What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-22 compared with 2022-08-25 · 144 added, 143 removed, 234 unchanged (55% of the section changed)

6 unchanged sentences

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

• Our expectations regarding the impact of continued supply chain challenges on our product availability, product mix, sales and merchandise margin, including uncertainties associated with delays in receiving imported merchandise from Asia and the potential increase in our costs if inventory levels exceed the storage capacity of our distribution centers;

• Our expectations regarding higher oceanic shipping and domestic freight and fuel costs;

• Our expectations regarding the impact of continued supply chain challenges on our product availability, product mix, sales and merchandise margin, including uncertainties associated with delays in receiving imported merchandise from Asia and expected increases in our costs due to inventory levels exceeding the storage capacity of our distribution centers;

• Our expectations regarding oceanic shipping and domestic freight and fuel costs;

• Our expectations regarding consumer spending behavior and inflation-related cost increases, including the impact on our gross margins;

• Our expectations regarding increased expenses for higher wages and bonuses paid to associates, including increases in the minimum wage by States and localities and potential federal legislation increasing the minimum wage;

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• The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations (including U.S.

Food and Drug Administration matters);

Food and Drug Administration matters), including with respect to the availability of indemnification or insurance;

• Our plans to renovate existing Family Dollar stores and build new stores in the H2 store format, and the performance of that format on our results of operations;

• Our plans and expectations relating to the introduction of additional price points above $1 in our Dollar Tree stores, including the impact on our gross margins;

• Our plans and expectations relating to the introduction of additional price points above $1 in our Dollar Tree stores and our investments in new products, including the impact on our gross margins;

• Our plans and expectations relating to new store openings and new store concepts such as Dollar Tree Plus and our Combo Store format;

• Our plans and expectations regarding future strategic investments and the uncertainty with respect to the amount, timing and impact of those investments on our business and results of operations;

• Our expectations regarding higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores, and construction, permitting and inspection delays related to new store openings.

• Our plans and expectations regarding our current initiatives and future strategic investments and the uncertainty with respect to the amount, timing and impact of those initiatives and investments on our business and results of operations;

• Our expectations regarding higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores, limitations on the availability of certain fixtures and equipment and construction, permitting and inspection delays related to new store openings.

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

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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 July 30, 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 26 weeks ended July 30, 2022 and July 31, 2021 is as follows:

At October 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 39 weeks ended October 29, 2022 and October 30, 2021 is as follows:

39 Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total

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Stores are included as re-banners when they close or open, respectively.

The average size of stores opened during the 26 weeks ended July 30, 2022 was approximately 8,540 selling square feet for the Dollar Tree segment and 8,920 selling square feet for the Family Dollar segment.

The average size of stores opened during the 39 weeks ended October 29, 2022 was approximately 8,590 selling square feet for the Dollar Tree segment and 8,970 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 26 weeks ended July 30, 2022, as compared with the preceding year, is as follows:

13 Weeks Ended July 30, 2022 26 Weeks Ended July 30, 2022

The percentage change in comparable store net sales on a constant currency basis for the 13 and 39 weeks ended October 29, 2022, as compared with the preceding year, is as follows:

13 Weeks Ended October 29, 2022 39 Weeks Ended October 29, 2022

Sales Growth Change in

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

As expected, we saw a lift in gross margin in the first half of fiscal 2022 as we sold through our existing inventory.

During fiscal 2022, we have begun investing in new products and modifying existing products to provide greater value for our customers and increase customer traffic and store productivity.

While we expect our gross margin to be higher in the second half of fiscal 2022 compared with the second half of fiscal 2021, because of the investments in new products, we do not expect the increase to be as high as it was in the first half of fiscal 2022.

While we expect our gross margin to be higher in the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, because of the investments in new products, we do not expect the increase to be as high as it was in the first three quarters of fiscal 2022.

We are also continuing 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 July 30, 2022, we have approximately 2,170 Dollar Tree Plus stores and we expect to implement the concept in a total of 1,500 stores during fiscal 2022.

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

As of July 30, 2022, the Instacart platform covers nearly 7,000 Dollar Tree stores.

As of October 29, 2022, we have approximately 2,350 Dollar Tree Plus stores.

We began testing the Instacart online delivery service at Dollar Tree stores in the third quarter of fiscal 2021 and began rolling it out in the fourth quarter of fiscal 2021.

As of October 29, 2022, the Instacart platform covers more than 7,500 Dollar Tree stores.

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

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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 July 30, 2022, we operated more than 540 Combo Stores.

As of October 29, 2022, we operated approximately 700 Combo Stores.

We are also continuing to execute our store optimization programs.

