What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-27 compared with 2020-11-24 · 196 added, 313 removed, 102 unchanged (83% of the section changed)

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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;

Our expectations regarding compliance with debt covenants and stock repurchases.

• The effect of higher costs and delays in importing merchandise from Asia, the capacity of our distribution centers to transport delayed goods to the stores on an expedited basis given current labor shortages, and the potential impact on our sales and merchandise margin;

• The reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from Asia and higher cost domestic goods;

• Our expectations regarding cost increases, including additional costs in fiscal 2021 as a result of higher shipping and domestic freight and fuel costs, increases in the minimum wage by States and localities, potential federal legislation increasing the minimum wage, and proposals to raise federal corporate tax rates;

• The potential effect of general business or economic conditions on our business including the direct and indirect effects of the COVID-19 pandemic, inflation, labor shortages, consumer spending levels, unemployment, 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, and increased expenses for higher wages and bonuses paid to associates;

• Our expectations regarding reductions in COVID-19-related expenses and the level of shrink in fiscal 2021;

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

• Our plans to renovate existing Family Dollar stores and build new stores in the H2 store format, including an increase in the number of stores with adult beverages, and the performance of that format on our results of operations;

• Our plans relating to new store openings and new store concepts such as Dollar Tree Plus!

and our Combination Store format;

• 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 Food and Drug Administration).

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 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 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.

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 January 30, 2021, and in this Quarterly Report on Form 10-Q.

The following risks could have a material adverse impact on our sales, costs, profitability, or financial performance:

• Our profitability is vulnerable to cost increases such as wages and operating costs.

• We may continue to encounter higher costs in our supply chain, including higher shipping, freight and fuel costs, and disruptions in our distribution network including merchandise delays and shortages and labor shortages that could result in lower sales or higher costs for substituted goods.

• Risks associated with our domestic and foreign suppliers, including tariffs or restrictions on trade or disruptions in trade arising from the COVID-19 pandemic or otherwise.

• Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of continued unfavorable economic conditions, for example because government assistance to households and businesses terminate or are reduced.

• A downturn or adverse change in economic conditions, such as inflation, could impact our sales or profitability.

• Our supply chain may be disrupted by changes in United States trade policy with China.

• We may not be successful in implementing important strategic initiatives, which may have an adverse impact on our business and financial results.

• 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.

• The potential unauthorized access to customer information may violate privacy laws and could damage our business reputation, subject us to negative publicity, litigation and costs, and adversely affect our results of operations or business.

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

• Changes in laws and government regulations, including any increase in federal corporate tax rates, or our failure to adequately estimate the impact of such changes, could increase our expenses, expose us to legal risks or otherwise adversely affect us.

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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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

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.

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;

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.

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, our business trends and financial results in 2020 were materially different than in prior years.

During March 2020, our Dollar Tree and Family Dollar stores began to experience a significant increase in customer demand and sales of essential products and comparable store net sales increased significantly.

However, beginning the last week of March 2020 and continuing into April during the peak of the 2020 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

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.

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.

After the 2020 Easter selling season, in both banners, we experienced an increase in demand for and sales of discretionary products and our seasonal business for the other holidays throughout 2020 was strong.

Easter sales were strong in both banners during 2021.

Our results of operations for the first quarter of fiscal 2020 include approximately $73.2 million of COVID-19-related expenses;

these expenses totaled $7.4 million in the first quarter of fiscal 2021.

The future impact of COVID-19 on our customers and our business is difficult to predict.

The course of the pandemic, the effectiveness of health measures such as vaccines, and the impact of ongoing economic stabilization efforts is uncertain and government assistance payments may not provide enough funding to support current spending.

The American Rescue Plan Act of 2021 (“Rescue Act”), which was enacted on March 11, 2021, provides U.S.

government funding to address the continuing impact of COVID-19 on the economy, public health, individuals and businesses.

Among other things, the Rescue Act provides for $1,400 direct payments to individuals, continues supplemental unemployment benefits until September 2021, extends a prior increase in food stamp benefits, expands the child tax credit and earned income tax credit, provides for rent and utility assistance, and funds COVID-19 vaccinations, testing, treatment and prevention.

For further discussion of the impacts that COVID-19 had on our financial condition and results of operations during fiscal 2020, refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 30, 2021.

We are a leading operator of more than 15,700 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 Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the fixed price point 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.

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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.

First is our success at opening new stores.

Second is the performance of stores once they are open.

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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 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:

At May 1, 2021, 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 1, 2021 and May 2, 2020 is as follows:

13 Weeks Ended

October 31, 2020

November 2, 2019

Family Dollar

May 1, 2021 May 2, 2020

Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total

Beginning 7,805 7,880 15,685 7,505 7,783 15,288

New stores 65 41 106 67 32 99

Re-bannered stores — — — (3) — (3)

Closings (3) (16) (19) (7) (7) (14)

Ending 7,867 7,905 15,772 7,562 7,808 15,370

Relocations 18 18 36 15 6 21

Selling Square Feet (in millions):

Re-bannered stores

Beginning 67.4 57.7 125.1 64.6 56.7 121.3

New stores 0.5 0.4 0.9 0.6 0.2 0.8

Closings — (0.1) (0.1) (0.1) — (0.1)

Relocations — — — 0.1 — 0.1

Ending 67.9 58.0 125.9 65.2 56.9 122.1

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.

The average size of stores opened during the 13 weeks ended May 1, 2021 was approximately 8,520 selling square feet for the Dollar Tree segment and 9,110 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

Customer Traffic

Average Ticket

Customer Traffic

The percentage change in comparable store net sales on a constant currency basis for the 13 weeks ended May 1, 2021, as compared with the preceding year, is as follows:

13 Weeks Ended May 1, 2021

Sales Growth Change in

Customer Traffic Change in

Average Ticket

Consolidated 0.8 % (8.0) % 9.6 %

Dollar Tree Segment 4.7 % (4.4) % 9.5 %

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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.

We believe that our Dollar Tree initiatives continue to positively affect our comparable store net sales.

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.

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

During fiscal 2020, we expanded this program, completing the roll-out to all of our Dollar Tree stores.

The Crafter’s Square assortment carries mark-ups which are higher than our average mark-up.

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:

in more than 100 stores in southwestern markets.

Based on learnings from the test, we 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 displays and signage to drive awareness and excitement to 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.

and increase the number of offerings above the $1 price point.

As of May 1, 2021, we have this assortment incorporated in more than 240 locations and initial feedback for this iteration is even more positive than in the prior test stores.

We have expanded Dollar Tree Plus!

into select locations in Colorado, as well as states in the southeast such as Georgia, Alabama, Louisiana and the Carolinas.

The newest iteration of the concept is experiencing a sales lift of more than double the prior versions.

Due to the stronger than forecasted sell-through combined with a potential for delayed shipments of import merchandise, the timing of our reaching our 500 store target may shift.

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

Family Dollar Initiatives

We are executing several initiatives in our Family Dollar stores to increase sales.

During 2020, we entered into a partnership with Instacart to enable our customers to shop online and receive merchandise without having to visit a store.

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.

The 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%, when compared to non-renovated stores, 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.

As of May 1, 2021, we have approximately 2,800 H2 stores.

We plan to renovate at least 1,250 stores to this format in fiscal 2021 and also plan to build new stores in this format.

In addition, we installed adult beverage product in more than 160 stores in the first quarter of 2021 and plan to add it to 800 stores in total in fiscal 2021.

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

Building on the success of the H2 format, we have developed a Combination Store which leverages both the Dollar Tree and Family Dollar brands to serve small towns across the country.

We are taking Family Dollar’s great value and assortment and blending in select Dollar Tree merchandise categories, creating a new store format targeted for small towns and rural communities with populations of 3,000 to 4,000 residents.

As of May 1, 2021, we have approximately 60 Combination Stores.

Additionally, the following trends or uncertainties have already impacted or could impact our business or results of operations during 2021 or in the future:

• The amount of COVID-19-related costs for premium pay including bonuses, supplies, protective equipment, and similar items was $279.0 million in fiscal 2020.

We expect these costs to be approximately $30.0 million in fiscal 2021.

• We expect shrink at cost as a percentage of net sales to be significantly lower in fiscal 2021 than fiscal 2020.

• 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.

Minimum wage increases in States and localities are expected to increase our costs by $45.0 to $50.0 million in 2021.

• We are experiencing significantly higher shipping costs as well as shipping delays as a result of Trans-Pacific shipping capacity shortage and port congestion.

◦ We now expect the increase in shipping and domestic freight costs in the last three quarters of fiscal 2021 compared to the last three quarters of fiscal 2020 to be $220.0 to $250.0 million, which is significantly higher than previously estimated.

◦ If the shipping delays do not improve they could potentially have a material adverse impact on our sales or on our merchandise margin.

Sales could be negatively impacted if imported goods do not arrive in time to stock our stores.

If higher cost domestic goods are substituted for delayed imports, our merchandise margin could be adversely impacted.

We also are experiencing a shortage of associates and applicants to fill staffing requirements at our distribution centers due to the current labor shortage affecting retail businesses.

Transporting delayed goods to our stores on an expedited basis could be challenging if we are unable to increase the staffing of our distribution centers.

Results of Operations

Our results of operations as a percentage of net sales and period-over-period changes are discussed in the following section.

13 Weeks Ended

Our results of operations and period-over-period changes are discussed in the following section.

Note that gross profit margin is calculated as gross profit (i.e., net sales less cost of sales) divided by net sales.

The selling, general and administrative expense rate and operating income margin are calculated by dividing the applicable amount by total revenue.

13 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Net sales $ 6,476.8 $ 6,286.8 3.0 %

Comparable store net sales change,

on a constant currency basis 0.8 % 7.0 %

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.

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.

The increase in net sales in the 13 weeks ended May 1, 2021 was a result of a comparable store net sales increase in the Dollar Tree segment and sales of $169.8 million at new stores, partially offset by a decrease in comparable store net sales in the Family Dollar segment.

Enterprise comparable store net sales increased 0.8% on a constant currency basis in the 13 weeks ended May 1, 2021, as a result of a 9.6% increase in average ticket and an 8.0% decrease in customer traffic.

Comparable store net sales increased 0.9% 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.

13 Weeks Ended

On a constant currency basis, comparable store net sales increased 4.7% in the Dollar Tree segment and decreased 2.8% in the Family Dollar segment.

In the first quarter of 2020, at the beginning of the COVID-19 pandemic, the Family Dollar segment had a comparable store net sales increase of 15.5% as we saw an increase in demand for essential products.

For the first quarter of 2020, the Dollar Tree segment had a decrease in comparable store net sales of 0.9%, resulting from lower traffic resulting from the COVID-19 pandemic which negatively affected Easter sales in the Dollar Tree segment.

13 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Gross profit $ 1,964.1 $ 1,794.9 9.4 %

Gross profit margin 30.3 % 28.5 % 1.8 %

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.

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.

The increase in gross profit margin in the 13 weeks ended May 1, 2021 was a result of the following:

• Merchandise cost, including freight, decreased 105 basis points resulting from higher sales of higher margin discretionary merchandise, including higher Easter sales in both segments and improved initial mark-on for the Family Dollar segment, partially offset by higher freight costs.

• Shrink costs decreased 55 basis points resulting from favorable inventory results in relation to accruals and decreases in the shrink accrual rates in both the Family Dollar and Dollar Tree segments in the current quarter.

• Markdown costs decreased 15 basis points primarily due to lower seasonal markdowns in the Dollar Tree segment resulting from the improved sell-through of Easter merchandise in the current quarter.

• Distribution costs decreased 5 basis points resulting from the prior year quarter including COVID-19 premium pay of $2 per hour for all hourly associates for hours worked beginning March 8, 2020, partially offset by higher distribution center payroll and depreciation costs in the Dollar Tree segment.

Selling, General and Administrative Expenses

13 Weeks Ended

39 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Selling, general and administrative

As a percentage of Net sales

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.

expenses $ 1,447.1 $ 1,429.0 1.3 %

Selling, general and administrative

expense rate 22.3 % 22.7 % (0.4) %

The decrease in the selling, general and administrative expense rate in the 13 weeks ended May 1, 2021 was the result of the net of the following:

• Payroll expenses decreased 55 basis points primarily due to lower COVID-19-related store payroll costs, partially offset by deleveraging resulting from the comparable store net sales decrease on the Family Dollar segment.

The 13 weeks ended May 2, 2020 included approximately $57.5 million, or 90 basis points, of store payroll costs for a $2 per hour premium for all store hourly associates for hours worked beginning March 8, 2020, guaranteed bonus payments for store managers and field management bonuses.

• Other selling, general and administrative expenses decreased 5 basis points resulting primarily from lower store supplies expense, partially offset by increased inventory service expenses.

The prior year quarter included costs for the installation of plexiglass sneeze guards at all registers in our stores and higher costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.

Also in the prior year quarter, inventory service expenses were lower resulting from the postponement of inventories from March 15, 2020 through the end of the quarter due to the COVID-19 pandemic.

• Store facility costs increased 20 basis points primarily due to increased repairs and maintenance costs.

Higher repairs and maintenance costs included higher snow removal costs in the current year.

Also, in the prior year quarter, we postponed certain maintenance activities as a result of the COVID-19 pandemic.

