DOLLAR TREE, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Note Regarding Forward-Looking Statements: This document contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding: • 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 possible disruptions in our supply chain or sources of supply, 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, and changes in customer demand for our consumable and essential products as well as our discretionary products; • 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; • Our costs could increase in the future. Certain states and local governments have passed laws to increase the minimum wage beginning in 2021 and it is likely that the federal government will consider whether to pass similar legislation next year; • Our plans relating to new store openings, the renovation of Family Dollar stores to the H2 format, and new store concepts such as Dollar Tree Plus! ; • 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 effect of our initiatives to renovate Family Dollar stores to the H2 store format and the performance of that format 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; • Our seasonal sales patterns and customer demand including those relating to the important holiday selling seasons and party merchandise; • 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, and other potential impediments to imports; • 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; and • Our expectations regarding compliance with debt covenants and stock repurchases. A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. 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 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. 17 Table of Contents • Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of unfavorable economic conditions 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. Next year the minimum wage will increase in certain States and localities and may increase nationally depending on the outcome of future legislation proposed in Congress. • 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. COVID-19 and other factors have slowed the flow of imported and other merchandise and could impact our profitability if product flow is not improved. • 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. • 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 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. • 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. 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. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events, or otherwise. Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to disclose to them any material, nonpublic information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any securities analyst regardless of the content of the statement or report. Furthermore, we have a policy against confirming projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility. The Impact of COVID-19 The COVID-19 pandemic has affected, and likely will continue to affect, our financial condition and results of operations for the foreseeable future. As you review the Management’s Discussion and Analysis of Financial Condition and Results of Operations, please keep in mind the following. As an essential business, our stores and distribution centers have remained open during the pandemic; however, our business trends and financial results are different than what we expected. 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 2020. As demand for essential 18 Table of Contents 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 for the remainder of the year. The effect of COVID-19-related stimulus purchases for some other non-essential items may create additional disruptions. We have hired more than 34,000 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. We have: • 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; • Deployed plexiglass sneeze guards for all registers at all stores; • Deployed hand sanitizer stands in each of our stores; • Equipped stores, distribution centers and the store support center with necessary supplies for enhanced cleaning protocol; • Provided wage premiums for all store and distribution center hourly associates, excluding hourly-paid store managers; • 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 when supplies were scarce in retail locations; • Eliminated all non-essential air travel; • Utilized technology options for all large group meetings; • Prohibited external visitors’ access to the store support center; • Enabled the majority of our store support center teams to work remotely; • Enabled contactless payments to our POS systems for our customers; • Followed local municipality, county, and state guidelines and regulations needed to be open as an essential business; • Encouraged safe social distancing protocols for our customers with signing, graphics and communications; • Enabled health prescreening questionnaire for all store and distribution associates before entering work; and • 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, and suspending share repurchases under the remaining Board authorization. Based on our second and third quarter cash flow as well as our projected cash flow and the outlook for liquidity in the banking system for the balance of fiscal 2020, the $750 million was repaid prior to October 31, 2020 and we restarted share repurchases during the third quarter. 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. Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on our customers, suppliers and the broader economies in the locations that we operate as well as uncertainty around the future impact on our supply chain, it is challenging to predict our future operations and financial results. Following is a discussion of the impacts that we have seen and the factors which could influence our future performance. Sales During March, our Dollar Tree and Family Dollar stores began to experience a significant increase in customer demand and sales related to essential products and comparable store net sales increased significantly. However, beginning the last week of March and continuing into April during the peak of the Easter selling season, comparable store net sales at our Dollar Tree stores decreased. Beginning in mid-April, comparable store net sales at our Dollar Tree stores increased as the comparable Easter period from 2019 had passed. 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%. 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 the 13 weeks ended October 31, 2020, enterprise comparable store net sales increased 5.1% resulting from an increase in average ticket of 20.1% partially offset by a decrease in traffic of 12.5%. 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 and the incremental unemployment benefits lapsed on July 31, 2020. It is uncertain whether additional government assistance or unemployment benefits and 19 Table of Contents other economic assistance to individuals, states, and localities will be authorized by governments or the timing and amount of such benefits. In addition, we cannot predict the impact of the spread of COVID-19 on the health and well-being of our customers and associates. The demand for essential supplies has increased and we are dependent on our suppliers to replenish the goods in our stores. Disruptions in our supply chain or sources of supply could adversely impact our sales. Gross Profit As noted, in the 13 weeks ended May 2, 2020, the demand for essential products, which typically sell at a lower margin than our discretionary products, increased significantly. 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 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 continued into the third quarter of 2020; however, the benefit was not as high on the Family Dollar segment as we experienced during the second quarter of 2020. Sales of Dollar Tree’s discretionary goods typically peak in the fourth quarter. Should sales volumes be lower than planned, our gross profit in the Dollar Tree segment would be negatively impacted as it was with Easter merchandise in the first quarter. Our distribution costs included $6.4 million, $11.4 million and $10.9 million in the 13 weeks ended May 2, 2020, August 1, 2020, and October 31, 2020, respectively, of incremental wage premiums in recognition of the team’s extraordinary efforts. We expect the incremental wage premium payments to continue for at least the first nine weeks of the fourth 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 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, $114.6 million and $28.9 million in the 13 weeks ended May 2, 2020, August 1, 2020, and October 31, 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 continued for 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. In the third quarter of 2020, we installed hand sanitizer stands in all of our stores. These expenses totaled $9.1 million, $8.1 million and $6.3 million in the 13 weeks ended May 2, 2020, August 1, 2020, and October 31, 2020, respectively. Store Openings and Initiatives During the first three quarters of fiscal 2020, we opened 262 new Dollar Tree stores and 111 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 155 Family Dollar stores 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 completed the installation of this assortment in approximately 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 600 stores in fiscal 2020. Overview We are a leading operator of more than 15,600 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price of $1.00 . Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores. 20 Table of Contents Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores or adding new stores through mergers or acquisitions. Second is the performance of stores once they are open. Sales vary at our existing stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the period in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. 