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

As of July 30, 2022, we have approximately 4,095 H2 stores.

As of October 29, 2022, we have approximately 4,300 H2 stores.

Based on the success of the Combo Store and H2 store formats, in fiscal 2022 we anticipate adding 400 new or relocated Combo Stores in total and completing a total of 700 renovations into either the Combo Store format or the H2 store format.

After a successful pilot program in 2020, we entered into a partnership with Instacart in February 2021, which covers more than 6,000 Family Dollar stores across the United States as of July 30, 2022.

In addition, we added adult beverage to approximately 270 stores in the first half of fiscal 2022.

After a successful pilot program in 2020, we entered into a partnership with Instacart in February 2021, which covers more than 7,200 Family Dollar stores across the United States as of October 29, 2022.

In addition, we added adult beverage to more than 440 stores in the first three quarters of fiscal 2022.

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

As of October 29, 2022, there were more than 3,180 stores selling adult beverage products.

Additional Considerations

The following trends or uncertainties have already impacted or could impact our business or results of operations during 2022 or in the future:

• Anticipated Pressures on Margins .

• Anticipated Expense Pressures .

Our financial performance is impacted by numerous factors, including changes in consumer spending behavior and increased costs due to inflation.

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We also are experiencing inflationary price pressures relating to, among other things, merchandise costs, freight costs, wages, utility costs, and repair and maintenance expenses.

In addition, we have begun making our planned competitive pricing investments at Family Dollar to improve its value proposition and drive store traffic and productivity.

We expect that the consumer’s shift to lower-margin consumable goods and any inflation-related cost increases, coupled with our planned investments in product pricing and our value proposition, will pressure gross margins in the second half of fiscal 2022.

In addition, we continue to improve Family Dollar’s value proposition and drive store traffic and productivity.

We expect that the consumer’s shift to lower-margin consumable goods and any inflation-related cost increases, coupled with our planned investments in product pricing and our value proposition, will continue to pressure gross margins in the fourth quarter of fiscal 2022.

• Supply Chain and Inventory .

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Significant disruptions in our supply chain, such as the shipping delays resulting from the COVID-19 pandemic, have negatively impacted our sales and the cost and availability of product in the stores.

Although we may continue to experience oceanic shipping delays in the future as a result of shipping capacity shortages, port congestion or closings, and the imposition of lockdowns in certain Chinese localities to address COVID-19 outbreaks, our ability to ship products from overseas on a timely basis has improved in recent months.

This improvement has led to an increase in inventory that is in route to or being held in our distribution centers.

To the extent that increased inventory levels exceed the storage capacity of our distribution centers, we will need to arrange for temporary offsite warehouse storage facilities and we may incur detention costs and incremental drayage costs, which will increase our cost of goods sold.

Although we may continue to experience oceanic shipping delays in the future as a result of shipping capacity shortages, port congestion or closings, or the imposition of additional lockdowns in certain Chinese localities to address COVID-19 outbreaks, our ability to ship products from overseas on a timely basis has improved in the second and third quarters of fiscal 2022.

In the third quarter, this improvement led to an increase in inventory levels that exceeded the storage capacity of some of our distribution centers.

As a result, we arranged for temporary offsite warehouse storage facilities and incurred detention costs and incremental drayage costs that increased our cost of goods sold and is expected to do so for the fourth quarter.

In addition, the union collective bargaining agreement that governs the wages and benefits of a large number of longshoremen at ports in California, Oregon, and Washington expired on July 1, 2022.

If the parties are unable to agree on a new or extended collective bargaining agreement, there could be work slowdowns or strikes that result in additional delays and disruptions in our supply chain which could adversely affect the availability of merchandise and increase our costs.

If the parties are unable to agree on a new or extended collective bargaining agreement, there could be work slowdowns or strikes, diversions of shipments to other U.S.

ports, or other disruptions in our supply chain which could cause delays or otherwise adversely affect the availability of merchandise and increase our costs.

We could also experience higher markdowns as a result of these supply chain challenges.

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• Freight Costs .

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

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

This trend, which accelerated in the second half of fiscal 2021, has continued during fiscal 2022.

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We are a large importer of merchandise from Asia and rely heavily on domestic freight to transport goods to our distribution centers and stores, which makes us particularly sensitive to freight costs.

Due to these trends, in the first half of fiscal 2022, import and domestic freight costs were higher compared to the first half of fiscal 2021.

Due to these trends, in the first three quarters of fiscal 2022, import and domestic freight costs were higher compared to the first three quarters of fiscal 2021.

• Labor Shortage and Wage Increases.

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This has adversely affected our stores operations, 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 include hosting national hiring events, paying sign-on bonuses in our distribution centers, offering enhanced wages in select competitive markets, and paying tuition reimbursement.

