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 merchandising plans and initiatives and related impacts, including those regarding product assortment, merchandisable space and store layout, cooler and freezer expansions, private label products and planogram and category resets in the Family Dollar segment, and multi-price assortments in the Dollar Tree segment; • Our plans to add, renovate and remodel stores, including our plans relating to new store concepts such as H2.5, rural and XSB formats for Family Dollar stores, and Dollar Tree Plus formats, and our expectations regarding store standards and operations, efficiency initiatives, selling square footage and the performance of those formats; • Our expectations regarding the implementation and impact of investments in supply chain, distribution facilities, store delivery and equipment, and technology initiatives, store appearance, wage investments and other workforce investments and goals; • 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 and Department of Justice matters), and the availability of indemnification or insurance with respect to such matters; • Our expectations regarding the impact of inflation on our business; • Our expectations regarding our commercial paper program, including our expected use of proceeds and repayment sources; 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. • 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. 15 Table of Contents • Our profitability is affected by the mix of products we sell. • Pressure from competitors may reduce our sales and profits. • 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, we may fail to realize our desired sales, operational efficiencies or other anticipated benefits of those initiatives, and our plans for implementing such initiatives may be altered or delayed due to various factors, any of which may have an adverse impact on our business and financial results. • Customers may not accept or respond to changes in our product assortment, store layouts and formats, and other results of our strategic initiatives. • 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. 16 Table of Contents 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 point of $1.25, with additional offerings at $3, $4 and $5 price points. 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 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 July 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 26 weeks ended July 29, 2023 was approximately 9,310 selling square feet for the Dollar Tree segment and 9,515 selling square feet for the Family Dollar segment. A breakdown of store counts and square footage by segment for the 26 weeks ended July 29, 2023 and July 30, 2022 is as follows: 26 Weeks Ended July 29, 2023 July 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 80 145 225 74 165 239 Re-bannered stores 4 (1) 3 (5) 7 2 Closings (41) (51) (92) (27) (60) (87) Ending 8,177 8,299 16,476 8,103 8,128 16,231 Relocations 16 48 64 17 45 62 Selling Square Feet (in millions): Beginning 70.5 61.6 132.1 69.7 59.2 128.9 New stores 0.7 1.4 2.1 0.6 1.5 2.1 Re-bannered stores — — — — 0.1 0.1 Closings (0.3) (0.3) (0.6) (0.2) (0.4) (0.6) Relocations — 0.1 0.1 0.1 0.1 0.2 Ending 70.9 62.8 133.7 70.2 60.5 130.7 Stores are included as re-banners when they close or open, respectively. The percentage change in comparable store net sales for the 13 and 26 weeks ended July 29, 2023, as compared with the preceding year, is as follows: 13 Weeks Ended July 29, 2023 26 Weeks Ended July 29, 2023 Sales Growth Change in Customer Traffic Change in Average Ticket Sales Growth Change in Customer Traffic Change in Average Ticket Consolidated 6.9% 7.1% (0.2)% 5.9% 6.1% (0.2)% Dollar Tree Segment 7.8% 9.6% (1.6)% 5.6% 7.7% (1.9)% Family Dollar Segment 5.8% 3.4% 2.3% 6.2% 3.9% 2.3% 17 Table of Contents Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores. Net sales per selling square foot is calculated based on total net sales for the preceding 12 months as of the end of the reporting period divided by the average selling square footage during the period. Selling square footage excludes the storage, receiving and office space that generally occupies approximately 20% of the total square footage of our stores. We believe that net sales per selling square foot more accurately depicts the productivity and operating performance of our stores as it isolates that portion of our footprint that is dedicated to selling merchandise. Net sales per selling square foot is calculated for stores open throughout the period presented. Net sales per selling square foot for the 52 weeks ended July 29, 2023 and July 30, 2022 is as follows: 52 Weeks Ended July 29, 2023 July 30, 2022 Dollar Tree Family Dollar Total Dollar Tree Family Dollar Total Net sales per selling square foot $225 $218 $222 $212 $210 $211 Strategic Initiatives In recent years, we have pursued and executed a number of strategic initiatives across the Dollar Tree and Family Dollar banners, including the $1.25 price point at Dollar Tree, implementation of Dollar Tree Plus , increased frozen and refrigerated products in our stores, and implementation of new store formats at Family Dollar. During our 2023 Investor Conference on June 21, 2023, we outlined updated strategies and plans to build upon these initiatives and drive productive sales growth, improve operating efficiency, invest in technology, and expand our culture of service to our associates. These initiatives include, among others, the following. Dollar Tree Merchandising. We completed our $1.25 price point initiative with the rollout to all Dollar Tree stores during the first quarter of fiscal 2022. This allowed us to re-introduce products and expand our brand assortment at the new $1.25 price point to provide greater value for our customers and increase customer traffic and store productivity. 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 select discretionary categories. As of July 29, 2023, we have approximately 3,630 Dollar Tree Plus stores. We are planning the continued expansion of our multi-price product assortment, both through the addition of $3, $4 and $5 frozen and refrigerated product, as well as other consumable and discretionary product. As of July 29, 2023, approximately 5,580 stores had $3, $4 and $5 frozen and refrigerated products. Within these stores, we also plan to transition some of our existing $1.25 freezer and cooler doors to multi-price products. We are currently taking actions to improve operating efficiencies and prepare for expanded multi-price products within our stores, including raising shelf heights, implementing space productivity, and rightsizing assortments. Family Dollar Merchandising. During the past several years, we have been implementing store design initiatives at Family Dollar with significantly improved merchandise offerings and establishing a minimum number of cooler doors. We are building upon these formats to further tailor space and assortment to local demographics with emerging formats including H2.5, our new primary store format (generally 6,700 to 8,700 square feet) with optimized layout and expanded frozen and refrigerated doors; rural stores, which are an evolution of our Combo format, generally contain more square footage (8,700+ square feet) and have assortments that may include Dollar Tree product; and XSB (Extra Small Box), which generally contain less square footage (less than 6,700 square feet) and add elements of H2.5 optimized to our smaller stores, particularly in urban markets. As of July 29, 2023, we have approximately 830 H2.5 stores, and in the quarter we opened or converted 90 stores into our rural Combo format. Actions taken in recent months have improved Family Dollar’s price position relative to competition, which we believe has positively impacted customer traffic and average ticket. Building on this momentum, we plan to improve our product assortment across all of Family Dollar’s formats by expanding our SKUs, continuing to add cooler doors, increasing our standard shelf profile from 72 inches to 78 inches, and implementing planogram and category resets. We continue to introduce new private brands at Family Dollar, convert control brands to private brands and align our “Family” brand message across key categories. Our Workforce & Our Workplace. Across both of our banners, we are investing in our talent, including initiatives to provide competitive pay and benefits, enhanced training, and attractive career opportunities to deliver an enhanced associate experience, reduce turnover, and improve our store standards and efficiencies and ultimately the customer experience. Additional initiatives include accelerating new store openings and expanding renovations and other projects to optimize and modernize our stores. We are continuing to implement our G.O.L.D. (Grand Opening Look Daily) initiative to improve store appearance, deliver consistent experiences across all stores, and drive positive sales trends. Supply Chain Optimization . Our supply chain initiatives include enhancing our distribution and transportation network to support store growth and merchandising programs, including investments in building a Dollar Tree Fleet Ownership Program, modernizing the existing Family Dollar fleet, transportation management systems, a new co-bannered distribution center to increase capacity and 18 Table of Contents improve efficiency, and a new rotacart delivery process that is expected to, among other things, streamline the truck unloading and store delivery process, improve associate and driver utilization and improve operational efficiencies. Technology Investment. Over the next several years, we are planning significant investment in our technology, including next-gen applications, data and analytics capabilities, and enhanced user experience across our business, including our store network and point-of-sale, merchandising and supply chain. We believe these improvements can promote operational efficiencies and deliver an elevated customer experience. 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 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Net sales $ 7,320.1 $ 6,765.3 8.2 % $ 14,639.6 $ 13,665.4 7.1 % Comparable store net sales change 6.9 % 4.8 % 5.9 % 4.6 % The increase in net sales in the 13 weeks ended July 29, 2023 was a result of the comparable store net sales increases in the Dollar Tree and Family Dollar segments and net sales of $233.1 million at non-comparable stores. Enterprise comparable store net sales increased 6.9% in the 13 weeks ended July 29, 2023, as a result of a 7.1% increase in customer traffic, partially offset by a 0.2% decrease in average ticket. Comparable store net sales increased 7.8% in the Dollar Tree segment and increased 5.8% in the Family Dollar segment. The increase in net sales in the 26 weeks ended July 29, 2023 was a result of the comparable store net sales increases in the Dollar Tree and Family Dollar segments and net sales of $495.0 million at non-comparable stores. Enterprise comparable store net sales increased 5.9% in the 26 weeks ended July 29, 2023, as a result of a 6.1% increase in customer traffic, partially offset by a 0.2% decrease in average ticket. Comparable store net sales increased 6.2% in the Family Dollar segment and increased 5.6% in the Dollar Tree segment. Gross Profit 13 Weeks Ended 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Gross profit $ 2,134.7 $ 2,124.4 0.5 % $ 4,365.1 $ 4,464.9 (2.2) % Gross profit margin 29.2 % 31.4 % (2.2) % 29.8 % 32.7 % (2.9) % The decrease in gross profit margin in the 13 weeks ended July 29, 2023 was a result of the net of the following: • Merchandise cost, which includes freight, increased 145 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 40 basis points due to a higher amount of costs capitalized in the prior year quarter resulting from increasing inventory levels in the prior year quarter and higher distribution center payroll costs in the current year quarter, primarily on the Dollar Tree segment. • Occupancy costs decreased 25 basis points due to leverage from the comparable store net sales increase. The decrease in gross profit margin in the 26 weeks ended July 29, 2023 was a result of the net of the following: 19 Table of Contents • Merchandise cost, which includes freight, increased 215 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 50 basis points due to a higher amount of costs capitalized in the prior year resulting from increasing inventory levels on both the Dollar Tree and Family Dollar segments in the prior year and higher distribution center payroll costs in the current year on the Dollar Tree segment. • Markdown costs decreased 10 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 on the Family Dollar segment, partially offset by higher seasonal markdowns on the Dollar Tree segment in the current year. • Occupancy costs decreased 25 basis points due to leverage from the comparable store net sales increase. Selling, General and Administrative Expenses 13 Weeks Ended 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Selling, general and administrative expenses $ 1,852.1 $ 1,622.2 14.2 % $ 3,667.1 $ 3,233.7 13.4 % Selling, general and administrative expense rate 25.3 % 24.0 % 1.3 % 25.0 % 23.7 % 1.3 % The increase in the selling, general and administrative expense rate in the 13 weeks ended July 29, 2023 was the result of the net of the following: • Payroll expenses increased 65 basis points primarily due to wage investments and minimum wage increases in store payroll, and higher incentive compensation expense, partially offset by lower stock compensation expense and leverage from the comparable store net sales increase. • Other selling, general and administrative expenses increased 45 basis points primarily due to unfavorable development of general liability insurance claims, increases in professional fees, and higher information technology system costs. • Store facility costs increased 25 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, partially offset by leverage from the comparable store net sales increase. • 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. The increase in the selling, general and administrative expense rate in the 26 weeks ended July 29, 2023 was the result of the net of the following: • Payroll expenses increased 60 basis points primarily due to wage investments and minimum wage increases in store payroll, partially offset by lower stock compensation expenses and leverage from the comparable store net sales increase. • Other selling, general and administrative expenses increased 60 basis points primarily due to increases in professional fees and legal 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. • Store facility costs increased 25 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, partially offset by leverage from the comparable store net sales increase. • 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. 20 Table of Contents Operating Income 13 Weeks Ended 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Operating income $ 287.8 $ 505.4 (43.1) % $ 707.5 $ 1,236.9 (42.8) % Operating income margin 3.9 % 7.5 % (3.6) % 4.8 % 9.0 % (4.2) % Operating income margin decreased to 3.9% for the 13 weeks ended July 29, 2023 compared to 7.5% 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. Operating income margin decreased to 4.8% for the 26 weeks ended July 29, 2023 compared to 9.0% 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 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Interest expense, net $ 24.2 $ 30.6 (20.9) % $ 50.1 $ 64.6 (22.4) % Interest expense, net decreased $6.4 million in the 13 weeks ended July 29, 2023 compared to the same period last year, resulting from higher interest income on investments. Interest expense, net decreased $14.5 million in the 26 weeks ended July 29, 2023 compared to the same period last year, resulting from higher interest income on investments. Provision for Income Taxes 13 Weeks Ended 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Provision for income taxes $ 63.3 $ 114.8 (44.9) % $ 158.0 $ 275.9 (42.7) % Effective tax rate 24.0 % 24.2 % (0.2) % 24.0 % 23.5 % 0.5 % The effective tax rate was 24.0% for the 13 weeks ended July 29, 2023 compared to 24.2% for the comparable prior year period, resulting from higher Work Opportunity Tax Credits as a percentage of pre-tax income in the current year, offset partially by higher non-deductible expenses. The effective tax rate was 24.0% for the 26 weeks ended July 29, 2023 compared to 23.5% 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. 21 Table of Contents 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 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Net sales $ 3,873.4 $ 3,571.1 8.5 % $ 7,805.1 $ 7,352.9 6.1 % Gross profit 1,293.3 1,334.9 (3.1) % 2,681.9 2,869.6 (6.5) % Gross profit margin 33.4 % 37.4 % (4.0) % 34.4 % 39.0 % (4.6) % Operating income $ 397.8 $ 550.8 (27.8) % $ 933.5 $ 1,315.0 (29.0) % Operating income margin 10.3 % 15.4 % (5.1) % 12.0 % 17.9 % (5.9) % Net sales for the Dollar Tree segment increased $302.3 million, or 8.5%, for the 13 weeks ended July 29, 2023 compared to the same period last year. The increase was due to an increase in comparable store net sales of 7.8% and $78.4 million of non-comparable store sales. Customer traffic increased 9.6% and average ticket decreased 1.6%. Net sales for the Dollar Tree segment increased $452.2 million, or 6.1%, for the 26 weeks ended July 29, 2023 compared to the same period last year. The increase was due to an increase in comparable store net sales of 5.6% and $177.8 million of non-comparable store sales. Customer traffic increased 7.7% and average ticket decreased 1.9%. Gross profit margin for the Dollar Tree segment decreased to 33.4% for the 13 weeks ended July 29, 2023 compared to 37.4% for the same period last year as a result of the net of the following: • Merchandise cost, which includes freight, increased 275 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 75 basis points due to a higher amount of costs capitalized in the prior year quarter resulting from increasing inventory levels in the prior year quarter and higher distribution center payroll costs in the current year quarter. • Shrink costs increased 75 basis points in the current year resulting from unfavorable physical inventory results. • Occupancy costs decreased 35 basis points due to leverage from the comparable store net sales increase. Gross profit margin for the Dollar Tree segment decreased to 34.4% for the 26 weeks ended July 29, 2023 compared to 39.0% for the same period last year as a result of the net of the following: • Merchandise cost, which includes freight, increased 350 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 a higher amount of costs capitalized in the prior year resulting from increasing inventory levels in the prior year and higher distribution center payroll costs in the current year. • Shrink costs increased 65 basis points in the current year resulting from unfavorable physical inventory results. • Markdown costs decreased 10 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. • Occupancy costs decreased 20 basis points due to leverage from the comparable store net sales increase. Operating income margin for the Dollar Tree segment decreased to 10.3% for the 13 weeks ended July 29, 2023 from 15.4% 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 23.1% in the 13 weeks ended July 29, 2023 compared to 22.0% for the same period last year as a result of the net of the following: 22 Table of Contents • Payroll expenses increased 60 basis points primarily due to wage investments and minimum wage increases in store payroll, and higher incentive compensation expense, partially offset by leverage from the comparable store net sales increase. • Store facility costs increased 40 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, partially offset by leverage from the comparable store net sales increase. • Other selling, general and administrative expenses increased 20 basis points primarily due to unfavorable development of general liability insurance claims. • 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. Operating income margin for the Dollar Tree segment decreased to 12.0% for the 26 weeks ended July 29, 2023 from 17.9% 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 22.4% in the 26 weeks ended July 29, 2023 compared to 21.1% for the same period last year as a result of the following: • Payroll expenses increased 70 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 45 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, partially offset by leverage from the comparable store net sales increase. • Other selling, general and administrative expenses increased 10 basis points primarily due to unfavorable development of general liability insurance claims. • 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. Family Dollar The following table summarizes the operating results of the Family Dollar segment: 13 Weeks Ended 26 Weeks Ended (dollars in millions) July 29, 2023 July 30, 2022 Percentage Change July 29, 2023 July 30, 2022 Percentage Change Net sales $ 3,446.7 $ 3,194.2 7.9 % $ 6,834.5 $ 6,312.5 8.3 % Gross profit 841.4 789.5 6.6 % 1,683.2 1,595.3 5.5 % Gross profit margin 24.4 % 24.7 % (0.3) % 24.6 % 25.3 % (0.7) % Operating income $ 11.8 $ 55.0 (78.5) % $ 20.6 $ 144.5 (85.7) % Operating income margin 0.3 % 1.7 % (1.4) % 0.3 % 2.3 % (2.0) % Net sales for the Family Dollar segment increased $252.5 million, or 7.9%, for the 13 weeks ended July 29, 2023 compared to the same period last year. The increase was due to a comparable store net sales increase of 5.8% and $154.7 million of non-comparable store sales. For the 13 weeks ended July 29, 2023, customer traffic increased 3.4% and average ticket increased 2.3%. Net sales for the Family Dollar segment increased $522.0 million, or 8.3%, for the 26 weeks ended July 29, 2023 compared to the same period last year. The increase was due to a comparable store net sales increase of 6.2% and $317.2 million of non-comparable store sales. For the 26 weeks ended July 29, 2023, customer traffic increased 3.9% and average ticket increased 2.3%. Gross profit margin for the Family Dollar segment decreased to 24.4% for the 13 weeks ended July 29, 2023 compared to 24.7% for the same period last year. The decrease is due to the net of the following: • Shrink costs increased 45 basis points in the current year resulting from unfavorable physical inventory results. • Merchandise cost, which includes freight, decreased 5 basis points resulting from lower freight costs, partially offset by lower initial mark-on and higher sales of lower margin consumable merchandise. • Occupancy costs decreased 15 basis points primarily due to leverage from the comparable store net sales increase. 23 Table of Contents Gross profit margin for the Family Dollar segment decreased to 24.6% for the 26 weeks ended July 29, 2023 compared to 25.3% for the same period last year. The decrease is due to the net of the following: • Shrink costs increased 55 basis points in the current year resulting from unfavorable physical inventory results. • Merchandise cost, which includes freight, increased 40 basis points resulting from lower initial mark-on and higher sales of lower margin consumable merchandise, partially offset by lower freight costs. • Distribution costs increased 10 basis points due to a higher amount of costs capitalized in the prior year resulting from increasing inventory levels during the prior year. • Markdown costs decreased 15 basis points primarily due to higher clearance markdowns in the prior year as a result of shipping delays of seasonal merchandise and slow moving inventory items, and lower promotional markdowns in the current year. • Occupancy costs decreased 30 basis points primarily due to leverage from the comparable store net sales increase. Operating income margin for the Family Dollar segment decreased to 0.3% for the 13 weeks ended July 29, 2023 from 1.7% 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 24.1% in the 13 weeks ended July 29, 2023 compared to 23.0% for the same period last year as a result of the net of the following: • Payroll expenses increased 65 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 40 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, partially offset by leverage from the comparable store net sales increase. • Other selling, general and administrative expenses increased 10 basis points primarily due to increases in professional fees and advertising costs. • 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. Operating income margin for the Family Dollar segment decreased to 0.3% for the 26 weeks ended July 29, 2023 from 2.3% 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 24.4% in the 26 weeks ended July 29, 2023 compared to 23.0% for the same period last year as a result of the net of the following: • Payroll expenses increased 70 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. • Other selling, general and administrative expenses increased 50 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 recorded in the first quarter of the current year. • Store facility costs increased 25 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, 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, enhance and grow our distribution network, operate our existing stores, maintain and upgrade our technology, and support our other strategic initiatives. 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 and new stores and have funded our distribution network programs and other capital projects from internally generated funds and borrowings under our credit facilities. 24 Table of Contents The following table compares cash flow-related information for the 26 weeks ended July 29, 2023 and July 30, 2022: 26 Weeks Ended (in millions) July 29, 2023 July 30, 2022 Net cash provided by (used in): Operating activities $ 923.8 $ 520.6 Investing activities (781.0) (533.4) Financing activities (272.2) (283.3) Net cash provided by operating activities increased $403.2 million primarily due to lower inventory levels, partially offset by lower current year earnings, net of non-cash items, lower accounts payable, and lower accrued liability balances. Net cash used in investing activities increased $247.6 million due to higher capital expenditures. Net cash used in financing activities decreased $11.1 million due to lower taxes paid on exercises/vesting of stock-based compensation. At July 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 $232.8 million was committed to letters of credit issued for routine purchases of imported merchandise as of July 29, 2023. Additionally, in July 2023, we established a commercial paper program to issue unsecured commercial paper notes with maturities up to 397 days from the date of issue, up to a maximum aggregate face or principal amount outstanding at any time of $1.5 billion. Our Revolving Credit Facility will serve as a liquidity backstop for the repayment of notes outstanding under the program. As of July 29, 2023, no notes have been issued under the program. For additional details regarding our commercial paper program, please see Note 3 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q . We repurchased 1,728,713 and 1,754,496 shares of common stock on the open market during the 26 weeks ended July 29, 2023 and July 30, 2022, respectively, for $250.0 million and $250.0 million, respectively. At July 29, 2023, we had $1.6 billion remaining under our Board repurchase authorization.