do not affect our customers’ shopping experiences.

We plan to continue enhancing this position over time while employing ongoing cost discipline to reduce certain expenses as a percentage of sales.

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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 2023, representing the majority of all outbound trucks delivering from our distribution centers.

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.

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

Furthermore, in 2023 we invested approximately $150 million 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 the labor investment in 2023, we took additional actions to support our customers, stores and distribution centers.

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

These investments in retail labor, markdowns, and other areas, had a materially negative impact on our operating profit in 2023.

While we believe the overall growth rate of inflation has moderated, 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, and will likely continue to have, a negative impact on our interest expense, both with respect to issuances of commercial paper notes, if any, and other indebtedness.

Further, 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 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 in 2023, including through our labor investment and allocation of labor hours, simplifying in-store activities, and reducing excess inventory.

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

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

Significant or rapid increases to federal, 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.

While the overall growth rate of inflation moderated over the second half of 2024, we believe ongoing inflationary pressures could 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 2025, these increased costs have negatively impacted our projected new store returns and influenced our new store growth plans.

Our 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, as 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 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.

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 2024 under our share repurchase program and do not plan to repurchase shares during 2025.

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

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Sales in same-stores increased 1.4%, primarily due to an increase in customer traffic.

Average sales per square foot in 2023 were $264 .

● The gross profit rate decreased by 94 basis points due primarily to increased shrink and inventory markdowns and lower inventory markups.

● SG&A as a percentage of sales increased by 153 basis points primarily due to increases in retail labor including the $150 million retail labor investment, store occupancy costs, and depreciation and amortization.

Average sales per square foot in 2024 and 2023 were $263 and $264, respectively .

● The gross profit rate decreased by 70 basis points due primarily to increased inventory markdowns, a greater proportion of sales coming from the consumables category and increased inventory damages.

● SG&A as a percentage of sales increased by 140 basis points primarily due to impairment charges totaling $214.2 million related to the store portfolio optimization review and increases in retail labor, depreciation and amortization and store occupancy costs.

● Operating profit decreased 29.9% to $1.71 billion in 2024 compared to $2.45 billion in 2023.

● Interest expense increased by $115.5 million in 2023 primarily due to higher average borrowings and higher interest rates.

● The change in the effective income tax rate to 21.6% in 2023 from 22.5% in 2022 was primarily due to the effect of certain rate-impacting items (such as federal tax credits) on lower earnings before taxes and a lower state effective rate resulting from increased recognition of state tax credits compared to 2022.

● Interest expense, net decreased by $52.5 million in 2024 primarily due to higher average cash balances and the repayment of long-term debt.

● The change in the effective income tax rate to 21.8% in 2024 from 21.6% in 2023 was primarily due to a higher state effective tax rate and a decreased benefit from stock-based compensation partially offset by the effect of certain rate-impacting items on lower earnings before taxes compared to 2023.

● We reported net income of $1.13 billion, or $5.11 per diluted share, for 2024 compared to net income of $1.66 billion, or $7.55 per diluted share, for 2023.

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Accounting Periods.

The following text contains references to years 2023, 2022, and 2021, which represent fiscal years ended February 2, 2024, February 3, 2023, and January 28, 2022, respectively.

The following text contains references to years 2024, 2023, and 2022, which represent fiscal years ended January 31, 2025, February 2, 2024, and February 3, 2023, respectively.

Our fiscal year ends on the Friday closest to January 31.

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

However, more recently, and in particular fiscal years 2023 and 2024, this has not been the case.

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

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% of net sales

Interest expense

Interest expense, net

% of net sales

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

The increase in same-store sales reflects a 1.1% increase in customer traffic and a 0.3% increase in average transaction amount.

The increase in average transaction amount was driven by higher average item retail prices and an increase in items per transaction.

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

In 2024, our 19,633 same-stores accounted for sales of $38.8 billion.

The net sales increase in 2023 was primarily due to sales from new stores and an increase in same-store sales of 0.2% compared to 2022, partially offset by the impact of store closures.

Net sales for the 53rd week of fiscal 2022 were $678.1 million.

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In 2023, our 18,763 same-stores accounted for sales of $36.9 billion.

The net sales increase in 2022 was primarily due to sales from new stores, and an increase in same-store sales of 4.3% compared to 2021, partially offset by the impact of store closures.