The steps we have taken to address the labor shortage include hosting national hiring events, offering enhanced wages in select competitive markets, and paying tuition reimbursement.

In 2022, the minimum wage has increased in certain States and localities, and proposals to increase the federal minimum wage have been introduced in Congress.

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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.

In addition, we have experienced delays in new store openings due to limitations on the availability of certain fixtures and equipment and inspection, permitting and contractor delays.

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

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On February 11, 2022, the Food and Drug Administration issued Form 483 observations primarily regarding rodent infestation at our West Memphis, Arkansas distribution center (“DC 202”), as well as other items that require remediation.

During the first half of fiscal 2022, we incurred costs related to the product recall, remediation efforts and asset impairment.

We expect to incur additional costs in the second half of fiscal 2022 for freight, merchandise disposal, payroll and legal costs associated with the remediation.

During fiscal 2022, we have incurred costs related to the product recall, remediation efforts and asset impairment.

We expect to incur additional costs in the fourth quarter of fiscal 2022 for freight, merchandise disposal, payroll and legal costs associated with the remediation.

• Strategic Investments.

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Within these areas, the focus of these investments is expected to be on associate wages, improved store execution, enhanced safety and working conditions, increased supply chain efficiencies, competitive pricing at Family Dollar, and enhancements to our systems infrastructure.

However, our plans have not been finalized at this time, and there is uncertainty regarding the amount and timing of these investments and the impact of such investments on our future business and results of operations.

Results of Operations

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13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

2 unchanged sentences

on a constant currency basis 6.5 % 1.6 % 5.4 % 0.4 %

The increase in net sales in the 13 weeks ended July 30, 2022 was a result of sales of $178.8 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.

Enterprise comparable store net sales increased 4.9% on a constant currency basis in the 13 weeks ended July 30, 2022, as a result of a 9.2% increase in average ticket, partially offset by a 4.0% decrease in customer traffic.

Comparable store net sales increased 4.8% when including the impact of Canadian currency fluctuations.

The increase in net sales in the 13 weeks ended October 29, 2022 was a result of sales of $183.2 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.

Enterprise comparable store net sales increased 6.5% on a constant currency basis in the 13 weeks ended October 29, 2022, as a result of a 10.0% increase in average ticket, partially offset by a 3.2% decrease in customer traffic.

Comparable store net sales increased the same 6.5% when including the impact of Canadian currency fluctuations.

On a constant currency basis, comparable store net sales increased 8.6% in the Dollar Tree segment and increased 4.1% in the Family Dollar segment.

The increase in net sales in the 26 weeks ended July 30, 2022 was a result of sales of $364.3 million at new stores and a comparable store net sales increase in the Dollar Tree segment, partially offset by a comparable store net sales decrease in the Family Dollar segment.

Enterprise comparable store net sales increased 4.7% on a constant currency basis in the 26 weeks ended July 30, 2022, as a result of an 8.8% increase in average ticket, partially offset by a 3.8% decrease in customer traffic.

The increase in net sales in the 39 weeks ended October 29, 2022 was a result of sales of $547.5 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.

Enterprise comparable store net sales increased 5.4% on a constant currency basis in the 39 weeks ended October 29, 2022, as a result of a 9.2% increase in average ticket, partially offset by a 3.5% decrease in customer traffic.

Comparable store net sales increased 5.3% when including the impact of Canadian currency fluctuations.

On a constant currency basis, comparable store net sales increased 9.4% in the Dollar Tree segment and decreased 0.4% in the Family Dollar segment.

On a constant currency basis, comparable store net sales increased 9.2% in the Dollar Tree segment and increased 1.2% in the Family Dollar segment.

13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

1 unchanged sentence

Gross profit margin 29.9 % 27.5 % 2.4 % 31.7 % 29.1 % 2.6 %

The increase in gross profit margin in the 13 weeks ended July 30, 2022 was a result of the net of the following:

• Merchandise cost, which includes freight, decreased 245 basis points resulting primarily from higher initial mark-on, partially offset by higher freight costs and increased sales of lower margin consumable merchandise.

The increase in gross profit margin in the 13 weeks ended October 29, 2022 was a result of the net of the following:

• Merchandise cost, which includes freight, decreased 285 basis points resulting primarily from higher initial mark-on and lower freight costs, partially offset by increased sales of lower margin consumable merchandise.

• Occupancy costs decreased 40 basis points due to leverage from the comparable store net sales increase.

• Distribution costs decreased 10 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts due to increases in inventory levels, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.

• Shrink costs increased 30 basis points in the current year quarter resulting from more favorable inventory results in relation to accruals in the prior year quarter.

