What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-27 compared with 2020-05-28 · 240 added, 171 removed, 163 unchanged (72% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introductory Note:

Unless otherwise stated, references to “we,” “our” and “us” generally refer to Dollar Tree, Inc.

and its direct and indirect subsidiaries on a consolidated basis.

Cautionary Note Regarding Forward-Looking Statements:

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For example, our forward-looking statements include, without limitation, statements regarding:

The potential effect of general business or economic conditions, including inflation, consumer spending levels, rates of population, employment and job growth and/or losses in our markets, the cost of COVID-19 initiatives, changes in prevailing wage rates and our plans to address these changes, shipping and trucking rates, freight and other distribution costs, fuel costs and wage and benefit costs;

The uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations, including uncertainties surrounding the physical and financial health of our customers, the ability of government assistance programs to individuals, households and businesses to support consumer spending, levels of foot traffic in our stores, changes in customer demand for our consumable and essential products as well as our discretionary products, possible disruptions in our supply chain or sources of supply, and whether we will have the governmental approvals, personnel and sources of supply to be able to keep our stores open;

The potential effect of general business or economic conditions on our business, including the COVID-19 pandemic-related recession, consumer spending levels, unemployment and the cost of COVID-19 initiatives;

The uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations, including uncertainties surrounding the physical and financial health of our customers, the effectiveness and duration of government assistance programs to individuals, households and businesses to support consumer spending, levels of foot traffic in our stores, changes in customer demand for our consumable and essential products as well as our discretionary products, and possible disruptions in our supply chain or sources of supply;

Our plans and expectations in response to the COVID-19 pandemic, including increased expenses for higher wages and bonuses paid to associates and the cost of personal protective equipment and additional cleaning supplies and protocols for the safety of our associates, and expected delays in new store openings;

The impact of trade relations and the ongoing trade dispute between the United States and China, including the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative, some of which were suspended or reduced in January and February 2020, and other potential impediments to imports;

Our growth plans, including our plans to add, renovate, re-banner, expand, remodel, relocate or close stores and any related costs or charges, our anticipated square footage increase, our leasing strategy for future expansion, and our ability to renew leases at existing store locations;

The ability to retain key personnel and attract new personnel at Family Dollar and Dollar Tree and the performance of those personnel;

Our anticipated sales, comparable store net sales, net sales growth, gross profit margin, costs of goods sold (including product mix), shrink rates, earnings and earnings growth, inventory levels, selling, general and administrative and other fixed costs, and our ability to leverage those costs;

The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations, including the proceeding by the FDA;

The effect of changes in labor laws, and the effect of the Fair Labor Standards Act as it relates to the qualification of our managers for exempt status, minimum wage and health care law;

Our growth plans, including our plans to add, renovate, re-banner, expand, remodel, relocate or close stores and any related costs or charges;

The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental actions, including the proceeding by the FDA;

The average size and productivity of our stores, including those to be added in 2020 and beyond;

The effect of our initiatives to renovate Family Dollar stores to the H2 store format and the performance of that format, the sales mix of lower margin consumable and higher margin discretionary merchandise in Dollar Tree and Family Dollar stores, including an increase in the number of stores with freezers and coolers, and the roll-out of adult beverages at Family Dollar and Snack Zone and Crafter’s Square at Dollar Tree, on our results of operations;

The net sales per square foot, net sales and operating income of our stores;

The benefits, results and effects of the Family Dollar acquisition and integration and the combined company’s plans, objectives, strategies and expectations (financial or otherwise), including synergies, the cost to achieve synergies, and the effect on earnings per share;

The effect of changes in tax laws and rates and regulatory interpretations of such laws;

Our seasonal sales patterns and customer demand including those relating to the important holiday selling seasons and party merchandise;

The capabilities of our inventory supply chain technology and other systems;

The reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China and domestic goods which are in higher demand as a result of the COVID-19 pandemic;

The capacity, performance and cost of our distribution centers and distribution network (including shipping and transportation), including future automation, and our expectations regarding the construction of new distribution centers;

Our expectations regarding compliance with debt covenants, our dividend policy and our stock repurchase program;

Our cash needs, including our ability to fund our future capital expenditures, working capital requirements and repurchases of common stock under our repurchase program, and our ability to service our debt obligations, including our expected annual interest expense;

Our expectations regarding competition, growth in our retail sector and our potential for long-term growth;

Our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the Financial Accounting Standards Board;

Our assessment of the impact on us of certain actions by activist shareholders and our potential responses to these actions;

Management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes and uncertain tax positions;

Management’s estimates associated with our critical accounting policies, including inventory valuation, self-insurance liabilities and valuations for our goodwill and indefinite-lived intangible assets impairment analyses.

Our expectations regarding compliance with debt covenants and our stock repurchase program.

A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances.

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Our forward-looking statements are all based on currently available operating, financial and business information.

The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and in this Quarterly Report on Form 10-Q.

The COVID-19 pandemic is a serious threat to the health and economic wellbeing of our customers, our associates and our sources of supply, and the impact of the COVID-19 pandemic and the measures implemented to contain or mitigate the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.

Our supply chain may be disrupted by changes in United States trade policy with China or as a result of the COVID-19 pandemic, and risks associated with our domestic and foreign suppliers, including tariffs or restrictions on trade or disruptions arising from the outbreak of the COVID-19 pandemic, could adversely affect our financial performance.

Our profitability is vulnerable to cost increases, including increased costs associated with responding to the COVID-19 pandemic.

The continuing COVID-19 pandemic and related public health measures have caused economic disruptions that have adversely affected, and are expected to continue to adversely affect, elements of our business.

If the COVID-19 pandemic worsens and new, more restrictive public health measures are implemented, there could be a material adverse impact on our business and results of operations.

Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of a deepening pandemic-related recession or political uncertainties, for example because government stabilization efforts terminate or are reduced prematurely.

Our profitability is vulnerable to cost increases such as wages.

For example, this year we have incurred increased costs associated with responding to the COVID-19 pandemic;

and this year and over the last several years we have incurred increased distribution costs and shrink costs.

Our profitability is affected by the mix of products we sell.

For example, in the first quarter of this fiscal year, sales of higher margin Easter merchandise at the Dollar Tree segment suffered as a result of the COVID-19 crisis, and profitability in the Dollar Tree segment was materially adversely affected.

We could continue to encounter higher costs and disruptions in our distribution network.

The continuing integration of Family Dollar’s operations is not complete and may be more difficult, costly or time consuming than expected.

Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.

Our financial performance could be adversely affected if our supply chain is affected or disrupted by changes in United States trade policy with China, including tariffs or restrictions on trade affecting our foreign suppliers, or by disruptions arising from the outbreak of the COVID-19 pandemic.

Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.

Our profitability is affected by the mix of products we sell.

We may stop selling or recall certain products for safety-related issues.

We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems, including because of a cyber-attack, could harm our ability to effectively operate and grow our business and could adversely affect our financial results.

If we suffer a data breach and are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business reputation and adversely affect our results of operations or business.

If we suffer a data breach and are unable to protect our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business reputation and adversely affect our results of operations or business.

We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.

Our business or the value of our common stock could be negatively affected as a result of actions by activist shareholders.

Litigation and arbitration may adversely affect our business, financial condition and results of operations.

Pressure from competitors may reduce our sales and profits.

A downturn or changes in economic conditions, including those caused by the COVID-19 pandemic, could impact our sales or profitability.

Changes in federal, state or local law, including regulations and interpretations or guidance thereunder, or our failure to adequately estimate the impact of such changes or comply with such laws, could increase our expenses, expose us to legal risks or otherwise adversely affect us.

The price of our common stock is subject to market and other conditions and may be volatile.

Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures.

Litigation, arbitration, and regulatory actions may adversely affect our business, financial condition and results of operations.

The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.

Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.

We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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We have experienced fewer customer visits and higher average ticket.

The mix and profit margin of products being purchased by our customers has been different and has changed during the first quarter of 2020.

As demand for essential goods, including cleaning supplies and sanitizer, household products, paper goods, food and over-the-counter medicine, increased to unprecedented levels, both our domestic suppliers and distribution centers were stressed to keep up with the demand.

We expect this disruption with certain vendors and SKUs to continue into the summer.

The effect of COVID-19-related stimulus

purchases for some other non-essential items may create additional disruptions.

The mix and profit margin of products being purchased by our customers has been different and has changed during the first half of 2020.

We expect this disruption with certain vendors and SKUs to continue for the remainder of the year.

The effect of COVID-19-related stimulus purchases for some other non-essential items may create additional disruptions.

The balance of our product, including imports, continues to operate as we planned.

including cleaning supplies and sanitizer, household products, paper goods, food and over-the-counter medicine.

We have hired more than 25,000 new associates since early March and we have implemented several changes to support our associates in adhering to Centers for Disease Control and Prevention (CDC) recommendations.

Activated our Business Response Team to meet daily to communicate, assess and address potential exposure throughout the organization;

We have hired more than 25,000 net new associates since early March and we have implemented several changes to support our associates in adhering to Centers for Disease Control and Prevention (CDC) recommendations.

Activated our Business Response Team to communicate, assess and address potential exposure throughout the organization;

Provided personal protective equipment including masks, gloves and sanitizers for our store and distribution center associates;

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Provided a $2 per hour wage premium for all store and distribution center hourly associates, excluding hourly-paid store managers;

Provided a minimum guaranteed sales bonus of $500 for each store manager in March and a minimum guaranteed target bonus payout for April as well as bonuses for certain salaried associates in our field operations and distribution centers;

Provided minimum guaranteed sales bonuses for each store manager as well as Thank You bonuses and bonuses for certain salaried associates in our field operations and distribution centers;

Provided pay continuation for associates who test positive or who are Group 1 associates who have to self-quarantine;

Created a “store” within each distribution center to allow our associates to shop for needed supplies at work;

Created a “store” within each distribution center to allow our associates to shop for needed supplies at work when supplies were scarce in retail locations;

Eliminated all non-essential air travel;

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Enabled health prescreening questionnaire for all store and distribution associates before entering work;

Established temperature check protocols for our associates at all distribution centers.

We also made changes to reduce our exposure to potential short-term liquidity risk in the banking system, including preemptively drawing $750 million under our Revolving Credit Facility and suspending share repurchases under the remaining $800 million of Board authorization.

Established temperature check protocols for our associates at all distribution centers and the store support center.

We also made changes to reduce our exposure to potential short-term liquidity risk in the banking system, including preemptively drawing $750 million under our Revolving Credit Facility, of which $250 million was repaid in the second quarter, and suspending share repurchases under the remaining $800 million of Board authorization.

We are in compliance with our debt covenants and, based on a continuation of current operating results, we expect to be in compliance for the remainder of fiscal 2020.

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In the 13 weeks ended May 2, 2020, enterprise comparable store net sales increased 7.0% resulting from an increase in average ticket of 15.5%, partially offset by a decrease in traffic of 7.4%.

The future impact of COVID-19 on our customers is difficult to predict as the effectiveness of economic stabilization efforts is uncertain and government assistance payments may not provide enough funding to support current spending.

In the 13 weeks ended August 1, 2020, enterprise comparable store net sales increased 7.2% resulting from an increase in average ticket of 24.7%, partially offset by a decrease in traffic of 14.0%.

In addition, we cannot predict the impact of the spread of COVID-19 on the health and well-being of our customers and associates.

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In addition, Easter sales in our Dollar Tree segment were materially lower than expected resulting in higher merchandise cost, including freight, and higher markdowns to clear the unsold Easter product.

During April, demand for discretionary products increased in our Family Dollar segment.

While the favorable mix change has continued into the second quarter of 2020, we cannot predict whether it will continue.

In the 13 weeks ended May 2, 2020, our distribution center payroll costs included $6.2 million of incremental wage premiums in recognition of the team’s extraordinary efforts.

The incremental wage premium payments will continue for at least the first six weeks of the second quarter of 2020.

The trade dispute between the United States and China is ongoing and should additional tariffs or other sanctions be imposed on imported goods, our business or results of operations in fiscal 2020 could be adversely affected.

During April, demand for discretionary products increased in both segments.

During the 13 weeks ended August 1, 2020, the higher demand for discretionary products continued in both our Dollar Tree and Family Dollar segments resulting in a reduction in our merchandise cost compared with the same period in 2019.

The favorable mix change has continued into the third quarter of 2020;

however, the benefit is not as high as we experienced during the second quarter of 2020.

Our distribution costs included $6.4 million and $11.4 million in the 13 weeks ended May 2, 2020 and the 13 weeks ended August 1, 2020, respectively, of incremental wage premiums in recognition of the team’s extraordinary efforts.

The incremental wage premium payments will continue for at least the first eight weeks of the third quarter of 2020.

During the COVID-19 pandemic, the trade dispute between the United States and China is ongoing and should additional tariffs or other sanctions be imposed on imported goods, our business or results of operations in fiscal 2020 could be adversely affected.

Selling, General and Administrative Expenses

In the 13 weeks ended May 2, 2020, we paid incremental wage premiums to our hourly store associates, minimum guaranteed bonuses to our store managers and other bonuses to certain field operations managers totaling $57.5 million.

The incremental wage premium payments and minimum guaranteed store manager bonuses will continue for at least the first six weeks of the second quarter of 2020.

In addition, for the safety of our associates and customers, we installed plexiglass sneeze guards at all registers in our stores and incurred incremental costs for masks, gloves and cleaning supplies.

These expenses totaled $8.9 million in the 13 weeks ended May 2, 2020.

We paid incremental wage premiums to our hourly store associates, minimum guaranteed bonuses and a Thank You bonus to our store managers and other bonuses to certain field operations managers totaling $57.5 million and $114.6 million in the 13 weeks ended May 2, 2020 and the 13 weeks ended August 1, 2020, respectively.

The incremental wage premium payments were reduced from $2 per hour to $1 per hour beginning in the third quarter of 2020 and will continue for at least the first eight weeks of the third quarter.

In addition, for the safety of our associates and customers, in the first quarter of 2020, we installed plexiglass sneeze guards at all registers in our stores and incurred incremental costs for masks, gloves and cleaning supplies.

These expenses totaled $8.9 million and $7.8 million in the 13 weeks ended May 2, 2020 and the 13 weeks ended August 1, 2020, respectively.

Store Openings and Initiatives

During the first quarter of 2020, we opened 67 new Dollar Tree stores and 32 new Family Dollar stores;

During the first half of fiscal 2020, we opened 167 new Dollar Tree stores and 63 new Family Dollar stores;

however, we have experienced construction-related delays due to challenges with the permitting process which has resulted in delays in our planned store openings.

We now plan to open 325 Dollar Tree stores and 175 Family Dollar stores in fiscal 2020.

As a result of the complications inherent in operating our stores during the COVID-19 pandemic, we paused the roll-out of our Snack Zone layout to our Dollar Tree stores;

however, we still plan to add this assortment to 300 additional Dollar Tree stores in fiscal 2020.

With the increase in customer activity in our Family Dollar stores and COVID-19-related travel restrictions, we paused the roll-out of our H2 stores during the first quarter of 2020.

We now expect to renovate approximately 750 stores to this format in fiscal 2020.

As a result of the complications inherent in operating our stores during the COVID-19 pandemic, during the first quarter of 2020, we paused the roll-out of our Snack Zone layout to our Dollar Tree stores.

We resumed the installation of our Snack Zone layout to Dollar Tree stores during the second quarter of 2020 and we plan to add this assortment to 300 Dollar Tree stores in fiscal 2020.

With the increase in customer activity in our Family Dollar stores and COVID-19-related travel restrictions, we paused the roll-out of our H2 stores during the first quarter of 2020, but resumed the roll-out of the H2 format to Family Dollar stores during the second quarter of 2020.

We expect to renovate approximately 750 stores to this format in fiscal 2020.

Also, as a result of permitting delays, we now expect to add adult beverage product to approximately 800 stores in fiscal 2020.

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Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand.

At May 2, 2020 , we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces.

A breakdown of store counts and square footage by segment for the 13 weeks ended May 2, 2020 and May 4, 2019 is as follows:

At August 1, 2020 , we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces.

A breakdown of store counts and square footage by segment for the 26 weeks ended August 1, 2020 and August 3, 2019 is as follows:

26 Weeks Ended

August 1, 2020

August 3, 2019

Family Dollar

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Comparable store net sales for Dollar Tree may be negatively affected when a Family Dollar store is re-bannered near an existing Dollar Tree store.

The average size of stores opened during the 13 weeks ended May 2, 2020 was approximately 8,490 selling square feet for the Dollar Tree segment and 7,990 selling square feet for the Family Dollar segment.

The average size of stores opened during the 26 weeks ended August 1, 2020 was approximately 8,690 selling square feet for the Dollar Tree segment and 8,130 selling square feet for the Family Dollar segment.

We believe that these size stores are in the ranges of our optimal sizes operationally and give our customers a shopping environment which invites them to shop longer, buy more and make return visits.

The percentage change in comparable store net sales on a constant currency basis for the 13 weeks ended May 2, 2020 , as compared with the preceding year, is as follows:

13 Weeks Ended May 2, 2020

The percentage change in comparable store net sales on a constant currency basis for the 13 and 26 weeks ended August 1, 2020 , as compared with the preceding year, is as follows:

13 Weeks Ended August 1, 2020

26 Weeks Ended August 1, 2020

Customer Traffic

Average Ticket

Customer Traffic

Average Ticket

Dollar Tree Segment

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Constant currency basis refers to the calculation excluding the impact of currency exchange rate fluctuations.

We calculated the constant currency basis change by translating the current year quarter’s comparable store net sales in Canada using the prior year first quarter’s currency exchange rates.

We calculated the constant currency basis change by translating the current year’s comparable store net sales in Canada using the prior year’s currency exchange rates.

We believe that the constant currency basis provides a more accurate measure of comparable store net sales performance.

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Dollar Tree Initiatives

We believe comparable store net sales continue to be positively affected by a number of our Dollar Tree initiatives.

We continued the roll-out of frozen and refrigerated merchandise to more of our Dollar Tree stores in the first quarter of 2020 and as of May 2, 2020 , the Dollar Tree segment had frozen and refrigerated merchandise in approximately 6,210 stores compared to approximately 5,765 stores at May 4, 2019 .

We believe comparable store net sales continue to be positively affected by our Dollar Tree initiatives.

We continued the roll-out of frozen and refrigerated merchandise to more of our Dollar Tree stores in the second quarter of 2020 and as of August 1, 2020 , the Dollar Tree segment had frozen and refrigerated merchandise in approximately 6,300 stores compared to approximately 5,970 stores at August 3, 2019 .

Beginning in fiscal 2018, we rolled out a new layout to a number of our Dollar Tree stores, which we call our Snack Zone.

This layout highlights our immediate consumption snack offerings in the front of the store near the checkout areas.

As of May 2, 2020 , we have Snack Zone in approximately 2,290 Dollar Tree stores.

In fiscal 2019, we introduced our Crafter’s Square initiative in

more than 650 stores.

As of August 1, 2020 , we

have Snack Zone in approximately 2,530 Dollar Tree stores.

In fiscal 2019, we introduced our Crafter’s Square initiative in more than 650 stores.

This section includes a new expanded assortment of arts and crafts supplies.

We have begun expanding this program and have rolled it out to more than 3,000 stores as of May 2, 2020.

We have begun expanding this program and have rolled it out to more than 3,100 stores as of August 1, 2020 .

We plan to include Crafter’s Square in additional stores in the future.

We believe these initiatives have and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers.

We believe these initiatives have and will continue to enable us to increase sales and earnings.

Family Dollar Initiatives

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H2 stores perform well in a variety of locations and especially in locations where our Family Dollar stores have been most challenged in the past.

As of May 2, 2020 , we have approximately 1,700 H2 stores.

As of August 1, 2020 , we have approximately 1,790 H2 stores.

We plan to renovate approximately 750 stores to the H2 format in fiscal 2020.

In addition, we installed adult beverage product in approximately 80 stores in the first quarter of 2020 and plan to add it to approximately 800 more stores in 2020.

In addition, we installed adult beverage product in approximately 250 stores in the first half of 2020 and plan to add it to approximately 570 more stores in 2020.

We believe the addition of adult beverage to our assortment will drive traffic to our stores.

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26 Weeks Ended

(dollars in millions)

Comparable store net sales change

The increase in net sales in the 13 weeks ended May 2, 2020 was a result of a comparable store net sales increase in the Family Dollar segment and sales of $234.6 million at new stores.

These sales increases were partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our Family Dollar segment store optimization program and a decrease in comparable store net sales in the Dollar Tree segment.

Lower traffic resulting from the COVID-19 pandemic negatively affected Easter sales in the Dollar Tree segment.

Enterprise comparable store net sales increased 7.0% on a constant currency basis as a result of a 15.5% increase in average ticket and a 7.4% decrease in customer traffic.

The increase in net sales in the 13 weeks ended August 1, 2020 was a result of comparable store net sales increases in both the Family Dollar and Dollar Tree segments and sales of $212.3 million at new stores.

These sales increases were partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our Family Dollar segment store optimization program.

Enterprise comparable store net sales increased 7.2% on a constant currency basis in the 13 weeks ended August 1, 2020, as a result of a 24.7% increase in average ticket and a 14.0% decrease in customer traffic.

Comparable store net sales increased the same 7.2% when including the impact of Canadian currency fluctuations.

On a constant currency basis, comparable store net sales increased 15.5% in the Family Dollar segment and decreased 0.9% in the Dollar Tree segment.

On a constant currency basis, comparable store net sales increased 11.6% in the Family Dollar segment and 3.1% in the Dollar Tree segment.

Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.

The increase in net sales in the 26 weeks ended August 1, 2020 was a result of comparable store net sales increases in the Family Dollar and Dollar Tree segments and sales of $447.0 million at new stores.

These sales increases were partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our Family Dollar segment store optimization program.

Enterprise comparable store net sales increased 7.1% on a constant currency basis in the 26 weeks ended August 1, 2020, as a result of a 20.0% increase in average ticket and a 10.8% decrease in customer traffic.

Comparable store net sales increased the same 7.1% when including the impact of Canadian currency fluctuations.

On a constant currency basis, comparable store net sales increased 13.6% in the Family Dollar segment and 1.1% in the Dollar Tree segment.

Lower traffic resulting from the COVID-19 pandemic negatively affected Easter sales in the Dollar Tree segment in the first quarter of fiscal 2020.

13 Weeks Ended

26 Weeks Ended

(dollars in millions)

Gross profit margin

The decrease in gross profit margin in the 13 weeks ended May 2, 2020 was a result of the following:

Merchandise cost, including freight, increased approximately 115 basis points resulting from higher sales of lower margin consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $23.0 million and higher freight costs, partially offset by improved initial mark-on.

Markdown costs increased approximately 25 basis points resulting primarily from the higher seasonal markdowns in the Dollar Tree segment due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic.

The increase in gross profit margin in the 13 weeks ended August 1, 2020 was a result of the following:

Merchandise cost, including freight, decreased approximately 120 basis points resulting from higher sales of higher margin discretionary merchandise, improved initial mark-on and lower freight costs, partially offset by incremental tariffs of approximately $10.8 million.

Occupancy costs decreased approximately 55 basis points as a result of the leverage from the increase in comparable store net sales.

Markdown costs decreased approximately 40 basis points resulting primarily from the prior year including markdowns related to Family Dollar store closures and clearance sales and lower promotional activity in the current year on the Family Dollar segment as a result of the increase in sales.

Partially offsetting this decrease was $9.8 million of uninsured markdown costs for stores affected by civil unrest.

Shrink costs decreased approximately 15 basis points resulting from favorable inventory reconciliations on the Family Dollar segment in the current quarter, partially offset by unfavorable inventory reconciliations on the Dollar Tree segment.

Distribution costs increased approximately 45 basis points resulting primarily from higher distribution center payroll and depreciation costs.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked beginning March 8, 2020.

Total distribution center COVID-19 related payroll expenses were approximately $6.2 million, or 10 basis points of this increase.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked during the 13 weeks ended August 1, 2020.

Total distribution center COVID-19-related expenses were approximately $11.4 million, or 20 basis points of this increase.

The increase in gross profit margin in the 26 weeks ended August 1, 2020 was a result of the following:

Occupancy costs decreased approximately 50 basis points as a result of the leverage from the increase in comparable store net sales.

Markdown costs decreased approximately 10 basis points resulting primarily from the prior year including markdowns related to Family Dollar store closures and clearance sales and lower promotional activity on the Family Dollar segment as a result of the increase in sales.

This decrease was partially offset by $9.8 million of uninsured markdown costs for stores affected by civil unrest and higher seasonal markdowns in the Dollar Tree segment due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic.

Shrink costs decreased approximately 10 basis points resulting from favorable inventory reconciliations on the Family Dollar segment in the current year, partially offset by unfavorable inventory reconciliations on the Dollar Tree segment.

Merchandise cost, including freight, as a percentage of net sales, was consistent in the 26 weeks ended August 1, 2020 and the same period last year.

Incremental tariff costs of approximately $33.8 million and sales of lower margin consumable merchandise were offset by improved initial mark-on and lower freight costs.

Distribution costs increased approximately 35 basis points resulting primarily from higher distribution center payroll and depreciation costs.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked since March 8, 2020.

Total distribution center COVID-19-related expenses were approximately $17.8 million, or 15 basis points of this increase.

Selling, General and Administrative Expenses

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(dollars in millions)

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As a percentage of Net sales

The decrease in selling, general and administrative expenses, as a percentage of net sales, in the 13 weeks ended May 2, 2020 was a result of the following:

Operating and corporate expenses decreased approximately 35 basis points as a result of the leverage from the comparable store net sales increase in the Family Dollar segment and the following:

Corporate costs decreased approximately 15 basis points resulting from the prior year including costs related to the consolidation of our store support centers and higher legal fees due to shareholder activism.

Advertising costs decreased 10 basis points resulting from lower promotional advertising during the COVID-19 pandemic.

Travel costs decreased approximately 10 basis points as a result of COVID-19 travel restrictions.

Inventory service expense decreased approximately 5 basis points as a result of the postponement of inventories from March 15, 2020 through the end of the quarter due to the COVID-19 pandemic.

Store supplies expense increased approximately 5 basis resulting primarily from the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.

Repairs and maintenance and utility costs decreased 30 basis points due to leverage from the comparable store net sales increase and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.

Payroll expenses increased approximately 25 basis points due to the following:

Store hourly payroll increased approximately 55 basis points due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020, partially offset by the leverage from the increase in comparable store net sales in the Family Dollar segment.

Total COVID-19-related pay was approximately $52.3 million or 85 basis points.

Store sales bonus expenses increased approximately 10 basis points as a result of the higher comparable store net sales in the Family Dollar segment and approximately $3.5 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

Field management payroll decreased 15 basis points due to leverage from the comparable store net sales increase and the lower store count in the Family Dollar segment.

We also paid $1.7 million of bonuses to certain field management associates related to the COVID-19 pandemic.

Office payroll decreased approximately 10 basis points as a result of the store support center consolidation and other leadership changes made in the fourth quarter of fiscal 2019.

Other payroll expenses decreased approximately 10 basis points resulting from lower temporary help expenses due to fewer H2 conversions in the current year as a result of the COVID-19 pandemic.

The increase in selling, general and administrative expenses, as a percentage of net sales, in the 13 weeks ended August 1, 2020 was a result of the following:

Payroll expenses increased approximately 130 basis points primarily due to incremental costs associated with the COVID-19 pandemic and an increase in incentive compensation and stock compensation costs resulting from improved operating performance in the Family Dollar segment.

These increases were partially offset by leverage from the comparable store net sales increase and decreases in workers’ compensation expenses and benefits costs, as well as lower temporary help expenses as a result of the prior year including higher expenses to support store-level initiatives.

Office payroll costs also decreased resulting from the store support center consolidation in the prior year quarter and other leadership changes made in the fourth quarter of fiscal 2019.

Payroll expenses also included $0.6 million in pay continuation for associates whose stores were closed due to civil unrest.

Incremental payroll costs associated with the COVID-19 pandemic, including a $2 per hour premium paid to all store hourly associates for all hours worked during the 13 weeks ended August 1, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes, totaled $114.6 million, or approximately 185 basis points.

Other selling, general and administrative expenses decreased approximately 55 basis points as a result of the leverage from the comparable store net sales increase, higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization program on the Family Dollar segment, decreases in promotional advertising on the Family Dollar segment and in travel due to the COVID-19 pandemic and higher costs in the prior year for the store support center consolidation.

These improvements were partially offset by an increase in insurance costs related to unfavorable development of general liability claims.

The 13 weeks ended August 1, 2020 included approximately $8.1 million, or 10 basis points, of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic and approximately $2.5 million of expenses, primarily for fixed asset disposals, related to stores damaged in civil unrest.

Store facility costs decreased approximately 20 basis points due to leverage from the comparable store net sales increase and lower electricity costs.

The 13 weeks ended August 1, 2020 included approximately $3.9 million, primarily for uninsured repairs, related to stores damaged in civil unrest and approximately $0.9 million of COVID-19-related expenses.

Selling, general and administrative expenses, as a percentage of net sales, was 23.6% in both the 26 weeks ended August 1, 2020 and August 3, 2019.

The changes in selling, general and administrative expenses were as follows:

Payroll expenses increased approximately 80 basis points primarily due to incremental costs associated with the COVID-19 pandemic and an increase in incentive compensation, stock compensation costs and store sales bonuses resulting from improved operating performance in the Family Dollar segment.

These increases were partially offset by leverage from the comparable store net sales increase and decreases in workers’ compensation and benefits costs, as well as lower temporary help expenses as a result of the prior year including higher expenses to support store-level initiatives.

Office payroll costs also decreased resulting from the store support center consolidation in the prior year quarter and other leadership changes made in the fourth quarter of fiscal 2019.

Incremental payroll costs associated with the COVID-19 pandemic, including a $2 per hour premium paid to all store hourly associates for all hours worked since March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes, totaled $172.1 million, or approximately 135 basis points.

Other selling, general and administrative expenses decreased approximately 45 basis points as a result of the leverage from the comparable store net sales increase, higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization program on the Family Dollar segment, decreases in promotional advertising on the Family Dollar segment and in travel due to the COVID-19 pandemic and higher costs in the prior year for the store support center consolidation.

These improvements were partially offset by an increase in insurance costs related to unfavorable development of general liability claims.

The 26 weeks ended August 1, 2020 included approximately $17.2 million, or 15 basis points, of costs for the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies due to

the COVID-19 pandemic, and approximately $2.5 million of expenses, primarily for fixed asset disposals, related to stores damaged in civil unrest.

Store facility costs decreased approximately 25 basis points due to leverage from the comparable store net sales increase and lower electricity costs.

The 26 weeks ended August 1, 2020 included approximately $3.9 million primarily for uninsured repairs related to stores damaged in civil unrest and approximately $1.0 million of COVID-19-related expenses.

Operating Income

13 Weeks Ended

26 Weeks Ended

(dollars in millions)

1 unchanged sentence

Operating income margin

Operating income margin decreased to 5.8% for the 13 weeks ended May 2, 2020 compared to 6.6% for the same period last year as operating income margin in the Dollar Tree segment declined 410 basis points.

The decrease was partially offset by a 230 basis point increase in the Family Dollar segment operating income margin.

Operating income in the 13 weeks ended May 2, 2020 includes approximately $73.2 million of COVID-19 related expenses.

Operating income margin increased to 6.0% for the 13 weeks ended August 1, 2020 compared to 4.7% for the same period last year as operating income margin in the Family Dollar segment increased approximately 470 basis points.

The increase was partially offset by a 170 basis point decrease in the Dollar Tree segment operating income margin.

Operating income in the 13 weeks ended August 1, 2020 includes approximately $134.9 million of COVID-19-related expenses and $16.8 million of uninsured expenses related to civil unrest.

Operating income margin increased to 5.9% for the 26 weeks ended August 1, 2020 compared to 5.7% for the same period last year as operating income margin in the Family Dollar segment increased approximately 350 basis points.

The increase was partially offset by a 300 basis point decrease in the Dollar Tree segment operating income margin.

Operating income in the 26 weeks ended August 1, 2020 includes approximately $208.0 million of COVID-19-related expenses and $16.8 million of uninsured expenses related to civil unrest.

Interest Expense, Net

13 Weeks Ended

26 Weeks Ended

(dollars in millions)

Interest expense, net

Interest expense decreased $1.2 million resulting from lower average debt outstanding in the current year quarter compared to the same quarter last year partially offset by lower interest income in the current year quarter.

Interest expense decreased $5.3 million in the 13 weeks ended August 1, 2020 compared to the same period last year, resulting from lower average debt outstanding in the current year quarter compared to the same quarter last year.

Interest expense decreased $6.5 million in the 26 weeks ended August 1, 2020 compared to the same period last year, resulting from lower average debt outstanding in the current year, partially offset by lower interest income.

Provision for Income Taxes

13 Weeks Ended

26 Weeks Ended

(dollars in millions)

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Effective tax rate

The increase in our effective tax rate in the 13 weeks ended May 2, 2020 was primarily the result of additional tax expense for restricted stock vestings in the current quarter due to the stock price for certain grants being lower at the vest date than the grant date.

The effective tax rate for the 13 weeks ended August 1, 2020 was 23.1% compared to 21.1% for the same period last year.

The 2019 rate reflects a reduction in the reserve for uncertain tax positions resulting from statute expirations of $5.8 million.

The effective tax rate for the 26 weeks ended August 1, 2020 was 23.5% compared to 21.7% for the same period last year.

The 2019 rate reflects a reduction in the reserve for uncertain tax positions resulting from statute expirations of $5.8 million.

The current year rate includes additional tax expense for restricted stock vestings due to the stock price for certain grants being lower at the vest date than the grant date.

Segment Information

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13 Weeks Ended

26 Weeks Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

(in millions)

Operating income

Net sales for the Dollar Tree segment increased $118.2 million, or 4.0%, for the 13 weeks ended May 2, 2020 , compared to the same period last year.

The increase was due to sales from new stores of $163.1 million, partially offset by a decrease of 0.9% in comparable store net sales.

Customer traffic declined 11.7% and average ticket increased 12.2%.

Gross profit margin for the Dollar Tree segment decreased to 31.9% for the 13 weeks ended May 2, 2020 compared to 34.5% for the same period last year as a result of the following:

Merchandise cost, including freight, increased approximately 140 basis points primarily due to increased sales of higher cost consumable merchandise and lower Easter sales as a result of the COVID-19 pandemic, incremental tariffs of approximately $18.0 million and higher freight costs, partially offset by increased initial mark-on.

Markdown costs increased 40 basis points resulting from higher seasonal markdowns due to the lower Easter sell-through as a result of the COVID-19 pandemic.

Distribution costs increased 30 basis points resulting from higher distribution center payroll and depreciation costs.

Distribution center payroll costs include approximately $3.5 million or 10 basis points of a $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 and guaranteed bonuses resulting from the COVID-19 pandemic.

Occupancy costs increased approximately 30 basis points resulting primarily from the loss of leverage due to the comparable store net sales decrease in the quarter.

Shrink costs increased 25 basis points resulting from unfavorable inventory results in the current quarter and an increase in the shrink accrual rate.

Operating income margin for the Dollar Tree segment decreased to 9.2% for the 13 weeks ended May 2, 2020 from 13.3% for the same period last year.

The decrease in operating income margin in the 13 weeks ended May 2, 2020 was the result of the gross profit margin decrease noted above and higher selling, general and administrative expenses as a percentage of net sales.

Selling, general and administrative expenses increased to 22.7% as a percentage of net sales in the 13 weeks ended May 2, 2020 compared to 21.2% for the same period last year as a result of the net of the following:

Payroll expenses increased approximately 145 basis points resulting from the net of the following:

Store hourly payroll increased approximately 120 basis points primarily due to the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 and the loss of leverage from the decrease in comparable store net sales.

Total COVID-19-related pay was $30.1 million or 95 basis points.

Field management payroll increased approximately 15 basis points primarily due to the loss of leverage from the decrease in comparable store net sales.

We also paid $0.9 million of bonuses to certain field management associates related to the COVID-19 pandemic.

Store sales bonus expenses increased approximately 10 basis points as a result of $2.7 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

Operating expenses increased approximately 5 basis points as a result of the loss of leverage from the comparable store net sales decrease and the net of the following COVID-19-related changes:

Store supplies costs increased approximately 10 basis points as a result of the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies.

Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.

Operating income in the 13 weeks ended May 2, 2020 includes approximately $42.2 million of COVID-19 related expenses.

Net sales for the Dollar Tree segment increased $219.2 million, or 7.4%, for the 13 weeks ended August 1, 2020 , compared to the same period last year.

The increase was due to a 3.1% increase in comparable store net sales and sales from new stores of $150.1 million.

Average ticket increased 22.6% and customer traffic declined 15.9%.

Net sales for the Dollar Tree segment increased $337.3 million, or 5.7%, for the 26 weeks ended August 1, 2020 , compared to the same period last year.

The increase was due to sales from new stores of $313.3 million and a 1.1% increase in comparable store net sales.

Average ticket increased 17.3% and customer traffic declined 13.8%.

Gross profit margin for the Dollar Tree segment decreased to 33.7% for the 13 weeks ended August 1, 2020 compared to 33.8% for the same period last year as a result of the net of the following:

Distribution costs increased approximately 70 basis points resulting primarily from higher distribution center payroll and depreciation costs.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked during the 13 weeks ended August 1, 2020.

Total distribution center COVID-19-related expenses were approximately $6.7 million, or 20 basis points of this increase.

Shrink costs increased 15 basis points resulting from unfavorable inventory reconciliations in the current quarter and an increase in the shrink accrual rate.

Markdown costs were flat, as a percentage of net sales, for the 13 weeks ended August 1, 2020 compared to the same period last year as lower store initiated markdowns were offset by $2.8 million of uninsured markdown costs for stores affected by civil unrest.

Merchandise cost, including freight, decreased approximately 65 basis points primarily due to increased sales of higher margin discretionary merchandise, lower freight costs and increased initial mark-on, partially offset by incremental tariffs of approximately $8.2 million.

Occupancy costs decreased approximately 15 basis points resulting primarily from the leverage due to the comparable store net sales increase in the quarter.

Gross profit margin for the Dollar Tree segment decreased to 32.8% for the 26 weeks ended August 1, 2020 compared to 34.1% for the same period last year as a result of the following:

Distribution costs increased approximately 50 basis points resulting primarily from higher distribution center payroll and depreciation costs.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked since March 8, 2020.

Total distribution center COVID-19-related expenses were approximately $10.3 million, or 15 basis points of this increase.

Merchandise cost, including freight, increased approximately 40 basis points primarily due to incremental tariffs of approximately $26.2 million and increased sales of higher cost consumable merchandise, particularly during the Easter selling season, as a result of the COVID-19 pandemic, partially offset by improved initial mark-on.

Shrink costs increased 20 basis points resulting from unfavorable inventory reconciliations in the current year and an increase in the shrink accrual rate.

Markdown costs increased 20 basis points resulting from increased seasonal markdowns from the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic and $2.8 million of uninsured markdown costs for stores affected by civil unrest.

Operating income margin for the Dollar Tree segment decreased to 9.7% for the 13 weeks ended August 1, 2020 from 11.4% for the same period last year.

The decrease in operating income margin in the 13 weeks ended August 1, 2020 was the result of higher selling, general and administrative expenses, as a percentage of net sales, and the gross profit margin decrease noted above.

Selling, general and administrative expenses increased to 24.0% as a percentage of net sales in the 13 weeks ended August 1, 2020 compared to 22.4% for the same period last year as a result of the net of the following:

Payroll expenses increased approximately 175 basis points primarily due to incremental costs associated with the COVID-19 pandemic.

The COVID-19-related increases were partially offset by leverage from the comparable store net sales increase and decreases in workers’ compensation expenses and benefits costs.

Payroll expenses also included $0.2 million in pay continuation for associates whose stores were closed due to civil unrest.

Other selling, general and administrative expenses increased approximately 5 basis points as a result of an increase in insurance costs related to unfavorable development of general liability claims, partially offset by lower travel costs due to the COVID-19 pandemic and lower legal expenses.

The 13 weeks ended August 1, 2020 included approximately $3.5 million, or 10 basis points, of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.

Store facility costs decreased approximately 10 basis points due to leverage from the comparable store net sales increase and lower electricity costs.

The 13 weeks ended August 1, 2020 included expenses for repairs to stores damaged by civil unrest.

Operating income in the 13 weeks ended August 1, 2020 includes approximately $76.6 million of COVID-19-related expenses and $5.1 million of uninsured costs related to civil unrest.

Operating income margin for the Dollar Tree segment decreased to 9.4% for the 26 weeks ended August 1, 2020 from 12.4% for the same period last year.

The decrease in operating income margin in the 26 weeks ended August 1, 2020 was the result of higher selling, general and administrative expenses, as a percentage of net sales, and the gross profit margin decrease noted above.

Selling, general and administrative expenses increased to 23.4% as a percentage of net sales in the 26 weeks ended August 1, 2020 compared to 21.7% for the same period last year as a result of the net of the following:

Payroll expenses increased approximately 160 basis points primarily due to incremental costs associated with the COVID-19 pandemic, including a $2 per hour premium paid to all store hourly associates for all hours worked since March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.

These costs totaled $99.7 million for the 26 weeks ended August 1, 2020.

The 26 weeks ended August 1, 2020 included approximately $8.3 million, or 15 basis points, of costs for the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.

Store facility costs decreased approximately 10 basis points due to leverage from the comparable store net sales increase.

The 26 weeks ended August 1, 2020 included expenses for repairs to stores damaged in civil unrest.

Operating income in the 26 weeks ended August 1, 2020 includes approximately $118.8 million of COVID-19-related expenses and $5.1 million of uninsured costs related to civil unrest.

Family Dollar

1 unchanged sentence

13 Weeks Ended

26 Weeks Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

(in millions)

Operating income

Net sales for the Family Dollar segment increased $359.9 million or 12.6% for the 13 weeks ended May 2, 2020 compared to the same period last year.

Net sales for the Family Dollar segment increased $317.8 million or 11.4% for the 13 weeks ended August 1, 2020 compared to the same period last year.

The increase was due to a comparable store net sales increase of 11.6% and $62.2 million of new store sales, partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our store optimization program.

For the 13 weeks ended May 2, 2020 , average ticket increased 17.1%, partially offset by a 1.4% decrease in customer traffic.

Gross profit margin for the Family Dollar segment increased to 25.4% for the 13 weeks ended May 2, 2020 compared to 24.8% for the same period last year.

For the 13 weeks ended August 1, 2020 , average ticket increased 25.9% and customer traffic declined 11.3%.

Net sales for the Family Dollar segment increased $677.8 million or 12.0% for the 26 weeks ended August 1, 2020 compared to the same period last year.

The increase was due to a comparable store net sales increase of 13.6% and $133.7 million of new store sales, partially offset by lost sales resulting from store closures during fiscal 2019 in connection with our store optimization program.

For the 26 weeks ended August 1, 2020 , average ticket increased 21.4% and customer traffic declined 6.4%.

Gross profit margin for the Family Dollar segment increased to 27.2% for the 13 weeks ended August 1, 2020 compared to 23.3% for the same period last year.

The increase is due to the net of the following:

Occupancy costs decreased approximately 105 basis points as a result of the leverage from the comparable store net sales increase and the higher expense in the prior year related to the accelerated amortization of right-of-use assets related to the second quarter 2019 store closures.

Shrink expense decreased approximately 30 basis points resulting from an increase in the accrual rate and unfavorable inventory reconciliations in the prior year quarter and improved inventory results in the current year.

Merchandise cost, including freight, increased approximately 55 basis points primarily due to increased sales of higher cost consumable merchandise as a result of the COVID-19 pandemic, incremental tariffs of approximately $5.0 million and higher freight costs, partially offset by improved initial mark-on.

Merchandise cost, including freight, decreased approximately 190 basis points primarily due to increased sales of higher margin discretionary merchandise, improved initial mark-on and lower freight costs, partially offset by incremental tariffs of approximately $2.6 million.

Occupancy costs decreased approximately 95 basis points as a result of the leverage from the comparable store net sales increase.

Markdowns at cost decreased approximately 85 basis points primarily due to store closure and clearance sale markdowns in the prior year quarter and lower promotional activity in the current year, partially offset by $7.0 million of uninsured markdown costs for stores affected by civil unrest.

Shrink expense decreased approximately 40 basis points resulting from favorable inventory reconciliations in the current year and the prior year including an increase in the accrual rate and unfavorable inventory reconciliations.

Distribution costs increased approximately 25 basis points resulting primarily from higher distribution center payroll costs.

These costs include $2.7 million, or 10 basis points, related to the $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 related to the COVID-19 pandemic.

Operating income margin for the Family Dollar segment increased to 5.5% for the 13 weeks ended May 2, 2020 from 3.2% for the same period last year resulting from the gross margin increase noted above and a decrease in selling, general and administrative expenses as a percentage of net sales.

Selling, general and administrative expenses were 19.9% as a percentage of net sales in the 13 weeks ended May 2, 2020 compared to 21.6% for the same period last year.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked during the current quarter.

Total distribution center COVID-19-related expenses were approximately $4.7 million, or 15 basis points of this increase.

Gross profit margin for the Family Dollar segment increased to 26.3% for the 26 weeks ended August 1, 2020 compared to 24.1% for the same period last year.

The increase is due to the net of the following:

Occupancy costs decreased approximately 100 basis points as a result of the leverage from the comparable store net sales increase and the higher expense in the prior year related to the accelerated amortization of the right-of-use assets for stores we closed during 2019.

Merchandise cost, including freight, decreased approximately 65 basis points primarily due to increased sales of higher margin discretionary merchandise, improved initial mark-on and lower freight costs, partially offset by incremental tariffs of approximately $7.6 million.

Markdowns at cost decreased approximately 40 basis points primarily due to store closure and clearance sale markdowns in the prior year and lower promotional activity in the current year, partially offset by $7.0 million of uninsured markdown costs for stores affected by civil unrest.

Shrink expense decreased approximately 35 basis points resulting from favorable inventory reconciliations in the current year and the prior year, including an increase in the accrual rate and unfavorable inventory reconciliations.

Distribution costs increased approximately 20 basis points resulting primarily from higher distribution center payroll costs.

We paid our hourly distribution center associates a $2 per hour premium for all hours worked since March 8, 2020.

Total distribution center COVID-19-related expenses were approximately $7.5 million, or 10 basis points of this increase.

Operating income margin for the Family Dollar segment increased to 5.3% for the 13 weeks ended August 1, 2020 from 0.6% for the same period last year resulting from the gross margin increase noted above and a decrease in selling, general and administrative expenses as a percentage of net sales.

Selling, general and administrative expenses were 21.9% as a percentage of net sales in the 13 weeks ended August 1, 2020 compared to 22.7% for the same period last year.

The current quarter decrease in selling, general and administrative expenses, as a percentage of net sales, was due to the net of the following:

Payroll expenses decreased approximately 65 basis points as a result of the leverage from the comparable store net sales increase and the net of the following:

Store hourly payroll was consistent with the prior year quarter as the $2 per hour COVID-19-related premium paid to all store hourly associates for hours worked beginning March 8, 2020 was offset by leverage from the comparable store net sales increase.

Total COVID-19-related pay was $22.2 million or 70 basis points.

Field management payroll decreased approximately 50 basis points due to the leverage from the comparable store net sales increase and the lower store count resulting from the 2019 store optimization program.

We also paid $0.8 million of bonuses to certain field management associates related to the COVID-19 pandemic.

Other payroll expenses decreased approximately 15 basis points as a result of lower temporary help expenses due to fewer H2 conversions in the current year due to the COVID-19 pandemic.

Store sales bonus expenses increased approximately 15 basis points as a result of higher sales and an incremental $0.8 million of guaranteed bonus payouts for store managers related to the COVID-19 pandemic.

Occupancy costs decreased approximately 55 basis points primarily due to the leverage associated with the increase in comparable store net sales in the period and the postponement of certain maintenance activities as a result of the COVID-19 pandemic.

Operating expenses decreased approximately 40 basis points primarily due to leverage from the comparable store net sales increase and the net of the following COVID-19-related changes:

Advertising costs decreased 25 basis points resulting from lower promotional advertising.

Travel decreased approximately 10 basis points resulting from travel restrictions.

Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15, 2020 through the end of the quarter.

Store supplies costs were consistent with the prior year quarter as the installation of plexiglass sneeze guards at all registers in our stores and incremental costs for masks, gloves and cleaning supplies were offset by leverage from the comparable store net sales increase.

Depreciation and amortization expense decreased 10 basis points as a result of leverage from the comparable store net sales increase.

Operating income in the 13 weeks ended May 2, 2020 includes approximately $30.4 million of COVID-19 related expenses.

Other selling, general and administrative expenses decreased approximately 90 basis points primarily due to higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization program, a decrease in promotional advertising and travel during the COVID-19 pandemic and leverage associated with the increase in comparable store net sales during the period, partially offset by an increase in insurance costs related to unfavorable development of general liability claims.

The 13 weeks ended August 1, 2020 included $3.9 million or 15 basis points of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic and $1.9 million of expenses primarily for fixed asset disposals for stores damaged by civil unrest.

Store facility costs decreased approximately 25 basis points primarily due to leverage from the comparable store net sales increase and lower electricity costs.

The 13 weeks ended August 1, 2020 included $2.4 million or 10 basis points of incremental repairs and maintenance expenses for stores damaged by civil unrest.

Payroll expenses increased approximately 40 basis points primarily due to incremental costs associated with the COVID-19 pandemic and an increase in incentive compensation resulting from the improved Family Dollar operating performance, partially offset by leverage from the comparable store net sales increase and decreases in workers’ compensation expenses and benefits costs, as well as lower temporary help expenses as a result of the prior year including higher expenses to support store-level initiatives.

Incremental costs associated with the COVID-19 pandemic, including a $2 per hour premium paid to all store hourly associates for all hours worked during the 13 weeks ended August 1, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes, totaled $48.2 million or 155 basis points.

Operating income in the 13 weeks ended August 1, 2020 includes approximately $57.1 million for COVID-19-related expenses and $11.7 million of uninsured costs related to civil unrest.

Operating income margin for the Family Dollar segment increased to 5.4% for the 26 weeks ended August 1, 2020 from 1.9% for the same period last year resulting from the gross margin increase noted above and a decrease in selling, general and administrative expenses, as a percentage of net sales.

Selling, general and administrative expenses were 20.9% as a percentage of net sales in the 26 weeks ended August 1, 2020 compared to 22.2% for the same period last year.

The decrease in selling, general and administrative expenses, as a percentage of net sales, was due to the following:

Other selling, general and administrative expenses decreased approximately 65 basis points primarily due to a decrease in promotional advertising during the COVID-19 pandemic, higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization program and leverage associated with the increase in comparable store net sales during the period, partially offset by an increase in insurance costs related to unfavorable development of general liability claims.

The 26 weeks ended August 1, 2020 included $7.7 million or 10 basis points of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic and $1.9 million of expenses primarily for fixed asset disposals for stores damaged by civil unrest.

Store facility costs decreased approximately 40 basis points primarily due to leverage from the comparable store net sales increase and lower electricity costs.

The 26 weeks ended August 1, 2020 included $2.4 million of incremental repairs and maintenance expenses for stores damaged by civil unrest.

Payroll expenses decreased approximately 15 basis points primarily due to leverage from the comparable store net sales increase and decreases in workers’ compensation expenses and benefits costs, as well as lower temporary help expenses as a result of the prior year including higher expenses to support store-level initiatives, partially offset by incremental costs associated with the COVID-19 pandemic and an increase in incentive compensation resulting from the improved Family Dollar operating performance.

Incremental costs associated with the COVID-19 pandemic, including a $2 per hour premium paid to all store hourly associates for all hours worked since March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes totaled approximately $72.0 million or 115 basis points.

Operating income in the 26 weeks ended August 1, 2020 includes approximately $87.5 million for COVID-19-related expenses and $11.7 million of uninsured costs related to civil unrest.

Liquidity and Capital Resources

2 unchanged sentences

Historically, we have satisfied our seasonal working capital requirements for existing stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.

The following table compares cash-flow related information for the 13 weeks ended May 2, 2020 and May 4, 2019 :

The following table compares cash-flow related information for the 26 weeks ended August 1, 2020 and August 3, 2019 :

26 Weeks Ended

4 unchanged sentences

Financing activities

Net cash provided by operating activities increased $344.9 million primarily as a result of lower inventory levels at the end of the quarter.

Net cash used in investing activities increased $43.5 million primarily due to increased capital expenditures related to distribution center projects and grant funds received from state and local governments for our Summit Pointe development in the prior year quarter.

For the 13 weeks ended May 2, 2020, cash provided by financing activities was $493.6 million compared to cash used in financing activities of $117.5 million for the 13 weeks ended May 4, 2019.

The cash provided by financing activities in the current quarter is the result of the preemptive draw on our Revolving Credit Facility of $750.0 million partially offset by the final $250.0 million payment on the Senior Floating Rate Notes due 2020.

Net cash provided by operating activities increased $593.0 million primarily as a result of lower inventory levels as well as higher accounts payable, current liabilities and other liabilities at August 1, 2020, and increased earnings before depreciation and amortization in the current year.

Net cash used in investing activities decreased $17.6 million primarily due to higher capital expenditures in the prior year for the Family Dollar store optimization program, including H2 renovations and re-banners.

H2 renovations have been slowed in the current year due to the COVID-19 pandemic.

The decrease was partially offset by increased capital expenditures related to distribution center projects in the current year and grant funds received from state and local governments for our Summit Pointe development in the prior year.

For the 26 weeks ended August 1, 2020, cash provided by financing activities was $245.4 million compared to cash used in financing activities of $154.0 million for the 26 weeks ended August 3, 2019.

The cash provided by financing activities in the current year is the result of the preemptive draw on our Revolving Credit Facility of $750.0 million partially offset by the final $250.0 million payment on the Senior Floating Rate Notes due 2020 and a $250.0 million repayment of the Revolving Credit Facility draw.

The prior year quarter included $139.2 million of cash paid for stock repurchases.

In the first quarter of fiscal 2020, we preemptively drew on our Revolving Credit Facility to reduce our exposure to potential short-term liquidity risk in the banking system as a result of the COVID-19 pandemic.

At May 2, 2020 , our total borrowings were $4.3 billion and we had $363.4 million available under our Revolving Credit Facility.

We also have $290.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which approximately $174.8 million was committed to letters of credit issued for routine purchases of imported merchandise as of May 2, 2020 .

Subsequent to May 2, 2020, our total Letter of Credit Reimbursement and Security Agreements was increased to $330.0 million.

There were no shares repurchased on the open market during the 13 weeks ended May 2, 2020 , and we have temporarily suspended share repurchases under the Board repurchase authorization.

We repurchased 960,683 shares of common stock on the open market for approximately $100.0 million during the 13 weeks ended May 4, 2019 .

As of May 2, 2020 , we had $800.0 million remaining under Board repurchase authorization.

At August 1, 2020 , our total borrowings were $4.1 billion and we had $614.3 million available under our Revolving Credit Facility.

We also have $346.5 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which approximately $308.5 million was committed to letters of credit issued for routine purchases of imported merchandise as of August 1, 2020 .

There were no shares repurchased on the open market during the 26 weeks ended August 1, 2020 , and we have temporarily suspended share repurchases under the Board repurchase authorization.

We repurchased 1,842,307 shares of common stock on the open market for approximately $188.4 million during the 26 weeks ended August 3, 2019 .

As of August 1, 2020 , we had $800.0 million remaining under Board repurchase authorization.

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