DOLLAR TREE, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Note Regarding Forward-Looking Statements This document contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding: • 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 the impact of investments in new products on the gross margin of our Dollar Tree banner; • 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), and the availability of indemnification or insurance with respect to such matters; • Our plans to renovate existing Family Dollar stores, continue the addition of adult beverage product to our stores, and build new stores in the H2 store format, and our expectations regarding the performance of the H2 format on our results of operations; • Our plans relating to new store concepts such as Dollar Tree Plus and our Combo Store format; • Our expectations regarding the impact of inflation on our business; and • Our cash needs, including our ability to fund our future capital expenditures and working capital requirements. A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, and in this Quarterly Report on Form 10-Q. The following risks could have a material adverse impact on our sales, costs, profitability, financial performance or implementation of strategic initiatives: • Our profitability is vulnerable to increases in merchandise, shipping, freight and fuel costs, wage and benefit costs and other operating costs. • We are experiencing higher costs and disruptions in our distribution network, which have had and could have an adverse impact on our sales, margins and profitability. • We may stop selling or recall certain products for safety-related or other issues. • Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of consumer concerns about the quality and safety of our products or our brand standards. • Inflation or other adverse change or downturn in economic conditions could impact our sales or profitability. • If the COVID-19 pandemic and associated disruptions worsen or continue longer than expected, there could be a material adverse impact on our business and results of operations. • Risks associated with our domestic and foreign suppliers could adversely affect our financial performance. • Our supply chain may be disrupted by changes in United States trade policy with China. • Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably. • Our profitability is affected by the mix of products we sell. • Pressure from competitors may reduce our sales and profits. 14 Table of Contents • Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel. • We may not be successful in implementing or in anticipating the impact of important strategic initiatives, and our plans for implementing such initiatives may be altered or delayed due to various factors, which may have an adverse impact on our business and financial results. • We could incur losses due to impairment of long-lived assets, goodwill and intangible assets. • We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems, including because of a cyber-attack, could harm our ability to effectively operate and grow our business and could adversely affect our financial results. • The potential unauthorized access to customer information may violate privacy laws and could damage our business reputation, subject us to negative publicity, litigation and costs, and adversely affect our results of operations or business. • Litigation, arbitration and government proceedings may adversely affect our business, financial condition and/or results of operations. • Changes in laws and government regulations or in other stakeholder expectations concerning business conduct, or our failure to adequately estimate the impact of such changes or expectations, could increase our expenses, expose us to legal risks or otherwise adversely affect us. • Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures. • The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity. • Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly. • Our business or the value of our common stock could be negatively affected as a result of actions by shareholders. • The price of our common stock is subject to market and other conditions and may be volatile. • Certain provisions in our Articles of Incorporation and By-Laws could delay or discourage a change of control transaction that may be in a shareholder’s best interest. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events, or otherwise. Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to disclose to them any material, nonpublic information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any securities analyst regardless of the content of the statement or report. Furthermore, we have a policy against confirming projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility. Overview We are a leading operator of more than 16,400 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the fixed price of $1.25. Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores. Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores. Second is the performance of stores once they are open which can be impacted by a number of factors including operational performance, competition, inflation and changes in the product assortment, pricing, or quality. Sales vary at our existing 15 Table of Contents stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the period in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand. Sales that are excluded from the calculation of comparable store net sales are referred to as non-comparable store sales and consist of sales from new stores open fifteen months or less and stores that are closed permanently or expected to be closed for more than 90 days. At April 29, 2023, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. The average size of stores opened during the 13 weeks ended April 29, 2023 was approximately 9,520 selling square feet for the Dollar Tree segment and 9,410 selling square feet for the Family Dollar segment. A breakdown of store counts and square footage by segment for the 13 weeks ended April 29, 2023 and April 30, 2022 is as follows: 13 Weeks Ended April 29, 2023 April 30, 2022 Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total Store Count: Beginning 8,134 8,206 16,340 8,061 8,016 16,077 New stores 32 75 107 42 70 112 Re-bannered stores 2 (1) 1 (2) 5 3 Closings (15) (14) (29) (13) (17) (30) Ending 8,153 8,266 16,419 8,088 8,074 16,162 Relocations 6 27 33 12 21 33 Selling Square Feet (in millions): Beginning 70.5 61.6 132.1 69.7 59.2 128.9 New stores 0.3 0.7 1.0 0.4 0.6 1.0 Closings (0.1) (0.1) (0.2) (0.1) (0.1) (0.2) Relocations — 0.1 0.1 — 0.1 0.1 Ending 70.7 62.3 133.0 70.0 59.8 129.8 Stores are included as re-banners when they close or open, respectively. The percentage change in comparable store net sales for the 13 weeks ended April 29, 2023, as compared with the preceding year, is as follows: 13 Weeks Ended April 29, 2023 Sales Growth Change in Customer Traffic Change in Average Ticket Consolidated 4.8 % 5.0 % (0.2) % Dollar Tree Segment 3.4 % 5.5 % (2.1) % Family Dollar Segment 6.6 % 4.3 % 2.2 % 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 In September 2021, we announced our new $1.25 price point initiative and we completed the rollout of this initiative to all Dollar Tree stores during the first quarter of fiscal 2022, increasing the price point on a majority of our $1 merchandise to $1.25. The increase in the price point has more than offset the decline in the number of units sold. During fiscal 2022, we began investing in new products and modifying existing products to provide greater value for our customers and increase customer traffic and store productivity. Because of the investments in new products, we expect Dollar Tree’s gross margin to be lower in the first half of fiscal 2023 compared to the prior year. 16 Table of Contents 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 April 29, 2023, we have approximately 2,915 Dollar Tree Plus stores. In addition, we have added $3, $4 and $5 frozen and refrigerated product to 3,935 stores as of April 29, 2023. Family Dollar Initiatives We are executing several initiatives in our Family Dollar stores to increase sales. 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 April 29, 2023, we operated approximately 885 Combo Stores. We are also continuing to implement our H2 initiative. Our H2 stores have significantly improved merchandise offerings throughout the store, including the addition of Dollar Tree $1.25 merchandise items 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 April 29, 2023, we have approximately 4,610 H2 stores. In addition, we are continuing to add adult beverage product to our stores. As of April 29, 2023, there were more than 3,510 stores selling adult beverage products. We believe the addition of adult beverage to our assortment will drive traffic to our stores. Additional Considerations The following trends or uncertainties have already impacted or could impact our business or results of operations during 2023 or in the future: • Strategic Investments. Building on our current initiatives, we are currently developing plans to make additional multi-year strategic investments across both banners to further position the company for long-term sustained growth. We anticipate that these investments will relate to four key areas of our business: our associates, our distribution center network and supply chain, our product pricing and value proposition, and our technology infrastructure. 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. Results of Operations Our results of operations and period-over-period changes are discussed in the following section. Note that gross profit margin is calculated as gross profit (i.e., net sales less cost of sales) divided by net sales. The selling, general and administrative expense rate and operating income margin are calculated by dividing the applicable amount by total revenue. Net Sales 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Net sales $ 7,319.5 $ 6,900.1 6.1 % Comparable store net sales change 4.8 % 4.4 % The increase in net sales in the 13 weeks ended April 29, 2023 was a result of the comparable store net sales increases in the Dollar Tree and Family Dollar segments and net sales of $241.2 million at non-comparable stores. Enterprise comparable store net sales increased 4.8% in the 13 weeks ended April 29, 2023, as a result of a 5.0% increase in customer traffic, partially offset by a 0.2% decrease in average ticket. Comparable store net sales increased 6.6% in the Family Dollar segment and increased 3.4% in the Dollar Tree segment. 17 Table of Contents Gross Profit 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Gross profit $ 2,230.4 $ 2,340.5 (4.7) % Gross profit margin 30.5 % 33.9 % (3.4) % The decrease in gross profit margin in the 13 weeks ended April 29, 2023 was a result of the net of the following: • Merchandise cost, which includes freight, increased 280 basis points resulting from lower initial mark-on due to the prior year benefiting from the $1.25 rollout whereas the current year reflects product value re-investments at Dollar Tree and cost increases as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs. • Shrink costs increased 60 basis points in the current year resulting from unfavorable physical inventory results. • Distribution costs increased 55 basis points due to higher maintenance and compliance costs and higher hourly wages as well as the prior year including higher capitalized amounts resulting from higher inventory levels. • Markdown costs decreased 25 basis points due to the prior year including higher clearance markdowns resulting from a transition to a higher value assortment at the $1.25 price point on the Dollar Tree segment and shipping delays of seasonal merchandise and slow moving inventory items on the Family Dollar segment. Offsetting these decreases, in the current year, we experienced higher seasonal markdowns on the Dollar Tree segment and higher promotional markdowns on the Family Dollar segment. • Occupancy costs decreased 25 basis points due to leverage from the comparable store net sales increase. Selling, General and Administrative Expenses 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Selling, general and administrative expenses $ 1,815.0 $ 1,611.5 12.6 % Selling, general and administrative expense rate 24.8 % 23.3 % 1.5 % The increase in the selling, general and administrative expense rate in the 13 weeks ended April 29, 2023 was the result of the following: • Other selling, general and administrative expenses increased 70 basis points primarily due to increases in legal costs, professional fees, and advertising costs, partially offset by higher costs in the prior year in connection with long-lived asset impairments at the Family Dollar West Memphis, Arkansas distribution center. The increase in legal costs was primarily due to a $30.0 million accrual for DC 202-related legal matters, partially offset by legal fees in the prior year related to the reconstitution of the Board of Directors. • Payroll expenses increased 60 basis points primarily due to wage investments and minimum wage increases in store payroll, partially offset by lower incentive and stock compensation expenses and leverage from the comparable store net sales increase. • Store facility costs increased 20 basis points primarily due to higher 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. • Depreciation and amortization expense was unchanged as a percentage of total revenue, as leverage from the comparable store net sales increase offset capital expenditures related to store renovations and improvements. 18 Table of Contents Operating Income 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Operating income $ 419.7 $ 731.5 (42.6) % Operating income margin 5.7 % 10.6 % (4.9) % Operating income margin decreased to 5.7% for the 13 weeks ended April 29, 2023 compared to 10.6% for the same period last year, resulting from the decrease in gross profit margin and the increase in the selling, general and administrative expense rate, as described above. Interest Expense, Net 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Interest expense, net $ 25.9 $ 34.0 (23.8) % Interest expense, net decreased $8.1 million in the 13 weeks ended April 29, 2023 compared to the same period last year, resulting from higher interest income on investments. Provision for Income Taxes 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Provision for income taxes $ 94.7 $ 161.1 (41.2) % Effective tax rate 24.1 % 23.1 % 1.0 % The effective tax rate was 24.1% for the 13 weeks ended April 29, 2023 compared to 23.1% for the comparable prior year period, resulting from lower stock-based compensation deductions and higher non-deductible expenses, offset partially by higher Work Opportunity Tax credits as a percentage of pre-tax income in the current year. Segment Information Our operating results for the Dollar Tree and Family Dollar segments and period-over-period changes are discussed in the following sections. Dollar Tree The following table summarizes the operating results of the Dollar Tree segment: 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Net sales $ 3,931.7 $ 3,781.8 4.0 % Gross profit 1,388.6 1,534.7 (9.5) % Gross profit margin 35.3 % 40.6 % (5.3) % Operating income $ 535.7 $ 764.2 (29.9) % Operating income margin 13.6 % 20.2 % (6.6) % Net sales for the Dollar Tree segment increased $149.9 million, or 4.0%, for the 13 weeks ended April 29, 2023 compared to the same period last year. The increase was due to an increase in comparable store net sales of 3.4% and $90.7 million of non-comparable store sales. Customer traffic increased 5.5% and average ticket decreased 2.1%. 19 Table of Contents Gross profit margin for the Dollar Tree segment decreased to 35.3% for the 13 weeks ended April 29, 2023 compared to 40.6% for the same period last year as a result of the net of the following: • Merchandise cost, which includes freight, increased 420 basis points due to the prior year benefiting from the $1.25 rollout whereas the current year reflects lower initial mark-on resulting from product value re-investments and cost increases as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs. • Distribution costs increased 80 basis points due to higher maintenance and compliance costs and higher hourly wages as well as the prior year including higher capitalized amounts resulting from higher inventory levels. • Shrink costs increased 55 basis points in the current year resulting from unfavorable physical inventory results. • Markdown costs decreased 20 basis points resulting from higher clearance markdowns in the prior year due to a transition to a higher value assortment at the $1.25 price point, partially offset by higher seasonal markdowns in the current