• Markdown costs increased 40 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher clearance markdowns resulting from a move to a higher value assortment at the $1.25 price point on the Dollar Tree segment.

The increase in gross profit margin in the 26 weeks ended July 30, 2022 was a result of the net of the following:

• Distribution costs decreased 15 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts due to increases in inventory levels partially offset by higher hourly wages.

• Markdown costs increased 50 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher dated product markdowns on the Dollar Tree segment.

• Shrink costs increased 60 basis points in the current year quarter resulting from unfavorable inventory results in relation to accruals.

The increase in gross profit margin in the 39 weeks ended October 29, 2022 was a result of the net of the following:

• Merchandise cost, which includes freight, decreased 300 basis points resulting primarily from higher initial mark-on, partially offset by higher freight costs and increased sales of lower margin consumable merchandise on the Family Dollar segment.

• Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts resulting from increases in inventory levels, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.

• Occupancy costs decreased 25 basis points due to leverage from the comparable store net sales increase.

• Shrink costs increased 20 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.

• Shrink costs increased 30 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

• Markdown costs increased 45 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher clearance markdowns resulting from a move to a higher value assortment at the $1.25 price point on the Dollar Tree segment.

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13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

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expense rate 24.4 % 22.7 % 1.7 % 23.9 % 22.7 % 1.2 %

The increase in the selling, general and administrative expense rate in the 13 weeks ended July 30, 2022 was the result of the following:

• Other selling, general and administrative expenses increased 45 basis points primarily due to unfavorable development of general liability insurance claims, higher legal fees, higher debit and credit fees and inflationary pressure across several expense categories.

• Store facility costs increased 30 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.

• Payroll expenses increased 5 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock compensation expenses, partially offset by leverage from the comparable store net sales increase.

• Depreciation and amortization expense increased 10 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the comparable store net sales increase.

The increase in the selling, general and administrative expense rate in the 26 weeks ended July 30, 2022 was the result of the following:

• Other selling, general and administrative expenses increased 60 basis points primarily due to long-lived asset impairments at the Family Dollar West Memphis, Arkansas distribution center, higher legal fees, including costs related to the reconstitution of the Board of Directors and higher store supplies expense.

• Store facility costs increased 20 basis points primarily due to costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall, higher utility costs and higher repairs and maintenance expenses as we focus on store conditions for our customers and associates.

The increase in the selling, general and administrative expense rate in the 13 weeks ended October 29, 2022 was the result of the following:

• Other selling, general and administrative expenses increased 75 basis points primarily due to higher legal fees and consulting fees as well as inflationary pressure across several expense categories.

The prior year quarter also included a benefit associated with the settlement of a contractual dispute.

• Store facility costs increased 60 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.

• Payroll expenses increased 40 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock and incentive compensation expenses, partially offset by leverage from the comparable store net sales increase.

• Depreciation and amortization expense was flat as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.

The increase in the selling, general and administrative expense rate in the 39 weeks ended October 29, 2022 was the result of the following:

• Other selling, general and administrative expenses increased 65 basis points primarily due to higher legal fees, including costs related to the reconstitution of the Board of Directors, long-lived asset impairments at the Family Dollar West Memphis, Arkansas distribution center and inflationary pressure across several expense categories.

• Store facility costs increased 35 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, higher utility costs and costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall.

• Payroll expenses increased 20 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock and incentive compensation expenses, partially offset by leverage from the comparable store net sales increase.

• Depreciation and amortization expense increased 5 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the comparable store net sales increase.

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13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

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Operating income margin 5.5 % 4.8 % 0.7 % 7.9 % 6.4 % 1.5 %

Operating income margin increased to 7.5% for the 13 weeks ended July 30, 2022 compared to 6.3% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Operating income margin increased to 9.0% for the 26 weeks ended July 30, 2022 compared to 7.2% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Operating income margin increased to 5.5% for the 13 weeks ended October 29, 2022 compared to 4.8% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Operating income margin increased to 7.9% for the 39 weeks ended October 29, 2022 compared to 6.4% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Interest Expense, Net

13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

Interest expense, net $ 32.7 $ 33.4 (2.1) % $ 97.3 $ 99.4 (2.1) %

Interest expense, net decreased $2.4 million in the 13 weeks ended July 30, 2022 compared to the same period last year, resulting from higher interest income on investments.

Interest expense, net decreased $1.4 million in the 26 weeks ended July 30, 2022 compared to the same period last year, resulting from higher interest income on investments.

Interest expense, net decreased $0.7 million in the 13 weeks ended October 29, 2022 compared to the same period last year, resulting from higher interest income on investments and capitalized interest on capital expenditures, partially offset by interest expense on credit facility borrowings.

Interest expense, net decreased $2.1 million in the 39 weeks ended October 29, 2022 compared to the same period last year, resulting from higher interest income on investments and capitalized interest on capital expenditures, partially offset by interest expense on credit facility borrowings.

Provision for Income Taxes

13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

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Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

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Effective tax rate 23.4 % 21.7 % 1.7 % 23.5 % 22.9 % 0.6 %

The effective tax rate was 24.2% for the 13 weeks ended July 30, 2022 compared to 23.5% for the comparable prior year period, resulting from higher state tax rates and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year quarter.

The effective tax rate was 23.5% for the 26 weeks ended July 30, 2022 compared to 23.3% for the comparable prior year period.

The effective tax rate was 23.4% for the 13 weeks ended October 29, 2022 compared to 21.7% for the comparable prior year period, resulting from higher net state taxes, higher non-deductible executive compensation and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year quarter.

The effective tax rate was 23.5% for the 39 weeks ended October 29, 2022 compared to 22.9% for the comparable prior year period.

Higher state tax rates and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year were offset by higher tax deductions related to restricted stock vesting.

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13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

4 unchanged sentences

Operating income margin 13.3 % 8.5 % 4.8 % 16.3 % 10.2 % 6.1 %

Net sales for the Dollar Tree segment increased $306.8 million, or 9.4%, for the 13 weeks ended July 30, 2022 compared to the same period last year.

Net sales for the Dollar Tree segment increased $338.7 million, or 9.9%, for the 13 weeks ended October 29, 2022 compared to the same period last year.

The increase was due to an increase in comparable store net sales of 8.6% and $81.8 million of new store sales.

Average ticket increased 14.6% and customer traffic decreased 5.2%.

The 13 weeks ended July 30, 2022 includes the impact of our $1.25 price point initiative which increased the selling price of the majority of our $1 merchandise to $1.25.

The 13 weeks ended October 29, 2022 includes the impact of our $1.25 price point initiative which increased the selling price of the majority of our $1 merchandise to $1.25.

The rollout of this initiative was completed during the first quarter of fiscal 2022.

The increase in price point more than offset the decline in the number of units sold during the second quarter of fiscal 2022.

Net sales for the Dollar Tree segment increased $767.3 million, or 11.7%, for the 26 weeks ended July 30, 2022 compared to the same period last year.

The increase in price point more than offset the decline in the number of units sold during the third quarter of fiscal 2022.

Net sales for the Dollar Tree segment increased $1,106.0 million, or 11.1%, for the 39 weeks ended October 29, 2022 compared to the same period last year.

The increase was due to an increase in comparable store net sales of 9.2% and $284.7 million of new store sales.

Average ticket increased 14.8% and customer traffic decreased 4.9%.

The 26 weeks ended July 30, 2022 was impacted by our $1.25 price point initiative.

The increase in price point more than offset the decline in the number of units sold during the first half of fiscal 2022.

Gross profit margin for the Dollar Tree segment increased to 37.4% for the 13 weeks ended July 30, 2022 compared to 32.4% for the same period last year as a result of the net of the following:

• Merchandise cost, which includes freight, decreased 455 basis points primarily due to higher initial mark-on, partially offset by higher freight costs.

The 39 weeks ended October 29, 2022 was impacted by our $1.25 price point initiative.

The increase in price point more than offset the decline in the number of units sold during the first three quarters of fiscal 2022.

Gross profit margin for the Dollar Tree segment increased to 35.4% for the 13 weeks ended October 29, 2022 compared to 30.2% for the same period last year as a result of the net of the following:

• Merchandise cost, which includes freight, decreased 485 basis points primarily due to higher initial mark-on and lower freight costs, partially offset by higher sales of lower margin consumable merchandise.

• Occupancy costs decreased 60 basis points primarily due to leverage from the comparable store net sales increase.

• Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels in the current year, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.

• Markdown costs increased 10 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.

• Shrink costs increased 20 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year quarter.

Gross profit margin for the Dollar Tree segment increased to 39.0% for the 26 weeks ended July 30, 2022 compared to 33.0% for the same period last year as a result of the net of the following:

• Merchandise cost, which includes freight, decreased 525 basis points primarily due to higher initial mark-on and increased sales of higher margin discretionary merchandise, partially offset by higher freight costs.

• Shrink costs increased 35 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

Gross profit margin for the Dollar Tree segment increased to 37.8% for the 39 weeks ended October 29, 2022 compared to 32.1% for the same period last year as a result of the net of the following:

• Merchandise cost, which includes freight, decreased 515 basis points primarily due to higher initial mark-on, partially offset by higher freight costs.