The increase in same-store sales reflects an increase in average transaction amount which was driven by higher average item retail prices as a result of higher inflation, partially offset by a decline in customer traffic.

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

In 2022, our 17,886 same-stores accounted for sales of $35.3 billion.

Gross Profit.

In 2023, gross profit decreased by 0.9%, and as a percentage of net sales decreased by 94 basis points to 30.3% compared to 2022, primarily driven by increased shrink and inventory markdowns, lower inventory markups, a higher proportion of lower margin consumables sales, and increased damages.

In 2024, gross profit increased by 2.5%, and as a percentage of net sales decreased by 70 basis points to 29.6% compared to 2023, primarily driven by increased markdowns, a greater proportion of sales coming from the consumables category and increased inventory damages, partially offset by decreased transportation costs.

In 2023, gross profit decreased by 0.9%, and as a percentage of net sales decreased by 94 basis points to

30.3% compared to 2022, primarily driven by increased shrink and inventory markdowns, lower inventory markups, a higher proportion of lower margin consumables sales, and increased damages.

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

In 2022, gross profit increased by 9.3%, and as a percentage of net sales decreased by 37 basis points to 31.2% compared to 2021.

A greater LIFO provision which was driven by higher product costs, a higher proportion of lower margin consumables sales, and increases in inventory markdowns, damages and shrink each contributed to the decrease in the gross profit rate.

These factors were partially offset by higher inventory markups and improvements in transportation costs.

SG&A as a percentage of net sales was 25.4% in 2024 compared to 24.0% in 2023, an increase of 140 basis points.

The primary expenses that were higher as a percentage of net sales in 2023 were retail labor, store occupancy costs, depreciation and amortization, repairs and maintenance, and other services purchased, including debt and credit card transaction fees, which were partially offset by a decrease in incentive compensation.

The increase reflects fourth quarter impairment charges totaling $214.2 million related to the store portfolio optimization review as discussed above in the Executive Summary and Note 12 to the consolidated financial statements.

Other expenses that were higher as a percentage of net sales in 2024 were retail labor, depreciation and amortization, store occupancy costs and incentive compensation.

SG&A as a percentage of net sales was 24.0% in 2023 compared to 22.4% in 2022, an increase of 153 basis points.

The primary expenses that were higher as a percentage of net sales in 2022 were utilities, retail labor, and repairs and maintenance, partially offset by incentive compensation expenses and store occupancy costs.

Interest Expense .

Interest expense increased $115.5 million to $326.8 million in 2023 compared to 2022 and increased $53.7 million to $211.3 million in 2022 compared to 2021, in each case primarily due to higher outstanding borrowings and higher interest rates.

Interest Expense, net .

Interest expense, net decreased $52.5 million to $274.3 million in 2024 compared to 2023 due to higher average cash balances and the repayment of long-term debt.

Interest expense, net increased $115.5 million to $326.8 million in 2023 compared to 2022, primarily due to higher outstanding borrowings and higher interest rates.

See the detailed discussion under “Liquidity and Capital Resources” regarding the financing of various long-term obligations.

Income Taxes .

The effective income tax rate for 2024 was 21.8% compared to a rate of 21.6% for 2023 which represents a net increase of 0.2 percentage points.

The effective tax rate was higher in 2024 primarily due to a higher state effective tax rate and a decreased benefit from stock-based compensation partially offset by the effect of certain rate-impacting items on lower earnings before taxes.

The effective income tax rate for 2023 was 21.6% compared to a rate of 22.5% for 2022 which represents a net decrease of 0.9 percentage points.

The effective tax rate was lower in 2023 primarily due to the effect of certain rate-impacting items (such as federal tax credits) on lower earnings before taxes and a lower state effective rate resulting from increased recognition of state tax credits.

The effective income tax rate for 2022 was 22.5% compared to a rate of 21.7% for 2021 which represents a net increase of 0.8 percentage points.

The effective income tax rate was higher in 2022 primarily due to decreased income tax benefits associated with stock-based compensation compared to 2021.

Effects of Inflation

In 2023, we experienced moderate increases in product costs due to lower rates of inflation.

In 2024 and 2023, we experienced moderate increases in product costs due to lower rates of inflation.

In addition, we continued to experience elevated but relatively stable costs of building materials and certain of our other capital costs.

In 2022, we experienced higher rates of inflation affecting product costs, the costs of building materials and certain of our other capital costs.