Operating Income

13 Weeks Ended

39 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

1 unchanged sentence

Operating income margin 8.0 % 5.8 % 2.2 %

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.

Operating income margin increased to 8.0% for the 13 weeks ended May 1, 2021 compared to 5.8% for the same period last year as operating income margin in the Dollar Tree segment increased 290 basis points and the Family Dollar segment increased 120 basis points.

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

Interest Expense, Net

13 Weeks Ended

39 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Interest expense, net $ 33.0 $ 40.2 (17.9) %

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.

Interest expense, net decreased $7.2 million in the 13 weeks ended May 1, 2021 compared to the same period last year, resulting from lower average debt outstanding in the current year quarter.

Provision for Income Taxes

13 Weeks Ended

39 Weeks Ended

May 1, May 2, Percentage

(dollars in millions) 2021 2020

1 unchanged sentence

Effective tax rate 23.1 % 23.9 % (0.8) %

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.

The effective tax rate for the 13 weeks ended May 1, 2021 was 23.1% compared to 23.9% for the same period last year resulting from additional tax deductions in the current year related to restricted stock vesting while last year the restricted stock vesting resulted in an increase in tax expense.

This benefit to the tax rate was partially offset by higher state tax rates and lower Work Opportunity Tax Credits as a percentage of pre-tax income in the current year quarter.

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.

Our operating results for the Dollar Tree and Family Dollar segments and period-over-period changes are discussed in the following sections.

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)

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Net sales $ 3,321.3 $ 3,077.5 7.9 %

Gross profit 1,118.3 980.7 14.0 %

Gross profit margin 33.7 % 31.9 % 1.8 %

Operating income $ 400.3 $ 282.0 42.0 %

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.

Operation income margin 12.1 % 9.2 % 2.9 %

Net sales for the Dollar Tree segment increased $243.8 million, or 7.9%, for the 13 weeks ended May 1, 2021 compared to the same period last year.

The increase was due to a 4.7% increase in comparable store net sales and sales from new stores of $112.2 million.

Average ticket increased 9.5% and customer traffic declined 4.4%.

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:

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.

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.

Gross profit margin for the Dollar Tree segment increased to 33.7% for the 13 weeks ended May 1, 2021 compared to 31.9% for the same period last year as a result of the net of the following:

• Merchandise cost, including freight, decreased 85 basis points primarily due to increased sales of higher margin discretionary merchandise, including a higher Easter sell-through, partially offset by higher freight costs.

Easter sales were significantly lower as a result of the COVID-19 pandemic in the first quarter of 2020.

• Shrink costs decreased 50 basis points resulting from favorable inventory results in relation to accruals in the current quarter and a decrease in the shrink accrual rate.

• Markdown costs decreased 30 basis points resulting from lower seasonal markdowns due to the higher Easter sell-through in the current year quarter.

• Occupancy costs decreased 25 basis points as a result of leverage due to the comparable store net sales increase in the quarter.

• Distribution costs increased 10 basis points resulting from higher distribution payroll and depreciation costs in the current quarter.

Operating income margin for the Dollar Tree segment increased to 12.1% for the 13 weeks ended May 1, 2021 from 9.2% for the same period last year.

The increase in operating income margin in the 13 weeks ended May 1, 2021 was the result of the gross margin increase noted above, and a decrease in the selling, general and administrative expense rate.

The selling, general and administrative expense rate decreased to 21.6% in the 13 weeks ended May 1, 2021 compared to 22.7% for the same period last year as a result of the net of the following:

• Payroll expenses decreased 110 basis points primarily due to lower COVID-19-related store payroll costs and leverage from the comparable store net sales increase.

The 13 weeks ended May 2, 2020 included approximately $33.7 million of store payroll costs for a $2 per hour premium for all store hourly associates for hours worked beginning March 8, 2020, guaranteed bonus payments for store managers and field management bonuses.

• Other selling, general and administrative expenses decreased 5 basis points resulting primarily from lower store supplies expense, partially offset by increased inventory service expenses.

Also in the prior year quarter, inventory service expenses were lower resulting from the postponement of inventories from March 15, 2020 through the end of the quarter due to the COVID-19 pandemic.

• Store facility costs increased 10 basis points primarily due to higher repairs and maintenance expenses.

Repairs and maintenance expenses were lower in the prior year due to the cancellation or postponement of certain services at the onset of the COVID-19 pandemic.