• Occupancy costs decreased 65 basis points primarily due to leverage from the comparable store net sales increase.

• Distribution costs decreased 30 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels partially offset by higher hourly wages.

• Shrink costs increased 10 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.

• Markdown costs increased 15 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.

Operating income margin for the Dollar Tree segment increased to 15.4% for the 13 weeks ended July 30, 2022 from 10.1% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate.

The selling, general and administrative expense rate decreased to 22.0% in the 13 weeks ended July 30, 2022 compared to 22.3% for the same period last year as a result of the net of the following:

• Payroll expenses decreased 90 basis points primarily due to leverage from the comparable store net sales increase and favorable development of workers’ compensation claims, partially offset by minimum wage increases and other investments in store payroll.

• Other selling, general and administrative expenses increased 40 basis points primarily due to unfavorable development of general liability insurance claims and inflationary pressure across several expense categories.

• Store facility costs increased 10 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.

• Shrink costs increased 20 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

Operating income margin for the Dollar Tree segment increased to 13.3% for the 13 weeks ended October 29, 2022 from 8.5% for the same period last year as a result of the gross profit margin increase noted above, partially offset by an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate increased to 22.1% in the 13 weeks ended October 29, 2022 compared to 21.7% for the same period last year as a result of the net of the following:

• Other selling, general and administrative expenses increased 65 basis points primarily due to the benefit in the prior year quarter associated with the settlement of a contractual dispute and the realization of certain tax credits as well as inflationary pressure across several expense categories in the current year quarter.

• Store facility costs increased 45 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.

• Depreciation and amortization expense was flat as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.

Operating income margin for the Dollar Tree segment increased to 17.9% for the 26 weeks ended July 30, 2022 from 11.1% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate.

The selling, general and administrative expense rate decreased to 21.1% in the 26 weeks ended July 30, 2022 compared to 21.9% for the same period last year as a result of the net of the following:

• Payroll expenses decreased 95 basis points primarily due to leverage from the comparable store net sales increase and favorable development of workers’ compensation claims, partially offset by minimum wage increases and other investments in store payroll.

• Store facility costs decreased 10 basis points primarily due to leverage from the comparable store net sales increase, partially offset by an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.

• Payroll expenses decreased 70 basis points primarily due to leverage from the comparable store net sales increase, partially offset by minimum wage increases and other investments in store payroll.

Operating income margin for the Dollar Tree segment increased to 16.3% for the 39 weeks ended October 29, 2022 from 10.2% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate.

The selling, general and administrative expense rate decreased to 21.5% in the 39 weeks ended October 29, 2022 compared to 21.9% for the same period last year as a result of the net of the following:

• Payroll expenses decreased 85 basis points primarily due to leverage from the comparable store net sales increase, partially offset by minimum wage increases and other investments in store payroll.

• Depreciation and amortization expense decreased 5 basis points primarily due to leverage from the comparable store net sales increase, partially offset by capital expenditures related to store renovations and improvements.

• Other selling, general and administrative expenses increased 25 basis points primarily due to unfavorable development of general liability claims, higher store supplies expense in connection with the $1.25 price point initiative, and inflationary pressure across several expense categories.

• Store facility costs increased 10 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, partially offset by leverage from the comparable store net sales increase.

• Other selling, general and administrative expenses increased 35 basis points primarily due to the benefit in the prior year associated with the settlement of a contractual dispute and the realization of certain tax credits as well as inflationary pressure across several expense categories in the current year.

Family Dollar

1 unchanged sentence

13 Weeks Ended 39 Weeks Ended

July 30, July 31, Percentage

Change July 30, July 31, Percentage

October 29, October 30, Percentage

Change October 29, October 30, Percentage

(dollars in millions) 2022 2021 2022 2021

2 unchanged sentences

Gross profit margin 23.4 % 24.4 % (1.0) % 24.6 % 25.8 % (1.2) %

Operating income $ 55.0 $ 156.3 (64.8) % $ 144.5 $ 367.7 (60.7) %

Operating income margin 1.7 % 5.1 % (3.4) % 2.3 % 5.9 % (3.6) %

Net sales for the Family Dollar segment increased $118.3 million, or 3.8%, for the 13 weeks ended July 30, 2022 compared to the same period last year.

Operating income (loss) $ (18.4) $ 88.6 (120.8) % $ 126.1 $ 456.3 (72.4) %

Operating margin (0.6) % 3.0 % (3.6) % 1.3 % 4.9 % (3.6) %

Net sales for the Family Dollar segment increased $182.5 million, or 6.1%, for the 13 weeks ended October 29, 2022 compared to the same period last year.