In 2021, we experienced increases in product costs due in part to higher rates of inflation.

Liquidity and Capital Resources

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During that period, we expanded the number of stores we operate by 2,464, representing store growth of approximately 14%, and we remodeled or relocated 5,764 stores, or approximately 32% of the stores we operated as of the beginning of the three-year period.

In 2024, we intend to continue our current strategy of pursuing store growth, remodels and relocations although at a slower pace than the past three years.

At February 2, 2024, we had a $2.0 billion unsecured revolving credit agreement (the “Revolving Facility”), $6.9 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $2.0 billion.

At February 2, 2024, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $7.0 billion, most of which was in the form of senior notes.

In 2025, we intend to pursue accelerated growth in remodels, including Project Elevate, with slower growth for new stores and fewer relocations.

At January 31, 2025, we had a $2.375 billion unsecured revolving credit agreement (the “Revolving Facility”), $6.2 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $2.0 billion.

At January 31, 2025, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $6.2 billion, most of which was in the form of senior notes.

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 commercial paper notes (“CP Notes”) as further described below.

Our borrowing availability under the Revolving Facility may be effectively limited by our commercial paper notes (“CP Notes”) as further

described below.

The information contained in Note 5 to the consolidated financial statements contained in Part II, Item 8 of this report is incorporated herein by reference.

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Revolving 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.

On September 3, 2024, we entered into an amended and restated credit agreement which provides for a $2.375 billion unsecured five-year revolving credit facility (the “Revolving Facility”) and allows for a subfacility for letters of credit of up to $100 million, of which $70 million is currently committed and $30 million is currently uncommitted.

The Revolving Facility also includes a subfacility with an available borrowing capacity of up to $50 million for short-term borrowings referred to as swingline loans.

The Revolving Facility is scheduled to mature on September 3, 2029.

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 February 2, 2024 was 1.015% for Adjusted Term SOFR borrowings and 0.015% for base-rate borrowings.

The applicable interest rate margin for borrowings as of January 31, 2025 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 February 2, 2024, the facility fee rate was 0.11%.

As of January 31, 2025, 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.

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The credit agreement governing the Revolving Facility also contains financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

As of February 2, 2024, we were in compliance with all such covenants.

On February 13, 2024, we amended the credit agreement governing the Revolving Facility to increase the

maximum leverage ratio for the four quarters of fiscal 2024.

As of January 31, 2025, we were in compliance with all such covenants.

On March 11, 2025, we amended the credit agreement governing the Revolving Facility to increase the maximum leverage ratio and decrease the minimum fixed charge ratio until January 30, 2026, or earlier at our option upon achieving certain financial covenant milestones (“Covenant Relief Period”).

During the Covenant Relief Period, we are restricted from repurchasing shares of our common stock and the ability to incur certain additional liens and subsidiary debt is reduced.

The credit agreement governing the Revolving Facility also contains customary events of default.

As of February 2, 2024, 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 liquidity of $1.8 billion.

As of January 31, 2025, we had no outstanding borrowings, no outstanding letters of credit, and borrowing availability of $2.375 billion under the Revolving Facility that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute liquidity of $2.18 billion.

In addition, we had outstanding letters of credit of $50.9 million which were issued pursuant to separate agreements.

364-Day Revolving Facility

The Company had a 364-day $750 million unsecured revolving credit facility (the “364-Day Revolving Facility”) which expired on January 30, 2024.

Borrowings under the 364-Day Revolving Facility bore interest at a rate equal to an applicable interest rate margin plus, at the Company’s 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 Company was also required to pay a facility fee to the lenders under the 364-Day Revolving Facility for any used and unused commitments.

Prior to its expiration, the applicable interest rate margin for Adjusted Term SOFR loans was 1.035% and the facility fee rate was 0.09%.

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

The Company had a 364-day $750 million unsecured revolving credit facility (the “364-Day Revolving

Facility”) which expired on January 30, 2024.

Commercial Paper

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

As of February 2, 2024, our consolidated balance sheet reflected no outstanding unsecured CP Notes.

As of January 31, 2025, our consolidated balance sheet reflected no outstanding unsecured CP Notes.

CP Notes totaling $195.0 million were held by a wholly-owned subsidiary and therefore are not reflected in the consolidated balance sheets.

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(In millions)

September 2024

September 2022

March 20 and September 20

November 2025

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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.

