HOME DEPOT, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides an analysis of the Company’s financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in this report. The discussion in this Form 10-K generally focuses on fiscal 2024 compared to fiscal 2023. A discussion of our results of operations and changes in financial condition for fiscal 2023 compared to fiscal 2022 has been omitted from this report, but can be found in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for fiscal 2023. TABLE OF CONTENTS Executive Summary 28 Results of Operations 29 Liquidity and Capital Resources 31 Critical Accounting Estimates 34 Fiscal 2024 Form 10-K 27 Table of Contents EXECUTIVE SUMMARY We reported net sales of $159.5 billion in fiscal 2024. Net earnings were $14.8 billion, or $14.91 per diluted share. Fiscal 2024 consisted of 53 weeks compared to 52 weeks in fiscal 2023. The 53 rd week in fiscal 2024 added approximately $2.5 billion of net sales and increased diluted earnings per share by approximately $0.30. During fiscal 2024, we opened ten new stores in the U.S. and two new stores in Mexico, resulting in a total store count of 2,347 at February 2, 2025. A total of 322 of our stores, or 13.7%, were located in Canada and Mexico. Total sales per retail square foot were $599.92 in fiscal 2024. Our inventory turnover ratio was 4.7 times at the end of fiscal 2024, compared to 4.3 times at the end of fiscal 2023. The increase in our inventory turnover ratio was primarily driven by lower average inventory levels within our Primary segment during fiscal 2024. During fiscal 2024, we generated $19.8 billion of cash flow from operations, received approximately $10.0 billion of proceeds from the issuance of long-term debt, net of discounts, and received $316 million of proceeds from commercial paper borrowings, net of repayments. We utilized a combination of commercial paper borrowings and the issuance of long-term debt, together with cash on hand, to fund the acquisition of SRS, with cash purchase consideration totaling $17.7 billion. Specifically, in June 2024, leading up to the SRS acquisition on June 18, 2024, we raised commercial paper borrowings of over $15.0 billion to fund the transaction, of which approximately $10.0 billion was then immediately repaid with the proceeds from our issuance of long-term debt. We have subsequently repaid all of the commercial borrowings used to fund the acquisition and ended fiscal 2024 with $316 million of commercial paper borrowings outstanding. During fiscal 2024, we also paid $8.9 billion in cash dividends, funded $3.5 billion in capital expenditures, repaid $1.5 billion of long-term debt, and funded $649 million of share repurchases, prior to pausing share repurchases in March 2024. In February 2025, we announced a 2.2% increase in our quarterly cash dividend to $2.30 per share. Our ROIC was 31.3% for fiscal 2024 and 36.7% for fiscal 2023. The decrease in ROIC was primarily driven by higher average long-term debt and higher average equity due to the financing of the SRS acquisition. See the Non-GAAP Financial Measures section below for our definition and calculation of ROIC. SRS Acquisition On March 27, 2024, we entered into a definitive agreement to acquire SRS, a leading residential specialty trade distribution company across several verticals serving the professional roofer, landscaper and pool contractor. On June 18, 2024, following the satisfaction or waiver of the applicable closing conditions, including receipt of the requisite regulatory approvals, the acquisition was completed and all merger consideration was transferred. We believe the acquisition of SRS will accelerate the Company’s growth with the Pro. The acquisition is expected to establish the Company as a leading specialty trade distributor across multiple verticals, complement our existing capabilities, and enable us to better serve complex project purchase occasions with the renovator/remodeler. Refer to Note 2 and Note 13 to our consolidated financial statements for further discussion of the impact of the acquisition on our consolidated financial statements. Fiscal 2024 Form 10-K 28 Table of Contents RESULTS OF OPERATIONS The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings: Fiscal Fiscal Fiscal 2024 2023 2022 dollars in millions $ % of Net Sales $ % of Net Sales $ % of Net Sales Net sales $ 159,514 $ 152,669 $ 157,403 Gross profit 53,308 33.4 % 50,960 33.4 % 52,778 33.5 % Operating expenses: Selling, general and administrative 28,748 18.0 26,598 17.4 26,284 16.7 Depreciation and amortization 3,034 1.9 2,673 1.8 2,455 1.6 Total operating expenses 31,782 19.9 29,271 19.2 28,739 18.3 Operating income 21,526 13.5 21,689 14.2 24,039 15.3 Interest and other (income) expense: Interest income and other, net (201) (0.1) (178) (0.1) (55) — Interest expense 2,321 1.5 1,943 1.3 1,617 1.0 Interest and other, net 2,120 1.3 1,765 1.2 1,562 1.0 Earnings before provision for income taxes 19,406 12.2 19,924 13.1 22,477 14.3 Provision for income taxes 4,600 2.9 4,781 3.1 5,372 3.4 Net earnings $ 14,806 9.3 % $ 15,143 9.9 % $ 17,105 10.9 % ————— Note: Fiscal 2024 includes 53 weeks. Fiscal 2023 and fiscal 2022 include 52 weeks. Certain percentages may not sum to totals due to rounding. % Change Selected financial and sales data: Fiscal Fiscal Fiscal Fiscal Fiscal 2024 2023 2022 2024 vs. 2023 2023 vs. 2022 Comparable sales (% change) (1) (1.8) % (3.2) % 3.1 % N/A N/A Comparable customer transactions (% change) (1) (2) (1.0) % (2.9) % (5.4) % N/A N/A Comparable average ticket (% change) (1) (2) (3) (0.9) % (0.3) % 8.8 % N/A N/A Customer transactions (in millions) (2) 1,637.2 1,621.8 1,666.4 0.9 % (2.7) % Average ticket (2) (3) $89.31 $90.07 $90.36 (0.8) % (0.3) % Sales per retail square foot (2) (4) $599.92 $604.55 $627.17 (0.8) % (3.6) % Diluted earnings per share (5) $14.91 $15.11 $16.69 (1.3) % (9.5) % ————— (1) Does not include results from the 53 rd week of fiscal 2024. (2) Customer transactions, average ticket, and sales per retail square foot measures do not include results from HD Supply or SRS. (3) Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance. (4) Sales per retail square foot represents sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company’s retail operations as an indicator of the productivity of owned and leased square footage for these retail operations. (5) The 53rd week of fiscal 2024 increased diluted earnings per share by approximately $0.30. FISCAL 2024 COMPARED TO FISCAL 2023 Sales We assess our sales performance by evaluating both net sales and comparable sales. Fiscal 2024 Form 10-K 29 Table of Contents Net Sales. Fiscal 2024 consisted of 53 weeks compared to 52 weeks in fiscal 2023. Net sales for fiscal 2024 increased $6.8 billion, or 4.5%, to $159.5 billion. The increase in net s ales for fiscal 2024 was primarily driven by SRS, which contributed $6.4 billion of net sales during fiscal 2024, and incremental net sales of approximately $2.5 billion attributable to the additional week in fiscal 2024. This increase in net sales was partially offset by the impact of a negative comparable sales environment, primarily driven by decreases in comparable customer transactions and comparable average ticket. Online sales, which consist of sales generated online through our websites and mobile applications for products picked up at our stores or delivered to customer locations, represented 15.1% of net sales and increased by 6.6% during fiscal 2024 compared to fiscal 2023, including the online sales attributable to the additional week in fiscal 2024. A stronger U.S. dollar negatively impacted net sales by $298 million in fiscal 2024. Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior period of equivalent length. Comparable sales includes sales at all locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excludes closed stores. Retail stores become comparable on the Monday following their 52 nd week of operation. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. Our comparable sales results for fiscal 2024 exclude the 53rd week and compare weeks 1 through 52 in fiscal 2024 to the 52-week period reported for fiscal 2023. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as similarly titled measures reported by other companies. Total comparable sales decreased 1.8% in fiscal 2024, reflecting a 1.0% decrease in comparable customer transactions and a 0.9% decrease in comparable average ticket compared to fiscal 2023. The decrease in comparable customer transactions primarily reflects the impact of heightened macroeconomic uncertainties and other macroeconomic factors, including the impacts of a persisting high interest rate environment pressuring home improvement demand. The decrease in comparable average ticket primarily reflects price stabilization relative to last year, slightly offset by demand for new and innovative products. For fiscal 2024 , our Power and Building Materials merchandising departments posted positive comparable sales compared to fiscal 2023. All of our other merchandising departments posted negative comparable sales during fiscal 2024 compared to fiscal 2023. Gross Profit Gross profit increased $2.3 billion, or 4.6%, to $53.3 billion in fiscal 2024. Gross profit as a percent of net sales, or gross profit margin, was 33.4% for both fiscal 2024 and fiscal 2023, and primarily reflected lower transportation costs and lower shrink within our Primary segment, offset by the inclusion of SRS in our consolidated results. Operating Expenses Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A increased $2.2 billion, or 8.1%, to $28.7 billion in fiscal 2024. As a percent of net sales, SG&A was 18.0% in fiscal 2024 compared to 17.4% in fiscal 2023, which primarily reflects higher payroll costs, deleverage from a negative comparable sales environment and lower legal-related benefits. Depreciation and Amortization. Depreciation and amortization increased $361 million, or 13.5%, to $3.0 billion in fiscal 2024. As a percent of net sales, depreciation and amortization was 1.9% in fiscal 2024 compared to 1.8% in fiscal 2023 , primarily reflecting increased intangible asset amortization expense of $239 million, of which $218 million was related to SRS, as well as increased depreciation expense from ongoing investments in the business. Interest and Other, net Interest and other, net increased $355 million, or 20.1%, to $2.1 billion in fiscal 2024. As a percent of net sales, interest and other, net, was 1.3% in fiscal 2024 compared to 1.2% in fiscal 2023, primarily due to higher interest expense driven by higher long-term debt. Provision for Income Taxes Our combined effective income tax rate was 23.7% in fiscal 2024 compared to 24.0% in fiscal 2023. Fiscal 2024 Form 10-K 30 Table of Contents Diluted Earnings per Share Diluted earnings per share were $14.91 in fiscal 2024 compared to $15.11 in fiscal 2023. The decrease in diluted earnings per share for fiscal 2024 was primarily driven by lower net earnings during fiscal 2024, partially offset by lower diluted shares. The 53rd week increased diluted earnings per share by approximately $0.30 for fiscal 2024. NON-GAAP FINANCIAL MEASURES To provide clarity on our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies. Return on Invested Capital We believe ROIC is meaningful for management, investors and ratings agencies because it measures how effectively we deploy our capital base. ROIC is a non-GAAP profitability measure, not a measure of financial performance under GAAP. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period. The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP financial measure): Fiscal Fiscal Fiscal dollars in millions 2024 (2) 2023 2022 Net earnings $ 14,806 $ 15,143 $ 17,105 Interest and other, net 2,120 1,765 1,562 Provision for income taxes 4,600 4,781 5,372 Operating income 21,526 21,689 24,039 Income tax adjustment (1) (5,102) (5,205) (5,745) NOPAT $ 16,424 $ 16,484 $ 18,294 Average debt and equity $ 52,431 $ 44,955 $ 41,055 ROIC 31.3 % 36.7 % 44.6 % ————— Note: Fiscal 2024 includes 53 weeks. Fiscal 2023 and fiscal 2022 include 52 weeks. (1) Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months. (2) Fiscal 2024 only includes operating results for SRS since the acquisition date of June 18, 2024, consistent with our consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES At February 2, 2025, we had $1.7 billion in cash and cash equivalents, of which $1.1 billion was held by our foreign subsidiaries. We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper program, and access to the long-term debt capital markets should be sufficient not only for our operating requirements, any required debt payments, and satisfaction of other contractual obligations, but also to enable us to invest in the business, fund dividend payments, and fund any share repurchases through the next several fiscal years. In addition, we believe we have the ability to obtain alternative sources of financing, if necessary. Our material cash requirements include contractual and other obligations arising in the normal course of business. These obligations primarily include long-term debt and related interest payments, operating and finance lease obligations, and purchase obligations. In addition to our cash requirements, we follow a disciplined approach to capital allocation. This approach first prioritizes investing in the business, followed by paying dividends, with the intent of then returning excess cash to shareholders in the form of share repurchases. In March 2024, we paused share repurchases in anticipation of the acquisition of SRS and do not have plans to resume share repurchases in fiscal 2025. Fiscal 2024 Form 10-K 31 Table of Contents During fiscal 2024, we invested approximately $3.5 billion back into our business in the form of capital expenditures. In line with our expectation of approximately 2.5% of fiscal 2025 net sales, we plan to invest approximately $4 billion back into our business in the form of capital expenditures in fiscal 2025, with investments across initiatives to improve the customer experience, including through technology and development of other differentiated capabilities, to continue to mature and build out Pro capabilities, as well as to build new stores. However, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate. We may also utilize strategic acquisitions to help accelerate our strategic initiatives. During fiscal 2024, we paid cash dividends of $8.9 billion to shareholders. In February 2025, we announced a 2.2% increase in our quarterly cash dividend from $2.25 to $2.30 per share. We intend to pay a dividend in the future; however, any future dividend is subject to declaration by our Board based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board. In August 2023, our Board approved a $15.0 billion share repurchase authorization that replaced the previous authorization of $15.0 billion, which was approved in August 2022. The August 2023 authorization does not have a prescribed expiration date. As of February 2, 2025, approximately $11.7 billion of the $15.0 billion share repurchase authorization remained available. During fiscal 2024, we made cash payments of $649 million for repurchases of our common stock through open market purchases, prior to pausing share repurchases in March 2024 as discussed above. DEBT At the beginning of fiscal 2024, we had a commercial paper program that allowed for an aggregate of $5.0 billion in borrowings. In connection with our program, we had back-up credit facilities with a consortium of banks for an aggregate of $5.0 billion in borrowings, which consisted of a five-year $3.5 billion credit facility scheduled to expire in July 2027 and a 364-day $1.5 billion credit facility scheduled to expire in July 2024. In May 2024, we increased our commercial paper program from $5.0 billion to $19.5 billion in connection with the anticipated financing of the acquisition of SRS (see Note 13 to our consolidated financial statements for details regarding the SRS acquisition). In May 2024, in connection with the increase in the commercial paper program, we entered into three additional back-up credit facilities that consisted of a 364-day $3.5 billion credit facility scheduled to expire in May 2025, a three-year $1.0 billion credit facility scheduled to expire in May 2027, and a 364-day $10.0 billion credit facility scheduled to expire in May 2025. The $10.0 billion credit facility also provided that the commitments and any borrowings under that facility would be reduced by the amount of net cash proceeds we receive from any future debt issuance. In June 2024, leading up to the acquisition of SRS on June 18, 2024, we raised commercial paper borrowings of over $15.0 billion to fund the transaction. On June 25, 2024, we received the proceeds from the issuance of $10.0 billion of long-term debt, as further discussed below, and immediately used the proceeds to repay approximately $10.0 billion of these commercial paper borrowings. On June 27, 2024, we terminated the $10.0 billion back-up credit facility, and subsequently reduced our commercial paper program from $19.5 billion to $9.5 billion. In July 2024, we completed the renewal of our 364-day $1.5 billion credit facility, extending the maturity from July 2024 to July 2025. In December 2024, we reduced our total credit facilities and concurrently reduced our commercial paper program, each by $2.5 billion. This reduction included terminating the three-year $1.0 billion back-up credit facility that was scheduled to expire in May 2027 and reducing the aggregate commitments under the 364-day back-up credit facility that is scheduled to expire in May 2025 from $3.5 billion to $2.0 billion. As of February 2, 2025, our commercial paper program allowed for an aggregate of $7.0 billion in borrowings and is supported by $7.0 billion of back-up credit facilities. All of our short-term borrowings in fiscal 2024 were under our commercial paper program, and the maximum amount outstanding at any time was $15.3 billion. At February 2, 2025, we had outstanding borrowings under our commercial paper program of $316 million with a weighted-average interest rate of 4.4%, we had no outstanding borrowings under our back-up credit facilities, and we were in compliance with all of the covenants contained in our credit facilities, none of which are expected to impact our liquidity or capital resources. Fiscal 2024 Form 10-K 32 Table of Contents We also issue senior notes from time to time as part of our capital management strategy. As discussed above, in June 2024, we issued $10.0 billion of senior notes in connection with the funding of the acquisition of SRS. Separately, in February 2024, we repaid $1.1 billion of senior notes at maturity. At February 2, 2025, we had an aggregate principal amount of senior notes outstanding of $51.1 billion, with $4.3 billion payable within 12 months. Future interest payments associated with these senior notes total $27.1 billion, with $2.1 billion payable within 12 months, based on current interest rates, which include the impact of our active interest rate swap agreements. The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing our notes contain various customary covenants; however, none of the covenants are expected to impact our liquidity or capital resources. We were in compliance with all such covenants at February 2, 2025. See Note 5 to our consolidated financial statements for further discussion of our debt arrangements. LEASES We use operating and finance leases largely to obtain a portion of our real estate, including our stores, distribution centers, and store support centers. At February 2, 2025, we had aggregate remaining lease payment obligations of $15.2 billion, with $2.0 billion payable within 12 months. Aggregate lease obligations include approximately $560 million of obligations related to leases not yet commenced. See Note 3 to our consolidated financial statements for further discussion of our operating and finance leases. PURCHASE OBLIGATIONS AND OTHER Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, media and sponsorship spend, software and license commitments, and legally binding service contracts. We issue inventory purchase orders in the ordinary course of business, which are typically cancellable by their terms, therefore we do not consider purchase orders that are cancellable to be firm inventory commitments. At February 2, 2025, we had aggregate purchase obligations of $2.4 billion , with $1.1 billion paya ble within 12 months. At February 2, 2025, we had aggregate liabilities for unrecognized tax benefits totaling $627 million, none of which are expected to be paid in the next 12 months. The timing of payment, if any, associated with our long-term unrecognized tax benefit liabilities is unknown. See Note 6 to our consolidated financial statements for further discussion of our unrecognized tax benefits. We have no material off-balance sheet arrangements. CASH FLOWS SUMMARY Fiscal 2024 Form 10-K 33 Table of Contents Operating Activities Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, associate compensation, operations, occupancy costs, and income taxes. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Net cash provided by operating activities decreased by $1.4 billion in fiscal 2024 compared to fiscal 2023, primarily due to changes in working capital. Changes in working capital were primarily driven by more normalized inventory levels during fiscal 2024 compared to strategic reductions in inventory during fiscal 2023 within our Primary segment, partially offset by the timing of vendor payments and the deferral of our fourth quarter fiscal 2024 estimated federal tax payment to the first quarter of fiscal 2025 under automatic income tax relief provided by the IRS for taxpayers located in certain southeastern states. Investing Activities Net cash used in investing activities increased by $16.3 billion in fiscal 2024 compared to fiscal 2023, primarily due to higher cash payments for businesses acquired in fiscal 2024, driven by our acquisition of SRS. Financing Activities Net cash used in financing activities in fiscal 2024 primarily reflected $8.9 billion of cash dividends paid, $1.5 billion of repayments of long-term debt, and $649 million of share repurchases prior to pausing share repurchases in March 2024, largely offset by approximately $10.0 billion of net proceeds from long-term debt and $316 million of proceeds from commercial paper borrowings, net of repayments. Cash used in financing activities in fiscal 2023 primarily reflected $8.4 billion of cash dividends paid, $8.0 billion of share repurchases, and $1.3 billion of repayments of long-term debt, partially offset by $2.0 billion of net proceeds from long-term debt. The overall decrease in cash flows used in financing activities during fiscal 2024 compared to fiscal 2023 totaled $14.7 billion and was predominantly attributable to the financing of the SRS acquisition and the pause of share repurchases. Specifically, as discussed above, a combination of commercial paper borrowings, the $10.0 billion long-term debt issuance, along with increased cash on hand resulting from the pause of share repurchases, were utilized in connection with the SRS acquisition. The commercial paper borrowings which were used specifically to fund the SRS acquisition were all subsequently repaid during the year. CRITICAL ACCOUNTING ESTIMATES The preparation of our consolidated financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting estimates, which are those that are both important for the representation of our financial condition and results of operations, and that require significant judgment or use of significant assumptions or complex estimates. BUSINESS COMBINATIONS We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of the acquisition date fair values of identifiable assets acquired and liabilities assumed requires estimates and the use of valuation techniques when fair value is not readily available and requires a significant amount of management judgment. For the valuation of intangible assets acquired in a business combination, we typically use an income approach. Specifically, for the SRS acquisition, we used the multi-period excess earnings method to determine the estimated acquisition date fair values of the customer relationships intangible assets. The significant assumptions used to estimate the fair values of customer relationships included forecasted revenues, expected customer attrition rates, and the discount rate applied. Although the Company believes its estimates of acquisition date fair values are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair values of the customer relationships intangible assets acquired. Fiscal 2024 Form 10-K 34 Table of Contents The excess of the purchase price over fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill due to the use of preliminary information in our initial estimates. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. MERCHANDISE INVENTORIES We value the majority of our inventory under the retail inventory method, with the remainder of our inventories valued under a cost method, primarily the first-in, first-out method. Under the retail inventory method, inventories are stated at cost, which is determined by applying a cost-to-retail ratio to the retail value of inventories. The retail value of our inventory is adjusted as needed to reflect current market conditions. Because these adjustments are based on current prevailing market conditions, the value of our inventory approximates the lower of cost or market. The valuation under the retail inventory method is based on a number of factors such as markups, markdowns, and inventory losses (or shrink). As such, there exists an inherent uncertainty in the final determination of inventory cost and gross profit. We determine markups and markdowns based on the consideration of a variety of factors such as current and anticipated demand, customer preferences and buying trends, age of the merchandise, and weather conditions. We calculate shrink based on actual inventory losses identified as a result of physical inventory counts during each fiscal period and estimated inventory losses occurring between physical inventory counts. The estimate for shrink occurring in the interim period between physical inventory counts is calculated on a store-specific basis and is primarily based on recent shrink results. A 10% increase in the shrink rate used to estimate our inventory shrink reserve would have increased cost of sales by approximately $95 million for fiscal 2024. Historically, the difference between estimated shrink and actual inventory losses has not been material to our annual financial results. We do not believe there is a reasonable likelihood of a material change in the estimates or assumptions we use to value our inventory under the retail inventory method. We believe that the retail inventory method provides an inventory valuation which approximates cost and results in valuing our inventory at the lower of cost or market. ADDITIONAL INFORMATION For information on our accounting policies and on accounting pronouncements that have impacted or may materially impact our financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.