The increase was due to a comparable store net sales increase of 4.1% and $101.4 million of new store sales.

For the 13 weeks ended July 30, 2022, average ticket increased 3.3% and customer traffic declined 1.2%.

Net sales for the Family Dollar segment increased $81.1 million, or 1.3%, for the 26 weeks ended July 30, 2022 compared to the same period last year.

The increase was due to $161.4 million of new store sales, partially offset by a comparable store net sales decrease of 0.4%.

For the 26 weeks ended July 30, 2022, average ticket increased 2.1% and customer traffic declined 2.4%.

For the 13 weeks ended October 29, 2022, average ticket increased 4.1% and customer traffic increased 0.1%.

Net sales for the Family Dollar segment increased $263.6 million, or 2.9%, for the 39 weeks ended October 29, 2022 compared to the same period last year.

The increase was due to a comparable store net sales increase of 1.2% and $262.8 million of new store sales.

For the 39 weeks ended October 29, 2022, average ticket increased 2.7% and customer traffic declined 1.5%.

Customers received significant government stimulus dollars in the prior year period.

1 unchanged sentence

The Family Dollar comparable store net sales increased 1.7 % when excluding the effect of the store closures.

Gross profit margin for the Family Dollar segment decreased to 24.7% for the 13 weeks ended July 30, 2022 compared to 26.1% for the same period last year.

The decrease is due to the following:

• Markdown costs increased 80 basis points primarily due to higher clearance and promotional markdowns.

• Shrink expense increased 45 basis points in the current year quarter resulting from more favorable inventory results in relation to accruals in the prior year quarter.

• Merchandise cost, which includes freight, increased 15 basis points primarily due to higher freight costs and higher sales of lower margin consumable merchandise, partially offset by higher initial mark-on.

• Distribution costs were flat compared with the prior year quarter as higher capitalized balances resulting from increases in inventory levels in the current year offset higher hourly wages and higher maintenance and compliance costs in our distribution centers.

Gross profit margin for the Family Dollar segment decreased to 25.3% for the 26 weeks ended July 30, 2022 compared to 26.5% for the same period last year.

Gross profit margin for the Family Dollar segment decreased to 23.4% for the 13 weeks ended October 29, 2022 compared to 24.4% for the same period last year.

The decrease is due to the net of the following:

• Markdown costs increased 75 basis points primarily due to higher clearance and promotional markdowns.

• Occupancy costs increased 25 basis points primarily due to loss of leverage from the comparable store net sales decrease and higher real estate tax expenses.

• Shrink expense increased 35 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.

• Markdown costs increased 105 basis points primarily due to higher promotional and clearance markdowns.

• Shrink costs increased 85 basis points in the current year quarter resulting from unfavorable inventory results in relation to accruals.

• Distribution costs decreased 15 basis points primarily due to the leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels in the current year partially offset by higher hourly wages.

• Occupancy costs decreased 25 basis points primarily due to the leverage from the comparable store net sales increase.

• Merchandise cost, which includes freight, decreased 45 basis points primarily due to higher initial mark-on.

Gross profit margin for the Family Dollar segment decreased to 24.6% for the 39 weeks ended October 29, 2022 compared to 25.8% for the same period last year.

The decrease is due to the net of the following:

• Markdown costs increased 85 basis points primarily due to higher promotional and clearance markdowns.

• Shrink costs increased 50 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

• Occupancy costs increased 10 basis points primarily due to loss of leverage from the low comparable store net sales increase.

• Distribution costs decreased 10 basis points due to higher capitalized balances resulting from increases in inventory levels in the current year, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.

• Merchandise cost, which includes freight, decreased 20 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and higher sales of lower margin consumable merchandise.

Operating income margin for the Family Dollar segment decreased to 1.7% for the 13 weeks ended July 30, 2022 from 5.1% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate was 23.0% in the 13 weeks ended July 30, 2022 compared to 21.0% for the same period last year.

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

• Payroll expenses increased 70 basis points primarily due to minimum wage increases and other investments in store payroll and an increase in workers’ compensation expense due to favorable accrual adjustments in the prior year, partially offset by lower incentive compensation expenses.

• Store facility costs increased 50 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.

• Other selling, general and administrative expenses increased 45 basis points primarily due to higher legal fees, higher debit and credit fees, higher store supplies expense related to store projects and inflationary pressure across several expense categories.

Operating margin for the Family Dollar segment decreased to (0.6)% for the 13 weeks ended October 29, 2022 from 3.0% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate increased to 24.0% in the 13 weeks ended October 29, 2022 compared to 21.4% for the same period last year as a result of the following:

• Payroll expenses increased 95 basis points primarily due to minimum wage increases and other investments in store payroll.