We have provided notice to the trustees of our $500.0 million senior unsecured notes scheduled to mature on November 1, 2025, that we intend to redeem the entire principal amount of such notes on April 29, 2025.

We expect to use cash on hand for the redemption.

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

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Rating Agencies

Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a negative 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;

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

(ii) affect our financing costs;

and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs.

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

There can be no assurance that we will maintain or improve our current credit ratings, particularly, if we are unable to lower our leverage ratios to levels and within time frames deemed acceptable to the rating agencies.

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

Future Cash Requirements

The following table summarizes significant estimated future cash requirements under our various contractual obligations and other commitments at February 2, 2024, in total and disaggregated into current (<1 year) and long-term (1 or more years) obligations (in thousands):

The following table summarizes significant estimated future cash requirements under our various contractual obligations and other commitments at January 31, 2025, in total and disaggregated into current (<1 year) and long-term (1 or more years) obligations (in thousands):

Payments Due by Period

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(a) Represents obligations for interest payments on long-term debt and includes projected interest on variable rate long-term debt using 2024 year-end rates and balances.

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of February 2, 2024), the CP Notes (which had a balance of $0 as of February 2, 2024, and which amount is net of $197.7 million held by a wholly-owned subsidiary), and interest rate swaps being accounted for as fair value hedges.

Variable rate long-term debt includes the Revolving Facility (although such facility had a balance of zero as of January 31, 2025), the CP Notes (which had a balance of zero as of January 31, 2025, and which amount is net of $195.0 million held by a wholly-owned subsidiary), and interest rate swaps being accounted for as fair value hedges.

(b) We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, auto liability, and certain third-party landlord claims exposures.

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Share Repurchase Program

Our common stock repurchase program had a total remaining authorization of approximately $1.38 billion at February 2, 2024.

Our common stock repurchase program had a total remaining authorization of approximately $1.38 billion at January 31, 2025.

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

The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt agreements, 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 do not plan to repurchase shares during fiscal 2024.

For more detail about our share repurchase program, see Part II, Item 5 of this report and Note 11 to the consolidated financial statements contained in Part II, Item 8 of this report.

The repurchase program 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 2024 and do not plan to repurchase shares during fiscal 2025.

For more detail, see Note 11 to the consolidated financial statements.

Other Considerations

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Although the Board currently expects to continue regular quarterly cash dividends, the declaration and amount of future cash dividends are subject to the Board’s sole discretion and will depend upon, among other factors, our results of operations, cash requirements, financial condition, contractual restrictions, excess debt capacity and other factors that our Board may deem relevant in its sole discretion.

Our inventory balance represented approximately 49% of our total assets exclusive of operating lease assets, goodwill, and other intangible assets as of February 2, 2024.

Our inventory balance represented approximately 47% of our total assets exclusive of operating lease assets, goodwill, and other intangible assets as of January 31, 2025.

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 further below.

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Cash flows from operating activities were $2.996 billion in 2024, which represents a $604.3 million increase compared to 2023.

Changes in merchandise inventories resulted in a $230.2 million increase in our working capital in 2024 compared to the decrease of $299.1 million in 2023 as described in greater detail below.

Changes in accounts payable resulted in a $302.9 million increase in our working capital in 2024 compared to a $36.9 million increase in 2023, due primarily to the timing of inventory receipts and related payments.

Changes in accrued expenses resulted in a $91.8 million increase in 2024 compared to a $39.2 million decrease in 2023.

Net income decreased to $1.1 billion in 2024 as compared to $1.7 billion in 2023.

Changes in other noncash losses resulted in a $296.2 million increase as compared to a $89.0 million increase in 2023 primarily due to impairment charges in 2024.

Changes in income taxes paid in 2024 compared to 2023 are primarily due to the decrease in pre-tax earnings in 2024 and the timing of payments for income taxes.

Cash flows from operating activities were $2.4 billion in 2023, which represents a $407.2 million increase compared to 2022.

Changes in merchandise inventories resulted in a $299.1 million decrease in our working capital in 2023 compared to the decrease of $1.7 billion in 2022 as described in greater detail below.

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Changes in other noncash losses resulted in a $89.0 million increase as compared to a $530.5 million increase in 2022 primarily due to a lower LIFO provision in 2023.

Changes in income taxes including a decrease in cash paid for income taxes in 2023 compared to 2022 are primarily due to the decrease in pre-tax earnings in 2023.

Cash flows from operating activities were $1.98 billion in 2022, which represents a $881.3 million decrease compared to 2021.

Changes in merchandise inventories resulted in a $1.7 billion decrease in our working capital in 2022 compared to the decrease of $550.1 million in 2021 as described in greater detail below.

Changes in other noncash losses resulted in a $530.5 million increase as compared to a $191.0 million increase in 2021 primarily due to an increase in the LIFO provision.

Changes in accounts payable resulted in a $194.7 million decrease in our working capital in 2022 compared to a $98.7 million increase in 2021, due primarily to the timing of inventory receipts and related payments.

Changes in accrued expenses resulted in a $25.4 million decrease in our working capital in 2022 compared to a $37.3 million decrease in 2021, due primarily to the timing of accruals and payments for freight, payroll taxes and incentive compensation.

Changes in income taxes in 2022 compared to 2021 are primarily due to the timing of payments for income taxes.

Changes in income

taxes including a decrease in cash paid for income taxes in 2023 compared to 2022 are primarily due to the decrease in pre-tax earnings in 2023.

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.

Merchandise inventories increased by 3% in 2023, 20% in 2022 and 7% in 2021.

The increase in the 2023 period primarily reflects an increase in the consumables category due mostly to a lower than planned level of consumables at the end of 2022 and initiatives to improve on-shelf availability.

Offsetting the inventory increase in consumables were decreases in the seasonal, home products, and apparel categories primarily due to our inventory reduction efforts.

Inventory levels in the consumables category increased by $744.5 million, or 20%, in 2023, increased by $367.8 million, or 11%, in 2022, and decreased by $1.8 million, or 0% in 2021.

The seasonal category decreased by $207.1 million, or 13%, in 2023, increased by $455.5 million, or 42%, in 2022, and increased by $177.8 million, or 20%, in 2021.

The home products category decreased by $291.3 million, or 28%, in 2023, increased by $315.4 million, or 43%, in 2022, and increased by $230.0 million, or 45%, in 2021.

The apparel category decreased by $12.6 million, or 4%, in 2023, increased by $7.8 million, or 2%, in 2022, and decreased by $39.2 million, or 10%, in 2021.

Merchandise inventories decreased by 4% in 2024 and increased by 3% in 2023 and 20% in 2022.

The decrease in the 2024 period primarily reflects a decrease in the consumables and home products categories due to inventory reduction efforts and core SKU reductions.

Offsetting the inventory decrease in consumables and home products were increases in the seasonal and apparel categories primarily due to an increase in overall store count.

Percent and dollar changes in our four inventory categories for the past three years were as follows:

For the Year Ended

Increase (decrease)

Home products

Cash flows from investing activities .

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

$683 million for improvements, upgrades, remodels and relocations of existing stores;

$542 million for distribution and transportation-related capital expenditures;

$390 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $67 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 2023, we opened 987 new stores and remodeled or relocated 2,136 stores.

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

$589 million for improvements, upgrades, remodels and relocations of existing stores;

$443 million for distribution and transportation-related capital expenditures;

$373 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $62 million for information systems upgrades and technology-related projects.

During 2022, we opened 1,039 new stores and remodeled or relocated 1,922 stores.

Significant components of property and equipment purchases in 2021 included the following approximate amounts:

$510 million for improvements, upgrades, remodels and relocations of existing stores;

$268 million for distribution and transportation-related capital expenditures;

$244 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new stores;

and $44 million for information systems upgrades and technology-related projects.

During 2021, we opened 1,050 new stores and remodeled or relocated 1,852 stores.

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

For the Year 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

Capital expenditures during 2025 are projected to be in the range of $1.3 billion to $1.4 billion.

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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 and development of approximately 800 new stores and approximately 1,585 stores to be remodeled or relocated.

We plan to continue to invest in store growth and development with approximately 575 new stores in the United States and up to 15 new stores in Mexico and approximately 4,295 remodels or relocations, including fully remodeling approximately 2,000 stores through Project Renovate, remodeling approximately 2,250 through Project Elevate, and relocating approximately 45 stores.

Capital expenditures in 2025 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment;

the construction of new stores;

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

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

technology initiatives;

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Cash flows from financing activities .

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

During the 2024 period we had repayments of long-term obligations of $770.2 million.