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 October 31, 2020 , we operated stores in 48 states and the District of Columbia, as well as five Canadian provinces. A breakdown of store counts and square footage by segment for the 39 weeks ended October 31, 2020 and November 2, 2019 is as follows: 39 Weeks Ended October 31, 2020 November 2, 2019 Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total Store Count: Beginning 7,505 7,783 15,288 7,001 8,236 15,237 New stores 262 111 373 286 120 406 Re-bannered stores (3 ) 4 1 190 (199 ) (9 ) Closings (23 ) (33 ) (56 ) (30 ) (342 ) (372 ) Ending 7,741 7,865 15,606 7,447 7,815 15,262 Relocations 46 31 77 35 10 45 Selling Square Feet (in millions): Beginning 64.6 56.7 121.3 60.3 59.8 120.1 New stores 2.3 0.9 3.2 2.5 0.9 3.4 Re-bannered stores (0.1 ) 0.1 — 1.4 (1.4 ) — Closings (0.2 ) (0.2 ) (0.4 ) (0.2 ) (2.4 ) (2.6 ) Relocations 0.1 0.1 0.2 0.1 — 0.1 Ending 66.7 57.6 124.3 64.1 56.9 121.0 Stores are included as re-banners when they close or open, respectively. 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 39 weeks ended October 31, 2020 was approximately 8,670 selling square feet for the Dollar Tree segment and 8,430 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 and 39 weeks ended October 31, 2020 , as compared with the preceding year, is as follows: 13 Weeks Ended October 31, 2020 39 Weeks Ended October 31, 2020 Sales Growth Change in Customer Traffic Change in Average Ticket Sales Growth Change in Customer Traffic Change in Average Ticket Consolidated 5.1 % (12.5 )% 20.1 % 6.5 % (11.3 )% 20.1 % Dollar Tree Segment 4.0 % (12.6 )% 19.0 % 2.1 % (13.4 )% 17.9 % Family Dollar Segment 6.4 % (12.3 )% 21.3 % 11.2 % (8.4 )% 21.4 % 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’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. 21 Table of Contents 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. Dollar Tree Initiatives 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 third quarter of 2020 and as of October 31, 2020 , the Dollar Tree segment had frozen and refrigerated merchandise in approximately 6,365 stores compared to approximately 6,100 stores at November 2, 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 October 31, 2020 , we have Snack Zone in 2,660 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 3,130 stores as of October 31, 2020 . We plan to add Crafter’s Square to the remainder of our Dollar Tree stores in early 2021. Additionally, for more than a year, we have tested a multi-price initiative referred to as Dollar Tree Plus! Beginning in fiscal 2019, we began testing multi-price assortments in more than 100 stores in southwestern markets. Using the results of the test, we have made modifications to: the mix of products offered to include primarily discretionary items; the displays and signage to drive awareness and excitement in the stores; the price points to focus on the $1, $3 and $5 price points; and increase the offerings above the $1 price point. We plan to expand this initiative into a total of 500 stores beginning in the Spring of 2021. We believe these initiatives have and will continue to enable us to increase sales and earnings. Family Dollar Initiatives In fiscal 2019, we executed a store optimization program for our Family Dollar stores to improve performance. Included in that program was a roll-out of a new model for both new and renovated Family Dollar stores internally known as H2. This H2 model has significantly improved merchandise offerings, including approximately 20 Dollar Tree $1.00 merchandise sections and establishing a minimum number of freezer and cooler doors, throughout the store. H2 stores have higher customer traffic and provide an average comparable store net sales lift in excess of 10% in the first year following renovation. 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 October 31, 2020 , we have approximately 2,240 H2 stores. We plan to renovate approximately 750 stores to the H2 format in fiscal 2020 and an additional 1,250 stores in fiscal 2021. In addition, we installed adult beverage product in approximately 470 stores through the third quarter of 2020 and plan to add it to approximately 150 more stores in 2020. We believe the addition of adult beverage to our assortment will drive traffic to our stores. Other Items In 2021, the minimum wage will increase in certain States and localities and may increase nationally depending on the outcome of future legislation proposed in Congress. The currently scheduled minimum wage increases are estimated to increase store payroll by $45.0 million to $50.0 million in 2021, which is less than the COVID-19-related payroll increases in 2020. Minimum wage increases could impact our results of operations in the future. Results of Operations Our results of operations as a percentage of net sales and period-over-period changes are discussed in the following section. Net Sales 13 Weeks Ended 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Net sales $ 6,177.0 $ 5,746.2 7.5 % $ 18,741.4 $ 17,295.5 8.4 % Comparable store net sales change, on a constant currency basis 5.1 % 2.5 % 6.5 % 2.4 % The increase in net sales in the 13 weeks ended October 31, 2020 was a result of comparable store net sales increases in both the Family Dollar and Dollar Tree segments and sales of $194.3 million at new stores. 22 Table of Contents Enterprise comparable store net sales increased 5.1% on a constant currency basis in the 13 weeks ended October 31, 2020, as a result of a 20.1% increase in average ticket and a 12.5% decrease in customer traffic. Comparable store net sales increased the same 5.1% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 6.4% in the Family Dollar segment and 4.0% 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 39 weeks ended October 31, 2020 was a result of comparable store net sales increases in the Family Dollar and Dollar Tree segments and sales of $641.3 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 6.5% on a constant currency basis in the 39 weeks ended October 31, 2020, as a result of a 20.1% increase in average ticket and a 11.3% decrease in customer traffic. Comparable store net sales increased 6.4% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 11.2% in the Family Dollar segment and 2.1% 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. Gross Profit 13 Weeks Ended 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Gross profit $ 1,924.4 $ 1,704.5 12.9 % $ 5,635.5 $ 5,080.2 10.9 % Gross profit margin 31.2 % 29.7 % 1.5 % 30.1 % 29.4 % 0.7 % The increase in gross profit margin in the 13 weeks ended October 31, 2020 was a result of the net of the following: • Merchandise cost, including freight, decreased 80 basis points resulting from higher sales of higher margin discretionary merchandise, improved initial mark-on for the Family Dollar segment and lower freight costs. • Occupancy costs decreased 35 basis points as a result of the leverage from the increase in comparable store net sales. • Shrink costs decreased 35 basis points resulting primarily from favorable inventory reconciliations on the Family Dollar segment in the current quarter. • Markdown costs decreased 25 basis points resulting primarily from lower promotional activity in the current year on the Family Dollar segment as a result of the increase in sales and lower seasonal markdowns in both segments resulting from the higher Halloween sell-through in the current quarter. Partially offsetting this decrease was increased uninsured markdown costs for natural disasters. • Distribution costs increased 30 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a premium for all hours worked during the 13 weeks ended October 31, 2020. Total distribution center COVID-19-related expenses were $10.9 million, or 20 basis points of this increase. The increase in gross profit margin in the 39 weeks ended October 31, 2020 was a result of the net of the following: • Occupancy costs decreased 45 basis points as a result of the leverage from the increase in comparable store net sales. • Merchandise cost, including freight, decreased 30 basis points in the 39 weeks ended October 31, 2020 compared to the same period last year resulting from higher sales of higher margin discretionary merchandise, improved initial mark-on and lower freight costs, partially offset by incremental tariff costs of $34.7 million. • Markdown costs decreased 15 basis points resulting primarily from the prior year including markdowns related to Family Dollar store closures and clearance sales as well as lower promotional activity in the current year on the Family Dollar segment as a result of the increase in sales. This decrease was partially offset by $10.4 million of uninsured markdown costs for stores affected by civil unrest and higher seasonal markdowns in the Dollar Tree segment in the first quarter 2020 due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic. • Shrink costs decreased 15 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. 23 Table of Contents • Distribution costs increased 35 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a per hour premium for all hours worked since March 8, 2020. Total distribution center COVID-19-related expenses were $28.7 million, or 15 basis points of this increase. Selling, General and Administrative Expenses 13 Weeks Ended 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Selling, general and administrative expenses $ 1,458.9 $ 1,346.1 8.4 % $ 4,429.2 $ 4,067.4 8.9 % As a percentage of Net sales 23.7 % 23.5 % 0.2 % 23.7 % 23.5 % 0.2 % The increase in selling, general and administrative expenses, as a percentage of net sales, in the 13 weeks ended October 31, 2020 was the result of the net of the following: • Payroll expenses increased 70 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 the improved operating performance in the quarter. These increases were partially offset by leverage from the comparable store net sales increase. Incremental payroll costs associated with the COVID-19 pandemic, including a $1 per hour premium paid to all store hourly associates for all hours worked during the quarter through September 26, 2020, bonuses for certain field management associates, quarantine pay and sick pay as well as the related payroll taxes, totaled $28.9 million, or 45 basis points. • Other selling, general and administrative expenses decreased 25 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. The 13 weeks ended October 31, 2020 included $6.3 million, or 10 