• Store facility costs increased 75 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.

• Other selling, general and administrative expenses increased 70 basis points primarily due to higher legal fees and inflationary pressure across several expense categories.

Operating margin for the Family Dollar segment decreased to 1.3% for the 39 weeks ended October 29, 2022 from 4.9% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate increased to 23.3% in the 39 weeks ended October 29, 2022 compared to 20.9% for the same period last year as a result of the following:

• Payroll expenses increased 85 basis points primarily due to minimum wage increases and other investments in store payroll.

• Other selling, general and administrative expenses increased 70 basis points primarily due to long-lived asset impairments at the West Memphis, Arkansas distribution center, higher legal fees and inflationary pressure across several expense categories.

• Store facility costs increased 65 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, higher utility costs and costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall.

• Depreciation and amortization expense increased 25 basis points primarily due to capital expenditures related to store renovations and improvements.

Operating income margin for the Family Dollar segment decreased to 2.3% for the 26 weeks ended July 30, 2022 from 5.9% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate.

The selling, general and administrative expense rate was 23.0% in the 26 weeks ended July 30, 2022 compared to 20.6% for the same period last year.

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

• Payroll expenses increased 80 basis points primarily due to minimum wage increases and other investments in store payroll, an increase in workers’ compensation expense due to favorable accrual adjustments in the prior year and loss of leverage from the decrease in comparable store net sales.

• Other selling, general and administrative expenses increased 65 basis points primarily due to long-lived asset impairments at the West Memphis, Arkansas distribution center, higher legal fees, higher debit and credit fees, higher store supplies expense related to store projects, loss of leverage from the decrease in comparable store net sales and inflationary pressure across several expense categories.

• Store facility costs increased 60 basis points primarily due to costs associated with the removal of product from certain stores in connection with the voluntary retail-level product recall, higher utility costs, higher repairs and maintenance expenses as we focus on store conditions for our customers and associates and loss of leverage from the decrease in comparable store net sales.

• Depreciation and amortization expense increased 30 basis points primarily due to capital expenditures related to store renovations and improvements and loss of leverage from the decrease in comparable store net sales.

Liquidity and Capital Resources

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

We invest 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 26 weeks ended July 30, 2022 and July 31, 2021:

The following table compares cash flow-related information for the 39 weeks ended October 29, 2022 and October 30, 2021:

39 Weeks Ended

July 30, July 31,

October 29, October 30,

(in millions) 2022 2021

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Financing activities (337.8) (981.6)

Net cash provided by operating activities decreased $215.5 million primarily due to higher inventory levels, partially offset by higher current year earnings, net of non-cash items and higher accrued liability balances.

Net cash provided by operating activities decreased $284.6 million primarily due to higher inventory levels and lower accounts payable, partially offset by higher current year earnings, net of non-cash items and higher accrued liability balances.

Net cash used in investing activities increased $179.6 million primarily due to higher capital expenditures in the current year.

Net cash used in financing activities decreased $697.5 million primarily due to $250.0 million of cash paid for stock repurchases in the current year compared to $947.5 million in the prior year.

At July 30, 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 $45.3 million.

We also have $425.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which $324.3 million was committed to letters of credit issued for routine purchases of imported merchandise as of July 30, 2022.

We repurchased 1,754,496 and 9,156,898 shares of common stock on the open market during the 26 weeks ended July 30, 2022 and July 31, 2021, respectively, for $250.0 million and $950.0 million, respectively.

Of the shares repurchased during the 26 weeks ended July 31, 2021, approximately $2.5 million had not settled as of July 31, 2021 and this amount was accrued in the accompanying unaudited condensed consolidated balance sheet as of July 31, 2021.

At July 30, 2022, we had $2.25 billion remaining under Board repurchase authorization.

Net cash used in financing activities decreased $643.8 million due to lower stock repurchases and net proceeds from borrowings under the Revolving Credit Facility in the current year.

At October 29, 2022, our long-term borrowings were $3.45 billion.

Additionally, we had $350.0 million of loans outstanding under our $1.5 billion Revolving Credit Facility and $1.1 billion of availability, net of $44.3 million of outstanding standby letters of credit.

We also have $425.0 million in trade letters of credit with various financial institutions, under which $178.0 million was committed to letters of credit issued for routine purchases of imported merchandise as of October 29, 2022.

We repurchased 4,613,696 and 9,156,898 shares of common stock on the open market during the 39 weeks ended October 29, 2022 and October 30, 2021, respectively, for $647.5 million and $950.0 million, respectively.

At October 29, 2022, we had $1.85 billion remaining under our 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