We paid cash dividends of $519.0 million and did not repurchase shares of our common stock.

In 2023, we received proceeds from the issuance of long-term debt of $1.5 billion.

Net commercial paper borrowings decreased by $1.5 billion, and we received and repaid $500.0 million under the 364-Day Revolving Facility.

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We repurchased 11.6 million shares of our common stock at a total cost of $2.7 billion and paid cash dividends of $493.7 million.

In 2021, net commercial paper borrowings increased by $54.3 million.

and we had no borrowings or repayments under the Revolving Facility.

We repurchased 12.1 million shares of our common stock at a total cost of $2.5 billion and paid cash dividends of $392.2 million.

Critical Accounting Policies and Estimates

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We apply the RIM to these departments, which are groups of products that are fairly uniform in terms of cost, selling price relationship and turnover.

The RIM will result in valuing inventories at LCM if permanent markdowns are currently taken as a reduction of the retail value of inventories.

The RIM will result in valuing inventories at LCM if permanent markdowns are recorded timely as a reduction of the retail value of inventories.

Inherent in the RIM calculation are certain management judgments and estimates that may impact the ending inventory valuation at cost, as well as the gross profit recognized.

These judgments include ensuring departments consist of similar products, recording estimated shrinkage between physical inventories, and timely recording of markdowns needed to sell inventory.

We perform an annual LIFO analysis whereby all merchandise units are considered for inclusion in the index formulation.

An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time.

In contrast, interim LIFO calculations are based on management’s annual estimates of sales, the rate of inflation or deflation, and year-end inventory levels.

We also perform analyses for determining obsolete inventory, adjusting inventory on a quarterly basis to an LCM value based on various management assumptions including estimated below cost markdowns not yet recorded, but required to liquidate such inventory in future periods.

Factors considered in the determination of markdowns include current and anticipated demand based on changes in competitors’ practices, consumer preferences, consumer spending, significant weather events and unseasonable weather patterns.

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We believe our estimates and assumptions related to the application of the RIM results in a merchandise inventory valuation that reasonably approximates cost on a consistent basis.

We perform an annual LIFO analysis whereby all merchandise units are considered for inclusion in the index formulation.

An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time.

In contrast, interim LIFO calculations are based on management’s annual estimates of sales, the rate of inflation or deflation, and year-end inventory levels.

We also perform analyses for determining obsolete inventory, adjusting inventory on a quarterly basis to an LCM value based on various

management assumptions including estimated below cost markdowns not yet recorded, but required to liquidate such inventory in future periods.

Impairment of Long-lived Assets.

Long-lived assets, including right of use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

The evaluation is performed primarily at the store level, which is the lowest level of identifiable cash flows that are largely independent of cash flows of other assets and liabilities .

Impairment of long-lived assets results when the carrying value of the assets exceeds the estimated undiscounted future cash flows generated by the assets.

Our estimate of undiscounted future store cash flows is based upon historical operations of the stores and estimates of future profitability which encompasses many factors that are subject to variability and are difficult to predict.

If our estimates of future cash flows are not materially accurate, our impairment analysis could be impacted accordingly.

If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s estimated fair value.

The fair value is estimated based primarily upon projected future cash flows (discounted at our credit adjusted risk-free rate) or other reasonable estimates of fair market value.

Although not currently anticipated, changes in these estimates, assumptions or projections could materially affect the determination of fair value or impairment.

Changes in these estimates, assumptions or projections could materially affect the determination of fair value or impairment.

Insurance Liabilities .

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If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position.

Uncertain tax positions require determinations and liabilities to be estimated based on

provisions of the tax law which may be subject to change or varying interpretation.

Uncertain tax positions require determinations and liabilities to be estimated based on provisions of the tax law which may be subject to change or varying interpretation.

If our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results.

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To determine an indicative secured rate, we use the estimated credit spread improvement that would result from an upgrade of one ratings classification by tenor.

Many of our stores are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of up to 15 years with multiple renewal options.

We also have stores subject to shorter-term leases and many of these leases have renewal options.

Many of our stores typically carry a primary lease term of up to 15 years with multiple renewal options.

We also have stores subject to shorter-term leases and many of these leases also have renewal options.

We record single lease expense on a straight-line basis over the lease term including any option periods that are reasonably certain to be renewed, commencing on the date that we take physical possession of the property from the landlord.

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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-K

Item 7. Management’s Discussion and Analysis