basis points, of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic. • Store facility costs decreased 20 basis points due to leverage from the comparable store net sales increase and lower electricity costs. The increase in selling, general and administrative expenses, as a percentage of net sales, in the 39 weeks ended October 31, 2020 was the result of the net of the following: • Payroll expenses increased 75 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, lower benefits costs and 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 and other leadership changes made in the fourth quarter of fiscal 2019. Incremental payroll costs associated with the COVID-19 pandemic, including a per hour premium paid to all store hourly associates for all hours worked March 8, 2020 through September 26, 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 $201.0 million, or 105 basis points. • Other selling, general and administrative expenses decreased 35 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 39 weeks ended October 31, 2020 included $23.5 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 $1.8 million of expenses, primarily for fixed asset disposals, related to stores damaged in civil unrest. • Store facility costs decreased 25 basis points due to leverage from the comparable store net sales increase and lower electricity costs. The 39 weeks ended October 31, 2020 included $3.9 million primarily for uninsured repairs related to stores damaged in civil unrest and $1.1 million of COVID-19-related expenses. 24 Table of Contents Operating Income 13 Weeks Ended 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Operating income $ 465.5 $ 358.4 29.9 % $ 1,206.3 $ 1,012.8 19.1 % Operating income margin 7.5 % 6.2 % 1.3 % 6.4 % 5.9 % 0.5 % Operating income margin increased to 7.5% for the 13 weeks ended October 31, 2020 compared to 6.2% for the same period last year as operating income margin in the Family Dollar segment increased 250 basis points and the Dollar Tree segment increased 45 basis points. Operating income in the 13 weeks ended October 31, 2020 includes $46.3 million of COVID-19-related expenses. Operating income margin increased to 6.4% for the 39 weeks ended October 31, 2020 compared to 5.9% for the same period last year as operating income margin in the Family Dollar segment increased 315 basis points, partially offset by a 175 basis point decrease in the Dollar Tree segment operating income margin. Operating income in the 39 weeks ended October 31, 2020 includes $254.3 million of COVID-19-related expenses and $17.6 million of uninsured expenses related to civil unrest. Interest Expense, Net 13 Weeks Ended 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Interest expense, net $ 38.1 $ 41.4 (8.0 )% $ 113.1 $ 122.9 (8.0 )% Interest expense, net decreased $3.3 million in the 13 weeks ended October 31, 2020 compared to the same period last year, resulting from lower average debt outstanding in the current year quarter, partially offset by lower interest income. Interest expense, net decreased $9.8 million in the 39 weeks ended October 31, 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 39 Weeks Ended October 31, November 2, Percentage Change October 31, November 2, Percentage Change (dollars in millions) 2020 2019 2020 2019 Provision for income taxes $ 97.3 $ 61.1 59.2 % $ 253.3 $ 185.2 36.8 % Effective tax rate 22.8 % 19.3 % 3.5 % 23.2 % 20.8 % 2.4 % The effective tax rate for the 13 weeks ended October 31, 2020 was 22.8% compared to 19.3% for the same period last year. The 2020 rate reflects higher state tax rates and higher income amounts taxed at the statutory rate. The 2019 rate reflects a higher benefit from the reconciliation of the filed tax returns to the estimated tax provision. The effective tax rate for the 39 weeks ended October 31, 2020 was 23.2% compared to 20.8% for the same period last year. The 2020 rate reflects higher state tax rates, higher income amounts taxed at the statutory rate and 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. The 2019 rate reflects a reduction in the reserve for uncertain tax positions resulting from statute expirations and a higher benefit from the reconciliation of the filed tax returns to the estimated tax provision. Segment Information Our operating results for the Dollar Tree and Family Dollar segments as a percentage of net sales and period-over-period changes are discussed in the following sections. 