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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-16 · 213 added, 282 removed, 184 unchanged (73% of the section changed)

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This section of Form 10-K generally discusses 2021 and 2020 events and results and year-to-year comparisons between 2021 and 2020.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be

found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including, factors that affect our business, analysis of annual changes in certain line items in the consolidated financial statements, performance of each of our operating segments, expenditures incurred for capital projects and sources of funding for future expenditures.

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Financial Statements and Supplementary Data ” of this Form 10-K.

Key Events and Recent Developments

Several key events have had or are expected to have a significant effect on our operations.

They are listed below:

• Impact of COVID-19

The COVID-19 pandemic has materially 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 materially different than what we expected.

We estimate that our increased costs related to COVID-19 for premium pay including bonuses, supplies, protective equipment, and similar items in fiscal 2020 was $279.0 million.

Although we believe that the pandemic has resulted in higher sales at Family Dollar, we also believe it has resulted in significantly lower sales at Dollar Tree during the Easter season in 2020 and in our party departments.

In addition, as a result of fewer customer trips, sales in certain consumable departments such as snacks and candy have been lower.

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 into 2021.

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

We have implemented several changes to support our associates in adhering to 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.

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 2020, 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 2020 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.

For fiscal 2020, enterprise comparable store net sales increased 6.1% resulting from an increase in average ticket of 20.0%, partially offset by decreased traffic of 11.6%.

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

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.

An increase in the federal minimum wage was not included in the Rescue Act as enacted.

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.

Our new store openings in fiscal 2020 were affected by construction delays due to challenges with the permitting process during COVID-19.

During 2020, we opened 341 new Dollar Tree stores and 156 new Family Dollar stores compared to an original plan of 350 new Dollar Tree stores and 200 new Family Dollar stores.

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

We resumed the roll-out during the second quarter of 2020 and renovated approximately 770 stores to this format in fiscal 2020 compared with our original plan of 1,250 renovations.

Also, as a result of COVID-19-related delays in obtaining permits, we added adult beverage product to approximately 570 stores in fiscal 2020 compared with our original plan of 1,000.

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

Initiatives and Recent Developments

Our initiatives, as well as other recent developments that have had or are expected to have a significant effect on our operations are listed below:

• Dollar Tree

◦ In September 2021, we announced our new $1.25 price point initiative and as of January 29, 2022, we increased the price point on a majority of our $1 merchandise to $1.25 in more than 5,800 legacy Dollar Tree stores.

We completed the rollout of this initiative to all Dollar Tree stores during the first quarter of fiscal 2022.

To date, the increase in the price point has more than offset the decline in the number of units sold.

We expect to see a greater lift in gross margin in the first half of the year as we sell through our current inventory.

We plan to invest in new products and modify existing products to provide greater value for our customers and increase customer traffic and store productivity.

◦ After a successful launch of the Instacart platform in the Family Dollar segment, we began testing the online service delivery at Dollar Tree stores in the third quarter of fiscal 2021.

As of January 29, 2022, the Instacart platform covers nearly 7,000 Dollar Tree stores.

This enables our customers to shop online and receive same-day delivery without having to visit a store.

◦ In fiscal 2021, we continued to implement our Dollar Tree Plus initiative which introduces products priced at the $3 and $5 price points and provides our customers with extraordinary value in discretionary categories.

As of January 29, 2022, we have approximately 660 Dollar Tree Plus stores.

We plan to accelerate the implementation of the Dollar Tree Plus initiative in fiscal 2022 by adding the concept to an additional 1,500 stores.

◦ The roll-out of our Crafter’s Square initiative to all of our Dollar Tree stores was completed during fiscal 2020.

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

• Family Dollar

◦ In 2018, based on our strategic and operational reassessment of the Family Dollar segment following challenges that the business experienced that impacted our ability to grow the business at the originally estimated rate when we acquired Family Dollar in 2015, management determined there were indicators that the goodwill of the business may be impaired.

Accordingly, a goodwill impairment test was performed in the fourth quarter of fiscal 2018 and we recorded a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge.

The results of our 2019 annual impairment test showed that the fair value of the Family Dollar reporting unit was lower than its carrying value resulting in a $313.0 million non-cash pre-tax and after-tax goodwill impairment charge.

◦ In March 2019, we announced plans for a store optimization program for Family Dollar.

For fiscal 2019, this program included rolling out a new model for both new and renovated Family Dollar stores, internally known as H2, re-bannering selected stores to the Dollar Tree brand, closing under-performing stores, and installing adult beverages and expanding freezers and coolers in selected stores.

In fiscal 2020, we continued to roll out the H2

concept to more stores, increased the number of stores with adult beverages and expanded freezers and coolers in selected stores and plan to continue these initiatives in fiscal 2021.

◦ In fiscal 2019, we substantially completed our consolidation of our store support centers in Matthews, North Carolina and Chesapeake, Virginia to our Summit Pointe development in Chesapeake, Virginia.

◦ 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.

Our H2 stores have significantly improved merchandise offerings throughout the store, including the addition of approximately 20 Dollar Tree $1.00 merchandise sections (which transitioned to $1.25 in the first quarter of 2022) and establishing a minimum number of freezer and cooler doors.

These stores have higher customer traffic and provide a higher average comparable store net sales lift, 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 January 29, 2022, we have approximately 3,815 H2 stores and we plan to complete 800 H2 store renovations in fiscal 2022.

In addition, we added adult beverage to 275 stores 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, in March 2021, we announced the development of a new combination store format.

Combo Stores leverage the strengths of the Dollar Tree and Family Dollar brands under one roof 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 January 29, 2022, we had more than 240 Combo Stores in operation.

Due to the success of this initiative, we plan to accelerate expansion of the program in fiscal 2022 by adding 400 new, renovated, or relocated Combo Stores.

◦ After a successful pilot program in 2020, in February 2021, we entered into a partnership with Instacart, which covers more than 6,000 Family Dollar stores across the United States as of January 29, 2022.

◦ In fiscal 2019, the results of our annual goodwill impairment test showed that the fair value of the Family Dollar reporting unit was lower than its carrying value resulting in a $313.0 million non-cash pre-tax and after-tax goodwill impairment charge.

◦ In fiscal 2019, we substantially completed the consolidation of the store support center in Matthews, North Carolina to our Summit Pointe development in Chesapeake, Virginia.

◦ On February 11, 2022, the FDA issued Form 483 observations primarily regarding rodent infestation at DC 202, as well as other items that require remediation.

We initiated a voluntary retail-level product recall of FDA and USDA-regulated products stored and shipped to approximately 400 stores from DC 202 from January 1, 2021 through February 18, 2022, temporarily closed DC 202 for extensive cleaning, temporarily closed approximately 400 affected stores to permit the removal and destruction of inventory subject to the recall, ceased sales of relevant inventory subject to the recall, committed to the FDA to continue to cease the shipment of FDA-regulated products from DC 202 until FDA approval is received, and initiated corrective actions at DC 202 intended to ensure that these issues will not recur when shipment of FDA-regulated products recommences.

The recall may have material adverse consequences.

See “ Item 3.

Legal Proceedings ” and Note 4 to our consolidated financial statements under the caption “Contingencies” for information concerning the proposed class action complaints filed against Family Dollar related to these matters.

We anticipate additional lawsuits of a similar nature related to the recall.

See also “ Item 1A.

Risk Factors ”:

“ Litigation, arbitration and government proceedings may adversely affect our business, financial condition and/or results of operations ” and “ We may stop selling or recall certain products for safety-related issues .”

• Supply Chain

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◦ In the third quarter of 2020, we opened a new 1.2 million square foot distribution center in Rosenberg, Texas and opened the first phase of our new Ocala, Florida distribution center.

◦ The following factors have impacted our operations in fiscal 2021 and we expect these challenges to continue in fiscal 2022:

▪ Shipping Delays:

We rely heavily on Trans-Pacific shipping to acquire merchandise for our stores, and we are experiencing significant shipping delays as a result of the shipping capacity shortage which have negatively impacted our sales and the availability of product in the stores.

We are also experiencing issues with port congestion and pandemic-related port closings and ship diversions.

If the shipping delays do not improve they would continue to have a material adverse impact on product availability and product mix, and on our sales and merchandise margin.

Sales could be negatively impacted if imported goods do not arrive in time to stock our stores, including the timely delivery of adequate levels of seasonal merchandise for the important Christmas holidays.

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

To address delays in shipments, we are prioritizing product categories for shipment in an effort to obtain seasonal assortments in advance of holiday seasons, adding and evaluating the use of long-term and short-term chartered vessels, and adding alternative sources of supply from North American factories.

▪ Freight Costs:

We are experiencing significantly higher international and domestic freight costs as a result of disruptions in the global supply chain.

This trend is likely to continue.

The combination of increased demand and limited availability of Trans-Pacific shipping capacity has caused spot market prices to increase substantially.

We are a large importer of merchandise from Asia and particularly sensitive to freight costs.

Import and domestic freight costs will present cost pressure in the first half of fiscal 2022 due to the annualization of fiscal 2021 rates.

In addition, diesel fuel prices are expected to be significantly higher in fiscal 2022 and may increase further because of international tensions.

We are working to reduce our freight costs by using chartered vessels, evaluating and securing long-term contracts with our carriers for vessels dedicated in large part to our needs, and adding alternative sources of supply that do not rely on Trans-Pacific shipping.

▪ Labor Shortage:

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

This has adversely affected the operating efficiency of our distribution centers and our ability to transport merchandise from our distribution centers to our stores.

The steps we have taken to address the labor shortage at our distribution centers include hosting national hiring events, paying sign-on bonuses, offering enhanced wages in select competitive markets, which is expected to increase our costs by more than $30.0 million in fiscal 2022, and paying tuition reimbursement.

• Minimum Wage Increases, Wage Investments and Store Labor Shortages

In 2022, the minimum wage has increased in certain States and localities.

In addition, the federal minimum wage may increase depending on the outcome of legislation proposed in Congress.

Minimum wage increases in States and localities and wage investments in certain markets are expected to increase our costs by more than $165.0 million in

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

• Build-out and Construction Costs and Delays

We have experienced higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores.

In addition, we have experienced delays in new store openings due to inspection, permitting and contractor delays.

We anticipate these increased costs and delays may continue for the foreseeable future.

• Impact of COVID-19

As an essential business, our stores and distribution centers have remained open during the pandemic;

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

Our results of operations in fiscal 2020 include approximately $279.0 million of COVID-19-related expenses and these expenses totaled $33.5 million in fiscal 2021 and we expect them to be minimal in fiscal 2022.

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

For example, although the American Rescue Plan Act of 2021 (“Rescue Act”), which was enacted on March 11, 2021, provided U.S.

government funding to address the continuing impact of COVID-19 on the economy, public health, individuals and businesses, some of the enacted benefits, including $1,400 direct payments to individuals and supplemental unemployment benefits, were temporary and have been discontinued.

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 and the global supply chain, it is challenging to predict our future operations and financial results.

• Long-term Debt

◦ During the first quarter of 2018, we redeemed our $750.0 million acquisition notes and accelerated the amortization of debt-issuance costs associated with the notes of $6.1 million.

◦ During the first quarter of 2018, we refinanced our long-term debt obligations as follows:

▪ We completed the registered offering of $750.0 million of Senior Floating Rate Notes due 2020, $1.0 billion of 3.70% Senior Notes due 2023, $1.0 billion of 4.00% Senior Notes due 2025 and $1.25 billion of 4.20% Senior Notes due 2028;

▪ We entered into a credit agreement for a $782.0 million term loan facility and a $1.25 billion revolving credit facility;

▪ We used the proceeds of the above offerings to repay the $2,182.7 million outstanding under our senior secured credit facilities and redeem the remaining $2.5 billion outstanding under our acquisition debt, resulting in the acceleration of the expensing of $41.2 million of deferred financing costs and our incurring $114.3 million in prepayment penalties.

◦ During the fourth quarter of 2018, we prepaid the $782.0 million outstanding under the term loan facility and accelerated the expensing of $1.5 million of deferred financing costs.

◦ During the fourth quarter of 2019, we prepaid $500.0 million of the $750.0 million Senior Floating Rate Notes due 2020 and accelerated the expensing of $0.3 million of deferred financing costs.

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◦ During the fourth quarter of 2020, we repaid the $300.0 million 5.00% Senior Notes that we assumed upon the acquisition of Family Dollar.

◦ During the fourth quarter of 2021, we refinanced our long-term debt obligations as follows:

▪ We completed the registered offering of $800.0 million of 2.65% Senior Notes due 2031 and $400.0 million of 3.375% Senior Notes due 2051 and used the proceeds of the offering to redeem the $1.0 billion 2023 Notes, which resulted in our incurring a $43.8 million prepayment penalty and we accelerated the expensing of $2.7 million of deferred financing and original issue discount costs associated with the 2023 Notes;

▪ We entered into a credit agreement for a $1.5 billion revolving credit facility, which replaced our then-existing $1.25 billion revolving credit facility.

For additional information regarding the risks related to our business and operations, including risks relating to the implementation of our Dollar Tree and Family Dollar initiatives, see “ Item 1A.

Risk Factors .”

We are a leading operator of more than 16,000 retail discount stores and we conduct our operations in two reporting segments.

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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 year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales.

We include sales from stores expanded or remodeled

during the year 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.

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At January 29, 2022, 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 years ended January 30, 2021 and February 1, 2020 is as follows:

January 30, 2021 February 1, 2020

A breakdown of store counts and square footage by segment for the years ended January 29, 2022 and January 30, 2021 is as follows:

January 29, 2022 January 30, 2021

Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total

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The average size of stores opened in 2021 was approximately 8,760 selling square feet (or about 11,050 gross square feet) for the Dollar Tree segment and 8,880 selling square feet (or about 10,990 gross square feet) for the Family Dollar segment.

For 2021, we continue to plan to open stores that are 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet) for the Dollar Tree segment and 7,000 - 10,000 selling square feet (or about 9,000 - 12,000 gross square feet) for the Family Dollar segment.

For 2022, we continue to plan to open stores that are 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet) for both the Dollar Tree segment and 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.

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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 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 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.

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 to the stores;

the price points to focus on the $1, $3 and $5 price points;

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

We plan to expand this initiative into a total of 500 stores beginning in the first quarter of fiscal 2021.

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.

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 January 30, 2021, we have approximately 2,385 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 approximately 570 stores in fiscal 2020 and plan to add it to approximately 1,000 stores 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.

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

• We are experiencing delays in receiving import merchandise as a result of worldwide container and other equipment shortages and issues with port congestion.

In the United States, the port congestion is resulting in ships not returning to Asia in a timely manner as well as impacting equipment availability.

This is resulting in delays in product being loaded and shipped from overseas locations.

Although this has not yet impacted our sales and we believe we are adequately stocked with merchandise for Easter, the delays could potentially have a material adverse impact on our sales after Easter, especially at Dollar Tree, if the delays do not improve.

In addition to creating business uncertainty, this disruption in the import transportation process is also resulting in higher costs.

We are also seeing increases in the cost to ship domestic freight from our suppliers to our distribution centers.

We are currently projecting approximately $80.0 to $100.0 million of additional costs in fiscal 2021 as a result of higher shipping and domestic freight costs.

• In 2021, the minimum wage has increased 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.

Additional minimum wage increases and other wage and hour law changes in the future could materially impact our results of operations.

• 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;

the amount of these costs for 2021 is highly uncertain.

Among other things, the duration and severity of the pandemic is uncertain, and a number of States and localities are considering legislation that could require premium pay for certain essential workers during certain government mandated restricted work periods.

We must continue to control our merchandise costs, inventory levels and our general and administrative expenses as increases in these items could negatively impact our operating results.

Results of Operations

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

Our results of operations and year-over-year 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.

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

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on a constant currency basis 1.0 % 6.1 % 1.8 %

The increase in net sales from 2019 to 2020 was a result of comparable store net sales increases in the Family Dollar and Dollar Tree segments and sales of $852.4 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 6.1% on a constant currency basis in 2020, as a result of a 20.0% increase in average ticket and an 11.6% decrease in customer traffic.

The increase in net sales from 2020 to 2021 was a result of sales of $703.4 million at new stores and a comparable store net sales increase in the Dollar Tree segment, partially offset by a net decrease in sales in the current year from stores closed in fiscal 2021 and fiscal 2020.

Enterprise comparable store net sales increased 1.0% on a constant currency basis in 2021, as a result of a 4.5% increase in average ticket and a 3.3% decrease in customer traffic.

Comparable store net sales increased 1.1% when including the impact of Canadian currency fluctuations.

On a constant currency basis, comparable store net sales increased 10.5% in the Family Dollar segment and 2.2% 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.

On a constant currency basis, comparable store net sales increased 2.1% in the Dollar Tree segment and decreased 0.1% in the Family Dollar segment.

In 2020, the Dollar Tree segment had a comparable store net sales increase of 2.2% and the Family Dollar segment had a comparable store net sales increase of 10.5%.

The Family Dollar segment increase was due to higher demand for essential products in the early stages of the COVID-19 pandemic and higher demand for discretionary items later in 2020.

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

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Gross profit margin 29.4 % 30.5 % 29.8 % (1.1) %

The increase in gross profit margin from 2019 to 2020 was a result of the net of the following:

• Occupancy costs decreased 40 basis points as a result of the leverage from the increase in comparable store net sales.

• Markdown costs decreased 25 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 of discretionary product.

Both segments also had higher sell-through of both Christmas and Halloween merchandise.

These decreases were partially offset by $10.4 million of uninsured markdown costs for stores affected by civil unrest during 2020 and higher seasonal markdowns in the Dollar Tree segment in the first quarter of 2020 due to the lower than planned sell-through on Easter merchandise as a result of the COVID-19 pandemic.

• Merchandise cost, including freight, decreased 20 basis points in 2020 compared to 2019 resulting from higher sales of higher margin discretionary merchandise and improved initial mark-on, partially offset by incremental tariff costs of $30.7 million.

• Shrink costs decreased 15 basis points resulting from favorable inventory reconciliations on the Family Dollar segment in the current year, partially offset by unfavorable physical inventory results in relation to accruals on the Dollar Tree segment.

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

We paid our hourly distribution center associates a wage premium for all hours worked from March 8, 2020 through January 2, 2021.

Total distribution center COVID-19-related expenses were $36.3 million, or 15 basis points of this increase.

The decrease in gross profit margin from 2020 to 2021 was a result of the net of the following:

• Merchandise cost, including freight, increased 140 basis points in 2021 compared to 2020 resulting primarily from higher freight costs in both segments, partially offset by increased initial mark-on in both segments and higher sales of lower cost discretionary merchandise in the Dollar Tree segment, primarily due to higher Easter seasonal sell-through.

• Markdown costs increased 10 basis points resulting from a reserve for a product recall and higher clearance markdowns on the Family Dollar segment, partially offset by lower seasonal markdowns on the Dollar Tree segment and $10.4 million of uninsured markdown costs for stores affected by civil unrest in 2020.

• Occupancy costs increased 5 basis points primarily due to the loss of leverage from the comparable store net sales decrease on the Family Dollar segment.

• Distribution costs decreased 5 basis points resulting from COVID-19-related expenses in 2020 of $36.3 million, including COVID-19 premium pay for all hourly associates for all hours worked from March 8, 2020 through January 2, 2021, partially offset by hourly wage increases at the distribution centers in 2021 and higher depreciation costs on the Dollar Tree segment resulting from the two new distribution centers.

COVID-19-related expenses at the distribution centers in 2021 were $8.8 million.

• Shrink costs decreased 40 basis points resulting from favorable inventory results in relation to accruals and decreases in the accrual rates on both the Family Dollar and Dollar Tree segments in the current year.

Selling, General and Administrative Expenses

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

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expenses $ 5,925.9 $ 5,900.4 $ 5,778.5 0.4 %

As a percentage of Net sales 23.1 % 24.5 % 34.5 % (1.4) %

We recorded non-cash goodwill impairment charges of $313.0 million and $2,727.0 million in fiscal 2019 and fiscal 2018, respectively.

The goodwill impairments are discussed further in Note 3 to our consolidated financial statements.

Excluding the goodwill impairment charges in 2019 and 2018, selling, general and administrative expenses were 23.2% and 22.6%, as a percentage of net sales, in 2019 and 2018, respectively.

The decrease in selling, general and administrative expenses, as a percentage of net sales, from 2019 to 2020, excluding the goodwill impairment charge from 2019, was the result of the net of the following:

• Other selling, general and administrative expenses decreased 40 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, lower promotional advertising on the Family Dollar segment, decreases in travel due to the COVID-19 pandemic, lower legal expenses and higher costs in the prior year for the store support center consolidation.

These improvements were partially offset by an increase in store supplies expenses due to the COVID-19 pandemic.

Fiscal 2020 included $26.5 million, or 10 basis points, of costs for the installation of plexiglass sneeze guards at all registers in our stores as well as incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic and $2.7 million of uninsured costs associated with stores damaged in civil unrest.

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

Fiscal 2020 included $1.3 million of COVID-19-related expenses and $4.5 million of expenses for stores damaged in civil unrest.

• Depreciation costs decreased 5 basis points due primarily to the leverage from the comparable store net sales increase.

• Payroll expenses increased 65 basis points primarily due to incremental costs associated with the COVID-19 pandemic and increases in incentive compensation, store sales bonuses and stock compensation expenses 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 wage 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 $212.6 million, or 85 basis points.

Operating Income (Loss)

Selling, general and administrative

expense rate 22.5 % 23.1 % 24.5 % (0.6) %

The decrease in the selling, general and administrative expense rate from 2020 to 2021 was the result of the net of the following:

• Payroll expenses decreased 70 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive and stock compensation expenses, partially offset by minimum wage increases in the current year and higher health care costs.

Fiscal 2021 and 2020 included $17.6 million and $212.6 million, respectively of COVID-19-related payroll costs.

The COVID-19 expenses in 2021 were primarily for quarantine and sick pay as well as the related payroll taxes.

The prior year expenses were for store payroll costs for a wage 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.

• Other selling, general and administrative expenses increased 10 basis points primarily due to higher debit and credit fees as a result of increased debit and credit card penetration and higher advertising costs.

We recorded a non-cash goodwill impairment charge of $313.0 million in fiscal 2019, as discussed further in Note 1 to our consolidated financial statements under the caption “Goodwill and Nonamortizing Intangible Assets.” Excluding the goodwill impairment charge in 2019, the selling, general and administrative expense rate was 23.2% in 2019.

Operating Income

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

Operating income (loss) $ 1,887.9 $ 1,262.2 $ (939.5) 49.6 %

Operating income $ 1,811.4 $ 1,887.9 $ 1,262.2 (4.1) %

Operating income margin 6.9 % 7.4 % 5.3 % (0.5) %

Excluding the non-cash goodwill impairment charges in 2019 and 2018, operating income margin was 6.7% in 2019 and 7.8% in 2018.

Operating income margin increased to 7.4% in fiscal 2020 compared to 6.7% in fiscal 2019, excluding the goodwill impairment charge, as operating income margin in the Family Dollar segment increased 330 basis points, partially offset by a 140 basis point decrease in the Dollar Tree segment operating income margin.

Operating income in fiscal 2020 includes $279.0 million of COVID-19-related expenses and $18.2 million of uninsured expenses related to civil unrest.

Operating income margin decreased to 6.9% in fiscal 2021 compared to 7.4% in fiscal 2020.

In the current year, the decrease in gross profit margin was partially offset by the decrease in the selling, general and administrative expense rate, as described above.

Operating income in fiscal 2021 included $33.5 million of COVID-19-related expenses.

Operating income in fiscal 2020 included $279.0 million of COVID-19-related expenses and $18.2 million of uninsured expenses related to civil unrest.

Excluding the non-cash goodwill impairment charge in 2019, operating income margin was 6.7% in 2019.

Interest Expense, Net

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

Interest expense, net $ 178.9 $ 147.3 $ 162.1 21.5 %

Interest expense, net decreased $14.8 million in fiscal 2020 compared to the prior year, resulting from lower average debt outstanding in the current year, partially offset by lower interest income.

In fiscal 2018, we refinanced our debt, resulting in the acceleration of the expensing of $41.2 million of amortizable non-cash deferred financing costs and prepayment penalties totaling $114.3 million.

Interest expense, net increased $31.6 million in fiscal 2021 compared to the prior year, resulting from the refinancing of our debt in the fourth quarter of 2021, which resulted in prepayment penalties of $43.8 million and the acceleration of the expensing of $2.7 million of amortizable non-cash deferred financing costs.

These increases were partially offset by lower average debt outstanding in the current year.

Provision for Income taxes

Year Ended Percentage Change

January 30, February 1, February 2, Fiscal 2020 vs.

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

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The effective tax rate for 2021 was 18.6% compared to 22.9% for 2020.

The 2020 effective rate decreased compared to the prior year rate as the $313.0 million goodwill impairment charge in 2019 was not tax deductible.

Partially offsetting that decrease, 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 effective tax rate also includes the benefit of the reversal of a valuation allowance of $24.6 million.

The 2021 effective rate decreased compared to the prior year rate primarily resulting from a deferred tax benefit related to state entity restructuring in the current year and additional tax deductions in the current year related to restricted stock vesting.

In the prior year, the restricted stock vesting resulted in an increase in tax expense.

Segment Information

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Corporate, support and Other consists primarily of store support center costs that are considered shared services and therefore these selling, general and administrative costs are excluded from our two reporting business segments.

These costs include operating expenses for our store support centers in Chesapeake, Virginia and Matthews, North Carolina.

During fiscal 2019, we consolidated our Matthews, North Carolina store support center with our store support center in Chesapeake, Virginia.

Corporate, support and Other also includes the results of operations for our Summit Pointe property in Chesapeake, Virginia.

Prior year amounts have been reclassified to be comparable to the current year presentation.

These costs include operating expenses for our store support center and the results of operations for our Summit Pointe property in Chesapeake, Virginia.

The Family Dollar segment “Operating income” includes advertising revenue, which is a component of “Other revenue” in the accompanying consolidated income statements.

Prior year amounts have been reclassified to conform to the current year presentation.

The following table summarizes the operating results of the Dollar Tree segment:

Year Ended Percentage Change

January 30, 2021 February 1, 2020 February 2, 2019 Fiscal 2020 vs.

(in millions) $ % of

Net Sales $ % of

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

Net sales $ 13,922.1 $ 13,265.0 $ 12,507.9 5.0 %

Gross profit 4,603.6 4,543.8 4,342.9 1.3 %

Gross profit margin 33.1 % 34.3 % 34.7 % (1.2) %

Operating income $ 1,607.0 $ 1,598.0 $ 1,670.2 0.6 %

Operating income margin 11.5 % 12.0 % 13.4 % (0.5) %

Net sales for the Dollar Tree segment increased 5.0%, or $657.1 million, in 2021 compared to 2020 due to sales from new stores of $446.2 million and a 2.1% increase in comparable store net sales.

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The decrease is due to 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 wage premium for all hours worked from March 8, 2020 through January 2, 2021.

Total distribution center COVID-19-related expenses were $21.3 million, or 15 basis points of this increase.

• Shrink costs increased 5 basis points resulting from unfavorable physical inventory results in relation to accruals in the current year and an increase in the shrink accrual rate.

• Markdown costs were flat as a percentage of net sales compared to the prior year as lower markdowns from higher seasonal merchandise sell-through in the third and fourth quarters of 2020 were offset by higher markdowns from the lower sell-through of Easter merchandise as a result of the COVID-19 pandemic in the first quarter of 2020, 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 increased initial mark-on, partially offset by incremental tariffs of $23.7 million.

Discretionary merchandise sales were a higher proportion of total sales in the second, third and fourth 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.

• Merchandise cost, including freight, increased 170 basis points due primarily to higher freight costs, partially offset by increased initial mark-on and higher sales of higher margin discretionary merchandise, including higher seasonal sell-through.

• Markdown costs decreased 5 basis points resulting from lower seasonal markdowns in the current year due to improved seasonal sell-through, partially offset by increased dated product markdowns.

• Distribution costs decreased 5 basis points resulting primarily from lower COVID-19-related expenses in the current year, partially offset by higher depreciation costs related to two new distribution centers and higher hourly wages in the current year.

Total distribution center COVID-19-related expenses were approximately $5.9 million and $21.3 million for fiscal

2021 and 2020, respectively.

COVID-19-related expenses in 2020 included a wage premium paid to all distribution center hourly associates for all hours worked from March 8, 2020 through January 2, 2021.

• Occupancy costs decreased 5 basis points resulting from the leverage from the comparable store net sales increase in the current year.

• Shrink costs decreased 40 basis points resulting from favorable inventory results in relation to accruals in the current year and a decrease in the shrink accrual rate.

Operating income margin for the Dollar Tree segment decreased to 11.5% in 2021 compared to 12.0% in 2020.

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

Selling, general and administrative expenses, as a percentage of net sales, increased to 22.3% in 2020 compared to 21.3% in 2019 as a result of the net of the following:

• Payroll expenses increased 100 basis points primarily due to incremental costs associated with the COVID-19 pandemic and higher incentive compensation and store sales bonuses.

Incremental payroll costs associated with the COVID-19 pandemic included a wage 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 $124.2 million, or 95 basis points, in fiscal 2020.

These increases were partially offset by leverage from the comparable store net sales increase and lower benefits costs.

• Other selling, general and administrative expenses decreased 5 basis points as a result of decreased travel costs due to the COVID-19 pandemic and lower legal expenses, partially offset by an increase in store supplies costs resulting from the COVID-19 pandemic.

Fiscal 2020 includes $14.9 million, or 10 basis points, of costs for the installation of plexiglass sneeze guards at all registers in our stores as well as 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.

Fiscal 2020 includes $1.7 million of expenses for repairs to stores damaged in civil unrest.

Operating income in fiscal 2020 includes $161.1 million of COVID-19-related expenses and $5.4 million of uninsured costs related to civil unrest.

The decrease in operating income margin in 2021 was the result of lower gross profit margin as noted above, partially offset by a lower selling, general and administrative expense rate.

The selling, general and administrative expense rate decreased to 21.5% in 2021 compared to 22.3% in 2020 primarily resulting from a decrease in payroll expenses of 65 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases and higher health insurance costs.

Fiscal 2021 and fiscal 2020 included $9.5 million and $124.2 million, respectively, of COVID-19-related payroll expenses.

COVID-19 expenses in the current year were primarily for quarantine and sick pay as well as the related payroll taxes.

In the prior year, COVID-19-related payroll expenses included store payroll costs for a wage 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, quarantine pay and sick pay as well as the related payroll taxes.

Operating income in fiscal 2021 included $19.2 million of COVID-19-related expenses.

Operating income in fiscal 2020 included $161.1 million of COVID-19-related expenses and $5.4 million of uninsured costs related to civil unrest.

Family Dollar

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Year Ended Percentage Change

January 30, 2021 February 1, 2020 February 2, 2019 Fiscal 2020 vs.

(in millions) $ % of

Net Sales $ % of

January 29, January 30, February 1, Fiscal 2021 vs.

(dollars in millions) 2022 2021 2020

Net sales $ 12,387.7 $ 12,243.4 $ 11,102.9 1.2 %

Gross profit 3,122.3 3,243.6 2,697.8 (3.7) %

Gross profit margin 25.2 % 26.5 % 24.3 % (1.3) %

Operating income (loss) $ 543.1 $ 655.6 $ (74.9) (17.2) %

Net sales for the Family Dollar segment increased $1,140.5 million or 10.3% in 2020 compared to 2019 due to a comparable store net sales increase of 10.5% and $261.4 million of new store sales, partially offset by lost sales resulting from store closures during

fiscal 2019 in connection with our store optimization program.

Operating income margin 4.4 % 5.4 % (0.7) % (1.0) %

Net sales for the Family Dollar segment increased $144.3 million, or 1.2%, in 2021 compared to 2020 due to $257.2 million of new store sales, partially offset by a comparable store net sales decrease of 0.1%.

Average ticket increased 5.7% and customer traffic declined 5.6% in 2021.

Gross profit margin for the Family Dollar segment increased to 26.5% in 2020 compared to 24.3% in 2019.

The increase is due to the net of the following:

• Occupancy costs decreased 80 basis points as a result of the leverage from the comparable store net sales increase.

• Markdowns at cost decreased 55 basis points primarily due to higher store closure and clearance sale markdowns in the prior year and lower promotional activity in the current year as a result of the increase in sales of discretionary product.

Family Dollar also had higher sell-through of both Christmas and Halloween merchandise.

These markdown reductions were partially offset by $7.5 million of uninsured markdown costs for stores affected by civil unrest.

• Merchandise cost, including freight, decreased 50 basis points primarily due to increased sales of higher margin discretionary merchandise and improved initial mark-on, partially offset by incremental tariffs of $7.1 million.

• Shrink expense decreased 45 basis points resulting from favorable physical inventory results in relation to accruals in the current year and a decrease in the accrual rate compared to an increase in the accrual rate in the prior year.

• Distribution costs increased 5 basis points resulting primarily from higher distribution center payroll costs.

We paid our hourly distribution center associates a wage premium for all hours worked from March 8, 2020 through January 2, 2021.

Total distribution center COVID-19-related expenses were $15.0 million, or 10 basis points of this increase.

Excluding the $313.0 million and $2,727.0 million non-cash goodwill impairment charges in 2019 and 2018, respectively, operating income margin for the Family Dollar segment was 2.1% in 2019 and 3.7% in 2018.

Operating income margin increased to 5.4% in fiscal 2020 compared to 2.1% in fiscal 2019, excluding the goodwill impairment charge, 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 21.1%, as a percentage of net sales, in 2020 compared to 22.2% in 2019, excluding the goodwill impairment charge.

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 60 basis points primarily due to a decrease in promotional advertising, less 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, lower legal expenses, and leverage associated with the increase in comparable store net sales during the period, partially offset by an increase in store supplies expense.

Fiscal 2020 included $11.6 million or 10 basis points of costs for the installation of plexiglass sneeze guards at all registers in our stores as well as incremental costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic and $2.1 million of expenses primarily for fixed asset disposals for stores damaged by civil unrest.

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

Gross profit margin for the Family Dollar segment decreased to 25.2% in 2021 compared to 26.5% in 2020.

The decrease is due to the net of the following:

• Merchandise cost, including freight, increased 130 basis points primarily due to higher freight costs, partially offset by higher initial mark-on.

• Markdown costs increased 20 basis points resulting from an increased reserve for a product recall and higher clearance markdowns, partially offset by $7.5 million of uninsured markdowns for stores affected by civil unrest in the prior year.

• Occupancy costs increased 15 basis points as a result of the loss of leverage from the comparable store net sales decrease and higher real estate tax expenses.

• Shrink expense decreased 35 basis points resulting from favorable physical inventory results in relation to accruals and a decrease in the shrink accrual rate.

• Distribution costs decreased 5 basis points primarily due to lower COVID-19-related costs, partially offset by higher hourly wages.

Total distribution center COVID-19-related expenses were $2.9 million and $15.0 million for 2021 and 2020, respectively.

COVID-19-related expenses in the prior year included a wage premium for all distribution center hourly associates for all hours worked beginning March 8, 2020 through January 2, 2021.

Operating income margin decreased to 4.4% in 2021 compared to 5.4% in 2020, resulting from the gross margin decrease noted above, partially offset by a decrease in the selling, general and administrative expense rate.

The selling, general and administrative expense rate was 20.9% in 2021 compared to 21.1% in 2020.

The decrease was due to the net of the following:

• Payroll expenses decreased 50 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases and the loss of leverage from the comparable store net sales decrease.

COVID-19-related payroll expenses for 2021 and 2020 were $8.1 million and $88.4 million, respectively.

COVID-19 expenses in the current year were primarily for quarantine and sick pay as well as the related payroll taxes.

The prior year included a wage 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.

• Store facility costs decreased 5 basis points primarily due to lower telecommunication expenses and lower repairs and maintenance expenses.

Fiscal 2020 included $2.8 million of incremental repairs and maintenance expenses for stores damaged by civil unrest.

• Depreciation and amortization expense decreased 15 basis points primarily due to leverage from the comparable store net sales increase.

• Payroll expenses decreased 5 basis points 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 more than offset by leverage from the comparable store net sales increase, lower temporary help expenses as a result of the prior year including higher expenses to support store-level initiatives, a decrease in workers’ compensation expenses and lower benefits costs.

Incremental costs associated with the COVID-19 pandemic, including a wage 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 $88.4 million or 70 basis points.

Operating income in fiscal 2020 includes $115.5 million for COVID-19-related expenses and $12.8 million of uninsured costs related to civil unrest.

• Other selling, general and administrative expenses increased 25 basis points primarily due to an increase in advertising expenses, increases in tax reserves and the loss of leverage from the comparable store net sales decrease.

Promotional advertising was lower in the prior year due to the COVID-19 pandemic.

• Depreciation and amortization expense increased 10 basis points primarily due to the loss of leverage from the comparable store net sales decrease and expenditures associated with the store renovation program.

Operating income in fiscal 2021 included $13.9 million of COVID-19-related expenses.

Fiscal 2020 included $115.5 million for COVID-19-related expenses and $12.8 million of uninsured costs related to civil unrest.

Excluding the $313.0 million non-cash goodwill impairment charge in 2019, operating income margin for the Family Dollar segment was 2.1% in 2019.

Liquidity and Capital Resources

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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 years ended January 30, 2021, February 1, 2020 and February 2, 2019:

January 30, February 1, February 2,

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 years ended January 29, 2022, January 30, 2021 and February 1, 2020:

January 29, January 30, February 1,

(in millions) 2022 2021 2020

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Operating Activities

Net cash provided by operating activities increased $846.5 million in 2020 compared to 2019 primarily as a result of higher accounts payable, current liabilities and other liabilities and lower inventory levels at January 30, 2021, and higher earnings before depreciation and amortization in the current year.

Net cash provided by operating activities decreased $1,284.8 million in 2021 compared to 2020 primarily as a result of higher inventory levels and lower current liabilities, partially offset by higher accounts payable.

Investing Activities

Net cash used in investing activities decreased $130.5 million in 2020 compared with 2019 primarily due to 2019 including higher capital expenditures related to the Family Dollar segment store optimization program, including H2 renovations and re-banners.

H2 renovations were 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 investing activities increased $130.2 million in 2021 compared with 2020 primarily due to higher capital expenditures in the current year.

Financing Activities

Net cash used in financing activities increased $240.1 million in 2020 compared to 2019 primarily due to $400.0 million of stock repurchases in 2020 compared to $200.0 million in 2019.

Net cash used in financing activities decreased $113.4 million in 2021 compared to 2020 primarily due to the following:

• On December 1, 2021, we completed the registered offering of $800.0 million aggregate principal amount of Senior Notes due 2031 and $400.0 million aggregate principal amount of Senior Notes due 2051 and used the proceeds of the offering to

redeem the $1.0 billion 2023 Notes, which resulted in our incurring a $43.8 million prepayment penalty.

In addition, in connection with the registering of these senior notes and the refinancing of our revolving line of credit, we paid $15.5 million in deferred financing costs.

• In 2021, we paid $950.0 million in cash for stock repurchases compared to $400.0 million in the prior year.

• In 2020, we also repaid the remaining $250.0 million of our $750.0 million Floating Rate Notes and the $300.0 million 5% Senior Notes.

In fiscal 2019, we prepaid $500.0 million of our $750.0 million Floating Rate Notes.

At January 29, 2022, our long-term borrowings were $3.45 billion and we had $1.5 billion available under our revolving credit facility, less amounts outstanding for standby letters of credit totaling $46.0 million.

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Share Repurchases

We repurchased 3,982,478 shares of common stock on the open market for $400.0 million in fiscal 2020 and we repurchased 1,967,355 shares of common stock on the open market for $200.0 million in fiscal 2019.

There were no shares repurchased in fiscal 2018.

At January 30, 2021, we had $400.0 million remaining under Board repurchase authorization.

Subsequently, on March 2, 2021, the Board increased the share repurchase authorization by $2.0 billion resulting in a total share repurchase authorization of $2.4 billion.

We repurchased 9,156,898, 3,982,478 and 1,967,355 shares of common stock on the open market in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, for $950.0 million, $400.0 million and $200.0 million, respectively.

At January 29, 2022, we had $2.5 billion remaining under Board repurchase authorization.

Funding Requirements

We expect our cash needs for opening new stores and expanding and renovating existing stores in fiscal 2022 to total approximately $748.0 million, which includes capital expenditures, initial inventory and pre-opening costs.

Our estimated capital expenditures for fiscal 2021 are approximately $1.2 billion, including planned expenditures for our new and expanded stores, approximately 1,250 planned H2 renovations of Family Dollar segment stores, distribution center expansions and the development of additional parcels on our Summit Pointe property, located in Chesapeake, Virginia, for mixed-use purposes.

Our estimated capital expenditures for fiscal 2022 are approximately $1.3 billion, including planned expenditures for our new and expanded stores, store renovations, distribution center expansions and the development of additional parcels on our Summit Pointe property, located in Chesapeake, Virginia, for mixed-use purposes.

We believe that we can adequately fund our working capital requirements and planned capital expenditures for the foreseeable future from net cash provided by operations and potential borrowings under our revolving credit facility.

The following tables summarize our material contractual obligations at January 30, 2021, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):

Contractual Obligations Total 2021 2022 2023 2024 2025 Thereafter

Lease Financing

Operating lease obligations $ 7,459.5 $ 1,480.1 $ 1,396.4 $ 1,184.1 $ 965.0 $ 731.2 $ 1,702.7

Long-term Borrowings

Principal 3,250.0 — — 1,000.0 — 1,000.0 1,250.0

Interest 639.2 129.1 129.1 104.8 92.0 64.1 120.1

Total obligations $ 11,348.7 $ 1,609.2 $ 1,525.5 $ 2,288.9 $ 1,057.0 $ 1,795.3 $ 3,072.8

Commitments Total Expiring in 2021 Expiring in 2022 Expiring in 2023 Expiring in 2024 Expiring in 2025 Thereafter

Letters of credit and surety bonds $ 404.8 $ 378.5 $ 25.7 $ 0.5 $ 0.1 $ — $ —

Purchase obligations 189.8 68.3 43.2 35.5 27.6 15.2 —

Total commitments $ 594.6 $ 446.8 $ 68.9 $ 36.0 $ 27.7 $ 15.2 $ —

Lease Financing

Operating lease obligations.

Refer to Note 7 to our consolidated financial statements for information on our operating leases.

The obligation above includes amounts for leases that were signed prior to January 30, 2021 for stores that were not yet open on January 30, 2021.

Long-term Borrowings

In the first quarter of 2018, we redeemed our $750.0 million acquisition notes and accelerated the amortization of debt-issuance costs associated with the notes of $6.1 million.

Additionally, in the first quarter of 2018, we completed the registered offering of $750.0 million aggregate principal amount of Senior Floating Rate Notes due 2020, $1.0 billion aggregate principal amount of 3.70% Senior Notes due 2023, $1.0 billion aggregate principal amount of 4.00% Senior Notes due 2025 and $1.25 billion aggregate principal amount of 4.20% Senior Notes due 2028.

We also entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, providing for $2.03 billion in senior credit facilities, consisting of a $1.25 billion revolving credit facility and a $782.0 million term loan facility.

We used the proceeds of these borrowings and cash on hand to repay all of the outstanding loans under our then-existing senior secured credit facilities and acquisition notes, resulting in the acceleration of the expensing of $41.2 million of deferred financing costs and our incurring $114.3 million in prepayment penalties.

In the fourth quarter of 2018, we prepaid in full the $782.0 million term loan facility.

In the fourth quarter of 2019, we prepaid $500.0 million of the $750.0 million Senior Floating Rate Notes and repaid the remaining $250.0 million outstanding in the first quarter of 2020.

In addition, upon the acquisition of Family Dollar in 2015, we assumed the liability for $300.0 million of 5.00% senior notes, which we repaid in the fourth quarter of 2020.

The interest on our long-term borrowings represents the interest payments on the foregoing long-term borrowings that were outstanding at January 30, 2021 using the interest rates for each at January 30, 2021.

For additional information on our long-term borrowings, please refer to Note 6 to our consolidated financial statements.

Letters of credit and surety bonds .

We have $356.5 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which $209.6 million was committed to letters of credit issued for routine purchases of imported merchandise at January 30, 2021.

We also have $98.7 million of letters of credit outstanding that serve as collateral for our large-deductible insurance programs and $96.5 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores and self-insured insurance programs.

Purchase obligations.

We have commitments totaling $189.8 million related to agreements for software licenses and support, telecommunication services and store technology assets and maintenance for our stores.

Critical Accounting Policies

Our material contractual obligations consist of long-term debt and related interest payments and operating lease obligations.

Additionally, we have commitments related to ocean shipping contracts, software license and support agreements, telecommunication services and store technology assets and maintenance for our stores.

Other commitments include letters of credit for imported merchandise, standby letters of credit that serve as collateral for our large-deductible insurance programs and surety bonds that serve as collateral for utility payments at our stores and self-insured insurance programs.

For additional information regarding these obligations, including amounts outstanding at January 29, 2022, refer to Note 4 , Note 5 and Note 6 to our consolidated financial statements.

Critical Accounting Estimates

The preparation of financial statements requires the use of estimates.

Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates.

Following is a discussion of the policies that we consider critical.

Following is a discussion of the estimates that we consider critical.

Inventory Valuation

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We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal carryover merchandise on hand, historical markdown statistics and future merchandising plans.

The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.

of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.

Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.

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The amounts recorded in the current year reflect the Dollar Tree and Family Dollar segments’ historical results.

We periodically adjust our shrink estimates to reflect our best estimates based on the factors described.

We periodically adjust our shrink estimates to reflect our best estimates based on the factors described and, historically, these adjustments have not been material.

Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market each year on a consistent basis.

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Under the discounted cash flow approach, we project future cash flows which are discounted using a weighted-average cost of capital analysis that reflects current market conditions, adjusted for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows).

the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.

If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.

The Family Dollar goodwill and trade name comprise a substantial portion of our goodwill and indefinite-lived intangible assets and management’s judgment utilized in the Family Dollar goodwill and trade name impairment evaluations is critical.

The computations require management to make estimates and assumptions and actual results may differ significantly, particularly if there are significant adverse changes in the operating environment.

Critical assumptions that are used as part of the Family Dollar goodwill evaluation include:

Critical assumptions that are used as part of a quantitative Family Dollar goodwill evaluation include:

• The potential future revenue, EBITDA and cash flows of the reporting unit.

The projections use management’s assumptions about economic and market conditions over the projected period as well as our estimates of future performance and reporting unit revenue, gross margin, expenses and other factors.

The resulting revenue, EBITDA and cash flow estimates are based on our most recent business operating plans, and various growth rates have been assumed for years beyond the current business plan period.

We believe that the assumptions, estimates and rates used in our fiscal 2020 impairment evaluations are reasonable;

however, variations in the assumptions, estimates and rates could result in significantly different estimates of fair value.

The resulting revenue, EBITDA and cash flow estimates are based on our most recent business operating plans, and various growth rates are assumed for years beyond the current business plan period.

We did not perform a quantitative evaluation in fiscal 2021;

however, we believe that the assumptions, estimates and rates used in our fiscal 2020 impairment evaluations are reasonable.

Variations in the assumptions, estimates and rates could result in significantly different estimates of fair value.

• Selection of an appropriate discount rate.

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Given current economic conditions, it is possible that the discount rate will fluctuate in the near term.

We engaged third party experts to assist in the determination of the weighted-average cost of capital used to discount the cash flows for our Family Dollar reporting unit.

The weighted-average cost of capital used to discount the cash flows for our evaluation was 8.25% for our fiscal 2020 analysis.

fiscal 2020, we engaged third party experts to assist in the determination of the weighted-average cost of capital used to discount the cash flows for our Family Dollar reporting unit.

We did not perform a quantitative analysis in fiscal 2021;

however, the weighted-average cost of capital used to discount the cash flows for our evaluation was 8.25% for our fiscal 2020 analysis.

Indefinite-lived intangible assets, such as the Family Dollar trade name, are not subject to amortization but are reviewed at least annually for impairment.

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The discount rate includes a premium compared to the discount used for the Family Dollar goodwill impairment evaluation due to the inherently higher risk profile of intangible assets compared to the overall reporting unit.

Our evaluation of goodwill did not result in an impairment charge being recorded in fiscal 2020.

Non-cash impairment charges of $313.0 million and $2.73 billion were recorded in fiscal 2019 and 2018, respectively, related to the Family Dollar reporting unit.

Our evaluation of goodwill did not result in impairment charges being recorded in fiscal 2021 or 2020.

A non-cash impairment charge of $313.0 million was recorded in fiscal 2019 related to the Family Dollar reporting unit.

Our evaluation of the Family Dollar trade name did not result in impairment charges during fiscal 2021, 2020 or 2019.

Based on the results of the 2020 evaluation, the fair value of the Family Dollar reporting unit exceeded its carrying value by a significant margin and the fair value of the Family Dollar trade name exceeded its carrying value by approximately 7.5%.

For additional information related to goodwill and indefinite-lived intangible assets, including the related impairment evaluations, refer to Note 3 to our consolidated financial statements.

For additional information related to uncertainties associated with the key assumptions and any potential events and/or circumstances that could have a negative effect on the key assumptions, please refer to “ Item 1A.

Based on the results of the 2020 quantitative evaluation, the fair value of the Family Dollar reporting unit exceeded its carrying value by a significant margin and the fair value of the Family Dollar trade name exceeded its carrying value by approximately 7.5%.

For additional information related to goodwill and indefinite-lived intangible assets, including the related impairment evaluations, refer to Note 1 to our consolidated financial statements under the caption “Goodwill and Nonamortizing Intangible Assets.” For additional information related to uncertainties associated with the key assumptions and any potential events and/or circumstances that could have a negative effect on the key assumptions, please refer to “ Item 1A.

Risk Factors ” and elsewhere within this “Item 7.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis