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Item 7. Management’s Discussion and Analysis

2024-03-20 compared with 2023-03-10 · 240 added, 186 removed, 143 unchanged (75% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section of Form 10-K generally discusses 2022 and 2021 events and results and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

This section of Form 10-K generally discusses fiscal 2023 and fiscal 2022 events and results, and year-to-year comparisons between fiscal 2023 and fiscal 2022.

Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

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

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

Initiatives and Recent Developments

Our initiatives, as well as other recent developments that have had or are expected to have an impact on our business or results of operations are listed below:

• Dollar Tree

◦ 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.

To date, 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.

While our gross margin was higher in the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, because of the investments in new products, the increase was not as high as it was in the first three quarters of fiscal 2022 and we expect Dollar Tree’s gross margin to be lower in the first half of fiscal 2023.

◦ 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 January 28, 2023, the Instacart platform covers more than 7,800 Dollar Tree stores.

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

◦ In fiscal 2022, we continued to implement our Dollar Tree Plus initiative which introduces products priced at the $3 and $5 price points and provides our customers with extraordinary value in discretionary categories.

As of January 28, 2023, we have approximately 2,500 Dollar Tree Plus stores.

We plan to accelerate the implementation of the Dollar Tree Plus initiative in fiscal 2023 by adding the concept to an additional 1,800, or more, stores.

In addition, beginning in fiscal 2022, we added $3, $4 and $5 frozen and refrigerated product to 3,500 stores.

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

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

• Family Dollar

◦ In fiscal 2022, we continued 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 January 28, 2023, we have approximately 4,360 H2 stores.

◦ Building on the success of the H2 format, in March 2021, we announced the development of a new combination store format.

Combo Stores leverage the strengths of the Dollar Tree and Family Dollar brands under one roof to serve small towns across the country.

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

As of January 28, 2023, we operated approximately 810 Combo Stores.

◦ After a successful pilot program in 2020, we entered into a partnership with Instacart in February 2021, which covers more than 7,500 Family Dollar stores across the United States as of January 28, 2023.

◦ We added adult beverage to approximately 570 stores in fiscal 2022.

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

As of January 28, 2023, there were more than 3,300 stores selling adult beverage products.

◦ 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 quarter of fiscal 2022, approximately 400 stores serviced by DC 202 were temporarily closed in connection with a retail-level product recall.

We incurred approximately $65.0 million in costs related to the product recall, remediation efforts and asset impairment during fiscal 2022.

Remediation-related costs included merchandise disposal costs, payroll and legal costs.

• 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.

• Supply Chain

During fiscal 2021, we experienced significant disruptions in our supply chain which impacted our ability to ship products from overseas on a timely basis.

During the second and third quarters of fiscal 2022 these challenges subsided;

however, as a result of receiving inventory more timely, our inventory levels 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.

◦ Freight Costs:

We experienced significantly higher international and domestic freight costs as a result of disruptions in the global supply chain during the second half of fiscal 2021 and into the first half of fiscal 2022.

Domestically, diesel fuel prices were higher in fiscal 2022 than in the prior year and may increase further in fiscal 2023 because of international tensions.

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 fiscal 2022, import and domestic freight costs were higher compared to fiscal 2021;

however, we expect freight costs to be lower in fiscal 2023 compared with fiscal 2022.

• Long-term Debt

◦ During the fourth quarter of 2021, we completed the registered offering of $800.0 million of 2.65% Senior Notes due 2031 and $400.0 million of 3.375% Senior Notes due 2051 and used the proceeds of the offering to redeem the $1.0 billion 2023 Notes, which resulted in our incurring a $43.8 million prepayment penalty and we accelerated the expensing of $2.7 million of deferred financing and original issue discount costs associated with the 2023 Notes;

◦ During the fourth quarter of 2021, we entered into a credit agreement for a $1.5 billion revolving credit facility, which replaced our then-existing $1.25 billion revolving credit facility.

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

Risk Factors .”

We are a leading operator of more than 16,300 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.

We are a leading operator of more than 16,700 retail discount stores and we conduct our operations through two reporting segments.

Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the opening 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.

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We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation.

We include sales from stores expanded or remodeled during the year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales.

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.

At January 28, 2023, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces.

A breakdown of store counts and square footage by segment for the years ended January 28, 2023 and January 29, 2022 is as follows:

January 28, 2023 January 29, 2022

We include sales from stores expanded, relocated or remodeled during the year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales.

Stores that have been re-bannered (i.e., Family Dollar stores converted to Dollar Tree stores, or vice versa) 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.

Annual Results

Financial highlights for the fiscal year ended February 3, 2024, as compared to the fiscal year ended January 28, 2023, include:

• Net sales increased 8.0% to $30,581.6 million, due to a 4.6% enterprise-wide comparable store net sales increase and net sales of $1,184.5 million at non-comparable stores.

The 53 rd week in fiscal 2023 accounted for $559.3 million of the total net sales increase.

• Gross profit increased 4.3% to $9,309.6 million as a result of our net store growth and the 53rd week.

Gross profit, as a percentage of net sales, decreased 110 basis points to 30.4%, primarily due to higher shrink, distribution and markdown costs, partially offset by lower freight costs and occupancy costs.

Excluding $86.2 million of distribution and markdown costs related to the store portfolio optimization review, gross profit, as a percentage of net sales, decreased 80 basis points.

• Selling, general and administrative expenses increased $3,514.5 million or 52.5%, primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, a $503.9 million non-cash store asset impairment charge, and $56.7 million in DC 202-related litigation charges.

Selling, general and administrative expenses, as a percentage of total revenues, increased 980 basis points to 33.4%.

Excluding the impairment and litigation charges noted above, selling, general and administrative expenses, as a percentage of total revenues, increased 125 basis points primarily due to higher store-based payroll expenses, unfavorable development of general liability claims, and higher repairs and maintenance expenses.

• Operating income (loss) was ($881.8) million and as a percentage of total revenues, decreased 1,080 basis points to (2.9)% primarily due to the current year impairments and litigation charges noted above.

Excluding the impairments and litigation charges, the operating income (loss), as a percentage of total revenues, decreased 210 basis points.

• The effective tax rate decreased to (1.0)% compared to 23.5% in the prior year primarily due to the current year goodwill impairment charge which is not tax deductible.

• Net income (loss) was ($998.4) million, or ($4.55) per diluted share, compared to $1,615.4 million, or $7.21 per diluted share.

At February 3, 2024, 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 in fiscal 2023 was approximately 9,300 selling square feet for the Dollar Tree segment and 9,360 selling square feet for the Family Dollar segment.

A breakdown of store counts and square footage by segment for the years ended February 3, 2024 and January 28, 2023 is as follows:

February 3, 2024 January 28, 2023

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 in 2022 was approximately 8,660 selling square feet (or about 10,710 gross square feet) for the Dollar Tree segment and 9,160 selling square feet (or about 11,210 gross square feet) for the Family Dollar segment.

For 2023, we continue to plan to open stores that are 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet) for both the Dollar Tree segment and the Family Dollar segment.

We believe that these size stores are in the ranges of our optimal sizes operationally and give our customers a shopping environment which invites them to shop longer, buy more and make return visits.

Fiscal 2022, fiscal 2021 and fiscal 2020 each included 52 weeks.

The percentage change in comparable store net sales for the fiscal year ended January 28, 2023, as compared with the preceding year, is as follows:

Year Ended January 28, 2023

During the fourth quarter of fiscal 2023, we initiated a comprehensive store portfolio optimization review, including identifying stores as candidates for closure, re-bannering, or relocation.

See the “Strategic Initiatives and Recent Developments” section below and Note 16 to our consolidated financial statements for additional detail.

Fiscal 2023 ended on February 3, 2024 and included 53 weeks, commensurate with the retail calendar.

The 53 rd week in fiscal 2023 added approximately $559.3 million in sales.

Fiscal 2022 and fiscal 2021 which ended on January 28, 2023 and January 29, 2022, respectively, each included 52 weeks.

The percentage change in comparable store net sales for the fiscal year ended February 3, 2024, as compared with the preceding year, is as follows, based on a 53-week comparison for both years:

Year Ended February 3, 2024

Sales Growth Change in Customer Traffic Change in Average Ticket

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Family Dollar Segment 3.2 % 2.5 % 0.7 %

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.

Comparable store net sales are positively affected by our expanded, relocated and remodeled 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 reflects the portion of our footprint that is dedicated to selling merchandise.

Net sales per selling square foot for the 53 weeks ended February 3, 2024 and the 52 weeks ended January 28, 2023 and January 29, 2022 is as follows:

53 Weeks Ended 52 Weeks Ended

February 3, 2024 January 28, 2023 January 29, 2022

Dollar Total Dollar

Net sales per selling square foot $234 $220 $227 $220 $214 $217 $203 $212 $207

The 53 rd week in fiscal 2023 contributed $4 to the total net sales per selling square foot.

See our “Strategic Initiatives and Recent Developments” below for more information on the initiatives that are driving our comparable store net sales growth and net sales per selling square foot growth.

Strategic Initiatives and Recent Developments

We continue to execute on a number of strategic initiatives across the Dollar Tree and Family Dollar banners to 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 continue to expand our brand assortment at the $1.25 price point to provide greater value to our customers and increase customer traffic and store productivity.

We are continuing to expand our multi-price product assortment, which began with the introduction of $3 and $5 Dollar Tree Plus product in select discretionary categories, expanded into $3, $4 and $5 frozen and refrigerated product, and now comprises a wide assortment of other consumable and discretionary product.

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 and Store Portfolio Optimization Review.

Our store design initiatives at Family Dollar provide significantly improved merchandise offerings and establish a minimum number of cooler doors.

We tailor space and assortment to local demographics with emerging formats including H2.5, our primary store format with optimized layout and expanded frozen and refrigerated doors;

larger rural stores where assortments may include Dollar Tree product;

and XSB (Extra Small Box), which adds elements of H2.5 optimized to our smaller stores, particularly in urban markets.

As of February 3, 2024, we have more than 1,890 stores across these three formats.

Across all of Family Dollar’s formats we are expanding our SKUs, continuing to add cooler doors, increasing our standard shelf profile, 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.

Additionally, during the fourth quarter of fiscal 2023, we announced that we had initiated a comprehensive store portfolio optimization review which involved identifying stores for closure, relocation or re-bannering based on an evaluation of current market conditions and individual store performance, among other factors.

As a result of this portfolio optimization review, we plan to close approximately 970 underperforming Family Dollar stores, including approximately 600 stores to be closed in the first half of fiscal 2024, and approximately 370 stores to be closed at the end of each store's current lease term.

Additionally, we identified approximately 30 underperforming Dollar Tree stores for closure and plan to close each store at the end of the store's current lease term.

In connection with the store portfolio optimization review, we incurred $503.9 million of non-cash impairment charges which are included in “Selling, general and administrative expenses” within the accompanying Consolidated Statements of Operations, comprised of $152.2 million of property, plant and equipment impairment charges and $351.7 million of operating lease right-of-use asset impairment charges.

In addition, we recorded $80.6 million of inventory markdowns and $5.6 million of capitalized distribution cost impairment within “Cost of sales” in the accompanying Consolidated Statements of Operations for the stores expected to close in the first half of fiscal 2024.

We also incurred $4.3 million in third party consulting fees related to the portfolio optimization review which are included in “Selling, general and administrative expenses” within the accompanying Consolidated Statements of Operations.

See Note 16 to our consolidated financial statements for more information.

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 projects to optimize and modernize our stores, with a focus on improving store appearance, delivering consistent experiences across all stores, and driving positive sales trends.

Supply Chain Optimization .

Our supply chain initiatives include enhancing our distribution and transportation network, including investments in our trucking fleet, transportation management systems, a new distribution center with enhanced automation to improve efficiency, and a new RotaCart delivery process to streamline the truck unloading and store delivery process.

Significant investments are also underway to improve climate control conditions in our distribution centers.

Technology Investment.

We continue our multi-year plan for significant investment in our technology 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

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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.

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

Basis points, as referred to below, are a percentage of net sales for expense categories within gross profit, and are a percentage of total revenue for all other expense categories.

A 100 basis point increase equals 1.00% and a 1 basis point increase equals 0.01%.

The following table contains results of operations data for the years ended February 3, 2024, January 28, 2023 and January 29, 2022:

(in millions, except percentages)

February 3, 2024 January 28, 2023 January 29, 2022

Net sales $ 30,581.6 $ 28,318.2 $ 26,309.8

Other revenue 22.2 13.5 11.4

Total revenue 30,603.8 28,331.7 26,321.2

Cost of sales 21,272.0 19,396.3 18,583.9

Selling, general and administrative expenses, excluding

Goodwill impairment 9,144.6 6,699.1 5,925.9

Goodwill impairment 1,069.0 — —

Selling, general and administrative expenses 10,213.6 6,699.1 5,925.9

Operating income (loss) (881.8) 2,236.3 1,811.4

Interest expense, net 106.8 125.3 178.9

Other expense, net

Income (loss) before income taxes (988.7) 2,110.6 1,632.2

Provision for income taxes 9.7 495.2 304.3

Net income (loss) $ (998.4) $ 1,615.4 $ 1,327.9

Gross profit margin

30.4 % 31.5 % 29.4 %

Selling, general and administrative expense rate

33.4 % 23.6 % 22.5 %

Operating income (loss) margin

(2.9) % 7.9 % 6.9 %

Interest expense as a percentage of total revenue

0.3 % 0.4 % 0.7 %

Income (loss) before income taxes as percentage of total revenue (3.2) % 7.4 % 6.2 %

Effective tax rate

(1.0) % 23.5 % 18.6 %

Net income (loss) margin (3.3) % 5.7 % 5.0 %

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Net sales $ 30,581.6 $ 28,318.2 $ 26,309.8 8.0 %

Comparable store net sales change 4.6 % 5.9 % 1.1 %

The increase in net sales from 2021 to 2022 was a result of comparable store net sales increases in the Dollar Tree and Family Dollar segments and sales of $758.6 m illion at new stores.

Enterprise comparable store net sales increased 5.9% in 2022, as a result of an 8.9% increase in average ticket, partially offset by a 2.7% decrease in customer traffic.

The increase in net sales from fiscal 2022 to fiscal 2023 was a result of the comparable store net sales increases in the Dollar Tree and Family Dollar segments, and net sales of $ 1,184.5 million at non-comparable stores.

The 53 rd week in fiscal 2023 accounted for $559.3 million of the total net sales increase.

Enterprise comparable store net sales increased 4.6% in fiscal 2023, as a result of a 5.4% increase in customer traffic, partially offset by a 0.8% decrease in average ticket.

This increase is based on a 53-week comparison for both periods.

Comparable store net sales increased 5.8% in the Dollar Tree segment and increased 3.2% in the Family Dollar segment.

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Gross profit $ 9,309.6 $ 8,921.9 $ 7,725.9 4.3 %

Gross profit margin 30.4 % 31.5 % 29.4 % (1.1) %

The increase in gross profit margin from 2021 to 2022 was a result of the net of the following:

• Merchandise cost, which includes freight, decreased 255 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.

• Occupancy costs decreased 30 basis points due to leverage from the comparable store net sales increase.

• Distribution costs decreased 5 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 maintenance and compliance costs and higher hourly wages in our distribution centers.

• Shrink costs increased 30 basis points 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.

The decrease in gross profit margin from fiscal 2022 to fiscal 2023 was a result of the net of the following:

• Shrink costs increased approximately 55 basis points primarily due to unfavorable physical inventory results.

• Distribution costs increased approximately 40 basis points primarily due to a higher amount of costs capitalized during the prior year resulting from increasing inventory levels in both the Dollar Tree and Family Dollar segments during that period, and higher distribution center payroll costs recognized during the current year in the Dollar Tree segment.

• Merchandise cost, which includes freight, increased approximately 30 basis points primarily due to re-investment in value-product assortments during the current year after transitioning to the $1.25 price point during the prior year at Dollar Tree, and cost increases due to inflation;

as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs.

• Markdowns increased approximately 15 basis points primarily due to $80.6 million of inventory reserves for the approximately 600 Family Dollar stores that are projected to close in the first half of fiscal 2024 as a result of the store portfolio optimization review.

This increase was partially offset by increased markdown allowances on the Family Dollar segment and higher clearance markdowns during the prior year on the Dollar Tree segment in connection with the transition to a higher value assortment at the $1.25 price point.

• Occupancy costs decreased approximately 30 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53 rd week of sales in the current year.

We expect continued pressure on gross profit margin due to unfavorable shrink results in the near term.

Selling, General and Administrative Expenses

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Selling, general and administrative

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expense rate 33.4 % 23.6 % 22.5 % 9.8 %

The increase in the selling, general and administrative expense rate from 2021 to 2022 was the result of the following:

• Other selling, general and administrative expenses increased 70 basis points primarily due to long-lived asset impairments related to certain Family Dollar stores and the Family Dollar West Memphis, Arkansas distribution center, higher legal fees, including costs related to the reconstitution of the Board of Directors, unfavorable development of general liability claims 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 retail-level product recall.

• Payroll expenses increased 10 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 was unchanged as a percentage of total revenue, as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.

Operating Income

The increase in the selling, general and administrative expense rate from fiscal 2022 to fiscal 2023 was primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, and a $503.9 million non-cash store asset impairment charge recorded in fiscal 2023 as further discussed in Note 1 5 and Note 1 6 to our consolidated financial statements.

All of the impairment charges were in the Family Dollar reporting unit with the exception of $10.8 million of store asset impairment charges in the Dollar Tree reporting unit.

In addition, there were $56.7 million in DC 202-related litigation charges in the Family Dollar reporting unit during fiscal 2023.

Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges noted above, the selling, general and administrative expense rate increased 125 basis points in fiscal 2023 as a result of the following:

• Payroll expenses increased approximately 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 approximately 40 basis points primarily due to unfavorable development of general liability claims, increases in professional fees, and higher information technology system costs, partially offset by Family Dollars’ prior year long-lived asset impairments.

During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated.

As a result, we increased our actuarially determined general liability accruals which led to an approximately 25 basis point increase in our general liability expenses.

See the “ Critical Accounting Estimates and Assumptions ” later in this “ Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

• Store facility costs increased approximately 10 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 increased approximately 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 and leverage from the 53 rd week of sales in the current year.

Operating Income (Loss)

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

Operating income $ 2,236.3 $ 1,811.4 $ 1,887.9 23.5 %

Operating income margin 7.9 % 6.9 % 7.4 % 1.0 %

Operating income margin increased to 7.9% in fiscal 2022 compared to 6.9% in fiscal 2021, resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Operating income (loss) $ (881.8) $ 2,236.3 $ 1,811.4 (139.4) %

Operating income (loss) margin

(2.9) % 7.9 % 6.9 % (10.8) %

Operating income (loss) margin decreased to (2.9)% in fiscal 2023 compared to 7.9% in fiscal 2022, resulting from the decrease in gross profit margin and the increase in the selling, general and administrative expense rate, as described above.

Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges, operating income margin decreased 210 basis points in fiscal 2023 compared to fiscal 2022.

Interest Expense, Net

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Interest expense, net $ 106.8 $ 125.3 $ 178.9 (14.8) %

Interest expense, net decreased $53.6 million in fiscal 2022 compared to the prior year, resulting from the refinancing of our debt in the fourth quarter of 2021, which resulted in prepayment penalties of $43.8 million and the acceleration of the expensing of $2.7 million of amortizable non-cash deferred financing costs.

Higher interest income on investments more than offset interest expense on credit facility borrowings in the current year.

Interest expense, net decreased $18.5 million in fiscal 2023 compared to the prior year, resulting from higher interest income on investments.

Provision for Income taxes

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Provision for income taxes $ 9.7 $ 495.2 $ 304.3 (98.0) %

Effective tax rate (1.0) % 23.5 % 18.6 % (24.5) %

The effective tax rate for 2022 was 23.5% compared to 18.6% for 2021.

The 2022 effective rate increased compared to the prior year rate primarily due to a deferred tax benefit in the prior year related to state entity restructuring as well as higher non-deductible executive compensation and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year.

The effective tax rate for fiscal 2023 was (1.0)% compared to 23.5% for fiscal 2022, resulting primarily from the current year goodwill impairment charge which is not tax deductible.

Segment Information

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We define our segments as those operations whose results our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.

We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income.

We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income (loss).

The CODM reviews these metrics for each of our reporting segments.

We may revise the measurement of each segment’s operating income, as determined by the information regularly reviewed by the CODM.

We may revise the measurement of each segment’s operating income (loss), as determined by the information regularly reviewed by the CODM.

If the measurement of a segment changes, prior period amounts and balances are reclassified to be comparable to the current period’s presentation.

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

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

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

Corporate, support and other consists primarily of store support center costs and the results of operations for our Summit Pointe property in Chesapeake, Virginia that are considered shared services and therefore these selling, general and administrative costs are excluded from our two reporting business segments.

The Family Dollar segment operating income (loss) includes advertising revenue, which is a component of “Other revenue” in the accompanying Consolidated Statements of Operations.

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

Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Net sales $ 16,770.3 $ 15,405.7 $ 13,922.1 8.9 %

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Operating income margin 13.6 % 16.5 % 11.5 % (2.9) %

Net sales for the Dollar Tree segment increased $1,483.6 million, or 10.7%, in 2022 compared to 2021 due to an increase in comparable store net sales of 9.0% and $372.8 million of new store sales.

Average ticket increased 13.4% and customer traffic declined 3.9% in 2022.

Net sales were positively impacted by 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 year.

Gross profit margin for the Dollar Tree segment increased to 37.5% in 2022 from 33.1% in 2021.

The increase is due to the net of the following:

• Merchandise cost, which includes freight, decreased 410 basis points primarily due to higher initial mark-on, partially offset by higher freight costs.

• Occupancy costs decreased 60 basis points primarily 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 balances resulting from increases in inventory levels partially offset by higher hourly wages in our distribution centers.

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

• Markdown costs increased 20 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 16.5% in 2022 from 11.5% in 2021 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 21.0% in 2022 compared to 21.5% in 2021 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.

• Store facility costs increased 15 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 25 basis points primarily due to unfavorable development of general liability claims, the benefit in the prior year associated with the realization of certain tax credits an d inflationary pressure across several expense categories in the current year.

Net sales for the Dollar Tree segment increased $1,364.6 million, or 8.9%, in fiscal 2023 compared to fiscal 2022 due to an increase in comparable store net sales of 5.8%, and net sales of $467.1 million from non-comparable stores.

The 53 rd week in fiscal 2023 accounted for $307.0 million of the total net sales increase.

Customer traffic increased 7.4% and average ticket decreased 1.5% in fiscal 2023 based on a 53-week comparison for both periods.

Gross profit margin for the Dollar Tree segment decreased to 35.8% in fiscal 2023 from 37.5% in fiscal 2022.

The decrease is due to the net of the following:

• Merchandise cost, which includes freight, increased approximately 85 basis points primarily due to re-investment in value-product assortments during the current year after transitioning to the $1.25 price point during the prior year and cost increases due to inflation;

as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs.

• Distribution costs increased approximately 65 basis points primarily due to a higher amount of costs capitalized during the prior year resulting from increasing inventory levels during that period, and higher distribution center payroll costs recognized during the current year.

• Shrink costs increased approximately 55 basis points primarily due to unfavorable physical inventory results.

• Markdowns decreased approximately 5 basis points primarily due to higher clearance markdowns during the prior year in connection with the transition to a higher value assortment at the $1.25 price point.

• Occupancy costs decreased approximately 30 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53 rd week of sales in the current year.