25 Table of Contents Dollar Tree The following table summarizes the operating results of the Dollar Tree segment: 13 Weeks Ended 39 Weeks Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 (in millions) $ % of Net Sales $ % of Net Sales $ % of Net Sales $ % of Net Sales Net sales $ 3,303.2 $ 3,074.3 $ 9,557.6 $ 8,991.4 Gross profit 1,154.2 34.9 % 1,050.5 34.2 % 3,206.8 33.6 % 3,070.8 34.2 % Operating income 417.9 12.7 % 374.6 12.2 % 1,006.5 10.5 % 1,105.9 12.3 % Net sales for the Dollar Tree segment increased $228.9 million, or 7.4%, for the 13 weeks ended October 31, 2020 , compared to the same period last year. The increase was due to sales from new stores of $131.1 million and a 4.0% increase in comparable store net sales. Average ticket increased 19.0% and customer traffic declined 12.6%. Net sales for the Dollar Tree segment increased $566.2 million, or 6.3%, for the 39 weeks ended October 31, 2020 , compared to the same period last year. The increase was due to sales from new stores of $444.4 million and a 2.1% increase in comparable store net sales. Average ticket increased 17.9% and customer traffic declined 13.4%. Gross profit margin for the Dollar Tree segment increased to 34.9% for the 13 weeks ended October 31, 2020 compared to 34.2% for the same period last year as a result of the net of the following: • Merchandise cost, including freight, decreased 95 basis points primarily due to increased sales of higher margin discretionary merchandise and lower freight costs, partially offset by lower initial mark-on. • Occupancy costs decreased 20 basis points resulting primarily from the leverage due to the comparable store net sales increase in the quarter. • Shrink costs decreased 10 basis points resulting from favorable inventory reconciliations in the current quarter. • Distribution costs increased 50 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a per hour premium for all hours worked during the 13 weeks ended October 31, 2020. Total distribution center COVID-19-related expenses were $6.6 million, or 20 basis points of this increase. Gross profit margin for the Dollar Tree segment decreased to 33.6% for the 39 weeks ended October 31, 2020 compared to 34.2% for the same period last year as a result of the net of the following: • Distribution costs increased 50 basis points resulting primarily from higher distribution center payroll and depreciation costs. We paid our hourly distribution center associates a per hour premium for all hours worked since March 8, 2020. Total distribution center COVID-19-related expenses were $16.9 million, or 20 basis points of this increase. • Shrink costs increased 10 basis points resulting from unfavorable inventory reconciliations in the current year and an increase in the shrink accrual rate. • Markdown costs increased 10 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 $2.9 million of uninsured markdown costs for stores affected by civil unrest. • Merchandise cost, including freight, decreased 10 basis points primarily due to increased sales of higher margin discretionary merchandise and lower freight costs, partially offset by incremental tariffs of $26.1 million and lower initial mark-on. Discretionary merchandise sales were a higher proportion of total sales in the second and third quarters of 2020 while they were a lower proportion in the first quarter of 2020 as a result of the lower Easter sales due to the COVID-19 pandemic. Operating income margin for the Dollar Tree segment increased to 12.7% for the 13 weeks ended October 31, 2020 from 12.2% for the same period last year. The increase in operating income margin in the 13 weeks ended October 31, 2020 was the result of the gross margin increase noted above, partially offset by an increase in selling, general and administrative expenses, as a percentage of net sales. Selling, general and administrative expenses increased to 22.2% as a percentage of net sales in the 13 weeks ended October 31, 2020 compared to 22.0% for the same period last year as a result of the net of the following: 26 Table of Contents • Payroll expenses increased 50 basis points primarily due to incremental costs associated with the COVID-19 pandemic and increased incentive compensation and store sales bonus expenses resulting from improved operating results in the current quarter. These increases were partially offset by leverage from the comparable store net sales increase and lower office payroll costs. Incremental payroll costs associated with the COVID-19 pandemic, including a $1 per hour premium paid to all store hourly associates for all hours worked during the quarter through September 26, 2020, bonuses for certain field management associates, quarantine pay and sick pay as well as the related payroll taxes, totaled $17.3 million, or 50 basis points. • Store facility costs decreased 15 basis points due to leverage from the comparable store net sales increase and lower electricity costs. • Other selling, general and administrative expenses decreased 5 basis points resulting from the leverage from the comparable store net sales increase and lower travel costs due to the COVID-19 pandemic. The 13 weeks ended October 31, 2020 included $4.5 million, or 15 basis points, of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic. Operating income in the 13 weeks ended October 31, 2020 includes $28.6 million of COVID-19-related expenses. Operating income margin for the Dollar Tree segment decreased to 10.5% for the 39 weeks ended October 31, 2020 from 12.3% for the same period last year. The decrease in operating income margin in the 39 weeks ended October 31, 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 23.1% as a percentage of net sales in the 39 weeks ended October 31, 2020 compared to 21.9% for the same period last year as a result of the net of the following: • Payroll expenses increased 125 basis points primarily due to incremental costs associated with the COVID-19 pandemic, including a per hour premium paid to all store hourly associates for all hours worked from March 8, 2020 through September 26, 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 $117.0 million, or 120 basis points, for the 39 weeks ended October 31, 2020. • Other selling, general and administrative expenses increased 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. The 39 weeks ended October 31, 2020 included $12.8 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 10 basis points due to leverage from the comparable store net sales increase. The 39 weeks ended October 31, 2020 included expenses for repairs to stores damaged in civil unrest. Operating income in the 39 weeks ended October 31, 2020 includes $147.4 million of COVID-19-related expenses and $5.2 million of uninsured costs related to civil unrest. Family Dollar The following table summarizes the operating results of the Family Dollar segment: 13 Weeks Ended 39 Weeks Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 (in millions) $ % of Net Sales $ % of Net Sales $ % of Net Sales $ % of Net Sales Net sales $ 2,873.5 $ 2,671.9 $ 9,183.5 $ 8,304.1 Gross profit 769.9 26.8 % 654.0 24.5 % 2,428.4 26.4 % 2,009.4 24.2 % Operating income 131.4 4.6 % 55.2 2.1 % 472.0 5.1 % 163.9 2.0 % Net sales for the Family Dollar segment increased $201.6 million or 7.5% for the 13 weeks ended October 31, 2020 compared to the same period last year. The increase was due to a comparable store net sales increase of 6.4% and $63.2 million of new store sales. For the 13 weeks ended October 31, 2020 , average ticket increased 21.3% and customer traffic declined 12.3%. Net sales for the Family Dollar segment increased $879.4 million or 10.6% for the 39 weeks ended October 31, 2020 compared to the same period last year. The increase was due to a comparable store net sales increase of 11.2% and $196.9 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 39 weeks ended October 31, 2020 , average ticket increased 21.4% and customer traffic declined 8.4%. 27 Table of Contents Gross profit margin for the Family Dollar segment increased to 26.8% for the 13 weeks ended October 31, 2020 compared to 24.5% for the same period last year. The increase is due to the net of the following: • Shrink expense decreased 70 basis points resulting from favorable inventory reconciliations in the current year. • Merchandise cost, including freight, decreased 60 basis points primarily due to increased sales of higher margin discretionary merchandise, improved initial mark-on and lower freight costs. • Occupancy costs decreased 60 basis points as a result of the leverage from the comparable store net sales increase. • Markdowns at cost decreased 40 basis points primarily due to lower promotional activity and lower clearance markdowns in the current year as a result of higher sell-through of seasonal and apparel merchandise. • Distribution costs were flat as higher distribution center payroll costs were offset by lower distribution center asset disposals and leverage from the comparable store net sales increase. We paid our hourly distribution center associates a per hour premium for all hours worked during the 13 weeks ended October 31, 2020. Total distribution center COVID-19-related expenses were $4.3 million, or 15 basis points. Gross profit margin for the Family Dollar segment increased to 26.4% for the 39 weeks ended October 31, 2020 compared to 24.2% for the same period last year. The increase is due to the net of the following: • Occupancy costs decreased 90 basis points as a result of the leverage from the comparable store net sales increase and 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 65 basis points primarily due to increased sales of higher margin discretionary merchandise and improved initial mark-on, partially offset by incremental tariffs of $8.7 million. • Shrink expense decreased 45 basis points resulting from favorable inventory reconciliations in the current year and the prior year including an increase in the accrual rate. • Markdowns at cost decreased 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 $7.5 million of uninsured markdown costs for stores affected by civil unrest. • Distribution costs increased 15 basis points resulting primarily from higher distribution center payroll costs. We paid our hourly distribution center associates a per hour premium for all hours worked since March 8, 2020. Total distribution center COVID-19-related expenses were $11.8 million, or 15 basis points of this increase. Operating income margin for the Family Dollar segment increased to 4.6% for the 13 weeks ended October 31, 2020 from 2.1% 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 22.2% as a percentage of net sales in the 13 weeks ended October 31, 2020 compared to 22.4% 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: • Other selling, general and administrative expenses decreased 20 basis points primarily due to a decrease in promotional advertising and travel 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 supplies expense. The 13 weeks ended October 31, 2020 included $1.7 million or 5 basis points of costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic. • Store facility costs decreased 20 basis points primarily due to leverage from the comparable store net sales increase and lower electricity costs. • Depreciation and amortization expense decreased 10 basis points primarily due to leverage from the comparable store net sales increase. • Payroll expenses increased 35 basis points primarily due to incremental costs associated with the COVID-19 pandemic and increased incentive compensation and store sales bonus expenses resulting from the improved Family Dollar operating performance, partially offset by leverage from the comparable store net sales increase. Incremental costs associated with the COVID-19 pandemic, including a $1 per hour premium paid to all store hourly associates for all hours worked during the current quarter through September 26, 2020, quarantine pay and sick pay as well as the related payroll taxes, totaled $11.4 million or 40 basis points. 28 Table of Contents Operating income in the 13 weeks ended October 31, 2020 includes $17.4 million for COVID-19-related expenses. Operating income margin for the Family Dollar segment increased to 5.1% for the 39 weeks ended October 31, 2020 from 2.0% 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 21.3% as a percentage of net sales in the 39 weeks ended October 31, 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 50 basis points primarily due to a decrease in promotional advertising and travel 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 39 weeks ended October 31, 2020 included $9.3 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 35 basis points primarily due to leverage from the comparable store net sales increase and lower electricity costs. The 39 weeks ended October 31, 2020 included $2.5 million of incremental repairs and maintenance expenses for stores damaged by civil unrest. • Depreciation and amortization expense decreased 10 basis points primarily due to leverage from the comparable store net sales increase. • Payroll expenses were flat as incremental costs associated with the COVID-19 pandemic and increased incentive compensation and store sales bonus expenses resulting from the improved Family Dollar operating performance were 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 per hour premium paid to all store hourly associates for all hours worked from March 8, 2020 to September 26, 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 $83.4 million or 90 basis points. Operating income in the 39 weeks ended October 31, 2020 includes $104.9 million for COVID-19-related expenses and $12.4 million of uninsured costs related to civil unrest. Liquidity and Capital Resources Our business requires capital to build and open new stores, expand our distribution network and operate and expand our existing stores. Our working capital requirements for existing stores are seasonal in nature and typically reach their peak in the months of September and October. 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 39 weeks ended October 31, 2020 and November 2, 2019 : 39 Weeks Ended October 31, November 2, (in millions) 2020 2019 Net cash provided by (used in): Operating activities $ 1,733.7 $ 1,014.5 Investing activities (707.5 ) (768.7 ) Financing activities (446.7 ) (212.0 ) Net cash provided by operating activities increased $719.2 million primarily as a result of higher accounts payable, current liabilities and other liabilities and lower inventory levels at October 31, 2020, and increased earnings before depreciation and amortization in the current year. Net cash used in investing activities decreased $61.2 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 29 Table of Contents projects in the current year and grant funds received from state and local governments for our Summit Pointe development in the prior year. Net cash used in financing activities increased $234.7 million, resulting primarily from the final $250.0 million payment on the Senior Floating Rate Notes due 2020. 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 and as of October 31, 2020 that has been repaid. At October 31, 2020 , our total borrowings were $3.55 billion and we had $1.2 billion 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 $216.6 million was committed to letters of credit issued for routine purchases of imported merchandise as of October 31, 2020 . We repurchased 2,154,304 shares of common stock on the open market for $200.0 million during the 39 weeks ended October 31, 2020 . Approximately $5.8 million in share repurchases had not settled as of October 31, 2020 and this amount was accrued in the accompanying unaudited condensed consolidated balance sheet as of October 31, 2020. We repurchased 1,967,355 shares of common stock on the open market for $200.0 million during the 39 weeks ended November 2, 2019 . As of October 31, 2020 , we have $600.0 million remaining under Board repurchase authorization.