year. Operating income margin for the Dollar Tree segment decreased to 13.6% for the 13 weeks ended April 29, 2023 from 20.2% for the same period last year as a result of 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 21.7% in the 13 weeks ended April 29, 2023 compared to 20.4% for the same period last year as a result of the following: • Payroll expenses increased 75 basis points primarily due to wage investments and minimum wage increases in store payroll. • Store facility costs increased 50 basis points primarily due to higher repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs. • Depreciation and amortization expense increased 5 basis points primarily due to capital expenditures related to store renovations and improvements. Family Dollar The following table summarizes the operating results of the Family Dollar segment: 13 Weeks Ended (dollars in millions) April 29, 2023 April 30, 2022 Percentage Change Net sales $ 3,387.8 $ 3,118.3 8.6 % Gross profit 841.8 805.8 4.5 % Gross profit margin 24.8 % 25.8 % (1.0) % Operating income $ 8.8 $ 89.5 (90.2) % Operating income margin 0.3 % 2.9 % (2.6) % Net sales for the Family Dollar segment increased $269.5 million, or 8.6%, for the 13 weeks ended April 29, 2023 compared to the same period last year. The increase was due to a comparable store net sales increase of 6.6% and $ 150.5 million of non-comparable store sales. For the 13 weeks ended April 29, 2023, customer traffic increased 4.3% and average ticket increased 2.2%. Gross profit margin for the Family Dollar segment decreased to 24.8% for the 13 weeks ended April 29, 2023 compared to 25.8% for the same period last year. The decrease is due to the net of the following: • Merchandise cost, which includes freight, increased 85 basis points resulting from lower initial mark-on and higher sales of lower margin consumable merchandise, partially offset by lower freight costs. • Shrink costs increased 60 basis points in the current year resulting from unfavorable physical inventory results. • Distribution costs increased 20 basis points primarily due to higher maintenance and compliance costs as well as the prior year including higher capitalized amounts resulting from higher inventory levels, partially offset by leverage from the comparable store net sales increase in the current year. • Markdown costs decreased 30 basis points due to higher clearance markdowns in the prior year as a result of shipping delays of seasonal merchandise and slow moving inventory items, partially offset by higher promotional markdowns in the current year. • Occupancy costs decreased 40 basis points primarily due to the leverage from the comparable store net sales increase. 20 Table of Contents Operating income margin for the Family Dollar segment decreased to 0.3% for the 13 weeks ended April 29, 2023 from 2.9% 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 24.6% in the 13 weeks ended April 29, 2023 compared to 23.0% for the same period last year as a result of the net of the following: • Other selling, general and administrative expenses increased 85 basis points primarily due to increases in legal costs, professional fees and advertising costs, partially offset by higher costs in the prior year in connection with long-lived asset impairments at the West Memphis, Arkansas distribution center. The increase in legal costs was primarily due to a $30.0 million accrual for DC 202-related legal matters in the current year. • Payroll expenses increased 75 basis points primarily due to wage investments and minimum wage increases in store payroll, partially offset by leverage from the comparable store net sales increase. • 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 and higher costs in the prior year associated with a product recall. • Depreciation and amortization expense decreased 10 basis points primarily due to leverage from the comparable store net sales increase, partially offset by capital expenditures related to store renovations and improvements. Liquidity and Capital Resources 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 13 weeks ended April 29, 2023 and April 30, 2022: 13 Weeks Ended (in millions) April 29, 2023 April 30, 2022 Net cash provided by (used in): Operating activities $ 752.0 $ 538.5 Investing activities (352.7) (256.3) Financing activities (167.6) (49.1) Net cash provided by operating activities increased $213.5 million primarily due to lower inventory levels, partially offset by lower accounts payable, lower current year earnings, net of non-cash items and lower accrued liability balances. Net cash used in investing activities increased $96.4 million due to higher capital expenditures. Net cash used in financing activities increased $118.5 million due to higher stock repurchases. At April 29, 2023, 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 $4.3 million. We also have $425.0 million in trade letters of credit with various financial institutions, under which $178.4 million was committed to letters of credit issued for routine purchases of imported merchandise as of April 29, 2023. We repurchased 1,025,000 and 89,779 shares of common stock on the open market during the 13 weeks ended April 29, 2023 and April 30, 2022, respectively, for $151.1 million and $14.2 million, respectively. Of the shares repurchased during the 13 weeks ended April 29, 2023, $7.7 million had not settled as of April 29, 2023 and this amount was accrued in the accompanying unaudited condensed consolidated balance sheet as of April 29, 2023. At April 29, 2023, we had $1.7 billion remaining under our Board repurchase authorization.