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

Family Dollar

1 unchanged sentence

13 Weeks Ended

39 Weeks Ended

October 31, 2020

November 2, 2019

October 31, 2020

November 2, 2019

(in millions)

May 1, May 2, Percentage

(dollars in millions) 2021 2020

Net sales $ 3,155.5 $ 3,209.3 (1.7) %

Gross profit 845.8 814.2 3.9 %

Gross profit margin 26.8 % 25.4 % 1.4 %

Operating income $ 211.4 $ 175.5 20.5 %

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%.

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.

Operation income margin 6.7 % 5.5 % 1.2 %

Net sales for the Family Dollar segment decreased $53.8 million, or 1.7%, for the 13 weeks ended May 1, 2021 compared to the same period last year.

The decrease was due to a comparable store net sales decrease of 2.8%, offset partially by $57.6 million of new store sales.

For the 13 weeks ended May 1, 2021, average ticket increased 11.3% and customer traffic declined 12.7%.

Gross profit margin for the Family Dollar segment increased to 26.8% for the 13 weeks ended May 1, 2021 compared to 25.4% 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.

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.

• Merchandise cost, including freight, decreased 85 basis points primarily due to increased sales of higher margin discretionary merchandise and higher initial mark-on, offset partially by higher freight costs.

• Shrink expense decreased 60 basis points resulting from favorable physical inventory results in relation to accruals in the current year quarter and a decrease in the shrink accrual rate.

• Distribution costs decreased 20 basis points primarily due to lower COVID-19-related distribution center payroll costs.

The 13 weeks ended May 2, 2020 included $2.7 million of incremental distribution center payroll costs, including a $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020.

• Occupancy costs increased 15 basis points as a result of deleverage from the comparable store net sales decrease.

Operating income margin for the Family Dollar segment increased to 6.7% for the 13 weeks ended May 1, 2021 from 5.5% for the same period last year resulting from the gross margin increase noted above, offset partially by an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate was 20.2% in the 13 weeks ended May 1, 2021 compared to 19.9% for the same period last year.

The current quarter increase in the selling, general and administrative expense rate was due to the net of the following:

• Store facility costs increased 25 basis points primarily due to higher snow removal costs in the current quarter and lower repairs and maintenance expenses in the prior year due to the cancellation or postponement of certain services at the onset of the COVID-19 pandemic.

• Other selling, general and administrative expenses increased 20 basis points primarily due to deleverage from the comparable store net sales decrease and lower inventory service expenses in the prior year as a result of postponement of physical inventories due to the COVID-19 pandemic.

• Depreciation and amortization expense increased 5 basis points primarily due to deleverage from the comparable store net sales decrease.

• Payroll expenses decreased 25 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation, partially offset by deleverage from the comparable store net sales decrease.

The 13 weeks ended May 2, 2020 included $23.8 million, or 75 basis points, of payroll costs related to the COVID-19 pandemic, including a $2 per hour premium for all store hourly associates for hours worked beginning March 8, 2020.

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

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 business requires capital to build and open new stores, expand and renovate existing stores, expand our distribution network and operate 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 :

The following table compares cash-flow related information for the 13 weeks ended May 1, 2021 and May 2, 2020:

13 Weeks Ended

May 1, May 2,

(in millions) 2021 2020

3 unchanged sentences

Financing activities (276.6) 493.6

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

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.

Net cash provided by operating activities decreased $402.8 million primarily due to increases in merchandise inventories.

Net cash used in investing activities decreased $13.1 million primarily due to lower capital expenditures in the current year quarter.

For the 13 weeks ended May 1, 2021, cash used in financing activities was $276.6 million compared to cash provided by financing activities of $493.6 million for the 13 weeks ended May 2, 2020.

The cash used in financing activities in the current quarter is primarily due to $241.3 million of cash paid for stock repurchases.

In the prior year first quarter we preemptively drew $750.0 million 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, which was partially offset by the final $250.0 million payment on the Senior Floating Rate Notes.

At May 1, 2021, our long-term borrowings were $3.25 billion and we had $1.15 billion available under our Revolving Credit Facility.

We also have $390.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which $348.1 million was committed to letters of credit issued for routine purchases of imported merchandise as of May 1, 2021.

We repurchased 2,150,572 shares of common stock on the open market for approximately $250.0 million during the 13 weeks ended May 1, 2021.

Approximately $8.7 million in share repurchases had not settled as of May 1, 2021 and this amount was accrued in the accompanying unaudited condensed consolidated balance sheet as of May 1, 2021.

We did not repurchase any shares of common stock in the 13 weeks ended May 2, 2020.

As of May 1, 2021, we have $2.15 billion 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