Operating income margin for the Dollar Tree segment decreased to 13.6% in fiscal 2023 from 16.5% in fiscal 2022 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 22.2% in fiscal 2023 compared to 21.0% in fiscal 2022 as a result of the following:

• Payroll expenses increased approximately 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.

• Other selling, general and administrative expenses increased approximately 30 basis points primarily due to unfavorable development of general liability claims.

During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated.

As a result, we increased our actuarially determined general liability accruals which led to an approximately 25 basis point increase in our general liability expenses.

See the “ Critical Accounting Estimates and Assumptions ” later in this “ Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

• Store facility costs increased approximately 25 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.

Family Dollar

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Year Ended Percentage Change

January 28, January 29, January 30, Fiscal 2022 vs.

(dollars in millions) 2023 2022 2021

(dollars in millions) February 3, 2024 January 28, 2023 January 29, 2022 Fiscal 2023 vs.

Net sales $ 13,811.3 $ 12,912.5 $ 12,387.7 7.0 %

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Gross profit margin 23.9 % 24.4 % 25.2 % (0.5) %

Operating income $ 127.5 $ 543.1 $ 655.6 (76.5) %

Operating income margin 1.0 % 4.4 % 5.4 % (3.4) %

Net sales for the Family Dollar segment increased $524.8 million, or 4.2%, in 2022 compared to 2021 due to $385.8 million of new store sales and a comparable store net sales increase of 2.4%.

Average ticket increased 3.4% and customer traffic declined 1.0% in 2022.

D uring the first quarter of 2022, approximately 400 stores serviced by the West Memphis, Arkansas distribution center were temporarily closed in connection with a retail-level product recall.

The Family Dollar comparable store net sales increased 2.8% when excluding the effect of the store closures.

Net sales in the prior year were positively impacted by significant government stimulus dollars provided to our customers.

Gross profit margin for the Family Dollar segment decreased to 24.4% in 2022 compared to 25.2% in 2021.

Operating income (loss) $ (2,663.5) $ 127.5 $ 543.1 (2,189.0) %

Operating income (loss) margin

(19.3) % 1.0 % 4.4 % (20.3) %

Net sales for the Family Dollar segment increased $898.8 million, or 7.0%, in fiscal 2023 compared to fiscal 2022 due to a comparable store net sales increase of 3.2%, and net sales of $717.5 million at non-comparable stores.

The 53 rd week in fiscal 2023 accounted for $252.3 million of the total net sales increase.

Customer traffic increased 2.5% and average ticket increased 0.7% in fiscal 2023 based on a 53-week comparison for both periods.

Gross profit margin for the Family Dollar segment decreased to 23.9% in fiscal 2023 compared to 24.4% in fiscal 2022.

The decrease is due to the net of the following:

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

• Shrink costs increased 45 basis points resulting from unfavorable inventory results in relation to accruals.

• Distribution costs were unchanged as a percentage of sales compared to the prior year as higher capitalized balances resulting from increases in inventory levels in the current year were offset by higher maintenance and compliance costs and higher hourly wages in our distribution centers.

• Merchandise cost, which includes freight, decreased 40 basis points primarily due to higher initial mark-on, partially offset by higher sales of lower margin consumable merchandise and higher freight costs.

Operating income margin for the Family Dollar segment decreased to 1.0% in 2022 from 4.4% in 2021, 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 23.4% in 2022 from 20.9% in 2021 as a result of the following:

• Other selling, general and administrative expenses increased 95 basis points primarily due to long-lived asset impairments related to certain stores and the West Memphis, Arkansas distribution center, higher legal fees and inflationary pressure across several expense categories.

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

• 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, higher utility costs and costs associated with the removal of product from certain stores in connection with a voluntary retail-level product recall.

• Depreciation and amortization expense increased 15 basis points primarily due to capital expenditures related to store renovations and improvements.

• Shrink costs increased approximately 60 basis points primarily due to unfavorable physical inventory results.

• Markdowns increased approximately 35 basis points primarily resulting from $80.6 million of inventory reserves for the approximately 600 Family Dollar stores that are projected to close in the first half of fiscal 2024 as a result of the store portfolio optimization review.

This increase was partially offset by increased markdown allowances.

• Distribution costs increased approximately 10 basis points primarily due to a higher amount of costs capitalized in the prior year resulting from increasing inventory levels during that period.

• Occupancy costs decreased approximately 25 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53 rd week of sales in the current year.

• Merchandise cost, which includes freight, decreased approximately 30 basis points primarily due to lower freight costs, partially offset by cost increases and higher sales of lower margin consumable merchandise.

Operating income (loss) margin for the Family Dollar segment decreased to (19.3)% in fiscal 2023 from 1.0% in fiscal 2022 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 43.2% in fiscal 2023 from 23.4% in fiscal 2022 primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, and a $493.1 million non-cash store asset impairment charge recorded in fiscal 2023 as further discussed in Note 1 5 and Note 1 6 to our consolidated financial statements.

In addition, there were $56.7 million in DC 202-related litigation charges in the Family Dollar reporting unit during fiscal 2023.

Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges noted above, the selling, general and administrative expense rate increased 120 basis points in fiscal 2023 as a result of the following:

• Payroll expenses increased approximately 75 basis points primarily due to wage investments and minimum wage increases in store payroll.

• Store facility costs increased approximately 30 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 higher costs in the prior year associated with a product recall related to issues at DC 202.

• Other selling, general and administrative expenses increased approximately 10 basis points primarily due to unfavorable development of general liability claims , partially offset by prior year long-lived asset impairments.

During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated.

As a result, we increased our actuarially determined general liability accruals which led to an approximately 20 basis point increase in our general liability expenses.

See the “ Critical Accounting Estimates and Assumptions ” later in this “ Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

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.

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 stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.

The following table compares cash flow-related information for the years ended January 28, 2023, January 29, 2022 and January 30, 2021:

January 28, January 29, January 30,

(in millions) 2023 2022 2021

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 and commercial paper program.

The following table compares cash flow-related information for the years ended February 3, 2024, January 28, 2023 and January 29, 2022:

(in millions) February 3, 2024 January 28, 2023 January 29, 2022

Net cash provided by (used in):

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Operating Activities

Net cash provided by operating activities increased $183.3 million in 2022 compared to 2021 primarily as a result of higher current year earnings, net of non-cash items, and smaller decreases in liability balances, partially offset by higher inventory levels and a smaller increase in accounts payable.

Net cash provided by operating activities increased $1,069.7 million in fiscal 2023 compared to fiscal 2022 primarily due to improving inventory levels, partially offset by lower current year earnings, net of non-cash items.

Inventory decreased $335.6 million during fiscal 2023 compared to an increase of $1,085.4 million during fiscal 2022.

Investing Activities

Net cash used in investing activities increased $233.9 million in 2022 compared with 2021 primarily due to higher capital expenditures in the current year.

Net cash used in investing activities increased $853.8 million in fiscal 2023 compared with fiscal 2022 due to higher capital expenditures in the current year.

Financing Activities

Net cash used in financing activities decreased $149.7 million in 2022 compared to 2021 primarily due to the following:

• In 2022, we paid $647.5 million in cash for stock repurchases compared to $950.0 million in the prior year.

• In 2021, we completed the registered offering of $800.0 million aggregate principal amount of Senior Notes due 2031 and $400.0 million aggregate principal amount of Senior Notes due 2051 and used the proceeds of the offering to redeem the $1.0 billion 2023 Notes, which resulted in our incurring a $43.8 million prepayment penalty.

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

At January 28, 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 $4.4 million.

For additional detail on our long-term borrowings and other commitments, refer to the discussion of Funding Requirements below, as well as Note 4 and Note 5 to our consolidated financial statements.

Net cash used in financing activities decreased $156.8 million in fiscal 2023 compared to fiscal 2022 primarily due to lower payments for stock repurchases in the current year.

For detail on our long-term and short-term borrowings and other commitments, refer to the discussion of “Funding Requirements” below, as well as Note 5 and Note 6 to our consolidated financial statements.

Share Repurchases

We repurchased 3,905,599, 4,613,696 and 9,156,898 shares of common stock on the open market in fiscal 2023, fiscal 2022 and fiscal 2021, respectively, for $504.3 million, $647.5 million and $950.0 million, respectively.

At January 28, 2023, we had $1.85 billion remaining under our Board repurchase authorization.

At February 3, 2024, we had $1.35 billion remaining under our existing $2.5 billion Board repurchase authorization.

Funding Requirements

We expect our cash needs for opening new stores and expanding existing stores in fiscal 2023 to total approximately $690.0 million, which includes capital expenditures, initial inventory and pre-opening costs.

Our total estimated capital expenditures for fiscal 2023 are approximately $2.0 billion, including planned expenditures for our new and expanded stores, store renovations, supply chain and information technology investments, and other property improvements.

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

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

We expect our cash needs for opening new stores and expanding existing stores in fiscal 2024 to total approximately $650.0 million to $675.0 million, which includes capital expenditures, initial inventory and pre-opening costs.

Our total estimated capital expenditures for fiscal 2024 are approximately $2.1 billion to $2.3 billion, including planned expenditures for our new and expanded stores, store renovations, supply chain and information technology investments, and other property improvements.

We believe that we can adequately fund our working capital requirements and planned capital expenditures for the foreseeable future from net cash provided by operations, our commercial paper program and borrowings under our credit facilities.

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

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

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

For additional information regarding these

obligations, including amounts outstanding at January 28, 2023, refer to Note 4 , Note 5 and Note 6 to our consolidated financial statements.

Critical Accounting Estimates

The preparation of financial statements requires the use of estimates.

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

For additional information regarding these obligations, including amounts outstanding at February 3, 2024, refer to Note 5 , Note 6 and Note 7 to our consolidated financial statements.

Critical Accounting Estimates and Assumptions

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities.

Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable.

It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Actual results could be significantly different from these estimates.

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

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

Our accrual for shrink is based on the actual, historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends.

Our accrual for shrink is based on the shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends.

These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger.

Our physical inventory counts are generally taken between January and October of each year;

therefore, the shrink accrual recorded at January 28, 2023 is based on estimated shrink for most of 2022, including the fourth quarter.

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

therefore, the shrink accrual recorded at February 3, 2024 is based on estimated shrink for most of fiscal 2023, including the fourth quarter.

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

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Self-Insurance Liabilities

The liabilities related to our self-insurance programs for workers’ compensation and general liability are estimates that require judgment and the use of assumptions.

Semiannually, we obtain third-party actuarial valuations to aid in valuing the liabilities and in determining the amount to accrue during the year.

These actuarial valuations are estimates based on our historical loss development factors and the related accruals are adjusted as management’s estimates change.

The liabilities related to our self-insurance programs for workers’ compensation, general liability and auto are estimates that require judgment and the use of assumptions.

Semiannually, we obtain third-party actuarial valuations to aid in valuing these liabilities and in determining the amount to accrue during the year.

These actuarial valuations are estimates based on our claims experience for current and prior periods, exposure and severity factors, historical loss development factors, and other actuarial assumptions and the related accruals are adjusted as management’s estimates change.

Management’s estimate for self-insurance liabilities could vary from the ultimate loss sustained given the difficulty in predicting future events;

however, historically, the net total of these differences has not had a material effect on our financial condition or results of operations.

Our self-insurance liabilities associated with workers’ compensation, general liability and auto are recorded within “Other current liabilities” and “Other liabilities” in the Consolidated Balance Sheets and amounted to $363.5 million and $318.2 million at February 3, 2024 and January 28, 2023, respectively.

The increase was primarily due to general liability claims beginning to develop and pay out at amounts significantly higher than anticipated, resulting in higher actuarially determined accruals.

Goodwill and Indefinite-Lived Intangible Assets

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Alternatively, we may bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.

In connection with the fiscal 2022 annual impairment evaluation, management’s qualitative assessment did not indicate that it was more likely than not that the fair value of the reporting units were less than their carrying values.

However, due to recent executive level management changes and investments being made with respect to the Family Dollar reporting unit, management elected to perform a quantitative assessment of both the Family Dollar goodwill and trade name.

In connection with the fiscal 2023 annual impairment evaluation, management’s qualitative assessment indicated that it was more likely than not that the fair value of the Family Dollar reporting unit was less than its carrying value.

There were no indicators that the fair value of the Dollar Tree or Dollar Tree Canada reporting units were less than their carrying value.

Therefore, management performed a quantitative assessment of both the Family Dollar goodwill and trade name.

We estimate the fair value using a combination of a market multiple method and a discounted cash flow method.

Under the market multiple approach, we estimate a fair value based on comparable companies’ market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted for a control premium.

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

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

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The weighted-average cost of capital used to discount the cash flows for our evaluation was 10.5 % for our fiscal 2023 analysis.

Our evaluation of goodwill did not result in impairment charges being recorded in fiscal 2022, 2021 or 2020.

Our evaluation of goodwill resulted in an impairment charge of $1,069.0 million in fiscal 2023 related to the Family Dollar reporting unit.

Our evaluation of goodwill did not result in impairment charges being recorded in fiscal 2022 or fiscal 2021.

The fiscal 2023 goodwill impairment was driven primarily by the Family Dollar reporting unit’s below plan performance, management’s store portfolio optimization review and the continued refinement of our transformational strategies which impact long-term growth rates between the segments.

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

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

Our evaluation of the Family Dollar trade name did not result in impairment charges during fiscal 2022, 2021 or 2020.

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

Our evaluation of the Family Dollar trade name resulted in an impairment charge of $950.0 million in fiscal 2023.

Our evaluation of the Family Dollar trade name did not result in impairment charges being recorded during fiscal 2022 or fiscal 2021.

The fiscal 2023 trade name impairment was driven primarily by a decrease in the royalty rate assumption based on lower future growth rates and operating income margin assumptions for the Family Dollar reporting unit.

For additional information related to goodwill and indefinite-lived intangible assets, including the related impairment evaluations, refer to Note 2 to our consolidated financial statements under the caption “Goodwill and Nonamortizing Intangible Assets” and Note 15 .

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

Risk Factors ” and elsewhere within this “Item 7.

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Any impairment charges that we may take in the future could be material to our results of operations and financial condition.

Summary of Significant Accounting Policies

Refer to Note 2 to our consolidated financial statements for a summary of our significant accounting policies and our assessment of recently issued accounting standards.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis