UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION☒Annual Report Pursuant to Section 13 ORor 15(d) OF THEof the Securities Exchange Act of 1934
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 20183, 2023, or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission file number: 001-11421
DOLLAR GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE | 61-0502302 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
100 MISSION RIDGE
GOODLETTSVILLE, TN37072
(Address of principal executive offices, zip code)
Registrant’s telephone number, including area code: (615) (615) 855-4000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | Name of | |
Common Stock, par value $0.875 per share | | DG | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrantregistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate fair market value of the registrant’s common stock outstanding and held by non-affiliates as of August 4, 2017July 29, 2022 was $18.1$55.9 billion calculated using the closing market price of ourthe registrant’s common stock as reported on the NYSE on such date ($74.86)248.43). For this purpose, directors, executive officers and greater than 10% record shareholders are considered the affiliates of the registrant.
The registrant had 268,741,400219,108,477 shares of common stock outstanding as of March 16, 2018.22, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the information required in Part III of this Form 10-K is incorporated by reference to the Registrant’sregistrant’s definitive proxy statement to be filed for the Annual Meeting of Shareholders to be held on May 30, 2018.
31, 2023.
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| ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 26 | |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 41 | |
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Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm (PCAOB ID:42) | 42 | ||
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| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 66 | |
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| ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | 69 | |
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| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 70 | |
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| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 71 | |
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INTRODUCTION
General
This report contains references to years 2018, 2017, 2016, 2015, 2014,2023, 2022, 2021, and 2013,2020, which represent fiscal years ending or ended February 1, 2019, February 2, 2018,2024, February 3, 2017,2023, January 28, 2022 and January 29, 2016, January 30, 2015, and January 31, 2014,2021, respectively. Our fiscal year ends on the Friday closest to January 31. Our 20162022 fiscal year consisted of 53 weeks, while each of the remaining years listed are or were 52-week years.consists of 52 weeks. All of the discussion and analysis in this report should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and related notes.
Solely for convenience, our trademarks and tradenames may appear in this report without the ® or TM symbol which is not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights or the right to these trademarks and tradenames.
Cautionary Disclosure Regarding Forward‑LookingForward-Looking Statements
We include “forward-looking statements” within the meaning of the federal securities laws throughout this report, particularly under the headings “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Note 7 – Commitments and Contingencies,” among others. You can identify these statements because they are not limited to historical fact or they use words such as “may,” “will,” “should,” “could,” “can,” “would,” “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “forecast,” “goal,” “seek,” “ensure,” “potential,” “opportunity,” “objective,” “intend,” “predict,” “committed,” “likely, to,” “continue,” “strive,” “aim,” “scheduled, to,” “focused on,” “long-term,” “future,” “over time,” “ongoing,” “uncertain,” “moving forward,” or “subject to” and similar expressions that concern our strategy,strategies, plans, initiatives, intentions or beliefs about future occurrences or results.results or other future matters. For example, all statements relating to, among others, our estimated and projected expenditures, cash flows, results of operations, financial condition and liquidity; our plans and objectives for, and expectations regarding future operations, economic and competitive market conditions, growth or initiatives including but not limited to the number of planned store openings, remodels and relocations and planned opening dates for new distribution centers, progress of merchandising and other initiatives, trends in sales of consumable and non-consumable products, and the level of future costs and expenses; potential future stock repurchases and cash dividends; anticipated borrowing under our credit facilities and commercial paper program; or the expected outcome or effect of legislative or regulatory changes or initiatives, and our responses thereto, or of pending or threatened litigation or auditsfollowing are forward-looking statements.statements:
| ● | our projections and expectations regarding expenditures, costs, cash flows, results of operations, financial condition and liquidity; |
| ● | our expectations regarding economic and competitive market conditions; |
| ● | our plans, objectives, and expectations regarding, future operations, growth, investments and initiatives, including but not limited to our real estate, store growth and international expansion plans, store formats or concepts, shrink and damages reduction actions, planned approximately $100 million investment in our stores, and anticipated progress and impact of our strategic initiatives (including but not limited to our non-consumables and digital initiatives, DG Media Network, DG Well Being, DG Fresh, Fast Track, and pOpshelf) and our merchandising, margin enhancing, and distribution/transportation efficiency (including but not limited to self-distribution and our private fleet) and other initiatives; |
| ● | expectations regarding sales and mix of consumable and non-consumable products, customer traffic, basket size and inventory levels; |
| ● | expectations regarding inflationary and labor pressures, fuel prices, and other supply chain challenges; |
| ● | anticipated stock repurchases and cash dividends; |
| ● | anticipated borrowing under our unsecured revolving credit agreement, our 364-day unsecured revolving credit facility and our commercial paper program; |
| ● | potential impact of legal or regulatory changes or governmental assistance or stimulus programs and our responses thereto, including without limitation the potential increase of federal, state and/or local minimum wage rates/salary levels, as well as changes to certain government assistance programs, such as SNAP benefits, unemployment benefits, and economic stimulus payments, or potential changes to the corporate tax rate; and |
| ● | expected outcome or effect of pending or threatened legal disputes, litigation or audits. |
All forward-looking statements are subject to risks, uncertainties and other factors that may cause our actual results to differ materially from those which we expected. Many of these statements are derived from our operating budgets and forecasts, which are based on many detailed assumptions that we believe are reasonable. However, it is very difficult to predict the effect of known factors, and we cannot anticipate all factors that could affect future results.
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Important factors that could cause actual results to differ materially from the expectations expressed in or implied in our forward-looking statements are disclosed under “Risk Factors” in Part I, Item 1A and elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves and under the heading “Critical Accounting Policies and Estimates”). All forward-looking statements are qualified in their entirety by these and other cautionary statements that we make from time to time in our other SEC filings and public communications. You should evaluate forward-looking statements in the context of these risks and uncertainties and are cautioned not to place undue reliance on such statements. These factors may not contain all of the factors that are important to you. We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. Forward-looking statements in this report are made only as of the date hereof. We undertake no obligation, and specifically disclaim any duty, to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwisemay be required by law.
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PART I
General
We are among the largest discount retailersretailer in the United States by number of stores, with 14,60919,147 stores located in 4447 U.S. states and Mexico as of March 2, 2018,3, 2023, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States. Our first store in Mexico opened in February of 2023. We offer a broad selection of merchandise, including consumables,consumable items, seasonal items, home products and apparel. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.
Our History
J.L. Turner founded our Company in 1939 as J.L. Turner and Son, Wholesale. We were incorporated as a Kentucky corporation under the name J.L. Turner & Son, Inc. in 1955, when we opened our first Dollar General store. We changed our name to Dollar General Corporation in 1968 and reincorporated in 1998 as a Tennessee corporation. Our common stock was publicly traded from 1968 until July 2007, when we merged with an entity controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., or KKR. In November 2009 our common stock again became publicly traded on the New York Stock Exchange under the symbol “DG”, and in December 2013 the entity controlled by investment funds affiliated with KKR sold its remaining shares of our common stock.
Our Business Model
Our long history of profitable growth is founded on a commitment to a relatively simple business model: providing a broad base of customers with their basic everyday and household needs, supplemented with a variety of general merchandise items, at everyday low prices in conveniently located, small-box stores. We continually evaluate the needs and demands of our customers and modify our merchandise selections and pricing accordingly, while remaining focused on increasing profitability, cash generation and returns for our shareholders.
Our long-term operating priorities remain:are: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.diverse teams through development, empowerment and inclusion. For more information on these operating priorities, see the “Executive Overview” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.
In fiscal year 2017,From 1990 through 2020, we achieved our 28th31 consecutive yearyears of positive same-store sales growth. WeFollowing unusually high sales results in 2020 during the height of the COVID pandemic, we did not achieve positive same-store sales growth in 2021. However, we achieved positive same-store sales growth once again in 2022. Notwithstanding the unusual circumstances of 2020 and 2021 resulting from the COVID pandemic, we believe that this consistent growth over many years, which has taken place in a variety of economic conditions, is a result of our compelling value and convenience proposition, although no assurances can be given that we will achieve positive same-store sales growth in any given year.
Compelling Value and Convenience Proposition. Our ability to deliver highly competitive prices in convenient locations and our easy “in and out” shopping format create a compelling shopping experience that we believe distinguishes us from other discount retailers as well as convenience, drug, grocery, online and mass merchant retailers. Our slogan “Save time. Save money. Every day!”® summarizes our appeal to customers. We believe our ability to effectively deliver both value and convenience allows us to succeed in small markets with
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limited shopping alternatives, as well as in larger and more competitive markets. Our value and convenience proposition is evidenced by the following attributes of our business model:
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| Everyday Low Prices on Quality Merchandise. Our research indicates that we offer a price advantage over most food and drug retailers and that our prices are competitive with even the largest discount retailers. Our ability to offer everyday low prices on quality merchandise is supported by our low-cost operating structure and our strategy to maintain a limited number of items per merchandise category, which we believe helps us maintain strong purchasing power. We offer nationally advertised brands at these everyday low prices in addition to offering our own private brands at substantially lower prices. |
| ● | Convenient Locations. Our stores are conveniently located in a variety of rural, suburban and urban communities. We seek to locate our stores in close proximity to our customers, which helps drive customer loyalty and trip frequency and makes us an attractive alternative to large discount and other large-box retail and grocery stores. |
| ● | Time-Saving Shopping Experience. We strive to provide customers with a highly convenient, easy to navigate shopping experience. Our small-box stores make it easier to get in and out quickly, and our digital tools and offerings help drive even greater convenience and additional access points. Our product offering includes most necessities, such as basic packaged and refrigerated or frozen food and dairy products, cleaning supplies, paper products, health and beauty care items, greeting cards and other stationery items, basic apparel, housewares, hardware and automotive supplies, among others. Our convenient hours and broad merchandise offering allow our customers to fulfill their requirements for basic goods and minimize their need to shop elsewhere. |
Substantial Growth Opportunities. We believe we have substantial long-term growth potential in the U.S. We, and we have identified significant opportunities to add new stores, including our pOpshelf concept, in both existing and new markets. In addition, we have opportunities to relocate or remodel locations within our existing store base to better serve our customers. Our pOpshelf concept represents an important growth opportunity as a unique small-box retail concept that focuses on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods. We have also identified international expansion as an important growth opportunity, with an initial focus on opening and operating stores in Mexico. We opened our first Mi Súper Dollar General store in Mexico in February of 2023, and believe there is additional growth potential in Mexico in the years ahead. Our attractive store economics, including a relatively low initial investment and simple, low-cost operating model, and our variety of store formats have allowed us to grow our store base to current levels and provide us significant opportunities to continue our profitable store growth strategy.
Our Merchandise
We offer a focused assortment of everyday necessities, which we believe helps to drive frequent customer visits, and key items in a broad range of general merchandise categories. Our product assortment provides the opportunity for our customers to address most of their basic shopping needs with one trip. We offer a wide selection of nationally advertised brands from leading manufacturers. Additionally, our private brand products offer even greater value with options to purchase both products that we believe to beare of comparable quality to national brands as well as valueopening price point items, each at substantial discounts to the national brands.
Consumables is our largest merchandise category and has become a larger percentage of our total sales in recent years as indicated in the table below. Consumables includeincludes paper and cleaning products (such as paper towels, bath tissue, paper dinnerware, trash and storage bags, laundrydisinfectants, and other home cleaning supplies)laundry); packaged food (such as cereals, pasta, canned soups, fruits and vegetables, condiments, spices, sugar and flour); perishables (such as milk, eggs, bread, refrigerated and frozen food, beer, wine and wine)produce); snacks (such as candy, cookies, crackers, salty snacks and carbonated beverages); health and beauty (such as over-the-counter medicines and personal care products including soap, body wash, shampoo, cosmetics, dental hygiene and foot care products); pet (such as pet supplies and pet food); and tobacco products.
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Seasonal products include decorations,holiday items, toys, batteries, small electronics, greeting cards, stationery, prepaid phones and accessories, gardening supplies, hardware, automotive and home office supplies.
Home products include kitchen supplies, cookware, small appliances, light bulbs, storage containers, frames, candles, craft supplies and kitchen, bed and bath soft goods.
Apparel includes casual everyday apparel for infants, toddlers, girls, boys, women and men, as well as socks, underwear, disposable diapers, shoes and accessories.
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The percentage of net sales of each of our four categories of merchandise for the fiscal years indicated below was as follows:
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Consumables |
| 76.9 | % | 76.4 | % | 75.9 | % |
| 79.7 | % | 76.7 | % | 76.8 | % |
Seasonal |
| 12.1 | % | 12.2 | % | 12.4 | % |
| 11.0 | % | 12.2 | % | 12.1 | % |
Home products |
| 6.0 | % | 6.2 | % | 6.3 | % |
| 6.2 | % | 6.8 | % | 6.5 | % |
Apparel |
| 5.0 | % | 5.2 | % | 5.4 | % |
| 3.1 | % | 4.3 | % | 4.6 | % |
Our seasonal and home products categories typically account for the highest gross profit margins, and the consumables category typically accounts for the lowest gross profit margin.
The Dollar General Store
The typical Dollar General store is operated by a store manager, one or more assistant store managers, and three or more sales associates. Our stores generally feature a low-cost, no frills building with limited maintenance capital requirements, low operating costs, and a focused merchandise offering within a broad range of categories, allowing us to deliver low retail prices while generating strong cash flows and capital investment returns. Our stores currently average approximately 7,4007,500 square feet of selling space, and approximately 75%over 80% of our stores are located in towns of 20,000 or fewer people. Our primary new store format currently averages approximately 8,500 square feet of selling space. We generally have had good success in locating suitable store sites in the past, and we believe that there is ample opportunity for new store growth in existing and new markets. In addition, we believe we have significant opportunities available for our relocation and remodel programs.
Our store growth over the past three years is summarized in the following table:
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| Stores at |
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| Beginning |
| Stores |
| Stores |
| Store |
| Stores at |
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| of Year |
| Opened |
| Closed |
| Increase |
| End of Year |
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2015 |
| 11,789 |
| 730 |
| 36 |
| 694 |
| 12,483 |
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2016 |
| 12,483 |
| 900 |
| 63 |
| 837 |
| 13,320 |
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2017 |
| 13,320 |
| 1,315 |
| 101 |
| 1,214 |
| 14,534 |
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Year | | of Year | | Opened | | Closed | | Increase | | End of Year |
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2020 |
| 16,278 |
| 1,000 |
| 101 |
| 899 |
| 17,177 | |
2021 |
| 17,177 |
| 1,050 |
| 97 |
| 953 |
| 18,130 | |
2022 |
| 18,130 |
| 1,039 |
| 65 |
| 974 |
| 19,104 | |
Our Customers
Our customers seek value and convenience. Depending on their financial situation and geographic proximity, customers’ reliance on Dollar General varies from fill-in shopping, to making periodic trips to stock up on household items, to making weekly or more frequent trips to meet most essential needs. We generally locate our stores and plan our merchandise selections to best serve the needs of our core customers, the low and fixed income households often underserved by other retailers (including grocers), and we are focused on helping them make the most of their spending dollars. At the same time, however, loyal Dollar General shoppers from a wide range of income brackets and life stages appreciate our quality merchandise as well as our attractive value and convenience proposition.
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Our Suppliers
We purchase merchandise from a wide variety of suppliers and maintain direct buying relationships with many producers of national brand merchandise. Despite our broad offering, we maintain only a limited number of items per category, allowing us to keep our average costs low. Our largest and secondtwo largest suppliers each accounted for approximately 10% and 8%, respectively, of our purchases in 2017.2022. Our private brands come from a diversified supplier base.wide variety of suppliers. We directly imported approximately 5%9% of our purchases at cost in 2017.2022.
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We have consistently managedIn 2020 and 2021, COVID-19 and its impacts caused disruptions in our supply chain, at times making it more difficult to obtain certain products in sufficient quantities of core merchandiseto meet customer demand and believe that, if one or more of our current sources ofincreasing distribution and transportation costs. We began to see normalization in the global supply became unavailable, we generally would be ablechain during 2022 and anticipate continuing improvement moving forward. In situations where it becomes necessary to obtain alternative sources; however, suchsecure alternative sources, could increase ourwe may experience increased merchandise costs and supply chain lead time and expenses, a temporary reduction in store inventory levels, and reduced product selection or reduce the quality of our merchandise, and anquality. An inability to obtain alternative sources could adversely affect our sales.
Distribution and Transportation
Our stores are currently supported by fifteen distribution centers for both refrigerated and non-refrigerated merchandise located strategically throughout our geographic footprint. Our sixteenth and seventeenth distribution centers in Longview, Texas and Amsterdam, New York, respectively, are under construction and each is expected to be completed in 2019. We lease additional temporary warehouse space as necessary to support our distribution needs. In addition to our traditional distribution centers, we now operate multiple temperature-controlled distribution facilities in support of “DG Fresh”, our strategic, multi-phased shift to self-distribution of frozen and refrigerated goods, such as dairy, deli and frozen products. We continuallyregularly analyze and rebalance the network to ensurewith a goal of ensuring that it remains efficient and provides the service levels our stores require. See “—Properties” below for additional information pertaining to our distribution centers.
Most of our merchandise flows through our distribution centers and is delivered to our stores by our private fleet and by third-party trucking firms, utilizing our trailers. We also own 79 semi-trailer trucks with which we transport our merchandise. In addition, vendors or third-party distributors deliver or ship certain food items and other merchandise directly to our stores.
SeasonalityIn the second half of 2022, we experienced a temporary shortage of available warehouse capacity, primarily due to delays in opening temporary warehouse space. This shortage resulted in a significant impact to our operating results due to increased costs associated with delays in unloading inventory into warehouse space, as well as inefficiencies in moving goods throughout our internal supply chain. With the opening of three permanent distribution facilities in the fourth quarter of 2022, significant warehouse capacity is now available and has relieved the vast majority of these constraints.
OurSeasonality
The nature of our business is somewhat seasonal. Generally, our most profitable sales mix occursoperating profit has been greater in the fourth quarter, which includes the Christmas selling season.season, as compared with operating profit in each of the first three quarters of our fiscal year. In addition, our quarterly results can be affected by the timing of certain holidays, the timing of new store openings, andremodels, relocations, store closings, and the amountweather patterns. See “Item 7. Management’s Discussion & Analysis of sales contributed by newFinancial Condition and existing stores. We typically purchase substantial amountsResults of inventory in the third quarter and incur higher shipping and payroll costs in the third quarter in anticipationOperation” for further discussion of increased sales activity during the fourth quarter. See Note 12 to the consolidated financial statements for additional information.seasonality.
Our Competition
We operate in the basic discount consumer goods market, which is highly competitive with respect to price, customers, store location, merchandise quality, assortment and presentation, service offerings, in-stock consistency, customer service, promotional activity, employees, and customer service.market share. We compete with discount stores and with many other retailers, including mass merchandise, warehouse club, grocery, drug, convenience, variety, online, and certain specialty stores. These other retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. Our direct competitors include Family Dollar, Dollar Tree, Big Lots, Fred’s, 99 Cents Only and various local, independent operators, as well as Walmart, Target, Kroger, Aldi, Lidl, Walgreens, CVS, and RiteAid,Rite Aid, among others. Certain of our competitors have greater financial, distribution,
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marketing and other resources than we do.do and may be able to secure better arrangements from suppliers than we can. Competition has intensifiedis intense and we believe it will continue to dobe so, aswith certain competitors reducing their store locations while others move into or increase their presence in our geographic and product markets and increase the availability of mobile, web-based and other digital technology to facilitate a more convenient and competitive customer online and in-store customer shopping experience.
We believe that we differentiate ourselves from other forms of retailing by offering consistently lowcompetitive prices in a convenient, small-store format. We believe that ourare able to maintain competitive prices are competitive due in part to our low-cost operating structure and the relatively limited assortment of products offered. Purchasing large volumes of merchandise within our focused assortment in each merchandise category allows us to keep our average product costs low, contributing to our ability to offer competitive everyday low prices to our customers. See “—Our Business Model” above and “Item 1A. Risk Factors” for further discussion of our competitive situation.
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Our Intellectual Property
Our Employees
As of March 2, 2018, we employed approximately 129,000 full-time and part-time employees, including divisional and regional managers, district managers, store managers, other store personnel and distribution center and administrative personnel. We have increasingly focused on recruiting, training, motivating and retaining employees, and we believe that the quality, performance and morale of our employees continue to be an important part of our success in recent years. We believe our overall relationship with our employees is good.
Our Trademarks
We own marks that are registered with the United States Patent and Trademark Office and are protected under applicable intellectual property laws, including, without limitation, the trademarks Dollar General®General®, Dollar General Market®DG®, Clover Valley®Valley®, DG®trueliving®, DG Deals®, DGX®, Forever Pals®, I*Magine®, OT Sport®, OT Revolution®, Smart & Simple®, trueliving®, Sweet Smiles®, Open Trails®, Beauty Cents®, Bobbie Brooks®, Comfort Bay®, Holiday Style®, Swiggles®, More Deals For Your Dollar. Every Day!®, The Fast Way To Save®, Zone Pro®, Operation Storm Force®, Ultimate Caffeine®and Save Time. Save Money. Every Day!®,pOpshelf® along with variations and formatives of these trademarks as well as certain other trademarks including Ever Pet™ , DG GO! ™, Perfect Harvest™, In.Out.Save. ™, and the Good Choices – Smart Prices – Good & Smart stylized logo™.trademarks. We attempt to obtain registration of our trademarks whenever practicable and to pursue vigorously any infringement of those marks. Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly renewed, they have a perpetual duration.
We also hold an exclusive license to the Rexall brand through at least March 5, 2020.2029 and the Believe Beauty brand through at least March 18, 2025.
Human Capital Resources
At Dollar General, a foundational element in how we operate is exemplified in our fourth operating priority – Investing in our diverse teams through development, empowerment and inclusion. Building on our core value of respecting the dignity and differences of others, our goal is to create a work environment where each employee is encouraged and empowered to bring their unique perspective and voice to work each day. Based on a talent philosophy of “Attract, Develop, and Retain”, whether an individual works in a store, a distribution center, our store support center or our international offices, over the last 80+ years, we have helped millions of individuals start and progress in their careers, providing employees with numerous opportunities to gain new skills and develop their talents, supported by our award-winning training and development programs.
Attract
We seek to provide market competitive compensation and benefits packages that attract talent to the organization and then retain and incent employees for performance. Although eligibility for and the level of benefits vary depending on the employee’s full-time or part-time status, compensation level, date of hire, and/or length of service, the broad range of benefits we provide or make available may include: medical, prescription, telemedicine, dental and vision plans; flexible spending accounts; disability insurance; 401(k) plan; paid vacation; employee assistance program with access to legal assistance and counseling; healthy lifestyle and disease management programs; education assistance benefits; parental leave; adoption assistance; service award recognition; and a broad range of discounts for other products and services. To help measure the success of our overall employee compensation and benefits programs, we monitor employee applicant flow and staffing levels across the organization, as well as employee turnover, particularly at the store manager level.
Develop
As a testament to our employee development efforts, in February 2021 we were inducted into Training magazine’s Hall of Fame, following two consecutive years as the magazine’s top training and development program and rounding out 10 consecutive years among its Top 100 list. In 2022, we estimate we invested over four million training hours in our employees to promote their education and development.
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We enhance our development programs each year based on the current needs of our employees and the business. We offer a variety of differentiated programs, including mentorship, cohorts, and leader-led and experiential opportunities to ensure there is a path of development for all employees.
Our internal promotion rate helps us measure the success of our development programs. As of March 3, 2023, we employed more than 170,000 full-time and part-time employees, including divisional and regional managers, district managers, store managers, other store personnel, and distribution center, fleet and administrative personnel. As of the end of 2022, more than 70% of store managers and thousands of additional employees, including several members of our senior leadership, have been promoted from within our organization.
Retain
We strive to create an environment where our employees feel respected, safe, empowered, and valued. We regularly monitor retention and engagement levels across the organization through a variety of means, working to understand what is important to our employees and how we can best continue to meet their evolving needs.
Compliance with Governmental Regulations
Our operations are subject to the applicable federal, state, local and foreign laws, rules, and regulations of the jurisdictions in which we operate or conduct business. These laws, rules and regulations relate to, among other things, the sale of products, including without limitation product and food safety, marketing and labeling; information security and privacy; labor and employment; employee wages and benefits; health and safety; real property; public accommodations; anti-bribery; financial reporting and disclosure; pricing; antitrust and fair competition; anti-money laundering; transportation; imports and customs; intellectual property; taxes; and environmental compliance.
We routinely incur significant compliance related costs, both direct and indirect, including investments in store standards and labor such as our approximately $100 million investment planned for 2023, which we believe to be material. Although we can make no guarantees that other future such costs will not be material, to date, other than the investment referenced above, compliance with these laws, rules and regulations has not had a material effect on our capital expenditures, earnings or competitive position. Many of our entry-level store employees are paid at rates in line with the applicable state minimum wage, and consequently, in certain situations, increases to such wage rates have increased our labor costs. If federal, state and/or local minimum wage rates/salary levels were to increase significantly and/or rapidly, compliance with such increases could adversely affect our earnings. Additionally, if significant changes in the federal, state or foreign corporate tax rates occur in the future, such change could adversely affect our overall effective tax rate and earnings. See “Item 1A. Risk Factors” for additional information regarding government regulations that could impact our business.
Available Information
Our Internet website address is www.dollargeneral.com. The information on our website is not incorporated by reference into, and is not a part of, this Form 10-K. We file with or furnish to the Securities and Exchange Commission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, proxy statements and annual reports to shareholders, and, from time to time, registration statements and other documents. These documents are available free of charge to investors on or through the Investor Information section of our website (https://investor.dollargeneral.com) as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. In addition, the public may read and copy any of the materials we file with theThe SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SECalso maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, such as Dollar General, that file electronically with the SEC. The address of that website is http://www.sec.gov.
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ITEM 1A. RISK FACTORS
Investment in our Company involves risks. You should carefully consider the risks described below and the other information contained in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. These risks are not the only risks we face. Our business, financial condition, results of operations or liquidity could also be adversely affected by additional factors that apply to all companies generally or by risks not currently known to us or that we currently view to be immaterial. We can provide no assurance and make no representation that our risk mitigation efforts, although we believe they are reasonable, will be successful.
Economic conditionsBusiness, Strategic and other economicCompetitive Risks
Economic factors may adversely affect our financial performance and other aspects of our business by negatively impactingreduce our customers’ disposable income or discretionary spending, affectingimpair our ability to plan and execute our strategicstrategies and initiatives, increasingand increase our costs of goods sold and selling, general and administrative expenses, and adversely affecting ourwhich could result in materially decreased sales and/or profitability.
We believe manyMany of our customers have fixed or low incomes and generally have limited discretionary spending dollars. Any factor that could adversely affect thattheir disposable income wouldcould decrease our customers’ confidence, spending and number of trips to our stores, and couldor cause our customersthem to shift their spending to products other than those sold by us or to our less profitablelower margin product choices, all of which could result in lower netmaterially decreased sales decreases in inventory turnover, greater markdowns on inventory, a change in the mix of products we sell, and a reduction in profitability due to lower margins.and/or profitability. Factors that could reduce our customers’ disposable income and over which we exercise no influence include but are not limited to adverse economic conditions such as increased or sustained high unemployment or underemployment levels inflation, increasesor decline in real wages; inflation; pandemics (such as the COVID-19 pandemic); higher fuel, or other energy, costshealthcare and housing costs; higher interest rates, consumer debt levels, and tax rates; lack of available credit, consumer debt levels, highercredit; tax rateslaw changes that negatively affect credits and other changes in tax laws, uncertainty regarding government mandated participation in health insurance programs, increasing healthcare and housing costs,refunds; and decreases in, or elimination of, government assistance programs or subsidies such as unemployment, food/nutrition assistance programs, and food assistance programs.economic stimulus payments.
Many of the economic factors identifiedlisted above, that affect disposable income, as well as commodity rates,rates; transportation, costslease and insurance costs; wage rates (including the costsheightened possibility of fuel), costs of labor, insurance and healthcare,increased federal, state and/or local minimum wage rates); foreign exchange rate fluctuations, lease costs,fluctuations; measures that create barriers to or increase the costs associated withof international trade (including increased import duties or tariffs), or; changes in otherapplicable laws and regulations (including tax laws related to the corporate tax rate); and other economic factors, also affectcould impair our ability to plan andsuccessfully execute our strategicstrategies and initiatives, as well as increase our cost of goods sold ourand selling, general and administrative expenses and our(including real estate costs,costs), and may have other adverse consequences whichthat we are unable to fully anticipate or control, all of which may adversely affectmaterially decrease our sales or profitability. We have limited
Inflation in the United States rose significantly in 2022, primarily believed to be the result of the economic impacts from the COVID-19 pandemic, including the global supply chain disruptions, strong economic recovery and associated widespread demand for goods, and government stimulus packages, among other factors. While we believe the growth rate of inflation is beginning to moderate, if inflation continues to increase, we may not be able to adjust prices sufficiently to offset the effect without negatively impacting customer demand or no abilityour gross margin. Additionally, to control manythe extent that these inflationary pressures result in a recessionary environment, we may experience material adverse effects on our business, results of these factors.operations and cash flows.
Our plans depend significantly on strategies, initiatives and initiativesinvestments designed to increase sales and profitprofitability and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could materially affect our performance adversely.
results of operations.
We have short-term and long-term strategies, initiatives and initiativesinvestments (such as those relating to merchandising, marketing, real estate and new store development, international expansion, store formats and concepts, digital, marketing, health services, shrink, damages, sourcing, shrink, private brand, inventory management, distribution and transportation,supply chain, private fleet, store operations, store formats, budgeting and expense reduction, and technology) in various stages of testing, evaluation, and implementation, upon which we expect to relyare designed to continue to improve our results of operations and financial condition and to achieve our financial plans. Thesecondition. The effectiveness of these initiatives areis inherently risky and uncertain, even when tested successfully, in their application to our business in general. Itand is possibledependent on consistency of training and execution, workforce stability, ease of execution and scalability, and the absence of
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offsetting factors that successful testing can result partially from resourcesinfluence results adversely. The number and attention that cannot be duplicated in broader implementation, particularly in light of the diverse geographic locations of our stores and distribution centers and our decentralized field management also contribute to the decentralizedchallenging nature of our field management. General implementation also may be negatively affected by otherthese factors. Other risk factors described herein. Successful systemwide implementation relies on consistency of training, stability of workforce, ease of execution, and the absence of offsetting factors that can influence results adversely.herein also could negatively affect general implementation. Failure to achieve successful
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or cost-effective implementation of our initiatives or the cost of these initiatives exceeding management’s estimates could materially and adversely affect our business, results of operations and financial condition.
The success of our merchandising initiatives, particularly those with respectour non-consumable initiatives (including our new pOpshelf concept) and efforts to non-consumable merchandise and store-specificincrease sales of higher margin products and allocations,within the consumables category, further depends in part upon our ability to predict consistently and successfully the products that our customers will demand and to identify and timely respond to evolving trends in consumer preferences and demographic mixes in our markets and consumer preferences, expectations and needs.markets. If we are unable to select and timely obtain products that are attractive to customers to timely obtain such productsand at costs that allow us to sell them at an acceptable profit, or to effectively market such products, it could result in materially decreased sales and profitability. Despite these initiatives, since the first quarter of 2022, we have experienced a sales mix trend reversion from non-consumables to consumables exceeding pre-pandemic levels.
The success of our sales,Fast Track initiative, which is designed to enhance our in-store labor productivity, on-shelf availability and customer convenience, further depends in part on successful acquisition, implementation and maintenance of the necessary hardware and new point of sale software, continued customer interest in and adoption of self-checkout, our ability to gain cost efficiencies and control shrink levels from the initiative, and vendor cooperation. The success of DG Media Network, which is our platform for connecting brand partners with our customers to drive even greater value for each, further depends on our ability to successfully gather target customer audiences that deliver consistent, predictable and beneficial returns on advertising spending so as to generate interest and demand from our brand partners, as well as to properly handle and secure all sensitive customer data.
We face intense competition that could limit our growth opportunities and materially and adversely affect our results of operations and financial condition.
The retail business is highly competitive with respect to price, customers, store location, merchandise quality, product assortment and presentation, service offerings, product sourcing and supply chain capacity, in-stock consistency, customer service, ease of shopping experience, promotional activity, employees, and market shareshare. We compete with discount stores and profitability couldmany other retailers, including mass merchandise, warehouse club, grocery, drug, convenience, variety, online retailers, and certain specialty stores. To maintain our competitive position, we may be adversely affected.required to lower prices, either temporarily or permanently, and may have limited ability to increase prices in response to increased costs, resulting in lower margins and reduced profitability. Certain of our competitors have greater financial, distribution, marketing and other resources, and may be able to secure better arrangements with suppliers, than we.
Competition is intense, and is expected to continue to be so, with certain competitors reducing their store locations while others enter or increase their presence in our geographic and product markets (including through the expansion of availability of delivery services) and expand availability of mobile, web-based and other digital technologies to facilitate a more convenient and competitive online and in-store shopping experience. If our merchandising effortscompetitors or others were to enter our industry in a significant way, including through alliances or other business combinations, it could significantly alter the non-consumables areacompetitive dynamics of the retail marketplace and result in competitors with greatly improved competitive positions, which could materially affect our financial performance. Our ability to effectively compete will depend substantially upon our continued ability to develop and execute compelling and cost-effective strategies and initiatives. If we fail to anticipate or the higher margin areas within consumables are unsuccessful, werespond effectively to competitive pressures and industry changes, it could be further adversely affected bymaterially affect our inability to offset the lower margins associated with our consumables business.results of operations and financial condition.
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Operational Risks
If we cannot open, relocatetimely and cost-effectively execute our real estate projects and meet our financial expectations, or remodel stores profitably and on schedule,if we do not anticipate or successfully address the challenges imposed by our expansion, including into new countries or domestic markets, states, or urban or suburban areas, it could materially impede our planned future growth will be impeded, which wouldand our profitability.
Delays in or failure to complete a significant portion of our real estate projects, or failure to meet our financial expectations for these projects, could materially and adversely affect sales.
our growth and our profitability. Our ability to timely open, relocate and remodel profitable stores and expand into additional market areas is a key component of our planned future growth. Our ability to timely open storesgrowth and to expand into additional market areas dependsmay depend in part on the following factors:on: the availability of attractivesuitable store locations;locations and capital funding; the absence of entitlement process, permitting or occupancy delays;delays, including zoning restrictions and moratoria on small box discount retail development such as those passed by certain local governments in areas where we operate or seek to operate; supply chain volatility resulting in delivery delays, and in some cases, lack of availability of store equipment, building materials, and store merchandise for resale; the ability to negotiate acceptable lease and development terms; the abilityterms (for example, real estate development requirements and cost of building materials and labor), to cost-effectively hire and train qualified new personnel, especially store managers, in a cost effective manner; the abilityand to identify and accurately assess sufficient customer demand in different geographic areas;demand; and general economic conditions; and the availability of capital funding for expansion. Manyconditions. While we continued to experience certain of these factors also affectat heightened levels in 2022, to date, they have not materially impaired our ability to successfully relocate stores,complete our planned real estate projects or growth, and manythus, have not had a material adverse effect on our financial performance. However, if the levels which we have experienced escalate for an extended period of them are beyondtime, we expect that they could have a material adverse effect on our control.ability to complete our future planned real estate projects or growth, and in turn, a material adverse effect on our financial performance.
Delays or failures in opening new stores or completing relocations or remodels, or achieving lower than expected sales in these projects, could materially adversely affect our growth and/or profitability. We also may not anticipate or successfully address all of the challenges imposed by the expansion of our operations and, as a result, may not meet(including our targets for opening new stores, remodelingpOpshelf store concept), including into new countries or relocating stores or expanding profitably. In addition, our construction costs could increase as a result of economic factors discussed above.
Some new stores and future new store opportunities may be located in areas, including but not limited to newdomestic markets, states or metro urban or suburban areas where we have limited or no meaningful experience or brand recognition. Those areas may have different regulatory environments, competitive and market conditions, consumer tastes and discretionary spending patterns than our existing markets, as well as higher cost of entry.entry and operating costs. These factors may cause our new stores to be initially less successfulprofitable than stores in our existing markets, which could slow future growth in these areas.
Many In addition, many new stores will be located in areas where we have existing stores. Although we have experience in these areas, increasing the number of locations in these marketsstores, which inadvertently may result in inadvertent oversaturation and temporarily or permanently divert a larger than anticipated number of customers and sales from our existing stores, thereby adversely affecting our overall financial performance.
We face intense competition that could limit our growth opportunitiesInventory shrinkage and adversely impact our financial performance.
The retail business is highly competitive with respect to price, store location, merchandise quality, product assortment and presentation, in-stock consistency, customer service, promotional activity, customers, market share, and employees. We compete with discount stores and with many other retailers, including mass merchandise, warehouse club, grocery, drug, convenience, variety, online retailers, and certain specialty stores. This competitive environment subjects us to the risk of adverse impact to our financial performance because of the lower prices, and thus the lower margins, thatdamages may be required to maintain our competitive position. Also, as a discount retailer, due to customer demographics and other factors, we may have limited ability to increase prices in response to increased costs without losing competitive position. This limitation may adverselynegatively affect our marginsresults of operations and financial performance. Certain of our competitors have greater financial, distribution, marketing and other resources than we do and may be able to secure better arrangements with suppliers than we can. If we fail to
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respond effectively to competitive pressures and changes in the retail markets, it could adversely affect our financial performance.condition.
Competition for customers has intensified as competitors have moved into, or increased their presence in, our geographic and product markets and increased the availability of mobile, web-based and other digital technology to facilitate a more convenient and competitive customer online and in-store shopping experience. We expect this competition to continue to increase. We remain vulnerable to the marketing power and high level of consumer recognition of larger competitors and to the risk that these competitors or others could venture into our industry in a significant way, including through the introduction of new store formats. Further, consolidation within the retail industry could significantly alter the competitive dynamics of the retail marketplace. This consolidation may result in competitors with greatly improved financial resources, improved access to merchandise, greater market penetration and other improvements in their competitive positions, as well as result in the provision of a wider variety of products and services at competitive prices by these consolidated companies, which could adversely affect our financial performance.
Our profitability may be negatively affected by inventory shrinkage.
We are subject to the risk of inventory loss and theft. We experience significant inventory shrinkage and cannot be sure that incidences of inventory loss and theft will decrease in the future or that the measures we are taking will effectively reduce the problem of inventory shrinkage.damages. Although some level of inventory shrinkage and damages is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage and damages or incur increased security or other costs to combat inventory theft could adversely affect our results of operations and financial condition couldcondition. During 2022, our inventory shrink levels returned to pre-COVID-19 levels, and higher damages also impacted our results. There can be affected adversely.no assurance that we will be successful in our efforts to contain or reduce inventory shrinkage and damages.
Our cash flows from operations, profitability and financial condition may be negatively affected if we are not successful in managing our inventory balances.
Our inventory balance represented approximately 52%53% of our total assets exclusive of goodwill, operating lease assets, and other intangible assets as of February 2, 2018.3, 2023. Efficient inventory management is a key component of our business success and profitability. To be successful, weWe must maintain sufficient inventory levels and an appropriate product mix to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impacts our financial results or that subjects us toincreases the risk of increased inventory shrinkage.shrinkage or damages. If our buying decisionswe do not accurately predict customer trends, we inappropriately price products or our expectations about customer spending levels, are inaccurate,or price sensitivity, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impactaffect our financial results. We continue to focus on ways to reduce these risks, but we cannot make assurances that we will be successful in our inventory
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management. If we are not successful in managing our inventory balances, our cash flows from operations and financial condition may be negatively affected.
Any failureFailure to maintain the security of information we hold relating to proprietaryour business, customer, employee or vendor information or our customers, employees and vendors, whether as a result of cybersecurity attacks or otherwise,to comply with privacy laws could expose us to litigation, government enforcement actions and costly response measures, and could materially disrupt our operations and harm our reputation and sales.
affect our business and financial performance.
In connection with sales, we transmit confidential credit and debit card information.information which is encrypted using point-to-point encryption. We also have access to, collect or maintain certain private or confidential information regarding our customers, employees and their dependents, and vendors, as well as our business. Some of this information is stored digitallyelectronically in connection with our e-commerce website and our mobile applications, some of which may leverage third-party service providers. Additionally, under certain circumstances, we may share information with and depend upon select vendors thatto assist us in conducting our business (for example, third-party service providers assist us in the transmittal of credit and debit card information in connection with sales), as required by law, or otherwise in accordance with our privacy policy.business. While we have implemented procedures and technology intended to protect and safeguard oursuch information and require appropriate controls of our service providers, it is possible that cyberattackers mightvendors, external attackers could compromise our security measures or thosesuch controls and result in unauthorized disclosure of our technology and other vendors or service providers in the future and obtain the personal information of our customers, employees and vendors that we hold or our businesssuch information, as cyberattacks
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are rapidly evolving and those threats and the means for obtaining access to information in digital and other storage mediaattacks are becoming increasingly sophisticated, may include attacks on our third-party business partners, and maydo not always or immediately produce signsdetectable indicators of intrusion.compromise. Moreover, employee errorinadvertent or malfeasance or other irregularities maymalicious internal personnel actions could result in a defeat of our or our third-party vendors’ security measures and breacha compromise of our or our third-party vendors’ information systems. Furthermore, if a vendor is the victim of a cyberattack, including a ransomware attack, such attack could have a corresponding material effect on our ability to do business with that vendor or to receive information that may be required to timely prepare our financial statements. Due to the political tensions involving China and the conflict between Russia and Ukraine, there is an increased likelihood that escalation of tensions could result in cyberattacks that could directly or indirectly impact our operations. Like other retailers, we and our vendors have experienced threats to, and incidents involving, data and systems, including by perpetrators of attempted random or targeted malicious attacks; computer malware, ransomware, bots, or other destructive or disruptive software; and attempts to misappropriate our information and cause system failures and disruptions, although to date none have been material to our business. If attackers obtain customer, employee or vendor passwords are obtained through unrelated third-party breaches, cyberattackers alsoand if impacted customers, employees, or vendors do not employ good online security practices (e.g., use the same password across different sites or do not use multifactor authentication), these passwords could be used to gain access to our customers’ accounts.
their information or accounts with us in certain situations.
Because we accept debit and credit cards for payment, we are subject to industry data protection standards and protocols, such as the Payment Card Industry Data Security Standards, (“PCI DSS”), issued by the Payment Card Industry Security Standards Council. Additionally, we have implemented technology in our stores to allow for the acceptance of Europay, Mastercard and Visa (EMV) credit transactions and point-to-point encryption. Complying with PCI DSS standards and implementing related procedures, technology and information security measures require significant resources and ongoing attention. However, even as we comply with PCI DSS standards and offer EMV and point-to-point encryption technology in our stores,Nonetheless, we may be vulnerable to, and unable to detect and appropriately respond to, cardholder data security breaches and data loss, including cybersecuritysuccessful attacks on applications, systems, or other breach of cardholder data.
networks.
A significant security breach of any kind (whether experienced by us or one of our vendors),vendors, which could be undetected for a period of time, or anya significant failure by us or one of our vendors to comply with the applicable privacy and information security laws, regulations and standards could expose us to risks of data loss, litigation, government enforcement actions, fines or penalties, credit card brand assessments, negative publicity and reputational harm, business disruption and costly response measures (including, for example,(e.g., providing notification to, and credit monitoring services for, affected customers,individuals, as well as further upgrades to our security measures)measures; procuring a replacement vendor if one of our current vendors is unable to fulfill its obligations to us due to a cyberattack or incident) which may not be covered by or may exceed the coverage limits of our insurance policies, and could materially disrupt our operations. Any resulting negative media attention and publicity could significantly harm our reputation which could cause us to lose market share as a result of customers discontinuing the use of our e-commerce and mobile applications or debit or credit cards in our stores or not shopping in our stores altogether and could have a material adverse effect onmaterially and adversely affect our business and financial performance.
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Material damage or interruptions to our information systems as a result of external factors, staffing shortages or challenges in maintaining or updating our existing technology or developing or implementing new technology could materially and adversely affect our business and results of operations.
We depend on a variety of information technology systems, including systems owned and managed by third-party vendors, for the efficient functioning of our business, including, without limitation, transaction processing and the management of our employees, facilities, logistics, inventories, stores and customer-facing digital applications and operations. Our technology initiatives may not deliver desired results or may do so on a delayed schedule. Additionally, such systems are subject to damage or interruption from power surges and outages, facility damage, physical theft, computer and telecommunications failures, inadequate or ineffective redundancy, malicious code (including malware, ransomware, or similar), successful attacks (e.g., account compromise; phishing; denial of service; and application, network or system vulnerability exploitation), software upgrade failures or code defects, natural disasters and human error. Due to the political tensions involving China and the conflict between Russia and Ukraine, there is an increased likelihood that escalation of tensions could result in cyberattacks that could either directly or indirectly impact our operations. Design defects, damage to, or interruption to these systems may require a significant investment to repair or replace, disrupt our operations and affect our ability to meet business and reporting requirements, result in the loss or corruption of critical data, and harm our reputation, all of which could materially and adversely affect our business or results of operations.
We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on third parties to maintain and periodically upgrade many of these systems so that they can continue to support our business. We license the software programs supporting many of our systems from independent software developers. The inability or failure of these vendors, developers or us to continue to maintain and upgrade these systems and software programs could disrupt or reduce the efficiency of our operations or retain vulnerability exploitation risk if we were unable to convert to alternate systems in an efficient and timely manner and could expose us to greater risk of a successful attack. In addition, costs and delays associated with the implementation of new or upgraded systems and technology, including the migration of applications to the cloud or our current implementation of our new point of sale system, or with maintenance or adequate support of existing systems also could disrupt or reduce the efficiency of our operations, fail to operate as designed, result in the potential loss or corruption of data or information, disrupt operation, inhibit our ability to innovate, and affect our ability to meet business and reporting requirements and adversely affect our profitability.
A significant disruption to our distribution network, to the capacity of our distribution centers or to the timely receipt of inventory could adversely impactaffect sales or increase our transportation costs, which would decrease our profits.
profitability.
We rely on our distribution and transportation network to provide goods to our stores in a timely and cost‑effective manner.cost-effectively. Using various transportation modes, of transportation, including ocean, rail, and truck, we and our vendors move goods from vendor locations to our distribution centers. Deliveries tocenters and our stores occur from our distribution centers or directly from our vendors.stores. Any disruption, unanticipated or unusual expense or operational failure related to this process could affect store operations negatively. For example,negatively impact sales and profits. In 2022, we experienced increased fuel costs; inventory receipt and delivery delays; earlier than expected receipt of seasonal inventory leading to capacity constraints that were exacerbated by unexpected delays orin acquiring additional temporary warehouse space sufficient for our inventory needs; and increases in transportation costs (including through increased fuelimport freight costs increasedand carrier rates orand driver wageswages) as a result of driver shortages,capacity rightsizing, port congestion, and labor shortages. These challenges resulted in materially higher than anticipated supply chain costs in 2022, including detention fees incurred for delays in returning shipping containers, higher temporary storage and transportation costs and labor, which in turn, had a decrease in transportation capacity for overseas shipments, or work stoppages or slowdowns) could significantly decreasematerial adverse impact on our ability to make salesbusiness, results of operations, and earn profits.financial condition. Labor shortages or work stoppages or slowdowns in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries or which would necessitate our securing alternative labor or shipping suppliers could also increase our costs or otherwise negatively affect our business.
We maintain a network of distribution facilities and are moving forward with plans to build or lease new facilities (including temperature-controlled distribution centers) to support our growth objectives.objectives and strategic initiatives. Delays in opening distribution centerssuch facilities could adversely affect our future financial performance by slowing store
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growth (including accelerated pOpshelf store growth plans) or the rollout/development of certain strategic initiatives, which may in turn reduce revenue growth and/or profitability, or by increasing transportation and product costs. In addition, distribution-related construction or expansion projects entail risks that could cause delays and cost overruns, such as: availability of temperature-controlled distribution centers and refrigerated transportation equipment; shortages of materials or skilled labor; work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. For these reasons, the completion date and ultimate cost of these projects could differ significantly from initial expectations, and we cannot guarantee that any project will be completed on time or within established budgets.
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Risks associated with or faced by our suppliers could adversely affect our financial performance.
The products we sell are sourcedWe source our merchandise from a wide variety of domestic and international suppliers, and we are dependentdepend on our vendorsthem to supply merchandise in a timely and efficient manner.manner and in the large volumes that we may require. In 2017,2022, our largest and secondtwo largest suppliers each accounted for approximately 10% and 8% respectively, of our purchases. We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, ifIf one or more of our current sources of supply became unavailable, we believe we generally would generally be able to obtain alternative sources. However, such alternative sources, but it could increase our merchandise costs and supply chain lead time and expenses, result in a temporary reduction in store inventory levels, and reduce the selection and quality of our merchandise, and anmerchandise. An inability to obtain alternative sources could adversely affectmaterially decrease our sales. Additionally, if a supplier fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience merchandise out‑of‑stocksout-of-stocks that could lead to lost sales and damagereputational harm. Further, failure of suppliers to meet our reputation.
compliance protocols could prolong our procurement lead time, resulting in lost sales and adverse margin impact.
We directly imported approximately 5%9% of our purchases (measured at cost) in 2017,2022, but many of our domestic vendors directly import their products or components of their products. Changes to the prices and flow of these goods often are for any reason,reasons beyond our control, such as political or civil unrest, or acts of war, disruptive global political events (for example, political tensions involving China and the current conflict between Russia and Ukraine), currency fluctuations, disruptions in maritime lanes, port labor disputes, and economic conditions and instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers’ failure to meet our terms and conditions or our standards, issues with our suppliers’ labor practices of our suppliers or labor problems they may experience (such as strikes, stoppages or slowdowns, which could also increase labor costs during and following the disruption), the availability and cost of raw materials, to suppliers, increased import duties,pandemic outbreaks, merchandise quality or safety issues, transport availability and cost, increases in wage rates and taxes, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located or from which they import, are beyond our control andimport. Such changes could adversely affect our operations and profitability.
While we are working to diversify our sources of imported goods to include Southeast Asia, India, South America and reduce the percentage of goods imported from China,Mexico, a substantial amount of our imported merchandise still comes from China, and thus, a change in the Chinese leadership, the effects of pandemic outbreaks, economic and market conditions, internal economic stimulus actions, or currency or other policies, as well as trade and other relations between China and the United States and increases in costs of labor, and wage taxes, could negatively impact our merchandise costs. In addition, the United States’ foreign trade policies, duties, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries the limitation(particularly China) and entities, import limitations on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade and port labor agreements are beyond our control. These and other factors affecting our suppliers and our access to products could adversely affect our business and financial performance. AsIf we increase our product imports of merchandise from foreign vendors, the risks associated with these imports also will increase, and we may be exposed to additional or different risks as we increase imports of goods produced in countries other than China.
16
Natural disasters and unusual or extreme weather conditions (whether or not caused by climate change), pandemic outbreaks or other health crises, political or civil unrest, acts of war, violence or terrorism, and disruptive global political events could disrupt business and result in lower sales and/or profitability and otherwise adversely affect our financial performance.
The occurrence of one or more natural disasters, such as hurricanes, fires, floods, tornadoes and earthquakes, unusual or extreme weather conditions, pandemic outbreaks or other health crises (for example, the COVID-19 pandemic), political or civil unrest, acts of war, violence or terrorism (including within our stores, distribution centers or other Company property), or disruptive global political events (for example, the political tensions involving China and the current conflict between Russia and Ukraine) or similar disruptions could adversely affect our reputation, business and financial performance. If any of these events result in the closure, or a limitation on operating hours, of one or more of our distribution centers, a significant number of stores, our sourcing offices, our corporate headquarters or data center or impact one or more of our key suppliers, our operations and financial performance could be materially and adversely affected through an inability or reduced ability to make deliveries, process payroll or provide other support functions to our stores and through lost sales. These events also could affect consumer shopping patterns or prevent customers from reaching our stores, which could lead to lost sales and higher markdowns, or result in increases in fuel or other energy prices, fuel shortage(s), new store or distribution center opening delays, the temporary lack of an adequate work force in a market, the temporary or long-term disruption of product availability in our stores, the temporary or long-term inability to obtain or access technology needed to effectively run our business, disruption of our utility services or information systems, and damage to our reputation. For example, in 2022, Winter Storm Elliott had a significant impact on our fourth quarter results because of lost sales, increased damages and increased markdowns. These events may also increase the costs of insurance if they result in significant loss of property or other insurable damage by us or in the market more generally.
Furthermore, the long-term impacts of global climate change present the possibility of both physical risks (such as extreme weather conditions or rising sea levels) and transition risks (such as regulatory or technology changes), which may be widespread and unpredictable. Over time, these changes, as well as regulatory efforts related thereto, could affect, for example, the availability and cost of products, commodities and energy (including utilities), which in turn may impact our ability to procure goods and services required for the operation of our businesses at the quantities and levels we require. In addition, our operations and facilities may be located in areas impacted by the physical risks of climate change, and we face the risk of losses incurred as a result of physical damage to stores, distribution centers, or our corporate offices, as well as loss or spoilage of inventory and business interruption caused by such events. We also use natural gas, diesel fuel and gasoline and electricity in our operations, all of which could face increased regulation relating to climate change or other environmental concerns. Regulations limiting greenhouse gas emissions and energy inputs may also increase in coming years, which may increase our costs associated with compliance and merchandise. These events and their impacts could otherwise disrupt and adversely affect our operations and could materially adversely affect our financial performance.
Product liability, product recall or other product safety or labeling claims could adversely affect our business, reputation and financial performance.
All ofWe depend on our vendors and their products must comply with applicable product safety laws and regulations (including those relating to product labeling), and we are dependent on them to ensure that the products we buy from them comply with all applicable product safety and labeling standards. However,laws and regulations and to inform us of all applicable restrictions on the sale of such products. Nonetheless, product liability, personal injury or other claims may be asserted against us relating to alleged product contamination, product tampering, product expiration, mislabeling, recall and other safety or labeling issues, with respectincluding those relating to the products that we sell.
may self-distribute through our DG Fresh initiative.
We seek but may not be successful in obtaining contractual indemnification and insurance coverage for product-related claims and issues from our vendors. If we do not have adequate contractual indemnification or insurance available, or our vendors fails to adhere to their obligations to us, such claims could have a material adverse effect onmaterially and adversely affect our business, financial condition and results of operations. Our ability to obtain indemnification from foreign vendors may be hindered by our ability to obtain jurisdiction over such vendorsthem to enforce contractual indemnification obligations. Even with adequate insurance and indemnification, such claims could significantly damageharm our reputation
17
and consumer confidence in our products. Ourproducts and we could incur significant litigation expenses, could increase as well, which also could have a materially negative impact onaffect our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
13
Our private brands may not be successful in improving our gross profit rate and may increase certain of the risks we face.
The sale of private brand items is an important component of our sales growth and gross profit rate enhancement plans. We have invested in our development and procurement resources and marketing efforts relating to these private brand offerings. We believe that our success in maintaining broad market acceptance of our private brands depends on many factors, including pricing, our costs, quality, customer perception and the timely development and introduction of new products. We may not achieve or maintain our expected sales for our private brands. The sale and expansion of our private brand offerings also subjects us to certain risks, such as: potential product liability risks and mandatory or voluntary product recalls; potential supply chain and distribution chain disruptions for raw materials and finished products; our ability to successfully protect our proprietary rights and successfully navigate and avoid claims related to the proprietary rights of third parties; our ability to successfully administer and comply with applicable contractual obligations and legal and regulatory requirements; and other risks generally encountered by entities that source, sell and market exclusive branded offerings for retail. An increase in sales of our private brands may also adversely affect sales of our vendors’ products, which, in turn, could adversely affect our relationship with certain of our vendors. Any failure to appropriately address some or all of these risks could have a significant adverse effect on our private brand initiatives and on our reputation, business, results of operations and financial condition.
We are subject to governmental regulations, procedures and requirements. A significant change in, or noncompliance with, these regulations could have a material adverse effect on our financial performance.
Our business is subject to numerous and frequently changing federal, state and local laws and regulations. We routinely incur significant costs in complying with these regulations. The complexity of the regulatory environment in which we operate and the related cost of compliance are increasing due to additional legal and regulatory requirements, our expanding operations, and increased enforcement efforts. Further, uncertainties exist regarding the future application of certain of these legal requirements to our business. New laws, regulations, policies and the related interpretations and enforcement practices, particularly those dealing with environmental compliance, product safety or labeling, food safety, information security and privacy, and labor and employment, among others, or changes in existing laws, regulations, policies and the related interpretations and enforcement practices, particularly those governing the sale of products or employee wages, may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our cost of doing business. Untimely compliance or noncompliance with applicable regulations or untimely or incomplete execution of a required product recall, can result in the imposition of penalties (including loss of licenses, eligibility to accept certain government benefits such as SNAP or significant fines or monetary penalties), class action litigation or other litigation, in addition to reputational damage. Additionally, changes in tax laws, the interpretation of existing laws, or our failure to sustain our reporting positions on examination could adversely affect our overall effective tax rate.
Litigation may adversely affect our business, results of operations and financial condition.
Our business is subject to the risk of litigation by employees, consumers, suppliers, competitors, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, results of operations and financial condition. See Note 7 to the consolidated financial statements for further details regarding certain of these pending matters.
14
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on the dispersion of our operations. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to acts of war, certain crimes (including employee and certain other crime,crime), certain wage and hour and other employment-related claims including class actions,and litigation, actions based on certain consumer protection laws, and some natural and other disasters or similar events. If we incur thesematerial uninsured losses, and they are material, our businessfinancial performance could suffer. Certain material events have resulted, and may result again in the future, in sizable losses for the insurance industry and adversely impactaffect the availability of adequate insurance coverage or result in excessive premium increases. To offset negative insurance market trends, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes.coverage. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, automobile liability, general liability (including claims made against certain of our landlords), property loss, and group health insurance programs. UnanticipatedSignificant changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including any expected increases in medical and indemnity costs, could result in materially different expenses than expected under these programs, which could have a material adverse effect onmaterially and adversely affect our results of operations and financial condition. Although we continue to maintain property insurance to cover insurable losses resulting from, for catastrophic eventsexample, fires and storms, at our store support center and distribution centers, we are effectively self-insured for other property losses. If we experience a greater number of these self-insured losses than we anticipate, our financial performance could be adversely affected.
Natural disasters and unusual weather conditions (whether or not caused by climate change), pandemic outbreaks, terrorist acts, and global political events could disrupt business and result in lower sales and otherwise adversely affect our financial performance.
The occurrence of one or more natural disasters, such as hurricanes, fires, floods, tornadoes and earthquakes, unusual weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could adversely affect our business and financial performance. Uncharacteristic or significant weather conditions can affect consumer shopping patterns, which could lead to lost sales or greater than expected markdowns and adversely affect our short-term results of operations. To the extent these events result in the closure of one or more of our distribution centers, a significant number of stores, or our corporate headquarters or impact one or more of our key suppliers, our operations and financial performance could be materially adversely affected through an inability to make deliveries or provide other support functions to our stores and through lost sales. In addition, these events could result in increases in fuel (or other energy) prices or a fuel shortage, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some domestic and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay or increased transportation costs in the delivery of goods to our distribution centers or stores, the inability of customers to reach or have transportation to our stores directly affected by such events, the temporary reduction in the availability of products in our stores and disruption of our utility services or to our information systems. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage.
Material damage or interruptions to our information systems as a result of external factors, staffing shortages or challenges or difficulties in maintaining or updating our existing technology or developing or implementing new technology could have a material adverse effect on our business or results of operations.
We depend on a variety of information technology systems for the efficient functioning of our business, including, without limitation the processing of transactions and the management of our employees, facilities, logistics, inventories, stores and customer-facing digital operations. We are continually improving our information processes and computer systems to better run our business. These technology initiatives may not deliver desired results or may do so on a delayed schedule. Additionally, such systems are subject to damage or interruption from power outages, facility damage, computer and telecommunications failures, computer viruses, cybersecurity breaches, cyber attacks (including malicious codes, worms, phishing and denial of service attacks, and
15
ransomware), software upgrade failures or code defects, natural disasters and human error. Damage or interruption to, or defects of design related to, these systems may require a significant investment to fix or replace them, and we may suffer interruptions or disruptions in our operations in the interim, may experience loss or corruption of critical data and may receive negative publicity, all of which could have a material adverse effect on our business or results of operations.
We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors and service providers to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these vendors, developers or us to continue to maintain and upgrade these information systems and software programs might disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner and could expose us to greater risk of a cybersecurity breach or other cyber attack. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.
Failure to attract, traindevelop and retain qualified employees while controlling labor costs, as well as other labor issues, including employee safety issues, could adversely affect our financial performance.
Our future growth and performance, positive customer experience and legal and regulatory compliance depends on our ability to attract, train,develop, retain and motivate qualified employees many of whom arewhile operating in positions withan industry challenged by historically high rates of employee turnover. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel, in a given market, unemployment levels, within those markets, wage rates within particular markets,and salary levels (including the heightened possibility of increased federal, state and/or local minimum wage laws,rates/salary levels), health and other insurance costs, changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulations (including changes inthose relating to employee benefit programs such as health insurance and paid leave programs), employee activism, employee safety issues, employee expectations and productivity, and our reputation and relevance within the labor market. If we are unable to attract, develop and retain adequate numbers of qualified employees, our operations, customer service levels, legal and regulatory compliance, and support functions could suffer. In addition, to the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor and other related costs could increase.increase, and it is possible that federal agencies may adopt or impose regulatory or other changes to existing law that could facilitate union organizing. Our ability to pass along labor and other related costs to our customers is constrained by our everyday low price model, and we may not be able to offset such increased costs elsewhere in our business.
Our success depends on our executive officers and other key personnel. If we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and other key personnel. The unexpected loss of the services of any of our executive officerssuch persons could have an adverse effect onadversely affect our operations. There can be no assurance that our executive succession planning, retention or hiring efforts will be successful. Competition for skilled and experienced management personnel is intense, and our future success will also depend on our ability to attract and retain qualified personnel, and a failure to attract and retain new qualified personnel or our inability to enforce non-compete agreements that we have in place with our management personnel could have an adverse effect onadversely affect our operations.
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Our private brands may not be successful in improving our gross profit rate at our expected levels and may increase certain of the risks we face.
The sale of private brand items is an important component of our sales growth and gross profit rate enhancement plans. Broad market acceptance of our private brands depends on many factors, including pricing, quality, customer perception, and timely development and introduction of new products. We cannot give assurance that we will achieve or maintain our expected level of private brand sales. The sale and expansion of these offerings also subjects us to or increases certain risks, such as: product liability claims and product recalls; disruptions in raw material and finished product supply and distribution chains; inability to successfully protect our proprietary rights; claims related to the proprietary rights of third parties; supplier labor and human rights issues, and other risks generally encountered by entities that source, sell and market exclusive branded offerings for retail. Failure to appropriately address these risks could materially and adversely affect our private brand initiatives, reputation, results of operations and financial condition.
Because our business is somewhat seasonal, adverse events during the fourth quarter could materially affect our financial statements as a whole.
Primarily because of sales of Christmas-related merchandise, our most profitable sales mix generally occurs in the fourth quarter. In anticipation of this holiday, we purchase substantial amounts of seasonal inventory.inventory, and if sales fall below seasonal norms or our expectations it could result in unanticipated markdowns. Adverse events, such as deteriorating economic conditions, high unemployment rates, high gas or energy prices, public transportation disruptions, or unusual or unanticipated adverse weather could result in lower-than-planned sales during the Christmas selling season, which in turn could reduce our operating profit. Additionally, an excess of seasonal merchandise inventory could result if our net sales during the Christmas selling season fall below
16
seasonal norms or expectations, which couldprofitability and otherwise adversely affect our financial performance and operating results. For example, in 2022, Winter Storm Elliott had a significant impact on our fourth quarter results, specifically lost sales and higher than anticipated damages and markdowns.
Failure to protect our reputation could adversely affect our business.
Our success depends in part on the protection of the reputation of Dollar General and the products and services we sell, including our private brands. Failure to comply or accusation of failure to comply, even if unfounded, with ethical, social, product, labor, data privacy, consumer protection, safety, environmental and other applicable standards could jeopardize our reputation and potentially lead to various adverse consumer, shareholder or non-governmental organization (NGO) actions, litigation and governmental investigations and/or require a costly response. In addition, our position or perceived lack of position on certain issues (e.g., public policy, social, or environmental issues), and any perceived lack of transparency about such matters, could harm our reputation and potentially lead to adverse consumer, shareholder or NGO actions, including negative public statements. Similar incidents or factors involving vendors and other third parties with whom we conduct business also may affect our reputation. Public comments on social media, whether or not they are accurate, have the potential to quickly influence negative perceptions of Dollar General or our goods and services, including our private brands. Any failure, or perceived failure, to meet any of our published ESG-related aspirations or goals, which is often outside of our control, could adversely affect public perception of our business, employee morale or customer or shareholder support. Negative reputational incidents could adversely affect our business through lost sales, loss of new store and development opportunities, or employee retention and recruiting difficulties.
Regulatory, Legal, Compliance and Accounting Risks
A significant change in governmental regulations and requirements could materially increase our cost of doing business, and noncompliance with governmental regulations could materially and adversely affect our financial performance.
We routinely incur significant costs in complying with numerous and frequently changing laws and regulations. The complexity of this regulatory environment and related compliance costs continue to increase due to additional legal and regulatory requirements, our expanding operations, and increased regulatory scrutiny and enforcement efforts. New or revised laws, regulations, orders, policies and related interpretations and enforcement practices, particularly those dealing with the sale of products, including without limitation, product and food safety,
19
marketing, labeling or pricing; information security and privacy; labor and employment; employee wages and benefits; health and safety; imports and customs; taxes; bribery; climate change; and environmental compliance, may significantly increase our expenses or require extensive system and operating changes that could materially increase our cost of doing business. In 2023, we plan to invest approximately $100 million, which we believe to be material, in our stores, primarily in the form of labor, to enhance store standards, our compliance efforts and the employee and customer experience. Violations of applicable laws and regulations or untimely or incomplete execution of a required product recall can result in significant penalties (including loss of licenses, eligibility to accept certain government benefits such as SNAP or significant fines), class action or other litigation, governmental investigation or action and reputational damage. Additionally, changes in tax laws (including those related to the federal, state or foreign corporate tax rate), the interpretation of existing laws, or our failure to sustain our reporting positions on examination could adversely affect our overall effective tax rate, or in the case of the recently enacted stock buyback excise tax, our cash flows. Furthermore, significant and/or rapid increases to federal, state and/or local minimum wage rates/salary levels could adversely affect our earnings if we are not able to otherwise offset these increased labor costs elsewhere in our business. Moreover, the adoption of new environmental laws and regulations in connection with climate change and the transition to a low carbon economy, including any federal or state laws enacted to regulate greenhouse gas emissions, could significantly increase our operating or merchandise costs or reduce the demand for our products. These laws and regulations may include, but are not limited to, requirements relating to hazardous waste materials, recycling, single-use plastics, extended producer responsibility, use of refrigerants, carbon pricing or carbon taxes, product energy efficiency standards and product labeling. If carbon pricing requirements or carbon taxes are adopted, there is a significant risk that the cost of merchandise from our suppliers will increase and adversely affect our business and results of operations.
Legal proceedings may adversely affect our reputation, business, results of operations and financial condition.
Our business is subject to the risk of litigation or other legal proceedings by employees, consumers, suppliers, competitors, shareholders, government agencies and others through private actions, class actions, multi-district litigation, arbitrations, derivative actions, administrative proceedings, regulatory actions or other litigation. For example, we are involved in certain legal proceedings as discussed in Note 7 to the consolidated financial statements. The outcome of legal proceedings, particularly class action or multi-district litigation or mass arbitrations and regulatory actions, can be difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss may remain unknown for lengthy periods. In addition, certain of these matters, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required, and sometimes these developments are unanticipated. Legal proceedings in general, and class actions, derivative actions, multi-district litigation, and governmental investigations and actions in particular, can be expensive and disruptive, and adverse publicity could harm our reputation, regardless of the validity of the allegations. As a result, legal proceedings may adversely affect our business, results of unanticipated markdowns.operations and financial condition. See also Note 7 to the consolidated financial statements.
New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect our financial performance.
The implementation of new accounting standards could require certain systems, internal process and controls and other changes that could increase our operating costs and result in changes to our financial statements.
U.S. generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or in underlying management assumptions, estimates or judgments could significantly change our reported or expected financial performance. The outcome of such changes could include litigation or regulatory actions which could adversely affect our financial condition and results of operations.
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Financial and Capital Market Risks
Deterioration in market conditions or changes in our credit profile could adversely affect our business operations and financial condition.
We rely on the positive cash flow we generate from our operating activities and our access to the credit and capital markets to fund our operations, growth strategy, and return of cash to our shareholders through share repurchases and dividends. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations,increases, may increase the cost of financing or restrict our access to these potential sources of future liquidity. In 2022, as interest rates rose, our interest expense rose as well. There continues to be market uncertainty, which could result in further increases in our cost of borrowing. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating performance and our credit ratings. Our debt securities currently have anare rated investment grade, rating, and a downgrade of this rating likely would negatively impact our access to the debt capital markets and increase our cost of borrowing. As a result, any disruptions or turmoil in the debt markets or any downgrade of our credit ratings could adversely affect our business operations and financial condition and our ability to return cash to our shareholders. ThereWe can bemake no assurances that our ability to obtain additional financing through the debt markets will not be adversely impactedaffected by economic conditions or that we will be able to maintain or improve our current credit ratings.
New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect our financial performance.
The implementation of new accounting standards could require certain systems, internal process and other changes that could increase our operating costs, and also will result in changes to our financial statements. In particular, the implementation of accounting standards related to leases, as issued by the Financial Accounting Standards Board (“FASB”) are requiring us to make significant changes to our lease management and other accounting systems, and will result in a material impact to our consolidated financial statements. Additionally, the FASB has issued accounting standards related to intra-entity transfers that will result in changes to our financial statements.
U.S. generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. The outcome of such changes could include litigation or regulatory actions which could have an adverse effect on our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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As of March 2, 2018,3, 2023, we operated 14,60919,147 retail stores, including those located in 4447 U.S. states as follows:listed in the table below, and one store in Mexico.
| | | | | | | |
State |
| Number of Stores |
| State |
| Number of Stores |
|
Alabama |
| 907 |
| Nevada |
| 21 | |
Arizona |
| 137 |
| New Hampshire |
| 45 | |
Arkansas |
| 528 |
| New Jersey |
| 186 | |
California |
| 259 |
| New Mexico |
| 119 | |
Colorado |
| 72 |
| New York |
| 575 | |
Connecticut |
| 86 |
| North Carolina |
| 1,035 | |
Delaware |
| 51 |
| North Dakota |
| 66 | |
Florida |
| 1,030 |
| Ohio |
| 977 | |
Georgia |
| 1,059 |
| Oklahoma |
| 527 | |
Idaho | | 6 | | Oregon |
| 85 | |
Illinois |
| 659 |
| Pennsylvania |
| 914 | |
Indiana |
| 669 |
| Rhode Island |
| 25 | |
Iowa |
| 310 |
| South Carolina |
| 644 | |
Kansas |
| 268 |
| South Dakota |
| 77 | |
Kentucky |
| 702 |
| Tennessee |
| 953 | |
Louisiana |
| 643 |
| Texas |
| 1,802 | |
Maine |
| 67 |
| Utah |
| 11 | |
Maryland |
| 166 |
| Vermont |
| 39 | |
Massachusetts |
| 55 |
| Virginia |
| 470 | |
Michigan |
| 696 |
| Washington | | 38 | |
Minnesota |
| 206 |
| West Virginia |
| 285 | |
Mississippi |
| 621 |
| Wisconsin |
| 260 | |
Missouri |
| 634 | | Wyoming | | 15 | |
Nebraska |
| 146 | | | | | |
|
|
|
|
|
|
|
|
State |
| Number of Stores |
| State |
| Number of Stores |
|
Alabama |
| 720 |
| Nebraska |
| 120 |
|
Arizona |
| 109 |
| Nevada |
| 22 |
|
Arkansas |
| 414 |
| New Hampshire |
| 30 |
|
California |
| 202 |
| New Jersey |
| 121 |
|
Colorado |
| 42 |
| New Mexico |
| 97 |
|
Connecticut |
| 47 |
| New York |
| 439 |
|
Delaware |
| 44 |
| North Carolina |
| 787 |
|
Florida |
| 825 |
| North Dakota |
| 15 |
|
Georgia |
| 827 |
| Ohio |
| 755 |
|
Illinois |
| 521 |
| Oklahoma |
| 429 |
|
Indiana |
| 494 |
| Oregon |
| 38 |
|
Iowa |
| 224 |
| Pennsylvania |
| 675 |
|
Kansas |
| 230 |
| Rhode Island |
| 13 |
|
Kentucky |
| 500 |
| South Carolina |
| 518 |
|
Louisiana |
| 536 |
| South Dakota |
| 47 |
|
Maine |
| 46 |
| Tennessee |
| 733 |
|
Maryland |
| 136 |
| Texas |
| 1,413 |
|
Massachusetts |
| 41 |
| Utah |
| 11 |
|
Michigan |
| 468 |
| Vermont |
| 35 |
|
Minnesota |
| 119 |
| Virginia |
| 395 |
|
Mississippi |
| 483 |
| West Virginia |
| 234 |
|
Missouri |
| 501 |
| Wisconsin |
| 153 |
|
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Most of our stores are located in leased premises. Individual store leases vary as to their terms, rental provisions and expiration dates. Many stores, including a significant portion of our new stores, are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of up to 15 years with multiple renewal options. We also have stores subject to shorter-term leases, and many of these leases have renewal options. A significant portion of our new stores are subject to build-to-suit arrangements.
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As of March 2, 2018,3, 2023, we operated fifteen19 distribution centers as described in the following table:
|
|
|
|
|
|
|
|
|
| Year |
| Approximate Square |
| Number of |
|
Location |
| Opened |
| Footage |
| Stores Served |
|
Scottsville, KY |
| 1959 |
| 720,000 |
| 695 |
|
Ardmore, OK |
| 1994 |
| 1,310,000 |
| 1,242 |
|
South Boston, VA |
| 1997 |
| 1,250,000 |
| 1,055 |
|
Indianola, MS |
| 1998 |
| 820,000 |
| 787 |
|
Fulton, MO |
| 1999 |
| 1,150,000 |
| 1,204 |
|
Alachua, FL |
| 2000 |
| 980,000 |
| 977 |
|
Zanesville, OH |
| 2001 |
| 1,170,000 |
| 1,223 |
|
Jonesville, SC |
| 2005 |
| 1,120,000 |
| 1,085 |
|
Marion, IN |
| 2006 |
| 1,110,000 |
| 1,191 |
|
Bessemer, AL |
| 2012 |
| 940,000 |
| 1,137 |
|
Lebec, CA |
| 2012 |
| 600,000 |
| 385 |
|
Bethel, PA |
| 2014 |
| 1,000,000 |
| 1,004 |
|
San Antonio, TX |
| 2016 |
| 920,000 |
| 993 |
|
Janesville, WI |
| 2016 |
| 1,000,000 |
| 895 |
|
Jackson, GA |
| 2017 |
| 1,000,000 |
| 736 |
|
for non-refrigerated products, 10 cold storage distribution centers, and two combination distribution centers which have both refrigerated and non-refrigerated products. We lease 14 of these facilities and the distribution centers located in California, Oklahoma, Mississippiremainder are owned. We have a total of 20.5 million square feet of non-refrigerated space and Missouri and own the remaining distribution centers in the table above.a total of 2.6 million square feet of cold storage space. Approximately 7.25 acres of the land on which our Kentuckyfor one of the distribution center is locatedcenters is subject to a ground lease. As of February 2, 2018, weWe also leased approximately 1,082,0004.8 million square feet of additional temporary warehouse space toin support of our distribution needs.network for non-refrigerated merchandise.
Our executive offices are located in approximately 302,000 square feet of owned buildings and approximately 42,000 square feet of leased office space in Goodlettsville, Tennessee.
The information contained in Note 7 to the consolidated financial statements under the heading “Legal proceedings” contained in Part II, Item 8 of this report is incorporated herein by this reference.
ITEM 4. MINE SAFETY DISCLOSURES
None.
19
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our current executive officers as of March 23, 201824, 2023 is set forth below. Each of our executive officers serves at the discretion of our Board of Directors and is elected annually by the Board to serve until a successor is duly elected.elected or their earlier resignation or termination. There are no familial relationships between any of our directors or executive officers.
8 | ||||||
Name | Age | Position | ||||
| | 53 | | Chief Executive Officer and Director | ||
Todd J. Vasos | | 61 | | Senior Advisor and Director | ||
John W. Garratt | |
| | President and Chief Financial Officer | ||
| |
| ||||
| | Executive Vice President and Chief People Officer | ||||
| | 59 | | Executive Vice President, Store Operations | ||
Emily C. Taylor | | 47 | | Executive Vice President and Chief Merchandising Officer | ||
Rhonda M. Taylor | | 55 | | Executive Vice President and General Counsel | ||
Carman R. Wenkoff | | 55 | | Executive Vice President and Chief Information Officer | ||
Antonio Zuazo | | 51 | | Executive Vice President, Global Supply Chain | ||
Anita C. Elliott | | 58 | | Senior Vice President and Chief Accounting Officer | ||
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|
Mr. VasosOwen has served as our Chief Executive Officer and as a member of our Board of Directors since November 2022. He previously served as our Chief Operating Officer from August 2019 to November 2022. He returned to Dollar General in June 2015 as Executive Vice President of Store Operations, with over 21 years of previous employment experience with the Company, including Senior Vice President, Store Operations (August 2011 to July 2014); Vice President, Division Manager (March 2007 to July 2011); Retail Division Manager (November 2006 to March 2007); and various other operations roles of increasing importance and responsibility. He began his employment at Dollar General in December 1992. Mr. Owen served as a director of Kirkland’s Inc. from March 2015 to September 2022.
Mr. Vasos served as our Chief Executive Officer from June 2015 to November 2022 when he transitioned to Senior Advisor. He has served as a member of our Board of Directors since June 2015. He joined Dollar General in December 2008 as Executive Vice President, Division President and Chief Merchandising Officer. HeOfficer and was
22
promoted to Chief Operating Officer in November 2013.2013 and to Chief Executive Officer in June 2015. As previously announced, Mr. Vasos plans to retire from Dollar General effective April 2, 2023, but will remain on our Board. Prior to joining Dollar General, Mr. Vasos served in executive positions with Longs Drug Stores Corporation for seven years, including Executive Vice President and Chief Operating Officer (February 2008 throughto November 2008) and Senior Vice President and Chief Merchandising Officer (2001 – to 2008), where he was responsible for all pharmacy and front-end marketing, merchandising, procurement, supply chain, advertising, store development, store layout and space allocation, and the operation of three distribution centers. He also previously served in leadership positions at Phar-Mor Food and Drug Inc. and Eckerd Corporation.
Mr. GarrattVasos has served as Executive Vicea director of KeyCorp since July 2020.
Mr. Garratt has served as President and Chief Financial Officer since December 2015. September 2022. As previously announced, Mr. Garratt plans to retire from Dollar General effective June 2, 2023. He joined Dollar General in October 2014 as Senior Vice President, Finance & Strategy, and subsequently served as Interim Chief Financial Officer from July 2015 to December 2015. Prior2015, and as Executive Vice President and Chief Financial Officer from December 2015 to joining Dollar General,September 2022. Mr. Garratt previously held various positions of increasing responsibility in corporate strategy and financial planning with Yum! Brands, Inc., one of the world’s largest restaurant companies, between May 2004 and October 2014, holding leadership positions in corporate strategy and financial planning. He served asincluding Vice President, Finance and Division Controller for the KFC division and earlier for the Pizza Hut division and for Yum Restaurants International between(October 2013 to October 2013 and October 2014. He also served as the2014); Senior Director, Yum Corporate Strategy from March(March 2010 to October 2013,2013), reporting directly to the corporate Chief Financial Officer and leading corporate strategy as well as driving key cross-divisional initiatives. Mr. Garratt served ininitiatives; and various other financial positions at Yum from May 2004 to March 2010.positions. He served as Plant Controller for Alcoa Inc. between April 2002 and May 2004, andpreviously held various financial management positions at Alcoa Inc. (April 2002 to May 2004) and General Electric from March(March 1999 to April 2002. He began2002), after beginning his career with Alcoa in May 1990 at Alcoa, where he served for approximately nine years.
1990. Mr. Owenreturned to Dollar General in June 2015 as Executive Vice President of Store Operations, with over 21 years of previous employment experience with the Company. Prior to his departure from Dollar General in July 2014, he was Senior Vice President, Store Operations. Prior to August 2011, Mr. Owen served as Vice President, Division Manager. From November 2006 to March 2007, he served as Retail Division Manager. Prior to November 2006, he was Senior Director, Operations Process Improvement. Mr. Owen served the Company in various operations roles of increasing importance and responsibility from December 1992 to September 2004. Mr. OwenGarratt has served as a director of Kirkland’sHumana Inc. since March 2015.February 2020.
Mr. RavenerMs. Reardonhas served as Executive Vice President and Chief People Officer since August 2020. She joined Dollar General as Director, Human Resources in September 2009 and was promoted to Vice President, Talent Management in October 2012. She became Vice President, Retail Human Resources in October 2014 and was promoted to Senior Vice President, Human Resources in March 2019 and to Senior Vice President and Chief People Officer in August 2008. He was promoted to Executive Vice President in March 2010.May 2019. Prior to joining Dollar General, he servedMs. Reardon held several positions of increasing responsibility at Centex from August 2005 until September 2009, serving as Director of Human Resources from October 2007 until September 2009. Since beginning her career in
20
human resources executive May 1998, Ms. Reardon also held various roles with StarbucksCarrier Corporation, a roaster, marketer and retailerincluding Manager of specialty coffee,Human Resources from September 2005August 2003 until August 20082005, and was also a Career Consultant at the Darden Graduate School of Business Administration, University of Virginia, from August 2001 until August 2003.
Mr. Sunderland has served as theExecutive Vice President, Store Operations, since August 2019. He joined Dollar General as Senior Vice President, of U.S. Partner Resources and, prior to that,Store Operations, in September 2014. Mr. Sunderland previously served as the Vice President, Partner Resources—Eastern Division. As the Senior Vice President, Retail Operations, of U.S. Partner Resources at Starbucks,Office Depot, Inc. (November 2013 to January 2014); Senior Vice President, Retail Operations, of OfficeMax Incorporated (May 2012 to November 2013); Chief Operating Officer of Bally Total Fitness Holding Corporation (2011 to April 2012); and World Kitchen, LLC’s President of Retail (2009 to 2011). Mr. Ravener oversaw all aspectsSunderland began his career with Sears in 1987, holding various positions of human resources activity for more than 10,000 stores. Prior to serving at Starbucks, Mr. Ravener heldincreasing responsibility, including Vice President of Human Resources rolesStrategic Operations for The Home Depot Inc., a home improvement retailer, at its Store Support Center and a domestic field divisionSears Holdings Corporation from April 2003 to September 2005. Mr. Ravener also served in executive roles in both human resources and operations at Footstar, Inc. and roles of increasing leadership at PepsiCo, Inc.2007 until 2009.
Mr. ReiserMs. E. Taylorhas served as Executive Vice President and Chief Merchandising Officer since July 12, 2017. Prior thereto, he served as the Executive Vice PresidentSeptember 2020. She joined Dollar General in 1998 and Chief Operating Officerheld roles of Vitamin Shoppe, Inc., a multi-channel specialty retailerincreasing responsibility in investor relations, financial planning and contract manufacturer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products, from July 2016 to June 2017, where he was responsible for leading merchandising, operations, end-to-end supply chain, information technology, real estate and construction,analysis, merchandise planning, pricing and merchandising operations. He also previouslyoperations prior to her promotion to Vice President, Pricing & Merchandise Data Optimization in March 2011. She served as Executive Vice President, Chief Merchandising Officer from January 2014Operations (March 2012 to June 2016April 2014) and was subsequently promoted to Senior Vice President, General Merchandise Manager in April 2014. She most recently served as Senior Vice President, Hardlines Merchandising from July 2013Channel Innovation (September 2019 to January 2014, for Dollar Tree, Inc. (successor to Family Dollar Stores, Inc.)September 2020). Prior to his employment with Family Dollar, Mr. Reiser was employed by Walmart Stores, Inc. for 17 years in a variety of roles, including Vice President, Merchandising, Health & Family Care of Sam’s Club from November 2010 to June 2013; Vice President, Operations & Compliance, Health & Wellness of Sam’s Club from May 2010 to November 2010; Divisional Merchandise Manager, Wellness, from May 2009 to May 2010; Senior Buyer Pharmacy/OTC of Sam’s Club from November 2006 to May 2009; Director, Government Relations and Regulatory Affairs from August 2002 to November 2006; Pharmacy District Manager from August 2000 to August 2002; and Pharmacy Manager from October 1995 to August 2000.
Ms. R. Taylorhas served as Executive Vice President and General Counsel since March 2015. She joined Dollar General as an Employment Attorney in March 2000 and was subsequently promoted to Senior Employment Attorney in 2001, Deputy General Counsel in 2004, Vice President and Assistant General Counsel in March 2010, and Senior Vice President and General Counsel in June 2013. Prior to joining Dollar General, she practiced law
23
with Ogletree, Deakins, Nash, Smoak & Stewart, P.C., where she specialized inher practice was focused on labor law and employment litigation. She has also held attorney positions with Ford & Harrison LLP and Stokes Bartholomew.LLP.
Mr. Wenkoffhas served as Executive Vice President and Chief Information Officer since July 10, 2017. Prior thereto, heHe previously served as the Chief Information Officer (May 2012 –to June 2017) and Chief Digital Officer (June 2016 –to June 2017) of Franchise World Headquarters, LLC (“Subway”), a restaurant chain, where he was responsible for global technology and digital strategy, execution and operations for the Subway brand and all of its restaurants. He also owned a Subway franchise in Southport, Connecticut from July 2015 until October 2017. Prior to joining Subway, heHe also previously served as the Chairman of the Board and Co-President of Retail Gift Card Association a member organization of diverse, closed loop gift card retailers committed to promoting and protecting the use of gift cards, from February(February 2008 to May 2012. He also served as the2012); Deputy Chief Information Officer for Independent Purchase Cooperative, Inc., an independent Subway franchisee-owned and operated purchasing and services cooperative, from May (May 2005 to May 2012,2012) and as President of its subsidiary, Value Pay Services LLC from May(May 2005 to February 2011. He was the2011); founder and President of Stored Value Management, Inc., an independently owned program and consulting company, from January (January 2004 to May 20052005); and the Vice President, Operations and Finance, as well asand General Counsel of Ontain Corporation a technology company focused on providing turn-key retail merchant solutions, from January(January 2000 to December 2004.2004). Mr. Wenkoff began his career in 1993 as an articled student, and then attorney with Douglas Symes & Brissenden and served in various legal positions, including General Counsel, with Pivotal Corporation from 1997 to 2000.
Mr. Zuazo has served as Executive Vice President, Global Supply Chain since April 2021. He joined Dollar General as Senior Director, Inventory and Planning Systems in May 2010, became Vice President, Inventory and Demand Management in February 2013, and was promoted to Senior Vice President, Inventory and Transportation in August 2018. Prior to joining Dollar General, Mr. Zuazo served as Director of Pricing Strategy for Dreyer’s Grand Ice Cream from January 2009 to May 2010 and Director of Procurement for Longs Drug Stores Corporation from January 2006 to December 2008, and prior thereto, held various roles of increasing responsibility with Safeway Inc., primarily in its corporate business processes department, from August 1998 to December 2005. Mr. Zuazo began his career in January 1988 with Lucky Stores and served as a pricing analyst for its Northern California division from October 1995 to August 1998.
Ms. Elliott has served as Senior Vice President and Chief Accounting Officer since December 2015. She joined Dollar General as Senior Vice President and Controller in August 2005. Prior to joining Dollar General, she served as Vice President and Controller of Big Lots, Inc., a closeout retailer, from May 2001 to August 2005, where she was responsible for accounting operations, financial reporting and internal audit. Prior to serving at Big
21
Lots, she served as Vice President and Controller for Jitney-Jungle Stores of America, Inc., a grocery retailer, from April 1998 to March 2001. At Jitney-Jungle, Ms. Elliott2001, where she was responsible for the accounting operations and the internal and external financial reporting functions. Prior to serving at Jitney-Jungle, she practiced public accounting for 12 years, 6 of which were with Ernst & Young LLP.
Mr. Kindyjoined Dollar General as Vice President, Distribution Centers in December 2008. He became Vice President, Transportation in May 2013 and was promoted to Senior Vice President, Global Supply Chain in June 2015. Prior to joining Dollar General, Mr. Kindy had 14 years of grocery distribution management and 5 years of logistics and distribution consulting experience. He served as Senior Director, Warehouse Operations, for ConAgra Foods, one of North America’s largest packaged food companies, from November 2007 to December 2008. Since beginning his career in July 1989, Mr. Kindy also held various distribution and warehouse leadership positions at Safeway, Inc., Crum & Crum Logistics, and Specialized Distribution Management, Inc., and served as a principal consultant for PricewaterhouseCoopers.
22
24
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange under the symbol “DG.” The high and low sales prices during each quarter in fiscal 2017 and 2016 were as follows:
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| First |
| Second |
| Third |
| Fourth |
| ||||
2017 |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
High |
| $ | 79.35 |
| $ | 79.28 |
| $ | 85.07 |
| $ | 105.82 |
|
Low |
| $ | 67.94 |
| $ | 65.97 |
| $ | 70.30 |
| $ | 79.79 |
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|
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
2016 |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
High |
| $ | 87.42 |
| $ | 96.88 |
| $ | 94.75 |
| $ | 80.67 |
|
Low |
| $ | 67.90 |
| $ | 78.91 |
| $ | 66.50 |
| $ | 68.04 |
|
On March 16, 2018, our stock price at the close of the market was $95.43 and22, 2023, there were approximately 2,3832,747 shareholders of record of our common stock.
Dividends
On March 14, 2018,We have paid quarterly cash dividends since 2015. Our Board of Directors most recently increased the amount of the quarterly cash dividend from $0.55 to $0.59 beginning with the dividend payable on April 25, 2023. While our Board of Directors declared a quarterly cash dividend of $0.29 per share, which is payable on or before April 24, 2018 to shareholders of record of our common stock on April 10, 2018. We paid quarterly cash dividends of $0.26 per share in 2017 and $0.25 per share in 2016. Prior to March 2015, we had not declared or paid recurring dividends since March 2007. Although the Board currently expects to continue regular quarterly cash dividends, the declaration and amount of future cash dividends are subject to the Board’s sole discretion and will depend upon, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Board may deem relevant in its sole discretion.
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of our common stock made during the quarter ended February 2, 20183, 2023 by or on behalf of Dollar General or any “affiliated purchaser,” as defined by Rule 10b‑18(a)10b-18(a)(3) of the Securities Exchange Act of 1934:
| | | | | | | | | | | |
|
| |
| | |
| Total Number |
| Approximate |
| |
| | | | | | | of Shares | | Dollar Value |
| |
| | | | | | | Purchased | | of Shares that May |
| |
| | Total Number | | Average | | as Part of Publicly | | Yet Be Purchased |
| ||
| | of Shares | | Price Paid | | Announced Plans | | Under the Plans |
| ||
Period | | Purchased | | per Share | | or Programs(a) | | or Programs(a) |
| ||
10/29/22-11/30/22 |
| — | | $ | — |
| — | | $ | 2,487,795,000 | |
12/01/22-12/31/22 |
| 3,200,346 | | $ | 245.64 |
| 3,200,346 | | $ | 1,701,653,000 | |
01/01/23-02/03/23 |
| 1,301,273 | | $ | 245.93 |
| 1,301,273 | | $ | 1,381,631,000 | |
Total |
| 4,501,619 | | $ | 245.73 |
| 4,501,619 | | $ | 1,381,631,000 | |
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|
|
| Total Number |
| Approximate |
| |
|
|
|
|
|
|
| of Shares |
| Dollar Value |
| |
|
|
|
|
|
|
| Purchased |
| of Shares that May |
| |
|
| Total Number |
| Average |
| as Part of Publicly |
| Yet Be Purchased |
| ||
|
| of Shares |
| Price Paid |
| Announced Plans or |
| Under the Plans |
| ||
Period |
| Purchased |
| per Share |
| Programs(a) |
| or Programs(a) |
| ||
11/04/17-11/30/17 |
| — |
| $ | — |
| — |
| $ | 634,594,000 |
|
12/01/17-12/31/17 |
| 2,056,411 |
| $ | 92.38 |
| 2,056,411 |
| $ | 444,616,000 |
|
01/01/18-02/02/18 |
| 954,934 |
| $ | 95.29 |
| 954,934 |
| $ | 353,617,000 |
|
Total |
| 3,011,345 |
| $ | 93.31 |
| 3,011,345 |
| $ | 353,617,000 |
|
| (a) |
| On September 5, 2012, the Company announced a program permitting the Company to repurchase a portion of its outstanding shares not to exceed a dollar maximum established by the Company’s Board of Directors. The program was most recently amended on |
23
ITEM 6. SELECTED FINANCIAL DATARESERVED
The following table sets forth selected consolidated financial and operating information of Dollar General Corporation as of the dates and for the periods indicated. The selected historical statement of income data and statement of cash flows data for the fiscal years ended February 2, 2018, February 3, 2017, and January 29, 2016, and balance sheet data as of February 2, 2018 and February 3, 2017, have been derived from our historical audited consolidated financial statements included elsewhere in this report. The selected historical statement of income data and statement of cash flows data for the fiscal years ended January 30, 2015 and January 31, 2014 and balance sheet data as of January 29, 2016, January 30, 2015, and January 31, 2014 presented in this table have been derived from audited consolidated financial statements not included in this report.Not applicable.
The information set forth below should be read in conjunction with, and is qualified by reference to, the Consolidated Financial Statements and related notes included in Part II, Item 8 of this report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II,
24
Item 7 of this report. Certain financial disclosures relating to prior periods have been reclassified to conform to the current year presentation.
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(Amounts in millions, excluding per share data, |
| Year Ended |
| |||||||||||||
number of stores, selling square feet, and net sales |
| February 2, |
| February 3, |
| January 29, |
| January 30, |
| January 31, |
| |||||
per square foot) |
| 2018 |
| 2017(1) |
| 2016 |
| 2015 |
| 2014 |
| |||||
Statement of Income Data: |
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|
|
Net sales |
| $ | 23,471.0 |
| $ | 21,986.6 |
| $ | 20,368.6 |
| $ | 18,909.6 |
| $ | 17,504.2 |
|
Cost of goods sold |
|
| 16,249.6 |
|
| 15,204.0 |
|
| 14,062.5 |
|
| 13,107.1 |
|
| 12,068.4 |
|
Gross profit |
|
| 7,221.4 |
|
| 6,782.6 |
|
| 6,306.1 |
|
| 5,802.5 |
|
| 5,435.7 |
|
Selling, general and administrative expenses |
|
| 5,213.5 |
|
| 4,719.2 |
|
| 4,365.8 |
|
| 4,033.4 |
|
| 3,699.6 |
|
Operating profit |
|
| 2,007.8 |
|
| 2,063.4 |
|
| 1,940.3 |
|
| 1,769.1 |
|
| 1,736.2 |
|
Interest expense |
|
| 97.0 |
|
| 97.8 |
|
| 86.9 |
|
| 88.2 |
|
| 89.0 |
|
Other (income) expense |
|
| 3.5 |
|
| — |
|
| 0.3 |
|
| — |
|
| 18.9 |
|
Income before income taxes |
|
| 1,907.3 |
|
| 1,965.6 |
|
| 1,853.0 |
|
| 1,680.9 |
|
| 1,628.3 |
|
Income tax expense |
|
| 368.3 |
|
| 714.5 |
|
| 687.9 |
|
| 615.5 |
|
| 603.2 |
|
Net income |
| $ | 1,539.0 |
| $ | 1,251.1 |
| $ | 1,165.1 |
| $ | 1,065.3 |
| $ | 1,025.1 |
|
Earnings per share—basic |
| $ | 5.64 |
| $ | 4.45 |
| $ | 3.96 |
| $ | 3.50 |
| $ | 3.17 |
|
Earnings per share—diluted |
|
| 5.63 |
|
| 4.43 |
|
| 3.95 |
|
| 3.49 |
|
| 3.17 |
|
Dividends per share |
|
| 1.04 |
|
| 1.00 |
|
| 0.88 |
|
| — |
|
| — |
|
Statement of Cash Flows Data: |
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Net cash provided by (used in): |
|
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|
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|
|
|
|
|
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|
|
Operating activities |
| $ | 1,802.1 |
| $ | 1,605.0 |
| $ | 1,391.7 |
| $ | 1,326.9 |
| $ | 1,244.1 |
|
Investing activities |
|
| (645.0) |
|
| (550.9) |
|
| (503.4) |
|
| (371.7) |
|
| (250.0) |
|
Financing activities |
|
| (1,077.6) |
|
| (1,024.1) |
|
| (1,310.2) |
|
| (880.9) |
|
| (629.3) |
|
Total capital expenditures |
|
| (646.5) |
|
| (560.3) |
|
| (504.8) |
|
| (374.0) |
|
| (538.4) |
|
Other Financial and Operating Data: |
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|
Same store sales growth(2) |
|
| 2.7 | % |
| 0.9 | % |
| 2.8 | % |
| 2.8 | % |
| 3.3 | % |
Same store sales(2) |
| $ | 21,871.6 |
| $ | 20,348.1 |
| $ | 19,254.3 |
| $ | 17,818.7 |
| $ | 16,365.5 |
|
Number of stores included in same store sales calculation |
|
| 13,150 |
|
| 12,383 |
|
| 11,706 |
|
| 11,052 |
|
| 10,387 |
|
Number of stores (at period end) |
|
| 14,534 |
|
| 13,320 |
|
| 12,483 |
|
| 11,789 |
|
| 11,132 |
|
Selling square feet (in thousands at period end) |
|
| 107,821 |
|
| 98,943 |
|
| 92,477 |
|
| 87,205 |
|
| 82,012 |
|
Net sales per square foot(3) |
| $ | 227 |
| $ | 229 |
| $ | 226 |
| $ | 223 |
| $ | 220 |
|
Consumables sales |
|
| 76.9 | % |
| 76.4 | % |
| 75.9 | % |
| 75.7 | % |
| 75.2 | % |
Seasonal sales |
|
| 12.1 | % |
| 12.2 | % |
| 12.4 | % |
| 12.4 | % |
| 12.9 | % |
Home products sales |
|
| 6.0 | % |
| 6.2 | % |
| 6.3 | % |
| 6.4 | % |
| 6.4 | % |
Apparel sales |
|
| 5.0 | % |
| 5.2 | % |
| 5.4 | % |
| 5.5 | % |
| 5.5 | % |
Rent expense |
| $ | 1,081.5 |
| $ | 942.4 |
| $ | 856.9 |
| $ | 785.2 |
| $ | 686.9 |
|
Balance Sheet Data (at period end): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments |
| $ | 267.4 |
| $ | 187.9 |
| $ | 157.9 |
| $ | 579.8 |
| $ | 505.6 |
|
Total assets |
|
| 12,516.9 |
|
| 11,672.3 |
|
| 11,257.9 |
|
| 11,208.6 |
|
| 10,848.2 |
|
Long-term debt(4) |
|
| 3,006.0 |
|
| 3,211.5 |
|
| 2,970.6 |
|
| 2,725.1 |
|
| 2,799.5 |
|
Total shareholders’ equity |
|
| 6,125.8 |
|
| 5,406.3 |
|
| 5,377.9 |
|
| 5,710.0 |
|
| 5,402.2 |
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|
|
| Year Ended |
| ||||||||
|
| February 2, |
| February 3, |
| January 29, |
| January 30, |
| January 31, |
|
|
| 2018 |
| 2017(1) |
| 2016 |
| 2015 |
| 2014 |
|
Ratio of earnings to fixed charges(2): |
| 3.9 | x | 4.3 | x | 4.5 | x | 4.4 | x | 4.7 | x |
|
|
|
|
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and the notes thereto. It also should be read in conjunction with the Cautionary Disclosure Regarding Forward‑LookingForward-Looking Statements and the Risk Factors disclosures set forth in the Introduction and in Item 1A of this report, respectively.
Executive Overview
We are among the largest discount retailersretailer in the United States by number of stores, with 14,60919,147 stores located in 4447 U.S. states and Mexico as of March 2, 2018,3, 2023, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States. Our first store in Mexico opened in February of 2023. We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.
Because the customers we serve are value-conscious, many with low or fixed incomes, we are intensely focused on helping them make the most of their spending dollars. We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years and through a variety of macroeconomic environments. Like other retailers,economic cycles. We are mindful that the majority of our customers are value-conscious, and many have low and/or fixed incomes. As a result, we have been operating for several years in an environment with ongoing macroeconomic challenges and uncertainties.are intensely focused on helping our customers make the most of their spending dollars. Our core customers are often among the first to be affected by negative or uncertain economic conditions and are among the last to feel the effects of improving economic conditions, particularly when as in the recent past, trends are inconsistent and their duration unknown.of an uncertain duration. The primary macroeconomic factors that affect our core customers include the unemployment rate, theand underemployment rate,rates, wage growth, fuel prices,changes in U.S. and global trade policy, and changes to certain government assistance programs (including cost of living adjustments), such as the Supplemental Nutrition Assistance Program.Program (“SNAP”), unemployment benefits, and economic stimulus payments. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget,budgets, such as rent, healthcare, energy and healthcare. We believe that at various times the overall effect of the factors listed above has negatively affected our customer traffic and could do so in the future.
During 2017, we continued to make progress on certain strategic initiatives to pursue long-term growth opportunities. Such opportunities include leveraging existing and developing additional digital tools and technology to provide our customers with additional shopping access points and even greater convenience,fuel prices, as well as an in-depth analysis of and refreshed approachcost inflation in frequently purchased household products (including food), such as that which we have continued to our non-consumables product offerings. These growth initiatives will be ongoing priorities in 2018, while ensuringexperience as further discussed below. Finally, significant unseasonable or unusual weather patterns or extreme weather, such as that we maintain our brand heritage and build upon our organizational capabilities. discussed below, can impact customer shopping behaviors.
We remain committed to the followingour long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus:focus. These priorities include: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.diverse teams through development, empowerment and inclusion.
We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount, as well as an ongoing focusamount. As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our gross margins while maintaining both everyday low pricethrough pricing and affordability.markdown optimization, effective category management, distribution and transportation efficiencies, private brands penetration, global sourcing, and inventory shrink and damage reduction initiatives. Several of our strategic and other sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.
During the second half of 2022, we experienced higher inventory damages and shrink than we anticipated. We believe these increases are due to multiple factors, including the challenging macroeconomic environment, materially higher inventory levels, and, as to damages, Winter Storm Elliott in December. In addition, we believe some portion of the increase in damages is a residual impact of the warehouse capacity constraints and associated store and supply chain inefficiencies we faced, which are discussed in more detail below. While we anticipate shrink and damages may continue to pressure our results through the first half of 2023, we believe we are taking actions that we believe will reduce the impact of these challenges to our business as we move throughout the year.
26
Historically, sales in our sales of consumables category, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales ofin our non-consumables categories, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. In addition, throughout 2017,Prior to 2020, our sales mix had continued to shift slightly toward consumables, and, within consumables, slightly
27
toward lower margin departments such as perishablesperishables. This trend did not occur in 2020 or the first quarter of 2021, as we saw a significant increase in demand in many non-consumable products, including home, seasonal and tobacco.apparel, resulting in an overall significant mix shift into non-consumable categories during those periods. Beginning in the second quarter of 2021 and continuing thereafter, we began to see reversion toward the historical mix trends. We continue to expect sales mix challenges to persist as the trendsmix trend reversion toward consumables returned to pre-pandemic levels in the fourth quarter of consumables,2021 and lower margin consumables, comprising an increasingly larger percentagehas exceeded pre-pandemic levels since the first quarter of our sales than non-consumables to continue throughout at least the beginning of 2018. Certain2022. Several of our initiatives, including certain of those related to the non-consumables categories,discussed below, are intended to address these trends, althoughmix challenges; however, there can be no assurance weassurances that these efforts will be successfulsuccessful.
In 2022, we saw continued growth in their reversal.average transaction amount, which was driven primarily by inflation, and we believe, to a lesser degree, our merchandising efforts. In the second and third quarters of 2022, we experienced a slight to modest increase in customer traffic, respectively. In addition, although we believe our sales growth in the first half of 2022 was negatively impacted by the global and domestic supply chain challenges and disruptions discussed further below, primarily in the form of lower merchandise in-stock levels in our stores, we have seen some improvement in our in-stock levels and in the global supply chain environment. However, in the second half of 2022, we experienced what we believe to be temporary warehouse capacity constraints and inefficiencies within our internal supply chain, including unanticipated temporary delays in opening or securing additional storage facilities, all of which is discussed further below.
We continue to implement and invest in certain strategic initiatives that we believe same-storewill help drive profitable sales growth with both new and existing customers and capture long-term growth opportunities. Such opportunities include providing our customers with additional shopping access points and even greater convenience by leveraging and developing digital tools and technology, such as our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience. Additionally, we launched a partnership with a third party delivery service during 2021, which is keynow available in the majority of our stores, and we continue to achievinggrow our financial objectives. Accordingly,DG Media Network, which is our initiativesplatform for connecting brand partners with our customers to drive even greater value for each.
Further, our non-consumables initiative, which offers a new, differentiated and limited assortment that will change throughout the year, continues to contribute to improved overall sales and gross margin performance in stores where it has been deployed. We have completed the rollout in the vast majority of our Dollar General stores.
Additionally, we are continuing to grow the footprint of pOpshelf, a unique retail concept that incorporates certain of the lessons learned from the non-consumables initiative in a differentiated format that is focused on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods. At the end of fiscal 2022, we operated 140 standalone pOpshelf locations and 40 pOpshelf store-within-a-store concepts within existing Dollar General Market stores. We believe this concept represents a significant growth opportunity and are targeting nearly 300 standalone pOpshelf stores by the end of fiscal 2023, and approximately 1,000 stores by the end of fiscal 2025.
Our “DG Fresh” initiative, a self-distribution model for frozen and refrigerated products that is designed to increase customer traffic and average transaction amounts. We made significant progress in 2017 on many of these initiatives, which included the continued expansion of coolers, the rollout of additional strategies across many of our merchandise departments, including a redesign of our Health and Beauty department to drive furtherreduce product awareness and market share, a continued focus on improvingcosts, enhance item assortment, improve our in-stock position, and enhance sales, has positively contributed to our sales performance since we completed the additioninitial rollout in the second quarter of a queue line containing items intended to drive impulse2021, driven by higher in-stock levels and the introduction of new products in select stores. DG Fresh now wholly or partially serves essentially all stores across the chain and has benefitted gross profit through improved initial markups on inventory purchases, in a portion of our existing store base. In 2018,which were partially offset by increased distribution and transportation costs. Moving forward, we plan to continue expanding the cooler count, as well as to launch a second phasefocus on additional optimization of the Healthdistribution footprint and Beauty initiative. Additionally, we planproduct assortment within DG Fresh to implementfurther drive profitable sales growth.
27
We also have a redesignhealth initiative, branded as “DG Well Being”, with the goal of the snackincreasing access to basic healthcare products, and beverage aisle to enhance customer awareness,ultimately services over time, particularly in immediate consumption items. We also plan to test anrural communities. The initial focus of this initiative is a significantly expanded health product assortment of “better-for-you” food choices across a select group of stores. In non-consumables, the planned introduction of new and expanded product classes will provide increased opportunities for our customers to take advantage of our value and convenience offering. Many of these initiatives support our plans to continue investingin certain stores, primarily those in our existing store base, with a goal to drive increased customer traffic and average transaction amount and, as a result, our same-store sales.larger formats.
We demonstrate our commitment to the affordability needs of our core customer as more than 80% of our stock-keeping units were priced at $5 or less at the end of 2017. Even as we work to provide everyday low prices and meet our customers’ affordability needs, we also remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing and pricing and markdown optimization. With respect to category management, we strive to maintain an appropriate mix of consumables and non-consumables sales because, as noted above, the mix of sales affects profitability due to the varying gross margins between, and even within, the consumables and non-consumables categories. We believe expanded and improved private brand offerings in 2018 will provide increased value offerings for our customers in addition to improving the profitability of certain product categories. To support our efforts to reduce inventory shrink, in 2018 we expect to continue to implement in-store defensive merchandising and technology-based tools, including a significant increase in the number of stores utilizing Electronic Article Surveillance (“EAS”), as the results from stores in which EAS has been implemented suggest these measures help reduce shrink and improve our in-stock position. Increasing carrier and fuel rates pressured our overall gross margin in the latter half of 2017, and we anticipate that these negative impacts will continue into and throughout 2018. However, we continue to seek to reduce our stem miles and optimize shipment loads to improve distribution and transportation efficiencies.
To support our other operating priorities, we remain focused on capturing growth opportunities. In 2017,fiscal 2022, we opened 1,315a total of 1,039 new stores, along with remodeling or relocating 764remodeled 1,795 stores, and relocated 127 stores. For 2018,In fiscal 2023, we plan to open approximately 9001,050 new stores in the United States (including any pOpshelf stores), remodel approximately 1,000 mature store locations,2,000 stores, and relocate approximately 100120 stores, for an approximatea total of 2,0003,170 real estate projects. We opened our first store in Mexico in the first quarter of fiscal 2023. Our goal is to operate approximately 20 stores in Mexico by the end of 2023, all of which would be incremental to our planned 1,050 new store openings.
We continue to innovate within our channel and are able to utilize the most productive of our various Dollar General store formats based on the specific market opportunity. We expect thatstore format innovation to allow us to capture additional growth opportunities within our existing markets. We are now using two larger format stores (approximately 8,500 square feet and 9,500 square feet, respectively), and expect the 8,500 square foot format, along with our existing Dollar General Plus format of a similar size, to continue as our base prototypes for the majority of new stores, replacing our traditional 7,300 square foot store format will continue to beand higher-cooler count Dollar General Traditional Plus format. The larger formats allow for expanded high-capacity-cooler counts; an extended queue line; and a broader product assortment, including the primary store layout for new stores, relocationsnon-consumable initiative, a larger health and remodelsbeauty section, and produce in 2018. We expect a significant number of the planned 1,000 remodels in 2018 to include a greater cooler count for increased selection of perishable items. In addition, our smaller format store (less than 6,000 square feet) allows us to capture growth opportunities in metropolitan areas as well as in rural areas with a low number of households.select stores. We continue to incorporate into our existing store base lessons learned from our various store formats and layouts into our existing store base. These lessons contribute to innovation in developing new formats, with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.
28
To support our new store growth and drive productivity, we continue to make investments in our distribution center network. Our fifteenth distribution center in Jackson, Georgia began shipping in October 2017. We began construction on our sixteenth and seventeenth distribution centers in Longview, Texas and Amsterdam, New York, respectively, in 2017 to continue to support our growth. We expect both of these distribution centers to open in 2019.
We have established a position as a low-cost operator, continuouslyalways seeking ways to reduce or control costs that do not affect our customers’ shopping experience.experiences. We plan to continue enhancing this position over time as we aim to continually streamline our business while also employing ongoing cost discipline to reduce certain expenses as a percentage of sales. AlthoughNonetheless, we didseek to maintain flexibility to invest in the business as necessary to enhance our long-term competitiveness and profitability.
We are continuing to deploy “Fast Track,” an initiative aimed at further enhancing our convenience proposition and in-stock position as well as creating labor efficiencies within our stores. The completed portion of the first phase of Fast Track involved sorting process optimization within our non-refrigerated distribution centers, as well as increased shelf-ready packaging, to allow for greater store-level stocking efficiencies, while the current focus involves adding a self-checkout option, which we now have in the majority of our stores. These and the other strategic initiatives discussed above have required and will require us to incur upfront expenses for which there may not leverage Selling, General & Administrative (“SG&A”)be an immediate return in terms of sales or enhanced profitability.
To further optimize our cost structure and facilitate greater operational control within our supply chain, we more-than-doubled the size of our private tractor fleet in 2022 to more than 1,600 tractors. We plan to continue expanding the size of our fleet to drive additional savings, and our goal is to have more than 2,000 tractors in the fleet by the end of fiscal 2023.
Certain of our operating expenses, in 2017, as discussed in more detail below, it was largely because of specific planned investments such as wage rates and occupancy costs, have continued to increase in recent years, due primarily to market forces, including labor availability, increases in minimum wage rates and increases in property rents. Further federal, state and/or local minimum wage increases could have a material negative impact on our operating expenses, although the magnitude and timing of such impact is uncertain. In 2023, we plan to make an investment of approximately $100 million to further enhance our store manager paystandards and training,compliance efforts as well as the customer and associate experience in our stores, primarily through incremental labor hours. We believe these investments will also elevate consistency of experience in our stores, and amplify the potential of our strategic initiatives, while driving greater on-shelf availability and market share gains.
In addition, we have experienced challenges such as increased store openingscosts and disruptions in our business as a result of various global events, including the COVID-19 pandemic and its associated impacts. Such challenges include incremental transportation, distribution, and payroll costs, as well as supply chain disruptions. While we have begun to see some improvement in the overall global supply chain environment, we experienced some
28
unanticipated delays in acquiring additional temporary warehouse space sufficient for our inventory needs, which caused delays and inefficiencies within our internal supply chain in the second half of fiscal 2022. These challenges resulted in materially higher than anticipated supply chain costs, including detention fees incurred for delays in returning shipping containers and higher temporary storage and transportation costs and labor. We have made significant progress in acquiring additional temporary and permanent warehouse capacity and plan to add a significant amount of additional warehouse capacity in fiscal 2023. We believe these additional facilities will support greater efficiencies throughout our supply chain.
In addition, while we believe the year, bothgrowth rate of inflation is beginning to moderate, we expect continued inflationary pressures in the near term due to higher input costs and that higher energy and fuel prices will continue to affect us as well as our vendors and customers, resulting in higher commodity, transportation and other costs, including product costs, all of which willmay result in continued pressure SG&A comparisons into our operating results. To the first half of 2018.
In 2017, we installed LED lightingextent that these inflationary pressures result in a significant numberrecessionary environment, we may experience adverse effects on our business, results of stores, which reduces utilitiesoperations and maintenancecash flows. Certain of our initiatives and plans are intended to help offset these inflation-driven challenges; however, they are somewhat dependent on the scale and timing of any increased costs, acrossamong other factors. There can be no assurance that our store base in addition to fostering a more customer and environmentally friendly shopping experience. We anticipate the remaining stores in the chain that are eligible for our LED lighting programmitigation efforts will be completedsuccessful. Moreover, recent increases in 2018. Over the long term, we believe actions such as these will supportmarket interest rates have had a negative impact on our goalinterest expense, both with respect to issuances of leveraging SG&A expenses at a lower same store sales growth percentage. In addition, we remain committed to simplifying or eliminating store-level taskscommercial paper notes and processes so that those time savings can be reinvested by our store managers and their teams in important areas such as enhanced customer service, higher in-stock levels and improved store standards.other indebtedness.
Our employeesdiverse teams are a competitive advantage, and we are always searching forproactively seek ways to continue investing in them. We invest in our employees in an efforttheir development. Our goal is to create an environment that attracts, develops, and retains talented personnel, as we believe that, particularly at the store manager level, because employees who are promoted from within our company generally have longer tenures and are greater contributors to improvements in our financial performance. Our store managers play an important role in our customer experience and individual store profitability, and beginning in March 2017 we implemented certain investments in compensation and training for this position in the form of increased SG&A expenses that we believe have already contributed to improved customer experience scores, higher sales and improved turnover metrics.
To further enhance shareholder return,returns, we continued to repurchaserepurchased shares of our common stock and paid quarterly cash dividends throughout 2017. In 2018, we intendin 2022, and our Board of Directors recently increased the quarterly cash dividend, beginning with the dividend to be paid on or before April 25, 2023. We expect to continue our share repurchase activity at a significantly greater dollar amount than in 2017, and to pay quarterly cash dividends for the foreseeable future, subject to Board discretion and approval.
OnDuring the fourth quarter of 2022, Winter Storm Elliott significantly impacted our operations during the month of December, 22, 2017,resulting in negative impacts to customer traffic, sales growth and associated gross margin, as well as incremental damages and repairs and maintenance expense.
We utilize key performance indicators (“KPIs”) in the Tax Cutsmanagement of our business. Our KPIs include same-store sales, average sales per square foot, and Jobs Act (the “Act”) was signed into law. Among other impacts,inventory turnover. Same-store sales are calculated based upon our stores that were open at least 13 full fiscal months and remain open at the Act reduces the federal corporate tax rate to 21% from 35% effective January 1, 2018. The Act reduced our effective tax rate in 2017 primarily as a resultend of the one-time remeasurement ofreporting period. We include stores that have been remodeled, expanded or relocated in our same-store sales calculation. Changes in same-store sales are calculated based on the federal portion of our deferred tax assets and liabilities to a lower rate, accompanied by a reductioncomparable 52 calendar weeks in the current year federal corporate tax rateand prior years. The method of calculating same-store sales varies across the retail industry. As a result, our calculation of same-store sales is not necessarily comparable to 33.7%, due to our fiscal yearsimilarly titled measures reported by other companies. Average sales per square foot is calculated based on total sales for the preceding 12 months as of the ending approximately one month after the effective date of the Act. The Act will have a positive material impactreporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our effective tax ratethree interim fiscal quarters. Each of these measures is commonly used by investors in 2018retail companies to measure the health of the business. We use these measures to maximize profitability and subsequent years.for decisions about the allocation of resources.
29
A continued focus on our four operating priorities as discussed above, coupled with strong cash flow management and share repurchasesother impacts as discussed below, resulted in solidthe following overall operating and financial performance in 20172022 as compared to 2016, as set forth below.2021. Basis points, as referred to below, are equal to 0.01% as a percentage of net sales.
| Net sales in |
29
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| Operating profit increased 3.3% to $3.33 billion in 2022 compared to $3.22 billion in 2021. |
| ● | Interest expense increased by $53.7 million in 2022 primarily due to higher average borrowings and higher interest rates. |
| ● | The |
| We reported net income of |
| We generated approximately |
| Inventory turnover was |
| We repurchased approximately |
Readers should refer to the detailed discussion of our operating results below for additional comments on financial performance in the current year as compared with the prior years presented.
Results of Operations
Accounting Periods. The following text contains references to years 2017, 2016,2022, 2021, and 2015,2020, which represent fiscal years ended February 2, 2018, February 3, 2017,2023, January 28, 2022, and January 29, 2016,2021, respectively. Our fiscal year ends on the Friday closest to January 31. Fiscal year 20162022 was a 53-week accounting period and fiscal years 20172021 and 20152020 were 52-week accounting periods.
Seasonality. The nature of our business is somewhat seasonal. Primarily because of sales of Christmas-related merchandise, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.
30
The following table contains results of operations data for fiscal years 2017, 20162022, 2021 and 2015,2020, and the dollar and percentage variances among those years.
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| | | | | | | | | | | 2022 vs. 2021 |
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(amounts in millions, except |
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| Amount |
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| % |
| Amount |
| % | | ||||
per share amounts) |
| 2017 |
| 2016 |
| 2015 |
| Change |
| Change |
| Change |
| Change |
| | 2022 | | 2021 | | 2020 | | Change | | Change |
| Change | | Change | | ||||||||||
Net sales by category: |
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Consumables |
| $ | 18,054.8 |
| $ | 16,798.9 |
| $ | 15,457.6 |
| $ | 1,255.9 |
| 7.5 | % | $ | 1,341.3 |
| 8.7 | % | | $ | 30,155.2 | | $ | 26,258.6 | | $ | 25,906.7 | | $ | 3,896.6 | | 14.8 | % | $ | 351.9 | | 1.4 | % |
% of net sales |
|
| 76.92 | % |
| 76.41 | % |
| 75.89 | % |
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| |
| 79.68 | % |
| 76.73 | % |
| 76.77 | % | | | | | |
| | | | |
Seasonal |
|
| 2,837.3 |
|
| 2,674.3 |
|
| 2,522.7 |
|
| 163.0 |
| 6.1 |
|
| 151.6 |
| 6.0 |
| |
| 4,182.8 | |
| 4,182.2 | |
| 4,083.7 | |
| 0.6 | | 0.0 | |
| 98.5 | | 2.4 | |
% of net sales |
|
| 12.09 | % |
| 12.16 | % |
| 12.39 | % |
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| |
| 11.05 | % |
| 12.22 | % |
| 12.10 | % | | | | | |
| | | | |
Home products |
|
| 1,400.6 |
|
| 1,373.4 |
|
| 1,289.4 |
|
| 27.2 |
| 2.0 |
|
| 84.0 |
| 6.5 |
| |
| 2,332.4 | |
| 2,322.4 | |
| 2,210.0 | |
| 10.0 | | 0.4 | |
| 112.4 | | 5.1 | |
% of net sales |
|
| 5.97 | % |
| 6.25 | % |
| 6.33 | % |
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| |
| 6.16 | % |
| 6.79 | % |
| 6.55 | % | | | | | |
| | | | |
Apparel |
|
| 1,178.3 |
|
| 1,140.0 |
|
| 1,098.8 |
|
| 38.3 |
| 3.4 |
|
| 41.2 |
| 3.7 |
| |
| 1,174.4 | |
| 1,457.3 | |
| 1,546.6 | |
| (282.9) | | (19.4) | |
| (89.2) | | (5.8) | |
% of net sales |
|
| 5.02 | % |
| 5.18 | % |
| 5.39 | % |
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| 3.10 | % |
| 4.26 | % |
| 4.58 | % | | | | | |
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Net sales |
| $ | 23,471.0 |
| $ | 21,986.6 |
| $ | 20,368.6 |
| $ | 1,484.4 |
| 6.8 | % | $ | 1,618.0 |
| 7.9 | % | | $ | 37,844.9 | | $ | 34,220.4 | | $ | 33,746.8 | | $ | 3,624.4 | | 10.6 | % | $ | 473.6 | | 1.4 | % |
Cost of goods sold |
|
| 16,249.6 |
|
| 15,204.0 |
|
| 14,062.5 |
|
| 1,045.6 |
| 6.9 |
|
| 1,141.5 |
| 8.1 |
| |
| 26,024.8 | |
| 23,407.4 | |
| 23,028.0 | |
| 2,617.3 | | 11.2 | |
| 379.5 | | 1.6 | |
% of net sales |
|
| 69.23 | % |
| 69.15 | % |
| 69.04 | % |
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| 68.77 | % |
| 68.40 | % |
| 68.24 | % | | | | | |
| | | | |
Gross profit |
|
| 7,221.4 |
|
| 6,782.6 |
|
| 6,306.1 |
|
| 438.7 |
| 6.5 |
|
| 476.5 |
| 7.6 |
| |
| 11,820.1 | |
| 10,813.0 | |
| 10,718.9 | |
| 1,007.1 | | 9.3 | |
| 94.1 | | 0.9 | |
% of net sales |
|
| 30.77 | % |
| 30.85 | % |
| 30.96 | % |
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| 31.23 | % |
| 31.60 | % |
| 31.76 | % | | | | | |
| | | | |
Selling, general and administrative expenses |
|
| 5,213.5 |
|
| 4,719.2 |
|
| 4,365.8 |
|
| 494.4 |
| 10.5 |
|
| 353.4 |
| 8.1 |
| |
| 8,491.8 | |
| 7,592.3 | |
| 7,164.1 | |
| 899.5 | | 11.8 | |
| 428.2 | | 6.0 | |
% of net sales |
|
| 22.21 | % |
| 21.46 | % |
| 21.43 | % |
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| |
| 22.44 | % |
| 22.19 | % |
| 21.23 | % | | | | | |
| | | | |
Operating profit |
|
| 2,007.8 |
|
| 2,063.4 |
|
| 1,940.3 |
|
| (55.6) |
| (2.7) |
|
| 123.2 |
| 6.3 |
| |
| 3,328.3 | |
| 3,220.7 | |
| 3,554.8 | |
| 107.6 | | 3.3 | |
| (334.1) | | (9.4) | |
% of net sales |
|
| 8.55 | % |
| 9.39 | % |
| 9.53 | % |
|
|
|
|
|
|
|
|
|
| |
| 8.79 | % |
| 9.41 | % |
| 10.53 | % | | | | | |
| | | | |
Interest expense |
|
| 97.0 |
|
| 97.8 |
|
| 86.9 |
|
| (0.8) |
| (0.8) |
|
| 10.9 |
| 12.5 |
| |
| 211.3 | |
| 157.5 | |
| 150.4 | |
| 53.7 | | 34.1 | |
| 7.1 | | 4.7 | |
% of net sales |
|
| 0.41 | % |
| 0.44 | % |
| 0.43 | % |
|
|
|
|
|
|
|
|
|
| |
| 0.56 | % |
| 0.46 | % |
| 0.45 | % | | | | | |
| | | | |
Other (income) expense |
|
| 3.5 |
|
| — |
|
| 0.3 |
|
| 3.5 |
| — |
|
| (0.3) |
| (100.0) |
| |
| 0.4 | |
| — | |
| — | |
| 0.4 | | — | |
| — | | — | |
% of net sales |
|
| 0.01 | % |
| 0.00 | % |
| 0.00 | % |
|
|
|
|
|
|
|
|
|
| |
| 0.00 | % |
| 0.00 | % |
| 0.00 | % | | | | | |
| | | | |
Income before income taxes |
|
| 1,907.3 |
|
| 1,965.6 |
|
| 1,853.0 |
|
| (58.3) |
| (3.0) |
|
| 112.6 |
| 6.1 |
| |
| 3,116.6 | |
| 3,063.1 | |
| 3,404.4 | |
| 53.5 | | 1.7 | |
| (341.2) | | (10.0) | |
% of net sales |
|
| 8.13 | % |
| 8.94 | % |
| 9.10 | % |
|
|
|
|
|
|
|
|
|
| |
| 8.24 | % |
| 8.95 | % |
| 10.09 | % | | | | | |
| | | | |
Income tax expense |
|
| 368.3 |
|
| 714.5 |
|
| 687.9 |
|
| (346.2) |
| (48.5) |
|
| 26.6 |
| 3.9 |
| |
| 700.6 | |
| 663.9 | |
| 749.3 | |
| 36.7 | | 5.5 | |
| (85.4) | | (11.4) | |
% of net sales |
|
| 1.57 | % |
| 3.25 | % |
| 3.38 | % |
|
|
|
|
|
|
|
|
|
| |
| 1.85 | % |
| 1.94 | % |
| 2.22 | % | | | | | |
| | | | |
Net income |
| $ | 1,539.0 |
| $ | 1,251.1 |
| $ | 1,165.1 |
| $ | 287.8 |
| 23.0 | % | $ | 86.1 |
| 7.4 | % | | $ | 2,416.0 | | $ | 2,399.2 | | $ | 2,655.1 | | $ | 16.8 | | 0.7 | % | $ | (255.8) | | (9.6) | % |
% of net sales |
|
| 6.56 | % |
| 5.69 | % |
| 5.72 | % |
|
|
|
|
|
|
|
|
|
| |
| 6.38 | % |
| 7.01 | % |
| 7.87 | % | | | | | |
| | | | |
Diluted earnings per share |
| $ | 5.63 |
| $ | 4.43 |
| $ | 3.95 |
| $ | 1.20 |
| 27.1 | % | $ | 0.48 |
| 12.2 | % | | $ | 10.68 | | $ | 10.17 | | $ | 10.62 | | $ | 0.51 | | 5.0 | % | $ | (0.45) | | (4.2) | % |
Net Sales. The net sales increase in 2017 reflects a same-store2022 was primarily due to sales increase of 2.7% compared to 2016. Same-stores includefrom new stores, that have been open for at least 13 months and remain open at the end of the reporting period. Changesan increase in same-store sales are calculated based onof 4.3% compared to 2021, partially offset by the comparable calendar weeks in the prior year, and include stores that have been remodeled, expanded or relocated.impact of store closures. In 2017,2022, our 13,15017,886 same-stores accounted for sales of $21.9$35.3 billion. The increase in same-store sales was due to increasesreflects an increase in average transaction amount andwhich was driven by higher average item retail prices as a result of higher inflation, partially offset by a decline in customer traffic relative to 2016.traffic. Same-store sales decreased in 2017 increasedeach of our product categories except consumables, with the largest percentage decrease in the consumables and seasonal categories, and declined in the home products and apparel categories, compared to 2016. Same-store sales results in 2017 for the three non-consumables categories, when aggregated, were positive.category. Net sales for the 53rd week of 20162022 totaled $398.7$678.1 million. The 2017 net sales increase was positively affected by new stores, modestly offset by sales from closed stores.
The net sales increase in 20162021 was primarily due to sales from new stores, partially offset by a decrease in same-store sales of 2.8% compared to 2020 as well as the impact of store closures. In 2021, our 16,954 same-stores accounted for sales of $32.4 billion. The decrease in same-store sales reflects a same-store sales increase of 0.9% compared to 2015, primarily due todecline in customer traffic partially offset by an increase in average transaction amount accompaniedwhich was driven by customer traffic that was essentially unchanged as compared to the prior year. For 2016, there were 12,383 same-stores, which accounted for sales of $20.3 billion.higher average item retail prices. Same-store sales resultsdecreased in 2016 reflect positive results ineach of our product categories, with the consumables and home products categories, partially offset by negative resultslargest percentage decrease in the apparel and seasonal categories, compared to 2015. The remainder of the 2016 net sales increase was attributable to new stores, partially offset by sales from closed stores.category.
31
Of our four major merchandise categories, the consumables category, which generally has a lower gross profit rate than the other three categories, has grown most significantly over the past several years. Because of the impact of sales mix on gross profit, we continually review our merchandise mix and strive to adjust it when appropriate.
Gross Profit. For 2017,In 2022, gross profit increased by 6.5%9.3%, and as a percentage of net sales decreased by 837 basis points to 30.8%31.2% compared to 2016.2021. A greater proportion of sales of consumables,LIFO provision which generally have a lower gross profit rate than our otherwas driven by higher product categories, and sales of lower margin products comprisingcosts, a higher proportion of lower margin consumables sales, reducedand increases in inventory markdowns, damages and shrink each contributed to the decrease in the gross profit rate. Higher markdowns, which were primarily for promotional activities, and increases in transportation costs also reduced the gross profit rate, and theseThese factors were partially offset by higher initialinventory markups on inventory purchases and an improved rateimprovements in transportation costs.
31
For 2016,In 2021, gross profit increased by 7.6%0.9%, and as a percentage of net sales decreased by 1116 basis points to 30.8%31.6% compared to 2015. The2020. Increased transportation costs, a greater LIFO provision which was driven by higher product costs, increased inventory damages and higher distribution costs each contributed to the decrease in the gross profit rate decreaserate. These factors were partially offset by higher inventory markups, a reduction in 2016markdowns as compared to 2015 primarily reflects increased markdowns which were driven by promotional and inventory clearance activity, sales of lower-margin consumables comprising a greater proportionpercentage of net sales, and increaseda lower inventory shrink partially offset by higher initial inventory markupsrate. In 2021, consumables and lower transportation costs. non-consumables sales increased at approximately the same rate when compared to 2020.
SG&A. SG&A as a percentage of net sales was 22.4% in 2022 compared to 22.2% in 2017 compared to 21.5% in 2016,2021, an increase of 7525 basis points. The 2017 results reflect increased retail laborprimary expenses which includes our investment in store manager compensation, increased occupancy costs, andthat were higher incentive compensation, each of which increased at a rate greater than the increase in net sales. Partially offsetting these increased expenses were reduced advertising costs, and costs that increased at a rate less than the increase in net sales, including utilities and waste management costs primarily resulting from our recycling efforts. The 2017 results include costs of $24.0 million related to 35 underperforming stores closed prior to the end of the year, primarily expenses for remaining lease liabilities. The 2017 results also reflect an increase in hurricane and other disaster-related expenses of approximately $18.0 million compared to 2016. SG&A as a percentage of sales was favorably impacted in 2016 by increased sales including the 53rd week discussed above, among other factors.
SG&A was 21.5% as a percentage of net sales in 2016, increasing by 3 basis points over 2015. The 2016 results reflect increases in2022 were utilities, retail labor, costs, which increased atand repairs and maintenance, partially offset by incentive compensation expenses and store occupancy costs.
SG&A as a rate greater than the increase inpercentage of net sales was 22.2% in 2021 compared to 21.2% in 2020, an increase of 96 basis points. The primary expenses that were higher as a percentage of net sales in 2021 were retail labor, store occupancy costs, depreciation and amortization, employee benefits, utilities, and workers’ compensation and general liability expenses, partially offset by reductions in administrative payroll costs,discretionary employee bonus and other miscellaneous COVID-related expenses and incentive compensation expenses, and advertising costs. The 2016 results also reflect an increase in hurricane and other disaster-related expenses of $12.2 million over the comparable 2015 amounts.expenses.
Interest Expense. Interest expense decreased $0.8increased $53.7 million to $97.0$211.3 million in 20172022 compared to 2016. Interest expense2021 and increased $10.9$7.1 million to $97.8$157.5 million in 20162021 compared to 20152020 primarily due to an increase in average debthigher outstanding borrowings and higher average interest rates. See the detailed discussion under “Liquidity and Capital Resources” regarding the financing of various long-term obligations.
We had consolidated outstanding variable-rate debt of $612.5 million and $924.3 million as of February 2, 2018 and February 3, 2017, respectively. The remainder of our outstanding indebtedness at February 2, 2018 and February 3, 2017 was fixed rate debt.
Other (income) expense. Other (income) expense in 2017 reflects expenses associated with the issuance and refinancing of long-term debt during the first quarter of 2017.
Income Taxes. The effective income tax ratesrate for 2017, 2016 and 2015 were expenses2022 was 22.5% compared to a rate of 19.3%, 36.3% and 37.1%, respectively.
Under accounting standards21.7% for 2021 which represents a net increase of 0.8 percentage points. The effective income taxes, the impact of new tax legislation must be taken into accountrate was higher in the period in which the new legislation is enacted, including the remeasurement of deferred tax assets
32
and liabilities at the tax rates at which such items are expected to reverse in future periods. Subsequent to the signing of the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which allows companies to record provisional amounts during a measurement period not to extend beyond one year after the enactment date while the accounting impact is still under analysis. Our 2017 provision for income taxes reflects such estimates2022 primarily due to the changes indecreased income tax law, including a provisional tax benefit of $335 million. The provisional tax benefit consists of $310.8 million related to the one-time remeasurement of the federal portion of our deferred tax assets and liabilities at the 21% rate and $24.2 million related to the reduced statutory tax rate of 33.7%,benefits associated with stock-based compensation compared to 35% in prior years. The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued and actions we may take as a result of the Act. Any subsequent adjustments to provisional estimates will be reflected in our income tax provision during one or more periods in 2018. 2021.
The effective income tax rate for 20172021 was 19.3%21.7% compared to a rate of 36.3%22.0% for 20162020 which represents a net decrease of 17.00.3 percentage points. The effective income tax rate was lower in 20172021 primarily due to increased income tax benefits associated with federal tax credits partially offset by a higher state effective tax rate compared to 2020.
Effects of Inflation
In 2022 and 2021, we experienced increases in product costs due in part to higher rates of inflation, particularly to the one-time remeasurementglobal supply chain as well as our own internal supply chain. In 2022, higher rates of inflation affected the federal portionscosts of building materials and certain of our deferred tax assets and liabilities at 21%, accompanied by the changes in the federal income tax laws pursuant to the Act that lowered our statutory federal tax rate to 33.7% for the 2017 fiscal year, compared to 35% in 2016. other capital costs.
The effective income tax rate for 2016 was 36.3% compared to a rate of 37.1% for 2015 which represents a net decrease of 0.8 percentage points. The effective income tax rate was lower in 2016 due principally to the early adoption of a change in accounting guidance related to employee share-based payments requiring the recognition of excess tax benefits in the statement of income rather than in the balance sheet, as reported in prior years.
Off Balance Sheet Arrangements
We are not party to any material off balance sheet arrangements.
Effects of Inflation
In 2016, we experienced product cost deflation reflecting reductions in commodity costs primarily related to food products. We experienced minimal overall commodity cost inflation or deflation in 2017 and 2015.
Liquidity and Capital Resources
Current Financial Condition and Recent Developments
During the past three years, we have generated an aggregate of approximately $4.8$8.7 billion in cash flows from operating activities and incurred approximately $1.7$3.7 billion in capital expenditures. During that period, we expanded the number of stores we operate by 2,745,2,826, representing growth of approximately 23%17%, and we remodeled or relocated 2,5515,554 stores, or approximately 22%34% of the stores we operated as of the beginning of the three-year period. In 2018,2023, we intend to continue our current strategy of pursuing store growth, remodels and relocations.
At February 2, 2018,3, 2023, we had a $1.4$2.0 billion unsecured revolving credit agreement (the “Facilities”“Revolving Facility”), $2.4$750.0 million 364-day unsecured revolving credit facility (the “364-Day Revolving Facility”), $5.4 billion aggregate principal amount of senior notes, and a commercial paper program that may provide borrowing availability of up to $1.0$2.0 billion. At February 2, 2018,3, 2023, we had total consolidated outstanding debt (including the current portion of long-term obligations) of $3.0$7.0 billion, which includes balances under the Term Facility (as defined below), commercial paper, and senior notes, allmost of which was in the form of senior notes. All of our material borrowing arrangements are described in greater detail below. Our borrowing availability under the unsecured credit agreementRevolving Facility may be effectively limited by borrowings under theour commercial paper programnotes (“CP Notes”) as further described
32
below. The information contained in Note 5 to the consolidated financial statements contained in Part II, Item 8 of this report is incorporated herein by reference.
33
We believe our cash flow from operations, including anticipated increases resulting from the Act, and our existing cash balances, combined with availability under the Facilities (as defined below), the commercial paper programRevolving Facility, 364-Day Revolving Facility, CP Notes and access to the debt markets, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending and anticipated dividend payments for a period that includes the next twelve months as well as the next several years. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.
For fiscal 2018,2023, we anticipate potential combined borrowings under the unsecured revolving credit facility described belowRevolving Facility, 364-Day Revolving Facility, and our commercial paper programCP Notes to be a maximum of approximately $800 million$2.0 billion outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.
Revolving Credit Facilities
On February 22, 2017, we entered into the Facilities, which consistOur Revolving Facility consists of a $175.0 million senior unsecured term loan facility (the “Term Facility”) and a $1.25$2.0 billion senior unsecured revolving credit facility (the “Revolving Facility”) of which up to $175.0$100.0 million is available for the issuance of letters of credit. The Term Facilitycredit and which is scheduled to mature on October 20, 2020, and the Revolving Facility is scheduled to mature on February 22, 2022.December 2, 2026.
Borrowings under the FacilitiesRevolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our option, either (a) LIBORAdjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10%) or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of February 2, 20183, 2023 was 1.10%1.015% for LIBORAdjusted Term SOFR borrowings and 0.10%0.015% for base-rate borrowings. We must also pay a facility fee, payable on any used and unused commitment amounts of the Facilities,Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility. As of February 2, 2018,3, 2023, the commitmentfacility fee rate was 0.15%0.11%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the FacilitiesRevolving Facility are subject to adjustment from time to time based on our long-term senior unsecured debt ratings. The weighted average all-in
We entered into the 364-Day Revolving Facility on January 31, 2023, which will expire on January 30, 2024. At February 3, 2023, the 364-Day Revolving Facility had no outstanding borrowings.
Borrowings under the 364-Day Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our option, either (a) Adjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10%) or (b) a base rate (which is usually equal to the prime rate). We are also required to pay a facility fee to the lenders under the 364-Day Revolving Facility for any used and unused commitments. As of February 3, 2023, the applicable interest rate margin for Adjusted Term SOFR loans was 1.035% and the facility fee rate was 0.09% per annum. The applicable interest rate margins for borrowings and the facility fees under the Facilities was 2.7% as of February 2, 2018.364-Day Revolving Facility are subject to adjustment from time to time based on our long-term senior unsecured debt ratings.
The Facilities can be voluntarily prepaid in whole or in part at any time without penalty. There is no required principal amortization underRevolving Facility and the Facilities. The Facilities364-Day Revolving Facility contain a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, our (including(and our subsidiaries’) ability to: incur additional liens; sell all or substantially all of the our assets; consummate certain fundamental changes or change in the our lines of business; and incur additional subsidiary indebtedness. The FacilitiesRevolving Facility and the 364-Day Revolving Facility also contain financial covenants thatwhich require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 2, 2018,3, 2023, we were in compliance with all such covenants. The FacilitiesBoth facilities also contain customary events of default.
As of February 2, 2018, the entire balance of the Term Facility was outstanding, and under the Revolving Facility,3, 2023, we had no outstanding borrowings, no outstanding letters of credit, of $9.1 million, and borrowing availability of $1.2$2.0 billion under the Revolving Facility that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $624.7 million at$0.3 billion. As of February 2, 2018.
33
3, 2023, under the 364-Day Revolving Facility, we had no outstanding borrowings and borrowing availability of $750 million. At February 3, 2023 we had combined availability under the credit facilities of $1.0 billion. In addition, as of February 2, 2018 we had outstanding letters of credit of $37.5$39.7 million which were issued pursuant to separate agreements.
Commercial Paper
As of February 2, 2018, we had outstanding unsecured commercial paper notes (the “CP Notes”) of $616.2 million, $186 million of which were held by a wholly-owned subsidiary. The consolidated balance of $430.2 million was classified as long-term obligations on the consolidated balance sheet due to our intent and ability to refinance these obligations as long-term debt. Under this program, weWe may issue the CP Notes from time
34
to time in an aggregate amount not to exceed $1.0$2.0 billion outstanding at any time. The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of our other unsecured and unsubordinated indebtedness. We intend to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. As of February 2, 2018, the3, 2023, our consolidated balance sheet reflected outstanding unsecured CP Notes hadof $1.5 billion. CP Notes totaling $230.8 million were held by a weighted average borrowing rate of 1.8%.wholly-owned subsidiary and therefore are not reflected in the consolidated balance sheets.
Senior Notes
In April 2013 we issued $400.0 million aggregate principal amount of 1.875% senior notes due 2018 (the “2018 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on April 15, 2018 and $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the “2023 Senior Notes”) at a discount of $2.4 million, which are scheduled to mature on April 15, 2023. In October 2015 we issued $500.0 million aggregate principal amount of 4.150% senior notes due 2025 (the “2025 Senior Notes”) at a discount of $0.8 million, which are scheduled to mature on November 1, 2025. In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027. In April 2018 we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028. In April 2020 we issued $1.0 billion aggregate principal amount of 3.5% senior notes due 2030 (the “2030 Senior Notes”) at a discount of $0.7 million, which are scheduled to mature on April 3, 2030, and $500.0 million aggregate principal amount of 4.125% senior notes due 2050 (the “2050 Senior Notes”) at a discount of $5.0 million, which are scheduled to mature on April 3, 2050. In September 2022, we issued $750.0 million aggregate principal amount of 4.25% senior notes due 2024 (the “2024 Senior Notes”), net of discount of $0.7 million, which are scheduled to mature on September 20, 2024, $550.0 million aggregate principal amount of 4.625% senior notes due 2027 (the “November 2027 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on November 1, 2027, $700.0 million aggregate principal amount of 5.0% senior notes due 2032 (the “2032 Senior Notes”), net of discount of $2.4 million which are scheduled to mature on November 1, 2032, and $300.0 million aggregate principal amount of 5.50% senior notes due 2052 (the “2052 Senior Notes”), net of discount of $0.3 million, which are scheduled to mature on November 1, 2052. Collectively, the 2018 Senior Notes, the 20232024 Senior Notes, 2025 Senior Notes, 2027 Senior Notes, November 2027 Senior Notes, 2028 Senior Notes, 2030 Senior Notes, 2032 Senior Notes, 2050 Senior Notes, and 20272052 Senior Notes, comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”). Interest on the 2018 Senior Notes, the 2023 Senior Notes, and the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year. Interest on the 2025 Senior Notes and the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year. We expect to refinanceInterest on the 20182030 Senior Notes and the 2050 Senior Notes is payable in cash on or prior to their maturity utilizing proceeds fromApril 3 and October 3 of each year. Interest on the issuance2024 Senior Notes is payable in cash on March 20 and September 20 of additional senior notes, revolver borrowings oreach year, commencing on March 20, 2023. Interest on the issuanceNovember 2027 Senior Notes, the 2032 Senior Notes and the 2052 Senior Notes is payable in cash on May 1 and November 1 of commercial paper.each year, commencing on May 1, 2023.
We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. In October 2022 we redeemed $900.0 million aggregate principal amount of 3.25% senior notes due 2023 and incurred a loss on redemption of $0.4 million.
The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.
34
The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.
Rating Agencies
Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will maintain or improve our current credit ratings.
35
Future Cash Requirements
Contractual Obligations
The following table summarizes significant estimated future cash requirements under our significantvarious contractual obligations and commercialother commitments as ofat February 2, 20183, 2023, in total and disaggregated into current (<1 year) and long-term (1 or more years) obligations (in thousands):
| | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| |||||||||||||
Contractual obligations |
| Total |
| < 1 year |
| 1 - 3 years |
| 3 - 5 years |
| 5+ years |
| |||||
Long-term debt obligations | | $ | 7,102,596 | | $ | 1,516,478 | | $ | 1,278,878 | | $ | 1,178,910 | | $ | 3,128,329 | |
Interest(a) | |
| 2,385,726 | |
| 317,474 | |
| 443,478 | |
| 359,908 | |
| 1,264,866 | |
Self-insurance liabilities(b) | |
| 274,160 | |
| 136,611 | | | 94,560 | | | 34,630 | | | 8,359 | |
Operating lease obligations | |
| 12,737,264 | |
| 1,675,193 | | | 3,138,929 | | | 2,651,776 | | | 5,271,366 | |
Subtotal | | $ | 22,499,745 | | $ | 3,645,756 | | $ | 4,955,845 | | $ | 4,225,224 | | $ | 9,672,920 | |
| | | | | | | | | | | | | | | | |
| | Commitments Expiring by Period |
| |||||||||||||
Commercial commitments(c) |
| Total |
| < 1 year |
| 1 - 3 years |
| 3 - 5 years |
| 5+ years |
| |||||
Letters of credit | | $ | 39,838 | | $ | 39,838 | | $ | — | | $ | — | | $ | — | |
Purchase obligations(d) | |
| 2,465,087 | |
| 2,409,635 | |
| 55,452 | |
| — | |
| — | |
Subtotal | | $ | 2,504,925 | | $ | 2,449,473 | | $ | 55,452 | | $ | — | | $ | — | |
Total contractual obligations and commercial commitments | | $ | 25,004,670 | | $ | 6,095,229 | | $ | 5,011,297 | | $ | 4,225,224 | | $ | 9,672,920 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Period |
| |||||||||||||
Contractual obligations |
| Total |
| < 1 year |
| 1 - 3 years |
| 3 - 5 years |
| 5+ years |
| |||||
Long-term debt obligations |
| $ | 3,012,535 |
| $ | 830,200 |
| $ | 176,080 |
| $ | 1,190 |
| $ | 2,005,065 |
|
Capital lease obligations |
|
| 12,321 |
|
| 1,345 |
|
| 2,828 |
|
| 2,514 |
|
| 5,634 |
|
Interest(a) |
|
| 552,891 |
|
| 87,849 |
|
| 155,553 |
|
| 147,248 |
|
| 162,241 |
|
Self-insurance liabilities(b) |
|
| 231,055 |
|
| 96,438 |
|
| 91,657 |
|
| 28,966 |
|
| 13,994 |
|
Operating lease obligations(c) |
|
| 9,108,164 |
|
| 1,088,538 |
|
| 2,011,558 |
|
| 1,723,759 |
|
| 4,284,309 |
|
Subtotal |
| $ | 12,916,966 |
| $ | 2,104,370 |
| $ | 2,437,676 |
| $ | 1,903,677 |
| $ | 6,471,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments Expiring by Period |
| |||||||||||||
Commercial commitments(d) |
| Total |
| < 1 year |
| 1 - 3 years |
| 3 - 5 years |
| 5+ years |
| |||||
Letters of credit |
| $ | 16,831 |
| $ | 16,831 |
| $ | — |
| $ | — |
| $ | — |
|
Purchase obligations(e) |
|
| 1,036,737 |
|
| 1,005,939 |
|
| 30,798 |
|
| — |
|
| — |
|
Subtotal |
| $ | 1,053,568 |
| $ | 1,022,770 |
| $ | 30,798 |
| $ | — |
| $ | — |
|
Total contractual obligations and commercial commitments(f) |
| $ | 13,970,534 |
| $ | 3,127,140 |
| $ | 2,468,474 |
| $ | 1,903,677 |
| $ | 6,471,243 |
|
| (a) |
| Represents obligations for interest payments on long-term debt |
| (b) |
| We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, automobile, and certain third-party landlord claims exposures. As these obligations do not have scheduled maturities, these amounts represent undiscounted estimates based upon actuarial assumptions. Substantially all amounts are reflected on an undiscounted basis in our consolidated balance sheets. |
| (c) |
|
|
| Commercial commitments include information technology license and support agreements, supplies, fixtures, letters of credit for import merchandise, and other inventory purchase obligations. |
| (d) |
| Purchase obligations include legally binding agreements for software licenses and support, supplies, fixtures, and merchandise purchases (excluding such purchases subject to letters of credit). |
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|
|
Share Repurchase Program
Our existing common stock repurchase program had a total remaining authorization of approximately $354 million$1.38 billion at February 2, 2018. Our Board3, 2023. The authorization allows repurchases from time to time in open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of Directors increased by $1.0 billion the authorization available under this common stock repurchase program on March 14, 2018. Under the authorization, purchases may be made in the open marketSecurities Exchange Act of 1934, as amended, or in privately negotiated transactions from time to time subject totransactions. The timing, manner and number of shares repurchased will depend on a variety of factors, including price, market conditions, compliance with the covenants and restrictions under our debt agreements and other
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conditions. factors. The authorizationrepurchase program has no expiration date and may be modified or terminated from time to time at the discretion of our Board of Directors. For more detail about our share repurchase program, see Part II, Item 5 of this report and Note 11 to the consolidated financial statements.statements contained in Part II, Item 8 of this report.
Other Considerations
OnIn March 14, 2018,2023, the Board of Directors declared a quarterly cash dividend of $0.29$0.59 per share which is payable on or before April 24, 201825, 2023 to shareholders of record of our common stock on April 10, 2018.11, 2023. We paid quarterly cash dividends of $0.26$0.55 per share in 2017.2022. Although the Board currently expects to continue regular quarterly cash dividends, the declaration and amount of future cash dividends are subject to the Board’s sole discretion and will depend upon, among other factors, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board may deem relevant in its sole discretion.
Our inventory balance represented approximately 52%53% of our total assets exclusive of operating lease assets, goodwill, and other intangible assets as of February 2, 2018.3, 2023. Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year.year as discussed further below. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.
We utilize supply chain finance programs whereby qualifying suppliers may elect at their sole discretion to sell our payment obligations to designated third party financial institutions. While the terms of these agreements are between the supplier and the financial institution, the supply chain finance financial institutions allow the participating suppliers to utilize our creditworthiness in establishing credit spreads and associated costs. As of February 3, 2023, the amount due to suppliers participating in these supply chain finance programs was $300.9 million.
As described in Note 7 to the consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity. We also have certain income tax-related contingencies as disclosed in Note 4 to the consolidated financial statements. Future negative developments could have a material adverse effect on our liquidity.
Cash Flows
Cash flows from operating activities. Cash flows from operating activities were $1.8$1.98 billion in 2017,2022, which represents a $197.1$881.3 million increasedecrease compared to 2016. Net income increased by $287.8 million in 2017 over 2016, offset by changes2021. Changes in merchandise inventories which resulted in a $348.4 million$1.7 billion decrease in 2017our working capital in 2022 compared to the decrease of $550.1 million in 2021 as described in greater detail below. Changes in other noncash losses resulted in a $530.5 million increase as compared to a decrease of $171.9$191.0 million increase in 2016.2021 primarily due to an increase in the LIFO provision. Changes in accounts payable resulted in a $427.9$194.7 million decrease in our working capital in 2022 compared to a $98.7 million increase in 20172021, due primarily to the timing of inventory receipts and related payments. Changes in accrued expenses resulted in a $25.4 million decrease in our working capital in 2022 compared to a $56.5$37.3 million decrease in 2021, due primarily to the timing of accruals and payments for freight, payroll taxes and incentive compensation. Changes in income taxes in 2022 compared to 2021 are primarily due to the timing of payments for income taxes.
Cash flows from operating activities were $2.87 billion in 2021, which represents a $1.01 billion decrease compared to 2020. The COVID-19 pandemic resulted in significantly increased sales, gross profit, and operating income in 2020, and our net income decreased $255.8 million in 2021 compared to 2020. Changes in accounts
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payable resulted in a $98.7 million increase in 2016,our working capital in 2021 compared to a $745.6 million increase in 2020, due primarily to the timing of receipts and payments which was partially impacted by certain changespayments. Changes in payment terms.
Cash flows from operating activities were $1.6 billionaccrued expenses resulted in 2016, an increase of $213.4a $37.3 million decrease in our working capital in 2021 compared to 2015. Significant components of thea $388.6 million increase in cash flows from operating activities in 2016 compared to 2015 include increased net income2020, due primarily to increased salesthe timing of accruals and operating profit in 2016 as described in more detail above under “Results of Operations.”payments for payroll taxes and incentive compensation. Changes in merchandise inventories resulted in a reduction$550.1 million decrease in our working capital usage in 2016 compared2021 which was similar to 2015the decrease of $575.8 million in 2020 as described in greater detail below. Accounts payable increased by $56.5 millionChanges in 2016income taxes in 2021 compared to a $105.6 million increase in 2015,2020 are primarily due primarily to the timing of merchandise receipts and related payments which were impacted by certain changes in payment terms.for income taxes.
On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. Merchandise inventories increased by 11%20% in 2017,2022, by 6%7% in 2016,2021 and by 10%12% in 2015.2020. The increase in the 2022 period primarily reflects the impact of product cost inflation, as well as a greater mix of higher-value products, particularly in the home products and seasonal categories, primarily due to the continued rollout of our non-consumables initiative. Inventory levels in the consumables category increased by $322.9$367.8 million, or 16%11%, in 2017,2022, decreased by $54.5$1.8 million, or 3%0%, in 2016,2021, and increased by $218.4$455.6 million, or 13%,15% in 2015.2020. The seasonal category increased by $14.9$455.5 million, or 2%42%, in 2017,2022, by $79.5$177.8 million, or 15%20%, in 2016,2021, and by $63.2$35.7 million, or 13%4%, in 2015.2020. The home products category increased by $10.6$315.4 million, or 43%, in 2022, by $230.0 million, or 45%, in 2021, and by $66.3 million, or 15%, in 2020. The apparel category increased by $7.8 million, or 2%, in 2022, decreased by $39.2 million, or 10%, in 2021, and increased by $12.9 million, or 3%, in 2017, by $40.8 million, or 14%, in 2016, and by $12.8 million, or 5%, in 2015. The apparel category increased by $1.9 million, or 1%, in 2017, increased by $9.9 million, or 3%, in 2016, and decreased by $2.7 million, or 1%, in 2015.2020.
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Cash flows from investing activities. Significant components of property and equipment purchases in 20172022 included the following approximate amounts: $231$589 million for improvements, upgrades, remodels and relocations of existing stores; $203 million for new leased stores; $176$443 million for distribution and transportation-related projects;capital expenditures; $373 million related to store facilities, primarily for leasehold improvements, fixtures and $30equipment in new stores; and $62 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During 2017,2022, we opened 1,3151,039 new stores and remodeled or relocated 7641,922 stores.
Significant components of property and equipment purchases in 20162021 included the following approximate amounts: $201 million for distribution and transportation-related projects; $168$510 million for improvements, upgrades, remodels and relocations of existing stores; $120$268 million for distribution and transportation-related capital expenditures; $244 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new leased stores; $38 million for stores purchased or built by us; and $26$44 million for information systems upgrades and technology-related projects. During 2016,2021, we opened 9001,050 new stores and remodeled or relocated 9061,852 stores.
Significant components of property and equipment purchases in 20152020 included the following approximate amounts: $168$447 million for improvements, upgrades, remodels and relocations of existing stores; $144$271 million for distribution and transportation-related projects; $99capital expenditures; $250 million related to store facilities, primarily for leasehold improvements, fixtures and equipment in new leased stores; $53 million for stores built by us; and $34$50 million for information systems upgrades and technology-related projects. During 2015,2020, we opened 7301,000 new stores and remodeled or relocated 8811,780 stores.
Capital expenditures during 20182023 are projected to be in the range of $725$1.8 billion to $800 million.$1.9 billion. We anticipate funding 20182023 capital requirements with a combination of some or all of the following: existing cash balances, cash flows from operations, availability under our Revolving Facility and 364-Day Revolving Facility and/or the issuance of additional senior notes orand CP Notes. We plan to continue to invest in store growth and development of approximately 9001,050 new stores and approximately 1,1002,120 stores to be remodeled or relocated. Capital expenditures in 20182023 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet; technology initiatives; as well as routine and ongoing capital requirements.
Cash flows from financing activities. In 2017,During the 2022 period we had net proceeds from the issuance of the 2027 Senior Noteslong-term debt of $599.6 million, we redeemed the 2017 Senior Notes for $500.0 million,$2.3 billion, and made a principal payment on the Term Facilityour repayments of $250.0long-term debt totaled $911.3 million. We had a net decrease in consolidatedNet commercial paper borrowings in 2017increased by $1.4 billion and we had no borrowings or repayments under the Revolving Facility or the
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364-Day Revolving Facility. We repurchased 11.6 million shares of our common stock at a total cost of $2.7 billion and paid cash dividends of $493.7 million.
In 2021, net commercial paper borrowings increased by $54.3 million. and we had no borrowings or repayments under the Revolving Facility. We repurchased 7.112.1 million outstanding shares of our common stock in 2017 at a total cost of $579.7 million, and paid cash dividends of $282.9 million.
In 2016, we repurchased 12.4 million outstanding shares of our common stock at a total cost of $990.5$2.5 billion and paid cash dividends of $392.2 million. Net repayments under
In 2020, net proceeds from the 2015 Revolving Facility during 2016 were $251.0 million. We hadissuance of long-term debt totaled $1.5 billion, net commercial paper borrowings during 2016 of $490.5 million.decreased by $425.2 million, and borrowings and repayments under the Revolving Facility were $300.0 million each. We also paid cash dividends of $281.1 million.
In 2015, we repurchased 17.612.3 million outstanding shares of our common stock at a total cost of $1.3 billion. We made repayments of $500.0 million on our term loan facilities,$2.5 billion and had proceeds of $499.2 million from the issuance of senior notes. Net borrowings under our revolving credit facilities during 2015 were $251.0 million. We also paid cash dividends of $258.3$355.9 million.
Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued comprehensive new accounting standards related to the recognition of revenue, which specified an effective date for annual reporting periods beginning after December 15, 2016, with early adoption not permitted. In August 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, with earlier adoption permitted only for annual reporting periods beginning after December 15, 2016. The new guidance allows
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companies to use either a full retrospective or a modified retrospective approach in the adoption of this guidance. We formed a project team to assess and implement the standard by compiling a list of the applicable revenue streams, evaluating relevant contracts and comparing our current accounting policies to the new standard. As a result of the efforts of this project team, we identified customer incentives and gross versus net considerations as the areas in which we would most likely be affected by the new guidance. We have assessed the impacts of the new standard and the related design of internal control over financial reporting. Based upon the terms of our agreements and the materiality of our transactions related to customer incentives and gross versus net considerations, the adoption had no effect on our consolidated results of operations, financial position or cash flows. We adopted this guidance on February 3, 2018.
In February 2016, the FASB issued new guidance related to lease accounting, which when effective will require a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Currently, a modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The FASB has proposed guidance which would allow companies to record the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings, although such guidance has not yet been formally issued. We formed a project team to assess and implement the standard, which is evaluating existing contractual arrangements for embedded leases, and comparing our current accounting policies to the new standard. As a result of the efforts of this project team, we have identified store leases as the area in which we would most likely be affected by the new guidance. Our assessment of the impact that adoption of this guidance will have on our consolidated financial statements is ongoing and we are anticipating a material impact because we are party to a significant number of lease contracts for our stores.
In October 2016, the FASB issued amendments to existing guidance related to accounting for intra-entity transfers of assets other than inventory. These amendments require an entity to recognize the income tax consequences of such transfers when the transfer occurs and affects our historical accounting for intra-entity transfers of certain intangible assets. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted subject to certain guidelines. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We adopted this guidance on February 3, 2018 which will result in an increase in deferred income tax liabilities and a decrease in retained earnings of approximately $33.6 million in the first quarter of 2018.
In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. Our assessment of the impact that adoption of this guidance will have on our consolidated financial statements is ongoing, but we do not anticipate a material effect on our consolidated results of operations, financial position or cash flows.
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Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. In addition to the estimates presented below, there are other items within our financial statements that require estimation but are not deemed critical as defined below. We believe these estimates are reasonable and appropriate. However, if actual experience differs from the assumptions and other considerations used, the resulting changes could have a material effect on the financial statements taken as a whole.
Management believes the following policies and estimates are critical because they involve significant judgments, assumptions, and estimates. Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates. See Note 1 to the consolidated financial statements for a detailed discussion of our principal accounting policies.
Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market (“LCM”) with cost determined using the retail last in, first out (“LIFO”) method. We use the retail inventory method (“RIM”) to calculate gross profit and the resulting valuation of inventories at cost, which are computed utilizing a calculated cost-to-retail inventory ratio to the retail value of sales at an inventory department level. We apply the RIM to these departments, which are groups of products that are fairly uniform in terms of cost, selling price relationship and turnover. The RIM will result in valuing inventories at LCM if permanent markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the retail inventory methodRIM calculation are certain management judgments and estimates that may impact the ending inventory valuation at cost, as well as the gross profit recognized. These judgments include ensuring departments consist of similar products, recording estimated shrinkage between physical inventories, and timely recording of markdowns needed to sell inventory.
We perform an annual LIFO analysis whereby all merchandise units are considered for inclusion in the index formulation. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. In contrast, interim LIFO calculations are based on management’s annual estimates of sales, the rate of inflation or deflation, and year-end inventory levels. We also perform analyses for determining obsolete inventory, adjusting inventory on a quarterly basis to an LCM value based on various management assumptions including estimated below cost markdowns not yet recorded, but required to liquidate such inventory in future periods.
Factors considered in the determination of markdowns include current and anticipated demand based on changes in competitors’ practices, consumer preferences, consumer spending, significant weather events and unseasonable weather patterns. Certain of these factors are outside of our control and may result in greater than estimated markdowns to entice consumer purchases of excess inventory. The amount and timing of markdowns may vary significantly from year to year.
We perform physical inventories in virtually alla significant majority of our stores on an annual basis. We calculate our shrink provision based on actual physical inventory results during the fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory through the end of the fiscal reporting period. This accrual is
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calculated as a percentage of sales at each retail store, at a department level, based on the store’s most recent historical shrink rate. To the extent that subsequent physical inventories yield different results than the estimated accrual, our effective shrink rate for a given reporting period will include the impact of adjusting to the actual results.
We believe our estimates and assumptions related to the application of the RIM results in a merchandise inventory valuation that reasonably approximates cost on a consistent basis.
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Goodwill and Other Intangible Assets. The qualitative and quantitative assessments related to the valuation and any potential impairment of goodwill and other intangible assets are each subject to judgments and/or assumptions. The analysis of qualitative factors may include determining the appropriate factors to consider and the relative importance of those factors along with other assumptions. If required, judgments in the quantitative testing process may include projecting future cash flows, determining appropriate discount rates, correctly applying valuation techniques, correctly computing the implied fair value of goodwill if necessary, and other assumptions. Future cash flow projections are based on management’s projections and represent best estimates taking into account recent financial performance, market trends, strategic plans and other available information, which in recent years have been materially accurate. Changes in these estimates and assumptions could materially affect the determination of fair value or impairment, however, such a conclusion is not indicated by recent analyses. Future indicators of impairment could result in an asset impairment charge. If these judgments or assumptions are incorrect or flawed, the analysis could be negatively impacted.
Our most recent evaluation of our goodwill and indefinite lived trade name intangible assets was completed during the third quarter of 2017. No indicators of impairment were evident and no assessment of or adjustment to these assets was required. We are not currently projecting a decline in cash flows that could be expected to have an adverse effect such as a violation of debt covenants or future impairment charges.
Property and Equipment. Property and equipment are recorded at cost. We group our assets into relatively homogeneous classes and generally provide for depreciation on a straight-line basis over the estimated average useful life of each asset class, except for leasehold improvements, which are amortized over the lesser of the applicable lease term or the estimated useful life of the asset. Certain store and warehouse fixtures, when fully depreciated, are removed from the cost and related accumulated depreciation and amortization accounts. The valuation and classification of these assets and the assignment of depreciable lives involves judgments and the use of estimates, which we believe have been materially accurate in recent years.
Impairment of Long-lived Assets. Impairment of long-lived assets results when the carrying value of the assets exceeds the estimated undiscounted future cash flows generated by the assets. Our estimate of undiscounted future store cash flows is based upon historical operations of the stores and estimates of future profitability which encompasses many factors that are subject to variability and are difficult to predict. If our estimates of future cash flows are not materially accurate, our impairment analysis could be impacted accordingly. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s estimated fair value. The fair value is estimated based primarily upon projected future cash flows (discounted at our credit adjusted risk-free rate) or other reasonable estimates of fair market value. Although not currently anticipated, changes in these estimates, assumptions or projections could materially affect the determination of fair value or impairment.
Insurance Liabilities. We retain a significant portion of the risk for our workers’ compensation, employee health, general liability, property loss, automobile and certain third-party landlord claim exposures. These represent significant costs primarily due to our large employee base and number of stores. Provisions are made for these liabilities on an undiscounted basis. Certain of these liabilities are based on actual claim data and estimates of incurred but not reported claims developed using actuarial methodologies based on historical claim trends, which have been and are anticipated to continue to be materially accurate. If future claim trends deviate from recent historical patterns, or other unanticipated events affect the number and significance of future claims, we may be required to record additional expenses or expense reductions, which could be material to our future financial results.
Contingent Liabilities – Income Taxes. Income tax reserves are determined using the methodology established by accounting standards relating to uncertainty in income taxes. These standards require companies to assess each income tax position taken using a two-step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of
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the respective tax position. Uncertain tax positions require determinations and liabilities to be estimated based on provisions of the tax law which may be subject to change or varying interpretation. If our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results.
Contingent Liabilities - Legal MattersLease Accounting.We Lease liabilities are subject to legal, regulatory and other proceedings and claims. We establish liabilities as appropriate for these claims and proceedingsrecorded at a discount based upon our estimated collateralized incremental borrowing rate which involves significant judgments and estimates. Factors incorporated into the probabilitycalculation of lease discount rates include the valuations and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in our financial statements and SEC filings, management’s viewyields of our exposure. We review outstanding claimssenior notes, their credit spread over comparable U.S. Treasury rates, and proceedings with external counsel, as needed, to assess probability and estimates of loss, which includes an analysis of whether such loss estimates are probable, reasonably possible, or remote. We re-evaluate these assessments on a quarterly basis or as new and significant information becomes available to determine whether a liability should be established or if any existing liability should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amountindex of the recorded liability. In addition, because it is not permissible under U.S. GAAP to establish a litigation liability untilcredit spreads for all North American investment grade companies by rating. To determine an indicative secured rate, we use the loss is both probable and estimable, in some cases there may be insufficient time to establish a liability prior to the actual incurrenceestimated credit spread improvement that would result from an upgrade of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).
Lease Accounting and Excess Facilities.one ratings classification by tenor. Many of our stores are subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of up to 15 years with multiple renewal options. We also have stores subject to shorter-term leases and many of these leases have renewal options. Certain of our stores have provisions for contingent rentals based upon a percentage of defined sales volume. We recognize contingent rental expense when the achievement of specified sales targets is considered probable. We record minimum rentalsingle lease expense on a straight-line basis over the base, non-cancelable lease term including any option periods that are reasonably certain to be renewed, commencing on the date that we take physical possession of the property from the landlord, which normally includes a period prior to store opening to make necessary leasehold improvements and install store fixtures. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and the amounts payable under the lease as deferred rent.landlord. Tenant allowances, to the extent received, are recorded as deferred incentive rent and amortized as a reduction to rent expense over the term of the lease. We reflect as a liability any difference between the calculated expense and the amounts actually paid.right of use asset. Improvements of leased properties are amortized over the shorter of the life of the applicable lease term or the estimated useful life of the asset.
Share-Based Payments. Our stock option awards are valued on an individual grant basis using the Black-Scholes-Merton closed form option pricing model. We believe that this model fairly estimates the value of our stock option awards. The application of this valuation model involves assumptions that are judgmental in the valuation of stock options, which affects compensation expense related to these options. These assumptions include the term that
39
the options are expected to be outstanding, the historical volatility of our stock price, applicable interest rates and the dividend yield of our stock. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of share-based awards. Historically, these estimates have been materially accurate; however, if our estimates differ materially from actual experience, we may be required to record additional expense or reductions of expense, which could be material to our future financial results.
Fair Value Measurements. Accounting standards for the measurement of fair value of assets and liabilities establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Therefore, Level 3 inputs are typically based on an entity’s own assumptions, as there is little, if any, related market activity, and thus require the use of significant judgment and estimates. Currently, we have no assets or liabilities that are valued based solely on Level 3 inputs.
Our fair value measurements are primarily associated with our outstanding debt instruments. We use various valuation models in determining the values of these liabilities. We believe that in recent years these methodologies have produced materially accurate valuations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
We are exposed to market risk primarily from adverse changes in interest rates, and to a lesser degree commodity prices. To minimize this risk, we may periodically use financial instruments, including derivatives. All derivative financial instrument transactions must be authorized and executed pursuant to approval by the Board of Directors. As a matter of policy, we do not buy or sell financial instruments for speculative or trading purposes, and any such derivative financial instruments are intended to be used to reduce risk by hedging an underlying economic exposure. Our objective is to correlate derivative financial instruments and the underlying exposure being hedged, so that fluctuations in the value of the financial instruments are generally offset by reciprocal changes in the value of the underlying economic exposure.
Interest Rate Risk
We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt. We manage our interest rate risk through the strategic use of fixed and variable interest rate debt and, from time to time, derivative financial instruments. OurCurrently, we are counterparty to certain interest rate swaps with a total notional amount of $350.0 million entered into in May 2021. These swaps are scheduled to mature in April 2030. Under the terms of these agreements, we swapped fixed interest rates on a portion of our 2030 Senior Notes for three-month LIBOR rates. In recent years, our principal interest rate exposure relates tohas been from outstanding amountsborrowings under our unsecured debt facilitiesRevolving Facility as well as our commercial paper program. As of February 2, 2018,3, 2023, we had variable rate borrowings$1.5 billion of $175 million under our Term Facility, consolidated borrowings of $430.2 million under our commercial paper program,borrowings and no borrowings outstanding under our Revolving Facility. In order to mitigate a portion of the variable rate interest exposure under the credit facilities, in prior years we have entered into various interest rate swaps. As of February 2, 2018, no such interest rate swaps were outstanding and, as a result, we are exposed to fluctuations in variable interest rates under the credit facilities andFacility or our commercial paper program.364-Day Revolving Facility. For a detailed discussion of our credit facilitiesRevolving Facility, our 364-Day Revolving Facility and our commercial paper program, see Note 5 to the consolidated financial statements.
A change in interest rates on variable rate debt impacts our pre-tax earnings and cash flows; whereas a change in interest rates on fixed rate debt impacts the economic fair value of debt but not our pre-tax earnings and cash flows. At February 3, 2023, our primary interest rate exposure was from changes in interest rates which affect our variable rate debt. Based on our outstanding variable rate borrowing levelsdebt as of February 2, 2018 and February 3, 2017,2023, after giving consideration to our interest rate swap agreements, the annualized effect of a one percentage point increase in variable interest rates would have resulted in a pretax reduction of our earnings and cash flows of approximately $6.1$18.5 million in 20172022.
At January 28, 2022, our primary interest rate exposure was from changes in interest rates which affect our variable rate debt. Based on our outstanding variable rate debt as of January 28, 2022, after giving consideration to our interest rate swap agreements, the annualized effect of a one percentage point increase in variable interest rates would have resulted in a pretax reduction of our earnings and $9.2cash flows of approximately $4.1 million in 2016.2021.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting FirmFirm
To the Shareholders and the Board of Directors of
Dollar General Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries (the Company) as of February 2, 20183, 2023 and February 3, 2017,January 28, 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended February 2, 2018,3, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 2, 20183, 2023 and February 3, 2017,January 28, 2022, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2018,3, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 2, 2018,3, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 23, 2018,24, 2023, expressed an unqualified opinion thereon.thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
42
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.
| ||
| Estimate of Workers’ Compensation and General Liability Reserves | |
| | |
Description of the Matter | The Company records expenses and reserves for workers’ compensation matters related to alleged work-related employee accidents and injuries, as well as general liability matters related to alleged non-employee incidents and injuries. At February 3, 2023, the Company’s reserves for self-insurance risks were $274.8 million, which includes workers’ compensation and general liability reserves. As discussed in Note 1 of the consolidated financial statements, the Company retains a significant portion of risk related to its workers’ compensation and general liability exposures. Accordingly, provisions are recorded for the Company’s estimates of such losses. The undiscounted future claim costs for the workers’ compensation and general liability exposures are estimated using actuarial methods. Auditing management’s assessment of the recorded workers’ compensation and general liability self-insurance exposure reserves was complex and judgmental due to the significant assumptions required in projecting the exposure on incurred claims (including those which have not been reported to the Company). In particular, the estimate was sensitive to significant assumptions such as loss development factors, trend factors, and pure loss rates. | |
| | |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for these self-insurance exposures. For example, we tested controls over the appropriateness of the assumptions management used in the calculation and the completeness and accuracy of the data underlying the reserves. To test the Company’s determination of the estimated required workers’ compensation and general liability self-insurance reserves, we performed audit procedures that included, among others, assessing the actuarial valuation methodologies utilized by management, testing the significant assumptions discussed above, testing the completeness and accuracy of the underlying data used by the Company in its evaluation, and testing the mathematical accuracy of the calculations. We also compared the significant assumptions used by management to industry accepted actuarial assumptions, reassessed the accuracy of management’s historical estimates utilized in prior period evaluations, and utilized an actuarial valuation specialist to assist in assessing the valuation methodologies and significant assumptions used in the valuation analysis, as well as to compare the Company’s recorded reserve to an independently developed range of actuarial reserves. | |
| |
| /s/ Ernst & Young LLP |
We have served as the Company’s auditor since 2001.
Nashville, Tennessee
March 23, 201824, 2023
44
43
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
| February 2, |
| February 3, |
| ||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
| |
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 267,441 |
| $ | 187,915 |
|
Merchandise inventories |
|
| 3,609,025 |
|
| 3,258,785 |
|
Income taxes receivable |
|
| 108,265 |
|
| 11,050 |
|
Prepaid expenses and other current assets |
|
| 263,121 |
|
| 220,021 |
|
Total current assets |
|
| 4,247,852 |
|
| 3,677,771 |
|
Net property and equipment |
|
| 2,701,282 |
|
| 2,434,456 |
|
Goodwill |
|
| 4,338,589 |
|
| 4,338,589 |
|
Other intangible assets, net |
|
| 1,200,428 |
|
| 1,200,659 |
|
Other assets, net |
|
| 28,760 |
|
| 20,823 |
|
Total assets |
| $ | 12,516,911 |
| $ | 11,672,298 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Current portion of long-term obligations |
| $ | 401,345 |
| $ | 500,950 |
|
Accounts payable |
|
| 2,009,771 |
|
| 1,557,596 |
|
Accrued expenses and other |
|
| 549,658 |
|
| 500,866 |
|
Income taxes payable |
|
| 4,104 |
|
| 63,393 |
|
Total current liabilities |
|
| 2,964,878 |
|
| 2,622,805 |
|
Long-term obligations |
|
| 2,604,613 |
|
| 2,710,576 |
|
Deferred income taxes |
|
| 515,702 |
|
| 652,841 |
|
Other liabilities |
|
| 305,944 |
|
| 279,782 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
Preferred stock, 1,000 shares authorized |
|
| — |
|
| — |
|
Common stock; $0.875 par value, 1,000,000 shares authorized, 268,733 and 275,212 shares issued and outstanding at February 2, 2018 and February 3, 2017, respectively |
|
| 235,141 |
|
| 240,811 |
|
Additional paid-in capital |
|
| 3,196,462 |
|
| 3,154,606 |
|
Retained earnings |
|
| 2,698,352 |
|
| 2,015,867 |
|
Accumulated other comprehensive loss |
|
| (4,181) |
|
| (4,990) |
|
Total shareholders’ equity |
|
| 6,125,774 |
|
| 5,406,294 |
|
Total liabilities and shareholders' equity |
| $ | 12,516,911 |
| $ | 11,672,298 |
|
| | | | | | | |
|
| February 3, |
| January 28, |
| ||
| | 2023 | | 2022 |
| ||
ASSETS | | | | | | ||
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 381,576 | | $ | 344,829 | |
Merchandise inventories | |
| 6,760,733 | |
| 5,614,325 | |
Income taxes receivable | | | 135,775 | | | 97,394 | |
Prepaid expenses and other current assets | |
| 302,925 | |
| 247,295 | |
Total current assets | |
| 7,581,009 | |
| 6,303,843 | |
Net property and equipment | |
| 5,236,309 | |
| 4,346,127 | |
Operating lease assets | | | 10,670,014 | | | 10,092,930 | |
Goodwill | |
| 4,338,589 | |
| 4,338,589 | |
Other intangible assets, net | |
| 1,199,700 | |
| 1,199,750 | |
Other assets, net | |
| 57,746 | |
| 46,132 | |
Total assets | | $ | 29,083,367 | | $ | 26,327,371 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Current portion of operating lease liabilities | | | 1,288,939 | | | 1,183,559 | |
Accounts payable | |
| 3,552,991 | |
| 3,738,604 | |
Accrued expenses and other | |
| 1,036,919 | |
| 1,049,139 | |
Income taxes payable | |
| 8,919 | |
| 8,055 | |
Total current liabilities | |
| 5,887,768 | |
| 5,979,357 | |
Long-term obligations | |
| 7,009,399 | |
| 4,172,068 | |
Long-term operating lease liabilities | | | 9,362,761 | | | 8,890,709 | |
Deferred income taxes | |
| 1,060,906 | |
| 825,254 | |
Other liabilities | |
| 220,761 | |
| 197,997 | |
Commitments and contingencies | | | | | | | |
Shareholders’ equity: | | | | | | | |
Preferred stock | |
| — | | | — | |
Common stock; $0.875 par value, 1,000,000 shares authorized, 219,105 and 230,016 shares issued and outstanding at February 3, 2023 and January 28, 2022, respectively | |
| 191,718 | |
| 201,265 | |
Additional paid-in capital | |
| 3,693,871 | |
| 3,587,914 | |
Retained earnings | |
| 1,656,140 | |
| 2,473,999 | |
Accumulated other comprehensive income (loss) | |
| 43 | |
| (1,192) | |
Total shareholders’ equity | |
| 5,541,772 | |
| 6,261,986 | |
Total liabilities and shareholders' equity | | $ | 29,083,367 | | $ | 26,327,371 | |
The accompanying notes are an integral part of the consolidated financial statements.
45
44
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended |
| |||||||
|
|
| February 2, |
| February 3, |
| January 29, |
| |||
|
|
| 2018 |
| 2017 |
| 2016 |
| |||
Net sales |
|
| $ | 23,470,967 |
| $ | 21,986,598 |
| $ | 20,368,562 |
|
Cost of goods sold |
|
|
| 16,249,608 |
|
| 15,203,960 |
|
| 14,062,471 |
|
Gross profit |
|
|
| 7,221,359 |
|
| 6,782,638 |
|
| 6,306,091 |
|
Selling, general and administrative expenses |
|
|
| 5,213,541 |
|
| 4,719,189 |
|
| 4,365,797 |
|
Operating profit |
|
|
| 2,007,818 |
|
| 2,063,449 |
|
| 1,940,294 |
|
Interest expense |
|
|
| 97,036 |
|
| 97,821 |
|
| 86,944 |
|
Other (income) expense |
|
|
| 3,502 |
|
| — |
|
| 326 |
|
Income before income taxes |
|
|
| 1,907,280 |
|
| 1,965,628 |
|
| 1,853,024 |
|
Income tax expense |
|
|
| 368,320 |
|
| 714,495 |
|
| 687,944 |
|
Net income |
|
| $ | 1,538,960 |
| $ | 1,251,133 |
| $ | 1,165,080 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| $ | 5.64 |
| $ | 4.45 |
| $ | 3.96 |
|
Diluted |
|
| $ | 5.63 |
| $ | 4.43 |
| $ | 3.95 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
| 272,751 |
|
| 281,317 |
|
| 294,330 |
|
Diluted |
|
|
| 273,362 |
|
| 282,261 |
|
| 295,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
| $ | 1.04 |
| $ | 1.00 |
| $ | 0.88 |
|
| | | | | | | | | | |
| | For the Year Ended |
| |||||||
|
| February 3, |
| January 28, |
| January 29, |
| |||
| | 2023 | | 2022 | | 2021 |
| |||
Net sales | | $ | 37,844,863 | | $ | 34,220,449 | | $ | 33,746,839 | |
Cost of goods sold | |
| 26,024,765 | |
| 23,407,443 | |
| 23,027,977 | |
Gross profit | |
| 11,820,098 | |
| 10,813,006 | |
| 10,718,862 | |
Selling, general and administrative expenses | |
| 8,491,796 | |
| 7,592,331 | |
| 7,164,097 | |
Operating profit | |
| 3,328,302 | |
| 3,220,675 | |
| 3,554,765 | |
Interest expense | |
| 211,273 | |
| 157,526 | |
| 150,385 | |
Other (income) expense | |
| 415 | |
| — | |
| — | |
Income before income taxes | |
| 3,116,614 | |
| 3,063,149 | |
| 3,404,380 | |
Income tax expense | |
| 700,625 | |
| 663,917 | |
| 749,330 | |
Net income | | $ | 2,415,989 | | $ | 2,399,232 | | $ | 2,655,050 | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 10.73 | | $ | 10.24 | | $ | 10.70 | |
Diluted | | $ | 10.68 | | $ | 10.17 | | $ | 10.62 | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | |
| 225,148 | |
| 234,261 | |
| 248,171 | |
Diluted | | | 226,297 | |
| 235,812 | |
| 250,076 | |
| | | | | | | | | | |
Dividends per share | | $ | 2.20 | | $ | 1.68 | | $ | 1.44 | |
The accompanying notes are an integral part of the consolidated financial statements.
46
45
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended |
| |||||||
|
| February 2, |
| February 3, |
| January 29, |
| |||
|
| 2018 |
| 2017 |
| 2016 |
| |||
Net income |
| $ | 1,538,960 |
| $ | 1,251,133 |
| $ | 1,165,080 |
|
Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $509, $527 and $971, respectively |
|
| 809 |
|
| 817 |
|
| 1,520 |
|
Comprehensive income |
| $ | 1,539,769 |
| $ | 1,251,950 |
| $ | 1,166,600 |
|
| | | | | | | | | |
| For the Year Ended |
| |||||||
| February 3, |
| January 28, |
| January 29, |
| |||
| 2023 | | 2022 | | 2021 |
| |||
Net income | $ | 2,415,989 | | $ | 2,399,232 | | $ | 2,655,050 | |
Unrealized net gain (loss) on hedged transactions and currency translation, net of related income tax expense (benefit) of $353, $346, and $346, respectively |
| 1,235 | |
| 971 | |
| 972 | |
Comprehensive income | $ | 2,417,224 | | $ | 2,400,203 | | $ | 2,656,022 | |
The accompanying notes are an integral part of the consolidated financial statements.
47
46
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |
|
| Common |
|
|
|
| Additional |
|
|
|
| Other |
|
|
|
| ||
|
| Stock |
| Common |
| Paid-in |
| Retained |
| Comprehensive |
|
|
|
| ||||
|
| Shares |
| Stock |
| Capital |
| Earnings |
| Loss |
| Total |
| |||||
Balances, January 30, 2015 |
| 303,447 |
| $ | 265,514 |
| $ | 3,048,806 |
| $ | 2,403,045 |
| $ | (7,327) |
| $ | 5,710,038 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 1,165,080 |
|
| — |
|
| 1,165,080 |
|
Dividends paid, $0.88 per common share |
| — |
|
| — |
|
| — |
|
| (258,328) |
|
| — |
|
| (258,328) |
|
Unrealized net gain (loss) on hedged transactions |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,520 |
|
| 1,520 |
|
Share-based compensation expense |
| — |
|
| — |
|
| 38,547 |
|
| — |
|
| — |
|
| 38,547 |
|
Repurchases of common stock |
| (17,556) |
|
| (15,361) |
|
| — |
|
| (1,284,252) |
|
| — |
|
| (1,299,613) |
|
Tax benefit from stock option exercises |
| — |
|
| — |
|
| 13,698 |
|
| — |
|
| — |
|
| 13,698 |
|
Other equity and related transactions |
| 803 |
|
| 702 |
|
| 6,232 |
|
| — |
|
| — |
|
| 6,934 |
|
Balances, January 29, 2016 |
| 286,694 |
| $ | 250,855 |
| $ | 3,107,283 |
| $ | 2,025,545 |
| $ | (5,807) |
| $ | 5,377,876 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 1,251,133 |
|
| — |
|
| 1,251,133 |
|
Dividends paid, $1.00 per common share |
| — |
|
| — |
|
| — |
|
| (281,147) |
|
| — |
|
| (281,147) |
|
Unrealized net gain (loss) on hedged transactions |
| — |
|
| — |
|
| — |
|
| — |
|
| 817 |
|
| 817 |
|
Share-based compensation expense |
| — |
|
| — |
|
| 36,967 |
|
| — |
|
| — |
|
| 36,967 |
|
Repurchases of common stock |
| (12,354) |
|
| (10,810) |
|
| — |
|
| (979,664) |
|
| — |
|
| (990,474) |
|
Other equity and related transactions |
| 872 |
|
| 766 |
|
| 10,356 |
|
| — |
|
| — |
|
| 11,122 |
|
Balances, February 3, 2017 |
| 275,212 |
| $ | 240,811 |
| $ | 3,154,606 |
| $ | 2,015,867 |
| $ | (4,990) |
| $ | 5,406,294 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 1,538,960 |
|
| — |
|
| 1,538,960 |
|
Dividends paid, $1.04 per common share |
| — |
|
| — |
|
| — |
|
| (282,941) |
|
| — |
|
| (282,941) |
|
Unrealized net gain (loss) on hedged transactions |
| — |
|
| — |
|
| — |
|
| — |
|
| 809 |
|
| 809 |
|
Share-based compensation expense |
| — |
|
| — |
|
| 34,323 |
|
| — |
|
| — |
|
| 34,323 |
|
Repurchases of common stock |
| (7,060) |
|
| (6,178) |
|
| — |
|
| (573,534) |
|
| — |
|
| (579,712) |
|
Other equity and related transactions |
| 581 |
|
| 508 |
|
| 7,533 |
|
| — |
|
| — |
|
| 8,041 |
|
Balances, February 2, 2018 |
| 268,733 |
| $ | 235,141 |
| $ | 3,196,462 |
| $ | 2,698,352 |
| $ | (4,181) |
| $ | 6,125,774 |
|
| | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| Accumulated |
| | |
| |
| | Common | | | | | Additional | | | | | Other | | | |
| ||
| | Stock | | Common | | Paid-in | | Retained | | Comprehensive | | | |
| ||||
| | Shares | | Stock | | Capital | | Earnings | | Income (Loss) | | Total |
| |||||
Balances, January 31, 2020 |
| 251,936 | | $ | 220,444 | | $ | 3,322,531 | | $ | 3,162,660 | | $ | (3,135) | | $ | 6,702,500 | |
Net income |
| — | |
| — | |
| — | |
| 2,655,050 | |
| — | |
| 2,655,050 | |
Dividends paid, $1.44 per common share | | — | | | — | | | — | | | (355,934) | | | — | | | (355,934) | |
Unrealized net gain (loss) on hedged transactions |
| — | |
| — | |
| — | |
| — | |
| 972 | |
| 972 | |
Share-based compensation expense |
| — | |
| — | |
| 68,609 | |
| — | |
| — | |
| 68,609 | |
Repurchases of common stock |
| (12,297) | |
| (10,760) | |
| — | |
| (2,455,674) | |
| — | |
| (2,466,434) | |
Other equity and related transactions |
| 1,146 | |
| 1,003 | |
| 55,472 | |
| — | |
| — | |
| 56,475 | |
Balances, January 29, 2021 |
| 240,785 | | $ | 210,687 | | $ | 3,446,612 | | $ | 3,006,102 | | $ | (2,163) | | $ | 6,661,238 | |
Net income |
| — | |
| — | |
| — | |
| 2,399,232 | |
| — | |
| 2,399,232 | |
Dividends paid, $1.68 per common share | | — | | | — | | | — | | | (392,217) | | | — | | | (392,217) | |
Unrealized net gain (loss) on hedged transactions |
| — | |
| — | |
| — | |
| — | |
| 971 | |
| 971 | |
Share-based compensation expense |
| — | |
| — | |
| 78,178 | |
| — | |
| — | |
| 78,178 | |
Repurchases of common stock |
| (12,058) | |
| (10,551) | |
| — | |
| (2,539,118) | |
| — | |
| (2,549,669) | |
Other equity and related transactions |
| 1,289 | |
| 1,129 | |
| 63,124 | |
| — | |
| — | |
| 64,253 | |
Balances, January 28, 2022 |
| 230,016 | | $ | 201,265 | | $ | 3,587,914 | | $ | 2,473,999 | | $ | (1,192) | | $ | 6,261,986 | |
Net income |
| — | |
| — | |
| — | |
| 2,415,989 | |
| — | |
| 2,415,989 | |
Dividends paid, $2.20 per common share | | — | | | — | | | — | | | (493,732) | | | — | | | (493,732) | |
Unrealized net gain (loss) on hedged transactions and currency translation |
| — | |
| — | |
| — | |
| — | |
| 1,235 | |
| 1,235 | |
Share-based compensation expense |
| — | |
| — | |
| 72,712 | |
| — | |
| — | |
| 72,712 | |
Repurchases of common stock |
| (11,643) | |
| (10,188) | |
| — | |
| (2,737,826) | |
| — | |
| (2,748,014) | |
Excise tax incurred on common stock repurchases | | — | | | — | | | — | | | (2,290) | | | — | | | (2,290) | |
Other equity and related transactions |
| 732 | |
| 641 | |
| 33,245 | |
| — | |
| — | |
| 33,886 | |
Balances, February 3, 2023 |
| 219,105 | | $ | 191,718 | | $ | 3,693,871 | | $ | 1,656,140 | | $ | 43 | | $ | 5,541,772 | |
The accompanying notes are an integral part of the consolidated financial statements.
48
47
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended |
| |||||||
|
| February 2, |
| February 3, |
| January 29, |
| |||
|
| 2018 |
| 2017 |
| 2016 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 1,538,960 |
| $ | 1,251,133 |
| $ | 1,165,080 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 404,231 |
|
| 379,931 |
|
| 352,431 |
|
Deferred income taxes |
|
| (137,648) |
|
| 12,359 |
|
| 12,126 |
|
Loss on debt retirement |
|
| 3,502 |
|
| — |
|
| 326 |
|
Noncash share-based compensation |
|
| 34,323 |
|
| 36,967 |
|
| 38,547 |
|
Other noncash (gains) and losses |
|
| 11,088 |
|
| (3,625) |
|
| 7,797 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
|
| (348,363) |
|
| (171,908) |
|
| (290,001) |
|
Prepaid expenses and other current assets |
|
| (49,406) |
|
| (25,046) |
|
| (24,626) |
|
Accounts payable |
|
| 427,911 |
|
| 56,477 |
|
| 105,637 |
|
Accrued expenses and other liabilities |
|
| 75,647 |
|
| 42,937 |
|
| 44,949 |
|
Income taxes |
|
| (156,504) |
|
| 26,316 |
|
| (19,675) |
|
Other |
|
| (1,633) |
|
| (500) |
|
| (905) |
|
Net cash provided by (used in) operating activities |
|
| 1,802,108 |
|
| 1,605,041 |
|
| 1,391,686 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (646,456) |
|
| (560,296) |
|
| (504,806) |
|
Proceeds from sales of property and equipment |
|
| 1,428 |
|
| 9,360 |
|
| 1,423 |
|
Net cash provided by (used in) investing activities |
|
| (645,028) |
|
| (550,936) |
|
| (503,383) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Issuance of long-term obligations |
|
| 599,556 |
|
| — |
|
| 499,220 |
|
Repayments of long-term obligations |
|
| (752,676) |
|
| (3,138) |
|
| (502,401) |
|
Net increase (decrease) in commercial paper outstanding |
|
| (60,300) |
|
| 490,500 |
|
| — |
|
Borrowings under revolving credit facilities |
|
| — |
|
| 1,584,000 |
|
| 2,034,100 |
|
Repayments of borrowings under revolving credit facilities |
|
| — |
|
| (1,835,000) |
|
| (1,783,100) |
|
Costs associated with issuance and retirement of debt |
|
| (9,524) |
|
| — |
|
| (6,991) |
|
Repurchases of common stock |
|
| (579,712) |
|
| (990,474) |
|
| (1,299,613) |
|
Payments of cash dividends |
|
| (282,931) |
|
| (281,135) |
|
| (258,328) |
|
Other equity and related transactions |
|
| 8,033 |
|
| 11,110 |
|
| 6,934 |
|
Net cash provided by (used in) financing activities |
|
| (1,077,554) |
|
| (1,024,137) |
|
| (1,310,179) |
|
Net increase (decrease) in cash and cash equivalents |
|
| 79,526 |
|
| 29,968 |
|
| (421,876) |
|
Cash and cash equivalents, beginning of period |
|
| 187,915 |
|
| 157,947 |
|
| 579,823 |
|
Cash and cash equivalents, end of period |
| $ | 267,441 |
| $ | 187,915 |
| $ | 157,947 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 88,749 |
| $ | 92,952 |
| $ | 76,354 |
|
Income taxes |
| $ | 660,510 |
| $ | 679,633 |
| $ | 697,357 |
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment awaiting processing for payment, included in Accounts payable |
| $ | 63,178 |
| $ | 38,914 |
| $ | 32,020 |
|
| | | | | | | | | |
| For the Year Ended |
| |||||||
| February 3, |
| January 28, |
| January 29, |
| |||
| 2023 | | 2022 | | 2021 |
| |||
Cash flows from operating activities: | | | | | | | | | |
Net income | $ | 2,415,989 | | $ | 2,399,232 | | $ | 2,655,050 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | |
Depreciation and amortization |
| 724,877 | |
| 641,316 | |
| 574,237 | |
Deferred income taxes |
| 235,299 | |
| 114,359 | |
| 34,976 | |
Noncash share-based compensation |
| 72,712 | |
| 78,178 | |
| 68,609 | |
Other noncash (gains) and losses |
| 530,530 | |
| 191,040 | |
| 11,570 | |
Change in operating assets and liabilities: | | | | | | | | | |
Merchandise inventories |
| (1,665,352) | |
| (550,114) | |
| (575,827) | |
Prepaid expenses and other current assets |
| (65,102) | |
| (47,471) | |
| (16,516) | |
Accounts payable |
| (194,722) | |
| 98,735 | |
| 745,596 | |
Accrued expenses and other liabilities |
| (25,409) | |
| (37,328) | |
| 388,597 | |
Income taxes |
| (37,517) | |
| (14,642) | |
| (6,522) | |
Other |
| (6,750) | |
| (7,494) | |
| (3,611) | |
Net cash provided by (used in) operating activities |
| 1,984,555 | |
| 2,865,811 | |
| 3,876,159 | |
Cash flows from investing activities: | | | | | | | | | |
Purchases of property and equipment |
| (1,560,582) | |
| (1,070,460) | |
| (1,027,963) | |
Proceeds from sales of property and equipment |
| 5,236 | |
| 4,903 | |
| 3,053 | |
Net cash provided by (used in) investing activities |
| (1,555,346) | |
| (1,065,557) | |
| (1,024,910) | |
Cash flows from financing activities: | | | | | | | | | |
Issuance of long-term obligations |
| 2,296,053 | |
| — | |
| 1,494,315 | |
Repayments of long-term obligations |
| (911,330) | |
| (6,402) | |
| (4,640) | |
Net increase (decrease) in commercial paper outstanding | | 1,447,600 | | | 54,300 | | | (425,200) | |
Borrowings under revolving credit facilities |
| — | |
| — | |
| 300,000 | |
Repayments of borrowings under revolving credit facilities |
| — | |
| — | |
| (300,000) | |
Costs associated with issuance of debt |
| (16,925) | |
| (2,268) | |
| (13,574) | |
Repurchases of common stock |
| (2,748,014) | |
| (2,549,669) | |
| (2,466,434) | |
Payments of cash dividends | | (493,726) | | | (392,188) | | | (355,926) | |
Other equity and related transactions |
| 33,880 | |
| 64,225 | |
| 56,467 | |
Net cash provided by (used in) financing activities |
| (392,462) | |
| (2,832,002) | |
| (1,714,992) | |
Net increase (decrease) in cash and cash equivalents |
| 36,747 | |
| (1,031,748) | |
| 1,136,257 | |
Cash and cash equivalents, beginning of period |
| 344,829 | |
| 1,376,577 | |
| 240,320 | |
Cash and cash equivalents, end of period | $ | 381,576 | | $ | 344,829 | | $ | 1,376,577 | |
Supplemental cash flow information: | | | | | | | | | |
Cash paid for: | | | | | | | | | |
Interest | $ | 195,312 | | $ | 159,803 | | $ | 128,211 | |
Income taxes | $ | 500,814 | | $ | 568,267 | | $ | 721,570 | |
Supplemental noncash investing and financing activities: | | | | | | | | | |
Right of use assets obtained in exchange for new operating lease liabilities | $ | 1,836,718 | | $ | 1,778,564 | | $ | 1,721,530 | |
Purchases of property and equipment awaiting processing for payment, included in Accounts payable | $ | 150,694 | | $ | 143,589 | | $ | 118,059 | |
The accompanying notes are an integral part of the consolidated financial statements.
4948
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Basis of presentation and accounting policies
Basis of presentation
These notes contain references to the years 2017, 2016,2022, 2021, and 2015,2020, which represent fiscal years ended February 2, 2018, February 3, 2017,2023, January 28, 2022, and January 29, 2016,2021, respectively. The Company had a 53-weekCompany’s 2022 accounting period in 2016, while 2017was comprised of 53 weeks, and 2015the 2021 and 2020 accounting periods were each 52-week accounting periods.comprised of 52 weeks. The Company’s fiscal year ends on the Friday closest to January 31. The consolidated financial statements include all subsidiaries of the Company, except for its not-for-profit subsidiary which the Company does not control. Intercompany transactions have been eliminated.
The Company sells general merchandise on a retail basis through 14,53419,104 stores (as of February 2, 2018)3, 2023) in 4447 states with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States. As of February 3, 2023, the Company operated 19 distribution centers for non-refrigerated products, ten cold storage distribution centers, and two combination distribution centers which have both refrigerated and non-refrigerated products. The Company has owned distribution centers (“DCs”) in Scottsville, Kentucky; South Boston, Virginia; Alachua, Florida; Zanesville, Ohio; Jonesville, South Carolina; Marion, Indiana; Bessemer, Alabama; Bethel, Pennsylvania; San Antonio, Texas; Janesville, Wisconsin;leases 14 of these facilities and Jackson, Georgia, and leased DCs in Ardmore, Oklahoma; Fulton, Missouri; Indianola, Mississippi; and Lebec, California.the remainder are owned.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with insignificant interest rate risk and original maturities of three months or less when purchased. Such investments primarily consist of money market funds, bank deposits, certificates of deposit, and commercial paper. The carrying amounts of these items are a reasonable estimate of their fair value due to the short maturity of these investments.
Payments due from processors for electronic tender transactions classified as cash and cash equivalents totaled approximately $90.4$157.3 million and $73.9$133.9 million at February 2, 20183, 2023 and February 3, 2017,January 28, 2022, respectively.
Investments in debt and equity securities
The Company accounts for investments in debt and marketable equity securities as held-to-maturity, available-for-sale, or trading, depending on their classification. Debt securities categorized as held-to-maturity are stated at amortized cost. Debt and equity securities categorized as available-for-sale are stated at fair value, with any unrealized gains and losses, net of deferred income taxes, reported as a component of Accumulated other comprehensive loss. Trading securities are stated at fair value, with changes in fair value recorded as a component of Selling, general and administrative (“SG&A”) expense. The cost of securities sold is based upon the specific identification method.
Merchandise inventories
Inventories are stated at the lower of cost or market (“LCM”) with cost determined using the retail last-in, first-out (“LIFO”) method as this method results in a better matching of costs and revenues. Under the Company’s retail inventory method (“RIM”), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales at a department level. The use of the RIM will result in valuing inventories at LCM if markdowns are currently taken as a reduction of the retail value of inventories. Costs directly associated with warehousing and distribution are capitalized into inventory.
50
The excess of current cost over LIFO cost was approximately $78.5$813.6 million and $80.7$296.3 million at February 2, 20183, 2023 and February 3, 2017,January 28, 2022, respectively. Current cost is determined using the RIM on a first-in, first-out basis. Under the LIFO inventory method, the impacts of rising or falling market price changes increase or decrease cost of sales (the LIFO provision or benefit). The Company recorded a LIFO provision (benefit) of $(2.2)$517.3 million in 2017, $(12.2)2022,
49
$180.4 million in 2016,2021, and $(2.3)$5.1 million in 2015,2020, which is included in cost of goods sold in the consolidated statements of income.
The Company purchases its merchandise from a wide variety of suppliers. The Company’s largest and secondtwo largest suppliers each accounted for approximately 10% and 8%, respectively, of the Company’s purchases in 2017.2022.
Vendor rebates
The Company accounts for all cash consideration received from vendors in accordance with applicable accounting standards pertaining to such arrangements. Cash consideration received from a vendor is generally presumed to be a rebate or an allowance and is accounted for as a reduction of merchandise purchase costs as earned. However, certain specific, incremental and otherwise qualifying SG&A expenses related to the promotion or sale of vendor products may be offset by cash consideration received from vendors, in accordance with arrangements such as cooperative advertising, when earned for dollar amounts up to but not exceeding actual incremental costs.
Prepaid expenses and other current assets
Prepaid expenses and other current assets include prepaid amounts for rent, maintenance, business licenses, advertising, and insurance, and amounts receivable for certain vendor rebates and other miscellaneous receivables (primarily those expected to be collected in cash), and coupons.prepaid amounts for SAAS fees, maintenance, business licenses and insurance.
Property and equipment
In 2007, the Company’s property and equipment was recorded at estimated fair values as the result of a merger transaction. Property and equipment acquired subsequent to the merger has beenis recorded at cost. The Company records depreciation and amortization on a straight-line basis over the assets’ estimated useful lives. TheAmounts included in the Company’s property and equipment balances and depreciabletheir estimated lives are summarized as follows:
| | | | | | | | | | | |
|
| |
| February 3, |
| January 28, |
| ||||
(In thousands) | | Life | | 2023 | | 2022 |
| ||||
Land |
| Indefinite | | $ | 230,814 | | $ | 227,085 | | ||
Land improvements |
| | 20 | | |
| 98,567 | |
| 96,402 | |
Buildings |
| 39 | - | 40 | |
| 1,561,440 | |
| 1,446,126 | |
Leasehold improvements |
| | (a) | | |
| 1,011,788 | |
| 889,782 | |
Furniture, fixtures and equipment |
| 3 | - | 10 | |
| 5,714,456 | |
| 4,984,534 | |
Construction in progress | | | | | |
| 313,615 | |
| 131,073 | |
Right of use assets - finance leases | | Various | | | 215,052 | | | 162,772 | | ||
| | | | | |
| 9,145,732 | |
| 7,937,774 | |
Less accumulated depreciation and amortization | | | | | |
| (3,909,423) | |
| (3,591,647) | |
Net property and equipment | | | | | | $ | 5,236,309 | | $ | 4,346,127 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciable |
| February 2, |
| February 3, |
| ||||
(In thousands) |
| Life |
| 2018 |
| 2017 |
| ||||
Land |
| Indefinite |
| $ | 212,033 |
| $ | 199,171 |
| ||
Land improvements |
|
|
| 20 |
|
| 79,597 |
|
| 74,209 |
|
Buildings |
| 39 | - | 40 |
|
| 1,116,872 |
|
| 1,013,227 |
|
Leasehold improvements |
|
|
| (a) |
|
| 507,894 |
|
| 438,711 |
|
Furniture, fixtures and equipment |
| 3 | - | 10 |
|
| 3,186,406 |
|
| 2,797,144 |
|
Construction in progress |
|
|
|
|
|
| 72,490 |
|
| 72,540 |
|
|
|
|
|
|
|
| 5,175,292 |
|
| 4,595,002 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
| 2,474,010 |
|
| 2,160,546 |
|
Net property and equipment |
|
|
|
|
| $ | 2,701,282 |
| $ | 2,434,456 |
|
(a) |
|
|
Depreciation and amortization expense related to property and equipment was approximately $403.3$717.8 million, $378.3$635.9 million and $350.6$569.3 million for 2017, 20162022, 2021 and 2015,2020, respectively. Amortization of capital lease assets is included in depreciation expense. Interest on borrowed funds during the construction of property and equipment is capitalized where applicable. Interest costs of $2.0$4.8 million, $1.4$1.2 million, and $1.4less than $0.1 million were capitalized in 2017, 20162022, 2021 and 2015,2020, respectively.
51
Impairment of long-lived assets
When indicators of impairment are present, the Company evaluates the carrying value of long-lived assets, excluding goodwill and other indefinite-lived intangible assets, in relation to the operating performance and future cash flows or the appraised values of the underlying assets. Generally, the Company’s policy is to review for impairment stores open more than three years for which current cash flows from operations are negative. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows expected to be
50
generated by the assets. The Company’s estimate of undiscounted future cash flows is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s estimated fair value. The fair value is estimated based primarily upon estimated future cash flows over the asset’s remaining useful life (discounted at the Company’s credit adjusted risk-free rate) or other reasonable estimates of fair market value. Assets to be disposed of are adjusted to the fair value less the cost to sell if less than the book value.
The Company recorded impairment charges included in SG&A expense of approximately $7.8$2.1 million in 2017, $6.32022, $2.6 million in 20162021 and $5.9$2.7 million in 2015,2020, to reduce the carrying value of certain of its stores’ assets. Such action was deemed necessary based on the Company’s evaluation that such amounts would not be recoverable primarily due to insufficient sales or excessive costs resulting in the carrying value of the assets exceeding the estimated undiscounted future cash flows generated by the assets at these locations.
Goodwill and other intangible assets
TheIf not deemed indefinite, the Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite.lives. Goodwill and intangible assets with indefinite lives are tested for impairment annually or more frequently if indicators of impairment are present. Definite lived intangible assets are tested for impairment if indicators of impairment are present. Impaired assets are written down to fair value as required. No impairment of intangible assets has been identified during any of the periods presented.
In accordance with accounting standards for goodwill and indefinite-lived intangible assets, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test. If the results of such test and if impaired,indicate impairment, the associated assets must be written down to fair value as described in further detail below.
The quantitative goodwill impairment test is a two-step process that would requirerequires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimatingcomparing the fair value of an entity’s reporting units based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the implied fair value of goodwill would require the entity to allocate the estimated fair value of its reporting unit to its assets and liabilities. Any unallocated fair value would representcarrying amount, including goodwill. If the implied fair value of the reporting unit is less than its carrying amount, management would then determine if the difference between the carrying amount and fair value is greater than the carrying amount of goodwill whichallocated to the reporting unit. If it is, the impairment recognized would be comparedequal to the total carrying amount of goodwill allocated to the reporting unit, and if not, impairment would be recognized equal to the difference between the carrying amount of the reporting unit and its corresponding carryingfair value.
The quantitative impairment test for intangible assets compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
52
the Company’s other intangible assets are its trade names and trademarks which have an indefinite life.
Other assets
Noncurrent Other assets consist primarily of investments and qualifying prepaid expenses for maintenance, beer and wine licenses, and utility security and other deposits.
51
Accrued expenses and other liabilities
Accrued expenses and other consist of the following:
|
|
|
|
|
|
|
| |||||||
|
| February 2, |
| February 3, |
| |||||||||
| | | | | | | | |||||||
|
| February 3, |
| January 28, |
| |||||||||
(In thousands) |
| 2018 |
| 2017 |
| | 2023 | | 2022 |
| ||||
Compensation and benefits |
| $ | 118,755 |
| $ | 91,243 |
| | $ | 214,472 | | $ | 215,355 | |
Insurance |
|
| 95,411 |
|
| 85,240 |
| |||||||
Self-insurance reserves | |
| 136,911 | |
| 127,719 | | |||||||
Taxes (other than taxes on income) |
|
| 164,451 |
|
| 175,099 |
| |
| 296,343 | |
| 324,438 | |
Other |
|
| 171,041 |
|
| 149,284 |
| |
| 389,193 | |
| 381,627 | |
|
| $ | 549,658 |
| $ | 500,866 |
| |||||||
| | $ | 1,036,919 | | $ | 1,049,139 | | |||||||
Included in other accrued expenses are liabilities for utilities, interest, maintenance, freight expense, interest, utilities, maintenance and credit card processing fees.legal settlements.
Insurance liabilities
The Company retains a significant portion of risk for its workers’ compensation, employee health, general liability, property, automobile, and certain third-party landlord general liability claim exposures. Accordingly, provisions are made for the Company’s estimates of such risks.risks which are recorded as self-insurance reserves pursuant to Company policy. The undiscounted future claim costs for the workers’ compensation, general liability, landlord liability, and health claim risks are derived using actuarial methods which are sensitive to significant assumptions such as loss development factors, trend factors, pure loss rates, and are recorded as self-insurance reserves pursuant to Company policy.projected claim counts. To the extent that subsequent claim costs vary from thosethe Company’s estimates, future results of operations will be affected as the reserves are adjusted.
Ashley River Insurance Company (“ARIC”), a Tennessee-based wholly owned captive insurance subsidiary of the Company, charges the operating subsidiary companies premiums to insure the retained workers’ compensation, medical stop-loss, and non-property general liability exposures. Pursuant to Tennessee insurance regulations, ARIC maintains certain levels of cash and cash equivalents related to its self-insured exposures.
Operating leases and related liabilitiesLeases
Rent expense is recognized over the term of the lease. The Company records minimum rental expenseoperating lease right of use assets and liabilities on its balance sheet. Lease liabilities are recorded at a discount based upon the Company’s estimated collateralized incremental borrowing rate. Factors incorporated into the calculation of lease discount rates include the valuations and yields of the Company’s senior notes, their credit spread over comparable U.S. Treasury rates, and an index of the credit spreads for all North American investment grade companies by rating. To determine an indicative secured rate, the Company uses the estimated credit spread improvement that would result from an upgrade of one ratings classification by tenor.
The Company records single lease cost on a straight-line basis over the base, non-cancelable lease term commencing on the date that the Company takes physical possession of the property from the landlord, which normally includesmay include a period prior to the opening of a store openingor other facility to make any necessary leasehold improvements and install store fixtures. WhenAny tenant allowances received are recorded as a lease contains a predetermined fixed escalationreduction of the minimum rent,right of use asset. Leases with an initial term of 12 months or less are not recorded on the Company recognizes the related rentbalance sheet and lease expense for such leases is recognized on a straight-line basis over the lease term. The Company combines lease and records the difference between the recognized rental expensenonlease components. Many leases include one or more options to renew, and the amounts payable underexercise of lease renewal options is at the Company’s sole discretion. The Company’s lease as deferred rent. Tenant allowances, to the extent received, are recorded as deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease. The difference between the calculated expense and the amounts paid result in a liability classified in other long-term liabilities in the consolidated balance sheets, and totaled approximately $65.9 million and $61.1 million at February 2, 2018 and February 3, 2017, respectively.agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company recognizes contingent rental expense when the achievement of specified sales targets is considered probable. The amount expensed but not paid as of February 2, 2018 and February 3, 2017 was approximately $2.7 million and $3.5 million, respectively, and is included in Accrued expenses and other in the consolidated balance sheets.
53
52
Other liabilities
Noncurrent Other liabilities consistprimarily consists of the following:self-insurance which equaled $137.8 million in 2022 and $129.7 million in 2021.
|
|
|
|
|
|
|
|
|
| February 2, |
| February 3, |
| ||
(In thousands) |
| 2018 |
| 2017 |
| ||
Insurance |
| $ | 134,256 |
| $ | 137,743 |
|
Deferred rent |
|
| 65,856 |
|
| 61,082 |
|
Deferred gain on sale leaseback |
|
| 44,781 |
|
| 49,259 |
|
Lease liabilities for closed stores |
|
| 24,174 |
|
| 3,483 |
|
Other |
|
| 36,877 |
|
| 28,215 |
|
|
| $ | 305,944 |
| $ | 279,782 |
|
Fair value accounting
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Other comprehensive income
The Company previously recorded a loss on the settlement of treasury locksderivatives associated with the issuance of long-term debt in 2013 which was deferred to other comprehensive income and is being amortized as an increase to interest expense over the 10-year period of the debt’s maturity.
Revenue and gain recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of merchandise. All sales are net of discounts and are presented net of taxes assessed by governmental authorities that are imposed concurrent with those sales. The Company records gain contingencies when realized.
The Company recognizes gift card sales revenue at the time of redemption. The liability for gift cards is established for the cash value at the time of purchase of the gift card. The liability for outstanding gift cards was approximately $4.2$10.7 million and $3.4$9.7 million at February 2, 20183, 2023 and February 3, 2017,January 28, 2022, respectively, and is recorded in Accrued expenses and other liabilities. Estimated breakage revenue, a percentage of gift cards that will
54
never be redeemed based on historical redemption rates, is recognized over time in proportion to actual gift card redemptions. The Company recorded breakage revenue of $0.6$2.3 million, $0.5$1.7 million and $0.6$1.3 million in 2017, 20162022, 2021 and 2015,2020, respectively.
Advertising costs
Advertising costs are expensed upon performance, “first showing” or distribution, and are reflected in SG&A expenses net of earned cooperative advertising amounts provided by vendors which are specific, incremental and otherwise qualifying expenses related to the promotion or sale of vendor products for dollar amounts up to but not exceeding actual incremental costs. Advertising costs were $68.8$126.0 million, $82.7$117.2 million and $89.3$107.4 million in 2017, 2016
53
2022, 2021 and 2015,2020, respectively. These costs primarily include promotional circulars, targeted circulars supporting new stores, television and radio advertising, and in-store signage, and costs associated with the sponsorships of certain automobile racing activities in 2016 and 2015.signage. Vendor funding for cooperative advertising offset reported expenses by $33.8$33.4 million, $35.9$34.3 million and $36.7$33.4 million in 2017, 20162022, 2021 and 2015,2020, respectively.
Share-based payments
The Company recognizes compensation expense for share-based compensation based on the fair value of the awards on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate may be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the prior estimate. The forfeiture rate is the estimated percentage of share-based awards granted that are expected to be forfeited or canceled before becoming fully vested. The Company bases this estimate on historical experience or estimates of future trends, as applicable. An increase in the forfeiture rate will decrease compensation expense.
The fair value of each option grant is separately estimated and amortized into compensation expense on a straight-line basis between the applicable grant date and each vesting date. The Company has estimated the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive to variation in the determination of compensation expense.
The Company calculates compensation expense for restricted stock, share units and similar awards as the difference between the market price of the underlying stock or similar award on the grant date and the purchase price, if any. Such expense is recognized on a straight-line basis for time-based awards and generally on an accelerated or straight-line basis for performance awards overdepending on the period inover which the recipient earns the awards.
Store pre-opening costs
Pre-opening costs related to new store openings and the related construction periods are expensed as incurred.
Income taxes
Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. Deferred income tax expense or benefit is the net change during the year in the Company’s deferred income tax assets and liabilities.
The Company includes income tax related interest and penalties as a component of the provision for income tax expense.
Income tax reserves are determined using a methodology which requires companies to assess each income tax position taken using a two-step process. A determination is first made as to whether it is more likely
55
than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial results.
Management estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
54
consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Accounting standards
In May 2014,March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued comprehensive new accounting standards updates pertaining to reference rate reform. This collective guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of LIBOR, related to regulators in several jurisdictions around the recognitionworld having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of revenue, which specified anthis guidance is effective date for annual reporting periods beginning afterall entities as of March 12, 2020 through December 15, 2016, with early adoption31, 2024. The Company does not permitted. In August 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, with earlier adoption permitted only for annual reporting periods beginning after December 15, 2016. The new guidance allows companies to use either a full retrospective or a modified retrospective approach inexpect the adoption of this guidance. The Company formed a project teamguidance to assess and implement the standard by compiling a list of the applicable revenue streams, evaluating relevant contracts and comparing the Company’s current accounting policies to the new standard. As a result of the efforts of this project team, the Company has identified customer incentives and gross versus net considerations as the areas in which it would most likely be affected by the new guidance. The Company has assessed the impacts of the new standard and the related design of internal control over financial reporting. Based upon the terms of the Company’s agreements and the materiality of transactions related to customer incentives and gross versus net considerations, the adoption had no effect on the Company’s consolidated results of operations, financial position or cash flows. The Company adopted this guidance on February 3, 2018.
In February 2016, the FASB issued new guidance related to lease accounting, which when effective will require a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Currently, a modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The FASB has proposed guidance which would allow companies to record the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings, although such guidance has not yet been formally issued. The Company formed a project team to assess and implement the standard, which is evaluating existing contractual arrangements for embedded leases, and comparing the Company’s current accounting policies to the new standard. As a result of the efforts of this project team, the Company has identified its store leases as the area in which it would most likely be affected by the new guidance. The Company’s assessment of the impact that adoption of this guidance will have on its consolidated financial statements is ongoing and the Company is anticipating a material impact because it is party to a significant number of lease contracts for its stores.
In October 2016, the FASB issued amendments to existing guidance related to accounting for intra-entity transfers of assets other than inventory. These amendments require an entity to recognize the income tax
56
consequences of such transfers when the transfer occurs and affects the Company’s historical accounting for intra-entity transfers of certain intangible assets. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted subject to certain guidelines. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance on February 3, 2018 which resulted in an increase in deferred income tax liabilities and a decrease in retained earnings of approximately $33.6 million.
In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. The Company’s assessment of the impact that adoption of this guidance will have on its consolidated financial statements is ongoing, but the Company currently does not anticipate a material effect on consolidated results of operations, financial position or cash flows.
ReclassificationsIn September 2022, the FASB issued new required disclosures for supplier finance programs. This is intended to enhance the transparency about the use of supplier finance programs for investors. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with the exception of the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The amendments should be applied retrospectively to each period in which a balance sheet is presented, except for disclosure of rollforward information, which should be applied prospectively. The Company does not expect the adoption of this guidance to have a material impact on its consolidated results of operations, financial position or cash flows.
Certain financial disclosures relating to prior periods have been reclassified to conform to the current year presentation where applicable.
2. Goodwill and other intangible assets
The Company’s other intangible assets primarily consist of trade names and trademarks of $1.2 billion which have an indefinite life. The Company’s goodwill balance has an indefinite life and is not expected to be deductible for tax purposes.
57
3. Earnings per share
Earnings per share is computed as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| ||||||
|
|
|
|
| Weighted |
|
|
|
|
|
| Net |
| Average |
| Per Share |
| ||
|
| Income |
| Shares |
| Amount |
| ||
Basic earnings per share |
| $ | 1,538,960 |
| 272,751 |
| $ | 5.64 |
|
Effect of dilutive share-based awards |
|
|
|
| 611 |
|
|
|
|
Diluted earnings per share |
| $ | 1,538,960 |
| 273,362 |
| $ | 5.63 |
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| 2016 |
| |||||||||||||||
|
|
|
|
| Weighted |
|
|
|
| |||||||||
|
| Net |
| Average |
| Per Share |
| |||||||||||
|
| Income |
| Shares |
| Amount |
| |||||||||||
| | | | | | | | | | |||||||||
| | 2022 | | |||||||||||||||
|
| | |
| Weighted |
| | |
| |||||||||
| | Net | | Average | | Per Share | | |||||||||||
| | Income | | Shares | | Amount | | |||||||||||
Basic earnings per share |
| $ | 1,251,133 |
| 281,317 |
| $ | 4.45 |
| | $ | 2,415,989 |
| 225,148 | | $ | 10.73 | |
Effect of dilutive share-based awards |
|
|
|
| 944 |
|
|
|
| | | |
| 1,149 | | | | |
Diluted earnings per share |
| $ | 1,251,133 |
| 282,261 |
| $ | 4.43 |
| | $ | 2,415,989 |
| 226,297 | | $ | 10.68 | |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| 2015 |
| |||||||||||||||
|
|
|
|
| Weighted |
|
|
|
| |||||||||
|
| Net |
| Average |
| Per Share |
| |||||||||||
|
| Income |
| Shares |
| Amount |
| |||||||||||
| | | | | | | | | | |||||||||
| | 2021 | | |||||||||||||||
|
| | |
| Weighted |
| | |
| |||||||||
| | Net | | Average | | Per Share | | |||||||||||
| | Income | | Shares | | Amount | | |||||||||||
Basic earnings per share |
| $ | 1,165,080 |
| 294,330 |
| $ | 3.96 |
| | $ | 2,399,232 |
| 234,261 | | $ | 10.24 | |
Effect of dilutive share-based awards |
|
|
|
| 881 |
|
|
|
| | | |
| 1,551 | | | | |
Diluted earnings per share |
| $ | 1,165,080 |
| 295,211 |
| $ | 3.95 |
| | $ | 2,399,232 |
| 235,812 | | $ | 10.17 | |
| | | | | | | | | |
| | 2020 | | ||||||
|
| | |
| Weighted |
| | |
|
| | Net | | Average | | Per Share | | ||
| | Income | | Shares | | Amount | | ||
Basic earnings per share | | $ | 2,655,050 |
| 248,171 | | $ | 10.70 | |
Effect of dilutive share-based awards | | | |
| 1,905 | | | | |
Diluted earnings per share | | $ | 2,655,050 |
| 250,076 | | $ | 10.62 | |
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is determined based on the dilutive effect of share-based awards using the treasury stock method.
55
Share-based awards that were outstanding at the end of the respective periods, but were not included in the computation of diluted earnings per share because the effect of exercising such options would be antidilutive, were 2.1approximately 0.1 million, 1.70.1 million and 1.30.2 million in 2017, 20162022, 2021 and 2015,2020, respectively.
4. 3.Income taxes
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
|
| 2022 |
| 2021 |
| 2020 |
| ||||||
Current: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Federal |
| $ | 426,933 |
| $ | 613,009 |
| $ | 590,120 |
| | $ | 400,752 | | $ | 472,913 | | $ | 614,207 | |
Foreign |
|
| 105 |
|
| 135 |
|
| 1,678 |
| |
| 279 | |
| 384 | |
| 127 | |
State |
|
| 79,011 |
|
| 88,990 |
|
| 84,021 |
| |
| 63,562 | |
| 76,261 | |
| 100,002 | |
|
|
| 506,049 |
|
| 702,134 |
|
| 675,819 |
| ||||||||||
| |
| 464,593 | |
| 549,558 | |
| 714,336 | | ||||||||||
Deferred: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Federal |
|
| (159,728) |
|
| 11,053 |
|
| 6,410 |
| |
| 195,529 | |
| 93,114 | |
| 32,433 | |
Foreign |
|
| (22) |
|
| — |
|
| — |
| | | (24) | | | (38) | | | (104) | |
State |
|
| 22,021 |
|
| 1,308 |
|
| 5,715 |
| |
| 40,527 | |
| 21,283 | |
| 2,665 | |
|
|
| (137,729) |
|
| 12,361 |
|
| 12,125 |
| ||||||||||
|
| $ | 368,320 |
| $ | 714,495 |
| $ | 687,944 |
| ||||||||||
| |
| 236,032 | |
| 114,359 | |
| 34,994 | | ||||||||||
| | $ | 700,625 | | $ | 663,917 | | $ | 749,330 | | ||||||||||
58
A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to income before income taxes is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
(Dollars in thousands) |
| 2017 |
| 2016 |
| 2015 |
| | 2022 | | 2021 | | 2020 |
| ||||||||||||||||||
U.S. federal statutory rate on earnings before income taxes |
| $ | 643,326 |
| 33.7 | % | $ | 687,969 |
| 35.0 | % | $ | 648,558 |
| 35.0 | % |
| $ | 654,489 |
| 21.0 | % | $ | 643,262 |
| 21.0 | % | $ | 714,920 |
| 21.0 | % |
Impact of tax rate changes |
|
| (310,756) |
| (16.3) |
|
| — |
| — |
|
| — |
| — |
| ||||||||||||||||
State income taxes, net of federal income tax benefit |
|
| 61,201 |
| 3.2 |
|
| 60,168 |
| 3.1 |
|
| 59,700 |
| 3.2 |
| |
| 82,134 |
| 2.6 | |
| 77,086 |
| 2.5 | |
| 81,117 |
| 2.4 | |
Jobs credits, net of federal income taxes |
|
| (26,759) |
| (1.4) |
|
| (18,952) |
| (1.0) |
|
| (21,366) |
| (1.2) |
| |
| (37,639) |
| (1.2) | |
| (39,936) |
| (1.3) | |
| (27,479) |
| (0.8) | |
Increase (decrease) in valuation allowances, net of federal taxes |
|
| 4,435 |
| 0.2 |
|
| (1,474) |
| (0.1) |
|
| (1,371) |
| (0.1) |
| ||||||||||||||||
Stock-based compensation programs |
|
| (2,227) |
| (0.1) |
|
| (9,915) |
| (0.5) |
|
| — |
| — |
| ||||||||||||||||
Decrease in income tax reserves |
|
| (1,837) |
| (0.1) |
|
| (2,161) |
| (0.1) |
|
| (2,037) |
| (0.1) |
| ||||||||||||||||
Other, net |
|
| 937 |
| 0.1 |
|
| (1,140) |
| (0.1) |
|
| 4,460 |
| 0.3 |
| |
| 1,641 |
| 0.1 | |
| (16,495) |
| (0.5) | |
| (19,228) |
| (0.6) | |
|
| $ | 368,320 |
| 19.3 | % | $ | 714,495 |
| 36.3 | % | $ | 687,944 |
| 37.1 | % | ||||||||||||||||
| | $ | 700,625 |
| 22.5 | % | $ | 663,917 |
| 21.7 | % | $ | 749,330 |
| 22.0 | % | ||||||||||||||||
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act reduces the federal corporate tax rate to 21% from 35% effective January 1, 2018, including a reduction in the Company’s current year federal corporate tax rate for 2017 to 33.7% as a result of the Company’s 2017 fiscal year ending approximately one month after the effective date of the Act.
Under accounting standards for income taxes, the impact of new tax legislation must be taken into account in the period in which the new legislation is enacted, including the remeasurement of deferred tax assets and liabilities at the tax rates that such items are expected to reverse in future periods. Subsequent to the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, allowing companies to record provisional amounts during a measurement period not to exceed one year after the enactment date while the accounting impact remains under analysis. The Company’s 2017 provision for income taxes reflects such estimates due to the changes in income tax law, including a provisional tax benefit of $335 million. The provisional tax benefit consists of $310.8 million related to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at the 21% rate and $24.2 million related to the reduced statutory tax rate of 33.7%, compared to 35% in prior years. The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Any subsequent adjustments to provisional estimates will be reflected in the Company’s income tax provision during one or more periods in 2018.
The effective income tax rate for 20172022 was 19.3%22.5% compared to a rate of 36.3%21.7% for 20162021 which represents a net increase of 0.8 percentage points. The effective income tax rate was higher in 2022 primarily due to decreased income tax benefits associated with stock-based compensation compared to 2021.
The effective income tax rate for 2021 was 21.7% compared to a rate of 22.0% for 2020 which represents a net decrease of 170.3 percentage points. The effective income tax rate was lower in 20172021 primarily due to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at 21%, and the changes in the federalincreased income tax laws pursuant to the Act that lowered the Company’sbenefits associated with federal statutory tax rate to 33.7% for 2017, compared to 35% in 2016.
The 2016credits partially offset by a higher state effective tax rate was an expense of 36.3%. This expense was greater than the federal statutory tax rate of 35% due primarilyin 2021 compared to the inclusion of state income taxes in the total effective tax rate. The effective income tax rate was lower in 2016 due principally to the adoption of a change in accounting guidance related to employee share-based payments, requiring the recognition of excess tax benefits in the statement of income rather than in the balance sheet, as reported in prior years.2020.
The 2015 effective tax rate was an expense of 37.1%. This expense was greater than the federal statutory tax rate of 35% primarily due to the inclusion of state income taxes in the total effective tax rate.
59
56
Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
| |||||||
|
| February 2, |
| February 3, |
| |||||||||
| | | | | | | | |||||||
|
| February 3, |
| January 28, |
| |||||||||
(In thousands) |
| 2018 |
| 2017 |
| | 2023 | | 2022 |
| ||||
Deferred tax assets: |
|
|
|
|
|
|
| | | | | | | |
Deferred compensation expense |
| $ | 6,522 |
| $ | 7,626 |
| | $ | 12,029 | | $ | 11,563 | |
Accrued expenses |
|
| 3,324 |
|
| 6,958 |
| |
| 7,274 | |
| 26,984 | |
Accrued rent |
|
| 23,418 |
|
| 24,077 |
| |
| 473 | |
| 552 | |
Lease liabilities | | | 2,760,588 | | | 2,617,954 | | |||||||
Accrued insurance |
|
| 8,630 |
|
| 72,990 |
| |
| 7,514 | |
| 6,971 | |
Accrued incentive compensation |
|
| 6,394 |
|
| 15,170 |
| |
| 26,534 | |
| 30,716 | |
Share based compensation |
|
| 13,442 |
|
| 18,908 |
| | | 15,309 | | | 16,605 | |
Interest rate hedges |
|
| 1,765 |
|
| 3,175 |
| |
| 31 | |
| 383 | |
Tax benefit of income tax and interest reserves related to uncertain tax positions |
|
| 365 |
|
| 746 |
| |
| 77 | |
| 79 | |
Deferred gain on sale-leaseback |
|
| 12,847 |
|
| 20,872 |
| |||||||
State and foreign tax net operating loss carry forwards, net of federal tax | |
| 4,279 | |
| 903 | | |||||||
State tax credit carry forwards, net of federal tax | |
| 7,812 | |
| 6,973 | | |||||||
Other |
|
| 3,900 |
|
| 12,591 |
| |
| 22,756 | |
| 16,715 | |
State tax net operating loss carryforwards, net of federal tax |
|
| 602 |
|
| — |
| |||||||
State tax credit carryforwards, net of federal tax |
|
| 8,350 |
|
| 8,765 |
| |||||||
|
|
| 89,559 |
|
| 191,878 |
| |||||||
Less valuation allowances, net of federal taxes |
|
| (4,435) |
|
| — |
| |||||||
| |
| 2,864,676 | |
| 2,736,398 | | |||||||
Less valuation allowances, net of federal income taxes | |
| (9,001) | |
| (5,235) | | |||||||
Total deferred tax assets |
|
| 85,124 |
|
| 191,878 |
| |
| 2,855,675 | |
| 2,731,163 | |
Deferred tax liabilities: |
|
|
|
|
|
|
| | | | | | | |
Property and equipment |
|
| (255,215) |
|
| (334,430) |
| |
| (684,468) | |
| (572,286) | |
Lease assets | | | (2,728,507) | | | (2,588,709) | | |||||||
Inventories |
|
| (46,244) |
|
| (65,844) |
| |
| (176,798) | |
| (68,780) | |
Trademarks |
|
| (269,820) |
|
| (434,045) |
| |
| (307,734) | |
| (310,011) | |
Prepaid insurance |
|
| (22,875) |
|
| — |
| | | (17,870) | | | (15,278) | |
Other |
|
| (6,672) |
|
| (10,400) |
| |
| (1,204) | |
| (1,353) | |
Total deferred tax liabilities |
|
| (600,826) |
|
| (844,719) |
| |
| (3,916,581) | |
| (3,556,417) | |
Net deferred tax liabilities |
| $ | (515,702) |
| $ | (652,841) |
| | $ | (1,060,906) | | $ | (825,254) | |
The Company has state tax credit carryforwards of approximately $10.6$7.8 million (net of federal benefit) that will expire beginning in 20222023 through 2027 and the Company has approximately $17.6$13.5 million of state apportioned net operating loss carryforwards, which will begin to expire in 20332029 and will continue through 20382041.
The Company establishedhas a valuation allowance for thecertain state tax credit carryforwards and foreign net operating loss carryforwards, in the amount of $4.4$9.0 million and $5.2 million (net of federal benefit) increasingwhich increased income tax expense by $3.8 million and $1.1 million in 2017.2022 and 2021, respectively. Management believes that the results from operations will not generate sufficient taxable income to realize certain statethese deferred tax creditsassets before they expire. In 2016, the Company reversed all of the previously recorded valuation allowance for state tax credit carryforwards in the amount of $1.5 million, which was recorded as a reduction in income tax expense.
Based upon expected future income, managementManagement believes that it is more likely than not that the Company’s results of operations and its existing deferred tax liabilities will generate sufficient taxable income to realize the remaining deferred tax assets.
The Company’s 20132018 and earlier tax years are not open for further examination by the Internal Revenue Service (“IRS”). The IRS, at its discretion, may choose to examine the Company’s 20142019 through 20172021 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, with few exceptions, the Company’s 20142019 and later tax years remain open for examination by the various state taxing authorities.
As of February 2, 2018,3, 2023, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $1.0$8.0 million, $0.7$0.3 million and $0.8$0.0 million, respectively, for a total of $2.5$8.3 million. This total amount is reflected in noncurrent Other liabilities in the consolidated balance sheet.
60
As of February 3, 2017,January 28, 2022, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $3.1$6.2 million, $0.8$0.2 million and $0.9$0.0 million, respectively, for a total of $4.8$6.4 million. This total amount isThese totals are reflected in noncurrent Other liabilities in the consolidated balance sheet.sheets.
57
The Company’s reserve for uncertain tax positions will notis expected to be reduced by $2.4 million in the coming twelve months as a result of expiring statutes of limitations.limitations or settlements. As of February 2, 2018,3, 2023 and January 28, 2022, approximately $1.0$8.0 million and $6.2 million, respectively, of the uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.
The amounts associated with uncertain tax positions included in income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
|
| 2022 |
| 2021 |
| 2020 |
| ||||||
Income tax expense (benefit) |
| $ | (2,076) |
| $ | (3,795) |
| $ | (2,379) |
| | $ | 1,797 | | $ | (1,311) | | $ | 2,411 | |
Income tax related interest expense (benefit) |
|
| (123) |
|
| (31) |
|
| (23) |
| |
| 28 | |
| (281) | |
| 104 | |
Income tax related penalty expense (benefit) |
|
| (9) |
|
| 50 |
|
| 373 |
| |
| — | |
| — | |
| — | |
A reconciliation of the uncertain income tax positions from January 30, 201531, 2020 through February 2, 20183, 2023 is as follows:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
|
| 2022 |
| 2021 |
| 2020 |
| ||||||
Beginning balance |
| $ | 3,117 |
| $ | 6,964 |
| $ | 9,343 |
| | $ | 6,191 | | $ | 7,502 | | $ | 5,090 | |
Increases—tax positions taken in the current year |
|
| 66 |
|
| 41 |
|
| 214 |
| |
| — | |
| — | |
| — | |
Increases—tax positions taken in prior years |
|
| 27 |
|
| 52 |
|
| 17 |
| |
| 3,499 | |
| 2,803 | |
| 3,857 | |
Decreases—tax positions taken in prior years |
|
| — |
|
| (1,435) |
|
| (106) |
| |
| — | |
| — | |
| (1,445) | |
Statute expirations |
|
| (2,169) |
|
| (2,453) |
|
| (2,504) |
| |
| (1,239) | |
| (1,456) | |
| — | |
Settlements |
|
| — |
|
| (52) |
|
| — |
| |
| (463) | |
| (2,658) | |
| — | |
Ending balance |
| $ | 1,041 |
| $ | 3,117 |
| $ | 6,964 |
| | $ | 7,988 | | $ | 6,191 | | $ | 7,502 | |
4.Leases
61As of February 3, 2023, the Company’s primary leasing activities were real estate leases for most of its retail store locations and certain of its distribution facilities. Many of the Company’s store locations are subject to build-to-suit arrangements with landlords which typically carry a primary lease term of up to 15 years. The Company does not control build-to-suit properties during the construction period. Store locations not subject to build-to-suit arrangements are typically shorter-term leases. Certain of the Company’s leased store locations have variable payments based upon actual costs of common area maintenance, real estate taxes and property and liability insurance. In addition, some of the Company’s leased store locations have provisions for variable payments based upon a specified percentage of defined sales volume. The Company’s lease agreements generally do not contain material restrictive covenants.
Most of the Company’s leases include one or more options to renew and extend the lease term. The exercise of lease renewal options is at the Company’s sole discretion. Generally, a renewal option is not deemed to be reasonably certain to be exercised until such option is legally executed. The Company’s leases do not include purchase options or residual value guarantees on the leased property. The depreciable life of leasehold improvements is limited by the expected lease term.
Substantially all of the Company’s leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the consolidated balance sheets. Finance lease assets are included in net property and equipment, and finance lease liabilities are included in long-term obligations, in the consolidated balance sheets. At February 3, 2023, the weighted-average remaining lease term for the Company’s leases was 9.6 years, and the weighted average discount rate was 3.9%. For 2022, 2021 and 2020, operating lease cost of $1.61 billion, $1.49 billion and $1.38 billion, respectively, and variable lease cost of $0.31 billion, $0.28 billion and $0.26 billion, respectively, were reflected as selling, general and administrative expenses in the consolidated statements of income. Cash paid for amounts included in the measurement of operating lease liabilities of $1.62 billion, $1.5 billion and $1.39 billion, respectively, were reflected in cash flows from operating activities in the consolidated statements of cash flows for 2022, 2021 and 2020.
58
The scheduled maturity of the Company’s operating lease liabilities is as follows:
| | | | |
(In thousands) |
| | |
|
2023 | | $ | 1,675,193 | |
2024 | |
| 1,619,954 | |
2025 | |
| 1,518,975 | |
2026 | |
| 1,396,714 | |
2027 | |
| 1,255,062 | |
Thereafter | |
| 5,271,366 | |
Total lease payments (a) | | | 12,737,264 | |
Less imputed interest | | | (2,085,564) | |
Present value of lease liabilities | | $ | 10,651,700 | |
| a) | Excludes approximately $481.0 million of legally binding minimum lease payments for leases signed which have not yet commenced. |
5.Current and long-term obligations
Consolidated current and long-term obligations consist of the following:
|
|
|
|
|
|
|
|
|
| February 2, |
| February 3, |
| ||
(In thousands) |
| 2018 |
| 2017 |
| ||
Senior unsecured credit facilities |
|
|
|
|
|
|
|
Term Facility |
| $ | 175,000 |
| $ | 425,000 |
|
Revolving Facility |
|
| — |
|
| — |
|
4.125% Senior Notes due July 15, 2017 |
|
| — |
|
| 500,000 |
|
1.875% Senior Notes due April 15, 2018 (net of discount of $16 and $111) |
|
| 399,984 |
|
| 399,889 |
|
3.250% Senior Notes due April 15, 2023 (net of discount of $1,322 and $1,552) |
|
| 898,678 |
|
| 898,448 |
|
4.150% Senior Notes due November 1, 2025 (net of discount of $632 and $700) |
|
| 499,368 |
|
| 499,300 |
|
3.875% Senior Notes due April 15, 2027 (net of discount of $413) |
|
| 599,587 |
|
| — |
|
Unsecured commercial paper notes |
|
| 430,200 |
|
| 490,500 |
|
Capital lease obligations |
|
| 12,321 |
|
| 3,643 |
|
Tax increment financing due February 1, 2035 |
|
| 7,335 |
|
| 8,840 |
|
Debt issuance costs, net |
|
| (16,515) |
|
| (14,094) |
|
|
|
| 3,005,958 |
|
| 3,211,526 |
|
Less: current portion |
|
| (401,345) |
|
| (500,950) |
|
Long-term portion |
| $ | 2,604,613 |
| $ | 2,710,576 |
|
| | | | | | | |
|
| February 3, |
| January 28, |
| ||
(In thousands) | | 2023 | | 2022 |
| ||
Revolving Facility | | $ | — | | $ | — | |
364-Day Revolving Facility | | | — | | | — | |
3.250% Senior Notes due April 15, 2023 (net of discount of $0 and $319) | |
| — | |
| 899,681 | |
4.250% Senior Notes due September 20, 2024 (net of discount of $563 and $0) | | | 749,437 | | | — | |
4.150% Senior Notes due November 1, 2025 (net of discount of $249 and $332) | | | 499,751 | | | 499,668 | |
3.875% Senior Notes due April 15, 2027 (net of discount of $207 and $251) | | | 599,793 | | | 599,749 | |
4.625% Senior Notes due November 1, 2027 (net of discount of $495 and $0) | | | 549,505 | | | — | |
4.125% Senior Notes due May 1, 2028 (net of discount of $287 and $336) | | | 499,713 | | | 499,664 | |
3.500% Senior Notes due April 3, 2030 (net of discount of $504 and $564) | | | 952,440 | | | 988,990 | |
5.000% Senior Notes due November 1, 2032 (net of discount of $2,346 and $0) | | | 697,654 | | | — | |
4.125% Senior Notes due April 3, 2050 (net of discount of $4,766 and $4,857) | | | 495,234 | | | 495,143 | |
5.500% Senior Notes due November 1, 2052 (net of discount of $292 and $0) | | | 299,708 | | | — | |
Unsecured commercial paper notes | | | 1,501,900 | | | 54,300 | |
Other | | | 200,695 | | | 159,525 | |
Debt issuance costs, net | |
| (36,431) | |
| (24,652) | |
Long-term obligations | | $ | 7,009,399 | | $ | 4,172,068 | |
At February 2, 2018,3, 2023, the Company’s senior unsecured credit facilities (the “Facilities”) consisted of a $175.0 million senior unsecured term loan facility (the “Term Facility”) and a $1.25 billionexisting senior unsecured revolving credit facility (the “Revolving Facility”) had a commitment of $2.0 billion that provides for the issuance of letters of credit up to $175.0 million. The Term Facility$100.0 million and is scheduled to mature on October 20, 2020, and the Revolving Facility is scheduled to mature on February 22, 2022.December 2, 2026.
Borrowings under the FacilitiesRevolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) LIBORAdjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10% or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of February 2, 20183, 2023 was 1.10%1.015% for LIBORAdjusted Term SOFR borrowings and 0.10%0.015% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Facilities,Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility. As of February 2, 2018,3, 2023, the commitmentfacility fee rate was 0.15%0.11%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the FacilitiesRevolving Facility are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings.
59
The weighted average all-inCompany entered into a 364-day $750 million unsecured revolving credit facility (the “364-Day Revolving Facility”) on January 31, 2023, which will expire on January 30, 2024. At February 3, 2023, the 364-Day Revolving Facility had no outstanding borrowing.
Borrowings under the 364-Day Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) Adjusted Term SOFR (which is Term SOFR (as published by CME Group Benchmark Administration Limited) plus a credit spread adjustment of 0.10%) or (b) a base rate (which is usually equal to the prime rate). The Company is also required to pay a facility fee to the lenders under the 364-Day Revolving Facility for any used and unused commitments. As of February 3, 2023, the applicable interest rate margin for Adjusted Term SOFR loans was 1.035% and the facility fee rate was 0.09%. The applicable interest rate margins for borrowings and the facility fees under the Facilities was 2.7% as of February 2, 2018.364-Day Revolving Facility are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings.
The Facilities can be voluntarily prepaid in whole or in part at any time without penalty. There is no required principal amortization underRevolving Facility and the Facilities. The Facilities364-Day Revolving Facility contain a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s (and its subsidiaries’) ability to: incur additional liens; sell all or substantially all of the Company’s assets; consummate certain fundamental changes or change in the Company’s lines of business; and incur additional subsidiary indebtedness. The FacilitiesRevolving Facility and the 364-Day Revolving Facility also contain financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 2, 2018,3, 2023, the Company was in compliance with all such covenants. The FacilitiesBoth facilities also contain customary events of default.
As of February 2, 2018, the entire balance of the Term Facility was outstanding and, under the Revolving Facility,3, 2023, the Company had no outstanding borrowings, no outstanding letters of credit, of $9.1 million, and borrowing
62
availability of $1.2$2.0 billion under the Revolving Facility that, due to its intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $624.7$0.3 billion. As of February 3, 2023, under the 364-Day Revolving Facility, the Company had no outstanding borrowings and borrowing availability of $750 million. At February 3, 2023, the Company had combined availability under the credit facilities of $1.0 billion. In addition, the Company had outstanding letters of credit of $37.5$39.7 million which were issued pursuant to separate agreements.
As of February 2, 2018,3, 2023, the Company had a commercial paper program under which the Company may issue unsecured commercial paper notes (the “CP Notes”) from time to time in an aggregate amount not to exceed $1.0$2.0 billion outstanding at any time. The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness. The Company intends to maintain available commitments under the amended and restated revolving credit facilitiesRevolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. As of February 2, 2018,3, 2023, the Company’s consolidated balance sheet reflected outstanding CP notesNotes of $430.2 million, which were classified as long-term obligations due to the Company’s intent and ability to refinance these obligations as long-term debt. An additional $186 million of outstanding$1.5 billion. CP Notes totaling $230.8 million were held by a wholly-owned subsidiary of the Company and are therefore not reflected on the consolidated balance sheet. The weighted average interest rate for borrowings under the commercial paper program was 1.8% as of February 2, 2018.sheets.
On April 11, 2017,September 20, 2022, the Company issued $600.0$750.0 million aggregate principal amount of 3.875%4.25% senior notes due 2024 (the “2024 Senior Notes”), net of discount of $0.7 million, $550.0 million aggregate principal amount of 4.625% senior notes due 2027 (the “2027“November 2027 Senior Notes”), at anet of discount of $0.4$0.5 million, which$700.0 million aggregate principal amount of 5.0% senior notes due 2032 (the “2032 Senior Notes”), net of discount of $2.4 million, and $300.0 million aggregate principal amount of 5.50% senior notes due 2052 (the “2052 Senior Notes”), net of discount of $0.3 million. The 2024 Senior Notes are scheduled to mature on April 15, 2027.September 20, 2024, the November 2027 Senior Notes are scheduled to mature on November 1, 2027, the 2032 Senior Notes are scheduled to mature on November 1, 2032 and the 2052 Senior Notes are scheduled to mature on November 1, 2052. Interest on the 20272024 Senior Notes is payable in cash on April 15March 20 and October 15September 20 of each year, commencing on March 20, 2023. Interest on the November 2027 Senior Notes, the 2032 Senior Notes and commencedthe 2052 Senior Notes is payable in cash on October 15, 2017.May 1 and November 1 of each year, commencing on May 1, 2023. The Company incurred $5.2$16.5 million of debt issuance costs associated with the issuance of the 20272024 Senior Notes. The net proceeds from the sale of theNotes, November 2027 Senior Notes, were used to repay all of the Company’s outstanding senior notes due in 2017 as discussed below and for general corporate purposes. Collectively, the 20272032 Senior Notes and 2052 Senior Notes.
Collectively, the Company’s other Senior Notes due 2018, 20232024, 2025, April 2027, November 2027, 2028, 2030, 2032, 2050 and 2025 as reflected in the table above2052 comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented
60
and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”).
On April 27, 2017, the Company redeemed $500.0 million aggregate principal amount of outstanding 4.125% senior notes due 2017 (the “2017 Senior Notes”), resulting in a pretax loss of $3.4 million which is reflected in Other (income) expense in the consolidated statement of income for the year ended February 2, 2018.
The Company may redeem some or all of its Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of the Senior Notes has the right to require the Company to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Senior Indenture contains covenants limiting, among other things, the ability of the Company and its subsidiaries to (subject to certain exceptions): consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; and to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.
The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Notes to become or to be declared due and payable, as applicable.
During the second quarter of 2021, the Company entered into interest rate swaps on a portion of the 2030 Senior Notes. These interest rate swaps are being accounted for as fair value hedges, with the derivative asset or liability offset by a corresponding adjustment to the carrying value of the 2030 Senior Notes. Such arrangements are not material to the Company’s consolidated financial statements.
Scheduled debt maturities at February 2, 2018, including capital lease obligations,3, 2023 for the Company’s fiscal years listed below are as follows (in thousands): 20182023 - $831,545; 2019$1,516,478; 2024 - $1,950; 2020$764,355; 2025 - $176,958; 2021$514,524; 2026 - $1,913; 2022$14,378; 2027 - $1,791;$1,164,532; thereafter - $2,010,699.$3,128,329.
63
6.Assets and liabilities measured at fair value
The following table presents the Company’s assets and liabilities required to be measured at fair value as of February 2, 2018,3, 2023, aggregated by the level in the fair value hierarchy within which those measurements are classified.
| | | | | | | | | | | | | |
|
| Quoted Prices |
| | |
| | |
| | |
| |
| | in Active | | | | | | | | | | | |
| | Markets | | Significant | | | | | | | | ||
| | for Identical | | Other | | Significant | | Total Fair | | ||||
| | Assets and | | Observable | | Unobservable | | Value at | | ||||
| | Liabilities | | Inputs | | Inputs | | February 3, | | ||||
(In thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | 2023 | | ||||
Liabilities: | | | | | | | | | | | | | |
Long-term obligations (a) | | $ | 5,223,916 | | $ | 1,702,595 | | $ | — | | $ | 6,926,511 | |
Deferred compensation (b) | |
| 45,794 | |
| — | |
| — | |
| 45,794 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
|
|
| |
|
| in Active |
|
|
|
|
|
|
|
|
|
| |
|
| Markets |
| Significant |
|
|
|
|
|
|
| ||
|
| for Identical |
| Other |
| Significant |
| Total Fair |
| ||||
|
| Assets and |
| Observable |
| Unobservable |
| Value at |
| ||||
|
| Liabilities |
| Inputs |
| Inputs |
| February 2, |
| ||||
(In thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| 2018 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations (a) |
| $ | 2,440,495 |
| $ | 624,856 |
| $ | — |
| $ | 3,065,351 |
|
Deferred compensation (b) |
|
| 24,956 |
|
| — |
|
| — |
|
| 24,956 |
|
| (a) |
| Included in the consolidated balance sheet at book value as |
| (b) |
| Reflected at fair value in the consolidated balance sheet as a component of Accrued expenses and other current liabilities of |
The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, short-term investments, receivables and payables approximate their respective fair values. The Company does not have any recurring fair value measurements using significant unobservable inputs (Level 3) as of February 2, 2018.3, 2023.
61
7.Commitments and contingencies
Leases
As of February 2, 2018, the Company was committed under operating lease agreements for most of its retail stores. Many of the Company’s stores are subject to build-to-suit arrangements with landlords which typically carry a primary lease term of up to 15 years with multiple renewal options. The Company also has stores subject to shorter-term leases and many of these leases have renewal options. Certain of the Company’s leased stores have provisions for contingent rent based upon a specified percentage of defined sales volume.
The land and buildings of the Company’s DCs in Missouri, Mississippi and California are subject to operating lease agreements and the leased Oklahoma DC is subject to a financing arrangement. Certain leases contain restrictive covenants, and as of February 2, 2018, the Company is not aware of any material violations of such covenants.
The Company is accounting for the Oklahoma DC as a financing obligation as a result of, among other things, the lessor’s ability to put the property back to the Company under certain circumstances. The property and equipment, along with the related lease obligation associated with this transaction are recorded in the consolidated balance sheets. The Company is the owner of a secured promissory note (the “Ardmore Note”) which represents debt issued by the third party entity from which the Company leases the Oklahoma DC and therefore the Company holds the debt instrument pertaining to its lease financing obligation. Because a legal right of offset exists, the Company is accounting for the Ardmore Note as a reduction of its outstanding financing obligation in its consolidated balance sheets.
64
Future minimum payments as of February 2, 2018 for operating leases are as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
2018 |
| $ | 1,088,538 |
|
2019 |
|
| 1,041,729 |
|
2020 |
|
| 969,829 |
|
2021 |
|
| 897,913 |
|
2022 |
|
| 825,846 |
|
Thereafter |
|
| 4,284,309 |
|
Total minimum payments |
| $ | 9,108,164 |
|
As of February 2, 2018, total future minimum payments for capital leases were $15.2 million, with a present value of $12.3 million. The gross amount of property and equipment recorded under capital leases and financing obligations at February 2, 2018 and February 3, 2017, was $36.2 million and $29.8 million, respectively. Accumulated depreciation on property and equipment under capital leases and financing obligations at February 2, 2018 and February 3, 2017, was $12.4 million and $14.3 million, respectively.
Rent expense under all operating leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
| |||
Minimum rentals |
| $ | 1,075,984 |
| $ | 935,663 |
| $ | 849,115 |
|
Contingent rentals |
|
| 5,532 |
|
| 6,748 |
|
| 7,793 |
|
|
| $ | 1,081,516 |
| $ | 942,411 |
| $ | 856,908 |
|
Legal proceedings
From time to time, the Company is a party to various legal matters involving claims incidental toin the conductordinary course of its business, including actions by employees, consumers, suppliers, government agencies, or others. The Company has recorded accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made.
ExceptOn January 20, 2023, a lawsuit entitled Brent Conforti, et al. v. Jeffrey C. Owen, et al. was filed in the United States District Court for the Middle District of Tennessee (Case No. 3:23-CV-00059) (“Conforti”) in which the plaintiff shareholder, purportedly on behalf and for the benefit of the Company, alleges that each of the Company’s directors violated their fiduciary duties by failing to implement and maintain a system of controls regarding the Company’s workplace safety practices. The plaintiff also alleges corporate waste and, as described below,to the Company’s former CEO, Mr. Vasos, unjust enrichment. On February 13, 2023, the plaintiff amended the complaint to add breach of fiduciary duty allegations against certain officers of the Company, including Messrs. Owen, Vasos, Garratt, Sunderland and Wenkoff and Mss. R. Taylor and Elliott, and to expand the unjust enrichment claim to include all individual director and officer defendants (the “Individual Defendants”). The plaintiff seeks both non-monetary and monetary relief for the benefit of the Company. The Company and the Individual Defendants intend to seek dismissal of the Conforti action.
Based on information currently available, the Company believes based upon information currently available, that suchits pending legal matters, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s consolidated financial statements as a whole. However, litigation and other legal matters involve an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these matters, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect operating results ifAdverse decisions and settlements, including any required changes to the Company’s business, operation are required.
Wage and Hour Litigation
The Company is defending the following wage and hour matters (collectively the “Wage/Hour Litigation”):
|
|
65
|
|
|
|
The Company is vigorously defending the Wage/Hour Litigation and believes that its policies and practices comply with federal and state laws and that these actions are not appropriate for class or similar treatment. At this time, it is not possible to predict whether these matters will be permitted to proceed as a class or other similar action,developments in such matters could affect the consolidated operating results in future periods or the size of any putative classresult in liability or classes. Likewise, except asother amounts material to the resolution of the Tennessee Wage/Hour Litigation, at this time it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, except as to the resolution of the Tennessee Wage/Hour Litigation, the Company is unable to estimate any potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of these actions could have a material adverse effect on the Company’s annual consolidated financial statements as a whole.statements.
Other Employment Litigation
The Company is defending the following employment-related matters (collectively the “Employment Litigation”):
|
|
|
|
The Company is vigorously defending the Employment Litigation and believes that its employment policies and practices comply with federal and state law and that these matters are not appropriate for class or similar treatment. At this time, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, or the size of any putative class or classes. Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, the Company is unable to estimate any potential loss or range of loss in these matters; however if the Company is not successful in its defense efforts, the resolution of these matters could have a material adverse effect on the Company’s consolidated financial statements as a whole.
66
Consumer/Product Litigation
In December 2015 the Company was first notified of several lawsuits in which the plaintiffs allege violation of state consumer protection laws relating to the labeling, marketing and sale of certain Dollar General private-label motor oil. Each of these lawsuits, as well as additional, similar lawsuits filed after December 2015, was filed in, or removed to, various federal district courts of the United States (collectively “the Motor Oil Lawsuits”).
On June 2, 2016, the United States Judicial Panel on Multidistrict Litigation (“JPML”) granted the Company’s motion to centralize the Motor Oil Lawsuits in a matter styled In re Dollar General Corp. Motor Oil Litigation, Case MDL No. 2709, before the United States District Court for the Western District of Missouri (“Motor Oil MDL”). Subsequently, the plaintiffs in the Motor Oil MDL filed a consolidated amended complaint, in which they seek to certify two nationwide classes and multiple statewide sub-classes and for each putative class member some or all of the following relief: compensatory damages, injunctive relief, statutory damages, punitive damages and attorneys’ fees. The Company’s motion to dismiss the allegations raised in the consolidated amended complaint was granted in part and denied in part. To the extent additional consumer lawsuits alleging violation of laws relating to the labeling, marketing and sale of Dollar General private-label motor oil have been or will be filed, the Company expects that such lawsuits will be transferred to the Motor Oil MDL.
In May 2017, the Company received a Notice of Proposed Action from the Office of the New Mexico Attorney General (the “New Mexico AG”) which alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated New Mexico law (the “New Mexico Motor Oil Matter”). The State is represented in connection with this matter by counsel for the plaintiffs in the Motor Oil MDL.
On May 25, 2017, in response to the Notice of Proposed Action, the Company filed an action in New Mexico federal court seeking a declaratory judgment that the New Mexico AG is prohibited by, among other things, the United States Constitution, from pursuing the New Mexico Motor Oil Matter and an order enjoining the New Mexico AG from pursuing such an action. (Dollar General Corporation v. Hector H. Balderas, D.N.M., Case No. 1:17-cv-00588). Thereafter, on June 20, 2017, the New Mexico AG filed an action in the First Judicial District Court, County of Santa Fe, New Mexico pertaining to the New Mexico Motor Oil Matter. (Hector H. Balderas v. Dolgencorp, LLC, Case No. D-101-cv-2017-01562). The Company removed this matter to New Mexico federal court on July 26, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the New Mexico AG has moved to remand it to state court. (Hector H. Balderas v. Dolgencorp, LLC, D.N.M., Case No. 1:17-cv-772). The Company’s and the New Mexico AG’s above-referenced motions are pending.
On September 1, 2017, the Mississippi Attorney General (the “Mississippi AG”), who also is represented by the counsel for the plaintiffs in the Motor Oil MDL, filed an action in the Chancery Court of the First Judicial District of Hinds County, Mississippi which alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated Mississippi law. (Jim Hood v. Dollar General Corporation, Case No. G2017-1229 T/1) (the “Mississippi Motor Oil Matter”). The Company removed this matter to Mississippi federal court on October 5, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the Mississippi AG moved to remand it to state court. (Jim Hood v. Dollar General Corporation, N.D. Miss., Case No. 3:17-cv-801-LG-LRA). The Company’s and the Mississippi AG’s above-referenced motions are pending.
On January 30, 2018, the Company received a Civil Investigative Demand (“CID”) from the Office of the Louisiana Attorney General (“Louisiana AG”) requesting information concerning the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil (the “Louisiana Motor Oil Matter”). In response to the CID, the Company filed a petition for a protective order on February 20, 2018 in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking to set aside the Louisiana AG’s CID. (In re Dollar General Corp. and Dolgencorp, LLC, Case No. 666499). The Company’s petition is pending.
A mediation held in the Motor Oil MDL on February 26, 2018, was unsuccessful.
67
The Company is vigorously defending these matters and believes that the labeling, marketing and sale of its private-label motor oil comply with applicable federal and state requirements and are not misleading. The Company further believes that these matters are not appropriate for class or similar treatment. At this time, however, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, whether on a statewide or nationwide basis, or the size of any putative class or classes. Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, the Company is unable to estimate the potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of the Motor Oil MDL, the New Mexico Motor Oil Matter, the Mississippi Motor Oil Matter or the Louisiana Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.
Shareholder Litigation
The Company is defending litigation filed in January and February 2017 in which the plaintiffs, on behalf of themselves and a putative class of shareholders, allege that between March 10, 2016 and December 1, 2016, the Company and certain of its officers (the “Individual Defendants”) violated federal securities laws by misrepresenting the impact to sales of changes to certain federal programs that provide supplemental nutritional assistance to individuals. (Iron Workers Local Union No. 405 Annuity Fund v. Dollar General Corporation, et al., M.D. Tenn., Case No. 3:17-cv-00063; Julia Askins v. Dollar General Corporation, et al., M.D. Tenn., Case No. 3:17-cv-00276; Bruce Velan v. Dollar General Corporation, et al., M.D. Tenn., Case No. 3:17-cv-00275) (collectively “the Shareholder Litigation”). The plaintiffs in the Shareholder Litigation seek the following relief: compensatory damages, unspecified equitable relief, pre- and post-judgment interest and attorneys’ fees and expenses. The court has consolidated the cases, appointed a lead plaintiff and entered a preliminary scheduling order. On March 8, 2018, the court granted the Company’s and the Individual Defendants’ motion to dismiss the Shareholder Litigation and entered judgment in the Company’s and the Individual Defendants’ favor. The plaintiffs have 30 days from the entry of the dismissal order within which to file an appeal with the federal appeals court.
The Company believes that the statements at issue in the Shareholder Litigation complied with the federal securities laws and intends to vigorously defend this matter. At this time, it is not possible to predict whether the Shareholder Litigation will be permitted to proceed as a class or the size of any putative class. Likewise, at this time, it is not possible to estimate the value of the claims asserted in this action, and no assurances can be given that the Company will be successful in its defense on the merits or otherwise. For these reasons, the Company is unable to estimate the potential loss or range of loss in this matter; however if the Company is not successful in its defense efforts, the resolution of the Shareholder Litigation could have a material adverse effect on the Company’s consolidated financial statements as a whole.
The Company is also defending shareholder derivative actions filed in April, July and August 2017, in which each plaintiff asserts, purportedly on behalf of the Company, some or all of the following claims against the Company’s board of directors and certain of its officers based upon factual allegations substantially similar to those in the Shareholder Litigation: alleged breach of fiduciary duties, unjust enrichment, violation of federal securities laws, abuse of control, and gross mismanagement. (Robert Anderson v. Todd Vasos, et al., M.D. Tenn., Case No. 3:17-cv-00693; Sharon Shaver v. Todd J. Vasos, et al., Chancery Court for the Twentieth Judicial District of Davidson County, Tennessee, Case No. 17-797-I; Glenn Saito v. Todd Vasos, et al., M.D. Tenn., Case No. 3:17-cv-01138) (collectively “the Derivative Litigation”). The plaintiffs in the Derivative Litigation seek, purportedly on behalf of the Company, some or all of the following relief: compensatory damages, injunctive relief, disgorgement, restitution and attorneys’ fees and expenses. The Anderson and Saito cases have been consolidated and stayed pending resolution of the motion to dismiss in the Shareholder Litigation, and a similar stay has been ordered in the Shaver action. At this time, the stays in the Derivative Litigation have not been lifted.
68
8.Benefit plans
The Dollar General Corporation 401(k) Savings and Retirement Plan, which became effective on January 1, 1998, is a safe harbor defined contribution plan and is subject to the Employee Retirement and Income Security Act (“ERISA”).
A participant’s right to claim a distribution of his or her account balance is dependent on the plan, ERISA guidelines and Internal Revenue Service regulations. All active participants are fully vested in all contributions to the 401(k) plan. During 2017, 20162022, 2021 and 2015,2020, the Company expensed approximately $17.5$35.7 million, $16.0$34.0 million and $15.0$30.1 million, respectively, for matching contributions.
The Company also has a compensation deferral plan (“CDP”) and a nonqualified supplemental retirement plan (“SERP”) and compensation deferral plan (“CDP”), known as the Dollar General Corporation CDP/SERP Plan, for a select group of management and other key employees. The Company incurred compensation expense for these plans of approximately $0.7 million, $0.7 million and $1.1$1.2 million in 2017, 20162022, $1.3 million in 2021 and 2015, respectively.$0.9 million in 2020.
The CDP/SERP Plan assets are invested in accounts selected by the Company’s Compensation Committee or its delegate, and the associated deferred compensation liability associated with the CDP/SERP Plan is reflected in the consolidated balance sheets as further disclosed in Note 6.
9.Share-based payments
The Company accounts for share-based payments in accordance with applicable accounting standards, under which the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’s stock option grants are estimated on the grant date using the Black-Scholes-Merton valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The fair value of the Company’s other share-based awards discussed below are estimated using the Company’s closing stock price on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.
62
On July 6, 2007,May 26, 2021, the Company’s Board of Directors adoptedshareholders approved the Dollar General Corporation 2021 Stock Incentive Plan (“2021 Plan”), which replaced the Company’s 2007 Stock Incentive Plan which plan was subsequently amended and restated on several occasions (as so amended and restated, the “Plan”(“2007 Plan”). The Plan allowsPlans allow the granting of stock options, stock appreciation rights, and other stock-based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. Upon the effective date of the 2021 Plan, no new awards may be granted under the 2007 Plan. Awards previously granted under the 2007 Plan remain outstanding in accordance with their terms. The number of shares of Company common stock authorized for grant under the 2021 Plan is 31,142,858. 11,838,143.
Since May 2011, most of theGenerally, share-based awards issued by the Company have beenare in the form of stock options, restricted stock restricted stock units and performance share units.units, and unless noted otherwise, the disclosures that follow refer to such awards. With limited exceptions, stock options and restricted stock units granted to employees generally vest ratably on an annual basis over four-year and three-year periods, respectively. Awards granted to board members generally vest over a one-year period. The number of performance share units earned are based on performance criteria measured in the year of grant or over a period of two orone to three years, and such awards generally vest over a three-year period. With limited exceptions, the performance share unit and restricted stock unit awards are payable in shares of common stock on the vesting date. At February 2, 2018, the Company also had a limited number of outstanding stock options issued prior to June 2011 (“Old Options”).
69
The weighted average for key assumptions used in determining the fair value of all stock options granted in the years ended February 2, 2018, February 3, 2017,2023, January 28, 2022, and January 29, 2016,2021, and a summary of the methodology applied to develop each assumption, are as follows:
|
|
|
|
|
|
|
| |||||||
|
| February 2, |
| February 3, |
| January 29, |
| |||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||
| | | | | | | | |||||||
|
| February 3, |
| January 28, |
| January 29, |
| |||||||
| | 2023 | | 2022 | | 2021 |
| |||||||
Expected dividend yield |
| 1.3 | % | 1.3 | % | 1.2 | % |
| 1.0 | % | 0.9 | % | 0.9 | % |
Expected stock price volatility |
| 25.5 | % | 25.4 | % | 25.3 | % |
| 25.4 | % | 26.5 | % | 26.4 | % |
Weighted average risk-free interest rate |
| 2.1 | % | 1.6 | % | 1.8 | % |
| 2.4 | % | 0.8 | % | 0.7 | % |
Expected term of options (years) |
| 6.3 |
| 6.3 |
| 6.4 |
|
| 4.8 | | 4.9 | | 5.2 | |
Expected dividend yield - This is an estimate of the expected dividend yield on the Company’s stock. An increase in the dividend yield will decrease compensation expense.
Expected stock price volatility - This is a measure of the amount by which the price of the Company’s common stock has fluctuated or is expected to fluctuate.fluctuate, calculated based upon historical volatility. An increase in the expected volatility will increase compensation expense.
Weighted average risk-free interest rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
Expected term of options - This is the period of time over which the options granted are expected to remain outstanding. The Company has estimated the expected term as the mid-point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.
A summary of the Company’s stock option activity excluding Old Options, during the year ended February 2, 20183, 2023 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Remaining |
|
|
|
| |
|
| Options |
| Exercise |
| Contractual |
| Intrinsic |
| ||
(Intrinsic value amounts reflected in thousands) |
| Issued |
| Price |
| Term in Years |
| Value |
| ||
Balance, February 3, 2017 |
| 2,698,658 |
|
| 70.64 |
|
|
|
|
|
|
Granted |
| 1,031,608 |
|
| 71.70 |
|
|
|
|
|
|
Exercised |
| (303,530) |
|
| 62.38 |
|
|
|
|
|
|
Canceled |
| (349,823) |
|
| 75.13 |
|
|
|
|
|
|
Balance, February 2, 2018 |
| 3,076,913 |
| $ | 71.31 |
| 7.6 |
| $ | 86,568 |
|
Exercisable at February 2, 2018 |
| 916,545 |
| $ | 61.09 |
| 6.1 |
| $ | 35,146 |
|
| | | | | | | | | | | |
|
| |
| Average |
| Remaining |
| | |
| |
| | Options | | Exercise | | Contractual | | Intrinsic |
| ||
(Intrinsic value amounts reflected in thousands) | | Issued | | Price | | Term in Years | | Value |
| ||
Balance, January 28, 2022 |
| 2,347,510 | | $ | 133.62 | | | | | | |
Granted |
| 813,165 | |
| 219.82 | | | | | | |
Exercised |
| (514,264) | |
| 115.84 | | | | | | |
Canceled or expired |
| (124,115) | |
| 183.61 | | | | | | |
Balance, February 3, 2023 |
| 2,522,296 | | $ | 162.58 |
| 7.1 | | $ | 168,452 | |
Exercisable at February 3, 2023 |
| 973,457 | | $ | 110.74 |
| 5.2 | | $ | 114,248 | |
The weighted average grant date fair value per share of options granted was $17.66, $20.06,$52.06, $42.89 and $18.48$34.60 during 2017, 20162022, 2021 and 2015,2020, respectively. The intrinsic value of options exercised during 2017, 2016,2022, 2021 and 2015, excluding Old Options,2020, was $7.3$62.7 million, $17.3$132.3 million and $20.8$116.1 million, respectively.
70
63
The number of performance share unit awards earned is based upon the Company’s financial performance as specified in the award agreement. A summary of performance share unit award activity during the year ended February 2, 20183, 2023 is as follows:
|
|
|
|
|
|
| ||||||
|
| Units |
| Intrinsic |
| |||||||
| | | | | | | ||||||
|
| Units |
| Intrinsic |
| |||||||
(Intrinsic value amounts reflected in thousands) |
| Issued |
| Value |
| | Issued | | Value |
| ||
Balance, February 3, 2017 |
| 174,383 |
|
|
|
| ||||||
Balance, January 28, 2022 |
| 337,243 | | | | | ||||||
Granted |
| 145,141 |
|
|
|
|
| 169,657 | | | | |
Converted to common stock |
| (80,464) |
|
|
|
|
| (184,603) | | | | |
Canceled |
| (29,970) |
|
|
|
|
| (7,400) | | | | |
Balance, February 2, 2018 |
| 209,090 |
| $ | 20,792 |
| ||||||
Balance, February 3, 2023 |
| 314,897 | | $ | 71,825 | | ||||||
The balance ofAll performance share unit awards at February 2, 2018 includes 34,8643, 2023 are unvested, awards,and the number of which was computed based upon the performance targets specified in the awards. The number of such awards which will ultimately vest will be based in part on the Company’s financial performance in 2018 and 2019.future years. The weighted average grant date fair value per share of performance share units granted was $70.68, $84.67$214.25, $193.55 and $74.72$154.53 during 2017, 2016,2022, 2021 and 2015,2020, respectively.
A summary of restricted stock unit award activity during the year ended February 2, 20183, 2023 is as follows:
|
|
|
|
|
|
| ||||||
|
| Units |
| Intrinsic |
| |||||||
| | | | | | | ||||||
|
| Units |
| Intrinsic |
| |||||||
(Intrinsic value amounts reflected in thousands) |
| Issued |
| Value |
| | Issued | | Value |
| ||
Balance, February 3, 2017 |
| 501,961 |
|
|
|
| ||||||
Balance, January 28, 2022 |
| 307,118 | | | | | ||||||
Granted |
| 327,167 |
|
|
|
|
| 222,420 | | | | |
Converted to common stock |
| (261,108) |
|
|
|
|
| (146,834) | | | | |
Canceled |
| (76,052) |
|
|
|
|
| (45,455) | | | | |
Balance, February 2, 2018 |
| 491,968 |
| $ | 48,921 |
| ||||||
Balance, February 3, 2023 |
| 337,249 | | $ | 76,923 | | ||||||
The weighted average grant date fair value per share of restricted stock units granted was $70.90, $84.56,$223.51, $193.76 and $74.67$155.73 during 2017, 20162022, 2021 and 2015,2020, respectively.
At February 2, 2018, 51,308 Old Options were outstanding, all of which were exercisable, with an average exercise price of $22.31, an average remaining contractual term of 2.1 years, and an aggregate intrinsic value of $4.0 million. The intrinsic value of Old Options exercised during 2017, 2016, and 2015 was $6.9 million, $10.8 million and $11.5 million, respectively.
At February 2, 2018,3, 2023, the total unrecognized compensation cost related to unvested stock-based awards was $60.6$119.6 million with an expected weighted average expense recognition period of 2.22.1 years.
The fair value method of accounting for share-based awards resulted in share-based compensation expense (a component of SG&A expenses) and a corresponding reduction in income before and net of income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Stock |
| Performance |
| Restricted |
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Stock | | Performance | | Restricted | | | |
| ||||||||||||||||
(In thousands) |
| Options |
| Share Units |
| Stock Units |
| Total |
|
| Options |
| Share Units |
| Stock Units |
| Total |
| ||||||||
Year ended February 2, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Year ended February 3, 2023 | | | | | | | | | | | | | | |||||||||||||
Pre-tax |
| $ | 11,599 |
| $ | 6,159 |
| $ | 16,565 |
| $ | 34,323 |
| | $ | 20,502 | | $ | 26,920 | | $ | 25,249 | | $ | 72,671 | |
Net of tax |
| $ | 7,223 |
| $ | 3,835 |
| $ | 10,315 |
| $ | 21,373 |
| | $ | 15,893 | | $ | 20,868 | | $ | 19,573 | | $ | 56,334 | |
Year ended February 3, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Year ended January 28, 2022 | | | | | | | | | | | | | | |||||||||||||
Pre-tax |
| $ | 12,008 |
| $ | 7,258 |
| $ | 17,701 |
| $ | 36,967 |
| | $ | 21,452 | | $ | 33,234 | | $ | 23,492 | | $ | 78,178 | |
Net of tax |
| $ | 7,325 |
| $ | 4,427 |
| $ | 10,798 |
| $ | 22,550 |
| | $ | 15,853 | | $ | 24,560 | | $ | 17,361 | | $ | 57,774 | |
Year ended January 29, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Year ended January 29, 2021 | | | | | | | | | | | | | | |||||||||||||
Pre-tax |
| $ | 11,113 |
| $ | 4,856 |
| $ | 22,578 |
| $ | 38,547 |
| | $ | 19,933 | | $ | 27,388 | | $ | 21,288 | | $ | 68,609 | |
Net of tax |
| $ | 6,779 |
| $ | 2,962 |
| $ | 13,772 |
| $ | 23,513 |
| | $ | 14,730 | | $ | 20,240 | | $ | 15,732 | | $ | 50,702 | |
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64
10.Segment reporting
The Company manages its business on the basis of one reportable operating segment. See Note 1 for a brief description of the Company’s business. As of February 2, 2018,3, 2023, all of the Company’s retail store operations were located within the United States withStates. Certain product sourcing and other operations are located outside the exception of certain subsidiaries in Hong Kong and China and a liaison office in India,United States, which collectively are not material with regard to assets, results of operations or otherwise to the consolidated financial statements. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
(in thousands) |
| 2017 |
| 2016 |
| 2015 |
| | 2022 |
| 2021 |
| 2020 |
| ||||||
Classes of similar products: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Consumables |
| $ | 18,054,785 |
| $ | 16,798,881 |
| $ | 15,457,611 |
| | $ | 30,155,218 | | $ | 26,258,605 | | $ | 25,906,685 | |
Seasonal |
|
| 2,837,310 |
|
| 2,674,319 |
|
| 2,522,701 |
| |
| 4,182,815 | |
| 4,182,165 | |
| 4,083,650 | |
Home products |
|
| 1,400,618 |
|
| 1,373,397 |
|
| 1,289,423 |
| |
| 2,332,411 | |
| 2,322,367 | |
| 2,209,950 | |
Apparel |
|
| 1,178,254 |
|
| 1,140,001 |
|
| 1,098,827 |
| |
| 1,174,419 | |
| 1,457,312 | |
| 1,546,554 | |
Net sales |
| $ | 23,470,967 |
| $ | 21,986,598 |
| $ | 20,368,562 |
| | $ | 37,844,863 | | $ | 34,220,449 | | $ | 33,746,839 | |
11.Common stock transactions
On August 29, 2012, the Company’s Board of Directors authorized a common stock repurchase program, which the Board has since increased on several occasions. On March 14, 2018,August 24, 2022, the Company’s Board of Directors authorized a $1.0$2.0 billion increase to the existing common stock repurchase program, and as of such date, abringing the cumulative total of $6.0 billion had been authorized under the program since its inception.inception to $16.0 billion. The repurchase authorization has no expiration date and allows repurchases from time to time in the open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. The timing, manner and number of shares purchased dependsrepurchased will depend on a variety of factors, such asincluding price, market conditions, compliance with the covenants and restrictions under the Company’s debt agreements and other factors. Repurchases under the program may be funded from available cash or borrowings including under the Company’s FacilitiesRevolving Facility, 364-Day Revolving Facility and issuance of CP Notes discussed in further detail in Note 5.
During the years ended February 2, 2018, February 3, 2017,2023, January 28, 2022, and January 29, 2016,2021, the Company repurchased approximately 7.111.6 million shares of its common stock at a total cost of $0.6$2.7 billion, approximately 12.412.1 million shares of its common stock at a total cost of $1.0$2.5 billion, and approximately 17.612.3 million shares of its common stock at a total cost of $1.3$2.5 billion, respectively, pursuant to its common stock repurchase programs.program.
The Company paid quarterly cash dividends of $0.26$0.55 per share in 2017. On2022. In March 14, 2018,2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.29$0.59 per share, which is payable on or before April 24, 201825, 2023 to shareholders of record on April 10, 2018.11, 2023. The amount and declaration of future cash dividends is subject to the sole discretion of the Company’s Board of Directors and will depend upon, among other things, the Company’s results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Board may deem relevant in its sole discretion.
72
65
12. Quarterly financial data (unaudited)
The following is selected unaudited quarterly financial data for the fiscal years ended February 2, 2018 and February 3, 2017. Each quarterly period listed below was a 13-week accounting period, with the exception of the fourth quarter of 2016, which was a 14-week accounting period. The sum of the four quarters for any given year may not equal annual totals due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
(In thousands) |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 5,609,625 |
| $ | 5,828,305 |
| $ | 5,903,606 |
| $ | 6,129,431 |
|
Gross profit |
|
| 1,698,983 |
|
| 1,790,522 |
|
| 1,766,456 |
|
| 1,965,398 |
|
Operating profit |
|
| 473,795 |
|
| 493,146 |
|
| 417,431 |
|
| 623,446 |
|
Net income |
|
| 279,489 |
|
| 294,783 |
|
| 252,533 |
|
| 712,155 |
|
Basic earnings per share |
|
| 1.02 |
|
| 1.08 |
|
| 0.93 |
|
| 2.63 |
|
Diluted earnings per share |
|
| 1.02 |
|
| 1.08 |
|
| 0.93 |
|
| 2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
(In thousands) |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 5,265,432 |
| $ | 5,391,891 |
| $ | 5,320,029 |
| $ | 6,009,246 |
|
Gross profit |
|
| 1,612,614 |
|
| 1,681,767 |
|
| 1,587,510 |
|
| 1,900,747 |
|
Operating profit |
|
| 480,743 |
|
| 509,097 |
|
| 392,991 |
|
| 680,618 |
|
Net income |
|
| 295,124 |
|
| 306,518 |
|
| 235,315 |
|
| 414,176 |
|
Basic earnings per share |
|
| 1.03 |
|
| 1.08 |
|
| 0.84 |
|
| 1.50 |
|
Diluted earnings per share |
|
| 1.03 |
|
| 1.08 |
|
| 0.84 |
|
| 1.49 |
|
In 2017, the Company purchased 15 retail store locations and assumed the lease obligations on approximately 300 retail store locations, and relocated certain of its existing stores to the acquired locations. As a result, the Company incurred expenses, primarily related to costs for remaining lease liabilities, of $7.3 million ($4.4 million net of tax, or $0.02 per diluted share), which was recognized in Selling, general, and administrative expense in the second quarter of 2017.
In the fourth quarter of 2017, the Company closed an incremental 35 stores as result of a strategic review process. The Company incurred $28.3 million of costs ($17.6 million net of tax, or $0.07 per diluted share) related to these store closings, most of which was in the form of SG&A expenses for remaining lease liabilities.
In 2016, the Company acquired 42 retail store locations and closed 40 of its own locations as part of relocating stores to the purchased locations. As a result, the Company incurred expenses, primarily related to costs for remaining lease liabilities, of $11.0 million ($6.7 million net of tax, or $0.02 per diluted share), which was recognized in SG&A expense in the third quarter of 2016.
In the fourth quarter of 2016, the Company sold or assigned the leases for 12 of its own locations which were closed as part of the relocation process to the acquired locations. As a result, the Company incurred a reduction of expenses of $4.5 million ($2.8 million net of tax, or $0.01 per diluted share), which was recognized in SG&A expense.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Management’s Annual Report on Internal Control Over Financial Reporting. Our management prepared and is responsible for the consolidated financial statements and all related financial information contained in this report. This responsibility includes establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, management designed and implemented a structured and comprehensive assessment process to evaluate the effectiveness of its internal control over financial reporting. Such assessment was based on criteria established in Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Management regularly monitors our internal control over financial reporting, and actions are taken to correct any deficiencies as they are identified. Based on its assessment, management has concluded that our internal control over financial reporting is effective as of February 2, 2018.3, 2023.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting. Such attestation report is contained below.
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66
(c) Attestation Report of Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Dollar General Corporation
Opinion on Internal Control over Financial Reporting
We have audited Dollar General Corporation and subsidiaries’ internal control over financial reporting as of February 2, 2018,3, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Dollar General Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 2, 2018,3, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 20172022 consolidated financial statements of the Company and our report dated March 23, 2018,24, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
7567
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
| /s/ Ernst & Young LLP |
Nashville, Tennessee
March 23, 201824, 2023
(d) Changes in Internal Control Over Financial Reporting. There have been no changes during the quarter ended February 2, 20183, 2023 in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Long-Term Incentive Program: 2018 Annual Equity Grants
(a)Amendment to Bylaws. On March 21, 2018, a subcommittee23, 2023, our Board of Directors approved an amendment and restatement of the Company’s Compensation Committee (the “Committee”) awarded 157,197 non-qualified stock options (“Options”)Bylaws, effective March 23, 2023 (as so amended and 40,924 performance share units (“PSUs”) to Mr. Vasos, 27,510 Options and 7,162 PSUs to Mr. Garratt and Ms. Taylor and 29,475 Options and 7,673 PSUs to Messrs. Owen and Ravener onrestated, the terms and subject“Bylaws”). Among other things, the amendments to the conditions set forthBylaws provide that:
| ● | if a shareholder intends to engage in a solicitation with respect to a nomination pursuant to Section 10 of Article 1 of the Bylaws, the notice to be furnished to the Company by such shareholder must include (i) a statement disclosing the name of each participant in such solicitation (as defined in Schedule 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and (ii) a representation that such shareholder intends to deliver a proxy statement and form of proxy to holders of at least the percentage of our outstanding shares required under Rule 14a-19 under the Exchange Act; |
| ● | if any shareholder provides notice of a proposed nomination for election to our Board of Directors pursuant to Rule 14a-19 under the Exchange Act, such shareholder shall deliver to the Company reasonable evidence that it has met the requirements of Rule 14a-19 under the Exchange Act to be delivered to the Secretary of the Company no later than five business days before the date of the meeting; |
| ● | if any shareholder provides notice of a proposed nomination for election to the Board of Directors pursuant to Rule 14a-19 under the Exchange Act and subsequently fails to comply with any requirements of Rule 14a-19 under the Exchange Act or any other rules or regulations thereunder, the Company shall disregard any proxies or votes solicited for such nominee; and |
| ● | any shareholder directly or indirectly soliciting proxies from other shareholders must use a proxy card color other than white, which shall be reserved for the exclusive use by our Board of Directors. |
In addition, the formamendments to the Bylaws require certain additional background information and disclosures as well as other administrative and conforming revisions.
The complete text of Option award agreement (“Form Option Agreement”) and formthe Bylaws, as well as a marked copy of PSU award agreement (“Form PSU Agreement”)such document illustrating the changes made thereto, are attached hereto as Exhibit 10.7Exhibits 3.2 and Exhibit 10.15, respectively (collectively, the “Form Award Agreements”), and subject to the terms and conditions of the previously filed Dollar General Corporation Amended and Restated 2007 Stock Incentive Plan.
The Options, which were granted on terms substantially similar to the prior year, have a term of ten years and, subject to earlier forfeiture or accelerated vesting under certain circumstances described in the Form Option Agreement, generally will vest in four equal annual installments beginning on April 1, 2019.
The PSUs represent a target number of units that can be earned if certain performance measures are achieved during the applicable performance periods and if certain additional vesting requirements are met. Fifty percent of the target number of PSUs is subject to an adjusted EBITDA performance measure with a performance period of the Company’s fiscal year 2018. The other fifty percent of the target number of PSUs is subject to an adjusted ROIC performance measure which is the average of adjusted ROIC for the Company’s fiscal years 2018, 2019 and 2020. All performance measures were established by the Committee on the grant date. The number of PSUs earned will vary between 0% and 300% of the target amount based on actual performance compared to target performance on a graduated scale, with performance at the target level resulting in 100% of the target number of PSUs being earned. At the conclusion of each applicable performance period, the Committee will determine the level of achievement of each performance goal measure and the corresponding number of PSUs earned by each grantee. Subject to certain pro-rata vesting conditions, one-third of the PSUs earned by each grantee for adjusted EBITDA performance will vest in equal installments on April 1, 2019, April 1, 2020 and April 1, 2021, in each case subject to the grantee’s continued employment with the Company and certain accelerated vesting provisions described in the Form PSU Agreement. Subject to certain pro-rata vesting conditions, the PSUs earned by each grantee for adjusted ROIC performance will vest on April 1, 2021, subject to the grantee’s continued employment with the Company and certain accelerated vesting provisions described in the Form PSU Agreement.
3.2(1). The foregoing descriptions of all Options and PSU awards and the Form Award Agreements are summaries only, do not purport to be complete, and are qualified in their entirety by reference to the filed Form Optioncomplete text of the Bylaws which are attached as Exhibit 3.2 and incorporated herein by reference.
(b)Consulting Agreement with Mr. Vasos. As previously announced, our former Chief Executive Officer, Todd Vasos, will retire from employment with the Company effective April 2, 2023. On March 23, 2023, the Company entered into a Consulting Agreement with Mr. Vasos (the “Consulting Agreement”) pursuant to which Mr. Vasos will provide such consulting services as may be reasonably requested by our Board of Directors or our Chief Executive Officer for a term beginning on April 2, 2023 and terminating at 11:59 p.m. Central Time on April 2, 2025, unless earlier terminated pursuant to the terms of the Consulting Agreement. The Consulting Agreement also extends the “Restricted Period” for purposes of the business protection provisions (Sections 16 through 20) of the Employment Agreement by and between the Company and Mr. Vasos, effective June 3, 2021, and as amended
68
effective November 1, 2022, which provide for various non-disclosure, non-competition, non-solicitation and non-interference obligations, from two years to three years.
The consulting services provided under the Consulting Agreement are intended to satisfy the transition services requirements contemplated by the early retirement provisions of the agreements governing certain stock option and performance share unit awards granted to Mr. Vasos in 2020 and 2021 (the “Equity Award Agreements”). The continued equity vesting pursuant to the terms of such early retirement provisions in the Equity Award Agreements constitutes consideration for the consulting services to be provided under the Consulting Agreement, and Form PSU Agreement attached hereto as Exhibits 10.7therefore Mr. Vasos will receive no additional compensation for the consulting services. Mr. Vasos’s service on our Board of Directors is separate from and 10.15, respectively.
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Short-Term Incentive Program: 2018 Teamshare
On March 21, 2018, the Committee approved the Company’s 2018 short-term incentive bonus program applicable to the Company’s named executive officers (“2018 Teamshare”) on the terms andnot subject to the conditions set forth in the 2018 Teamshare bonus program document attached hereto as Exhibit 10.35.
The Committee selected adjusted EBIT as the Company-wide performance measureConsulting Agreement, and therefore his fees for 2018 Teamshare and established the target level of adjusted EBIT consistent with adjusted EBIT in the Company’s fiscal year 2018 financial plan previously approved bysuch service on the Board of Directors in January 2018. The Committeeshall be determined that adjusted EBIT shall meanunder our normal processes and procedures for determining non-employee director compensation.
If Mr. Vasos terminates the Company’s Operating Profit as calculated in accordance with United States generally accepted accounting principles, but shall exclude the impact of (a) any costs, fees and expenses directly relatedConsulting Agreement prior to the consideration, negotiation, preparation, or consummation of any asset sale, merger or other transaction that results in a Change in Control (within the meaningend of the Dollar General Corporation Amendedminimum consulting periods required by the early retirement provisions in the Equity Award Agreements, it shall constitute noncompliance with the consulting requirements in such early retirement provisions, and Restated 2007 Stock Incentive Plan)any unvested portion of the equity awards under the Equity Award Agreements shall immediately and automatically terminate and be forfeited, and any vested portion of the equity awards that vested following Mr. Vasos’s retirement date shall be subject to clawback as provided in the Equity Award Agreements.
(c) Matter Pertaining to the Board of Directors. On March 22, 2023, William C. Rhodes, III, communicated to the Board of Directors of the Company orhis decision not to stand for re-election to the Board of Directors at the Company’s Annual Meeting of Shareholders to be held on May 31, 2023. Mr. Rhodes’s decision was not related to any offering of Company common stock or other security; (b) disaster-related charges; (c) any gains or losses associateddisagreement with the Company’s LIFO computation; and (d) unless the Committee disallowsCompany on any such item, (i) any unbudgeted loss as a result of the resolution of a legal matter relating to its operations, policies or (ii) any unplanned loss(es) or gain(s) related to the implementation of accounting or tax legislative changes or (iii) any unplanned loss(es) or gain(s) of a non-recurring nature, provided that in the case of each of (i), (ii) and (iii) such amount equals or exceeds $1 million from a single loss or gain, as applicable, and $10 million in the aggregate. The Committee established the threshold below which no bonus may be paid under 2018 Teamshare at 90% of the target level of the adjusted EBIT performance measure and the maximum above which no additional bonus may be paid at 120% of the target level of the adjusted EBIT performance measure. The amount of bonus paid to named executive officers will vary between 0% and 300% of the target bonus payment amount based on actual Company performance compared to target performance on a graduated scale, with performance at the target level resulting in 100% of the target bonus amount being earned, subject to individual eligibility requirements and additional individual performance factors. If a named executive officer is determined to be eligible to receive a 2018 Teamshare bonus payout in accordance with the eligibility rules, adjustments to bonus payouts may be made upward or downward, as applicable, to a level from 100%-120% if rated “Exceeds Expectations,” to a level from 80%-100% if rated “Meets Expectations” and to a level from 0%-80% if rated “Below Expectations". Mr. Vasos’s target percentage of base salary payout for 2018 Teamshare is 150%, and Messrs. Garratt, Owen and Ravener and Ms. Taylor’s target percentage of base salary payout for 2018 Teamshare is 75%.practices.
The foregoing description of 2018 Teamshare is a summary only, does not purport to be complete, and is qualified in its entirety by reference to the filed 2018 Teamshare Bonus Program document attached hereto as Exhibit 10.35.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a) Information Regarding Directors and Executive Officers. The information required by this Item 10 regarding our directors and director nominees is contained under the captions “Who are the nominees this year,” “What are the backgrounds of this year’s nominees,”year” and “Are there any familialfamily relationships between any of the directors, executive officers or nominees,” “How are directors identified and nominated,” and “What particular experience, qualifications, attributes or skills led the Board of Directors to conclude thatin each nominee should serve as a director of Dollar General,” allcase under the heading “Proposal 1: Election of Directors” in our definitive Proxy Statement to be filed for our Annual Meeting of Shareholders to be held on May 30, 201831, 2023 (the “2018“2023 Proxy Statement”), which information under such captions is incorporated herein by reference. Information required by this Item 10 regarding our executive officers is contained in Part I of this Form 10-K under the caption “Executive“Information About Our Executive Officers, of the Registrant,” which information under such caption is incorporated herein by reference.
(b) Compliance with Section 16(a) of the Exchange Act. Information required by this Item 10 regarding compliance with Section 16(a) of the Exchange Act is contained under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” under the heading “Security Ownership” in the 20182023 Proxy Statement, which information under such caption is incorporated herein by reference.
(c) Code of Business Conduct and Ethics. We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and Board members. This Code is posted on the Investor Information section of our Internet website at www.dollargeneral.com.https://investor.dollargeneral.com. If we choose to no longer post such Code, we will provide a free copy to any person upon written request to Dollar General Corporation, c/o Investor Relations Department, 100 Mission Ridge, Goodlettsville, TN 37072. We intend to provide any required disclosure of an amendment to or waiver from such Code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our Internet website located at www.dollargeneral.comhttps://investor.dollargeneral.com promptly following the amendment or waiver. We may elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to or in lieu of the website disclosure. The information contained on or connected to our Internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
(d) Procedures for Shareholders to Recommend Director Nominees. There have been no material changes On March 23, 2023, we amended our Bylaws principally to add procedural and information requirements pursuant to Rule 14a-19 (the “Universal Proxy Rule”) of the proceduresSecurities Exchange Act of 1934, as amended. Pursuant to our Bylaws, any notice of a director nomination submitted to us, other than through the “proxy access” provisions set forth in Article I, Section 12 of our Bylaws, must include the additional information required by which security holders may recommend nominees to the registrant’s Board of Directors.Universal Proxy Rule. See "Item 9B. Other Information” for additional information.
(e) Audit Committee Information. The Company has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The current members of the audit committee are William C. Rhodes, III, Warren F. Bryant, Ana M. Chadwick, and Debra A. Sandler. Information required by this Item 10 regarding persons determined by our audit committee and ourBoard of Directors to be audit committee financial experts is contained under the captions “Corporate Governance—Does the Board of Directors have standing Audit, Compensation and Nominating Committees” and “—Does Dollar General havecaption “Does an audit committee financial expert servingserve on itsthe Audit Committee”Committee,” under the heading “Corporate Governance” in the 20182023 Proxy Statement, which information under such captions is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 regarding director and executive officer compensation, the Compensation Committee Report, the risks arising from our compensation policies and practices for employees, pay ratio disclosure, and compensation committee interlocks and insider participation is contained under the captions “Director Compensation” and “Executive Compensation” in the 20182023 Proxy Statement, which information under such captions (but not including information under the “Pay Versus Performance” heading under the caption “Executive Compensation”) is incorporated herein by reference.
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70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a) Equity Compensation Plan Information. The following table sets forth information about securities authorized for issuance under our compensation plans (including individual compensation arrangements) as of February 2, 2018:3, 2023:
| | | | | | | | |
|
| |
| | |
| Number of |
|
| | | | | | | securities remaining |
|
| | | | | | | available for future |
|
| | Number of securities | | | | | issuance under |
|
| | to be issued upon | | Weighted-average | | equity compensation |
| |
| | exercise of | | exercise price of | | plans (excluding |
| |
| | outstanding options, | | outstanding options, | | securities reflected |
| |
| | warrants and rights | | warrants and rights | | in column (a)) |
| |
Plan category | | (a) | | (b) | | (c) |
| |
Equity compensation plans approved by security holders(1) |
| 3,308,807 | | | 162.58 |
| 10,665,844 | |
Equity compensation plans not approved by security holders |
| — | |
| — |
| — | |
Total(1) |
| 3,308,807 | | $ | 162.58 |
| 10,665,844 | |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
| Number of securities |
| |||||
|
| Number of securities |
|
|
| remaining available for |
| |||||
|
| to be issued upon |
|
|
| future issuance under |
| |||||
|
| exercise of |
| Weighted-average |
| equity compensation |
| |||||
|
| outstanding options, |
| exercise price of |
| plans (excluding |
| |||||
|
| warrants |
| outstanding options |
| securities reflected in |
| |||||
|
| and rights |
| warrants and rights |
| column (a)) |
| |||||
Plan Category |
| (a) |
| (b) |
| (c) |
| |||||
Equity compensation plans approved by security holders(1) |
| 3,882,450 |
|
| $ | 70.50 |
|
| 16,759,928 |
|
| |
Equity compensation plans not approved by security holders |
| — |
|
|
| — |
|
| — |
|
| |
Total |
| 3,882,450 |
|
| $ | 70.50 |
|
| 16,759,928 |
|
| |
| (1) | Column (a) consists of shares of common stock issuable upon exercise of outstanding options and upon vesting and payment of outstanding restricted stock units, performance share units and deferred shares, including any dividend equivalents accrued thereon, under the 2021 Stock Incentive Plan and the Amended and Restated 2007 Stock Incentive Plan. Restricted stock units, performance share units, deferred shares and dividend equivalents are settled for shares of common stock on a one-for-one basis and have no exercise price. Accordingly, they have been excluded for purposes of computing the weighted-average exercise price in column (b). Column (c) consists of shares remaining available for future grants pursuant to the 2021 Stock Incentive Plan, whether in the form of options, stock appreciation rights, stock, restricted stock, restricted stock units, performance share units or other stock-based awards. |
(1)Column (a) consists of shares of common stock issuable upon exercise of outstanding options and upon vesting and payment of restricted stock units, performance share units and deferred shares, including dividend equivalents accrued thereon, under the Stock Incentive Plan. Restricted stock units, performance share units, deferred shares and dividend equivalents are settled for shares of common stock on a one-for-one basis and have no exercise price. Accordingly, they have been excluded for purposes of computing the weighted-average exercise price in column (b). Column (c) consists of shares reserved for issuance pursuant to the Stock Incentive Plan, whether in the form of stock, restricted stock, restricted stock units, performance share units or other stock-based awards or upon the exercise of an option or right.
(b) Other Information. The information required by this Item 12 regarding security ownership of certain beneficial owners and our management is contained under the headings “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Officers and Directors,” in each case under the caption “Security Ownership” in the 20182023 Proxy Statement, which information under such caption is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 regarding certain relationships and related transactions is contained under the caption “Transactions with Management and Others” in the 20182023 Proxy Statement, which information under such caption is incorporated herein by reference.
The information required by this Item 13 regarding director independence is contained under the caption “Director Independence” in the 20182023 Proxy Statement, which information under such caption is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
The information required by this Item 14 regarding fees we paid to our principal accountant and the pre-approval policies and procedures established by the Audit Committee of our Board of Directors is contained under the caption “Fees Paid to Auditors” in the 20182023 Proxy Statement, which information under such caption is incorporated herein by reference.
7971
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | 42 | |
| 44 | |
| 45 | |
| 46 | |
| 47 | |
| 48 | |
| 49 | |
(b) | All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or the information is included in the Consolidated Financial Statements and, therefore, have been omitted. | |
(c) | Exhibits: | |
3.1 |
| |
| | |
3.2 | | |
| | |
3.2(1) | | |
| | |
4.1 | ||
| ||
| | |
4.2 | ||
| ||
| | |
4.3 | | |
| | |
4.4 | | |
| | |
4.5 | | |
| | |
4.6 | | |
| | |
4.7 | | |
| | |
72
4.8 | | |
| | |
4.9 | | |
| | |
4.10 | | |
| |
80
4.11 | ||
| ||
| | |
4.12 | | |
| | |
4.13 | | |
| | |
4.14 | | |
| | |
4.15 | | |
| | |
4.16 | | |
| | |
4.17 | | |
| | |
4.18 | | |
| | |
73
4.19 | | |
| | |
4.20 | | |
| | |
4.21 | | |
| | |
4.22 | | |
| | |
4.23 | | |
| | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
10.4 | | |
| | |
74
81
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
75
10.13 | | |
| | |
10.14 | | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.17 | |
82
| | |
10.18 | | |
| | |
10.19 | | |
| | |
10.20 | | |
| | |
76
10.21 | | |
| | |
10.22 | | |
| | |
10.23 | | |
| | |
10.24 | | |
| | |
10.25 | | |
| | |
10.26 | |
83
| | |
10.27 | | |
| | |
10.28 | | |
| | |
77
10.29 | | |
| | |
10.30 | | |
| | |
10.31 | | |
| | |
10.32 | | |
| | |
10.33 | | |
| | |
10.34 | | |
| | |
10.35 | | |
| | |
10.36 | | |
| | |
10.37 | | |
| | |
78
10.38 | | |
| | |
10.39 | | |
| | |
10.40 | | |
| | |
10.41 | | |
| | |
10.42 | | |
| | |
10.43 | | |
| | |
10.44 | | |
| | |
10.45 | | |
| | |
10.46 | | |
| | |
| ||
10.47 | ||
|
|
84
| ||
| | |
10.48 | | |
| | |
10.49 | | |
| | |
79
10.50 | | |
| | |
10.51 | | |
| | |
10.52 | | |
| | |
10.53 | | |
| | |
10.54 | | |
| | |
10.55 | | |
| | |
10.56 | | |
| | |
10.57 | | |
| | |
10.58 | | |
| | |
10.59 | | |
85
| | |
80
21 | | ||
| | | |
23 | | ||
| | | |
24 | | Powers of Attorney (included as part of the signature pages hereto) | |
| | | |
31 | | ||
| | | |
32 | | ||
| | | |
101 | | Interactive data files for Dollar General Corporation’s Annual Report on Form 10-K for the fiscal year ended February 3, | |
| | | |
104 | The cover page from Dollar General Corporation’s Annual Report on Form 10-K for the fiscal year ended |
* | ||
| ||
| ||
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
*Management Contract or Compensatory Plan
86
87
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DOLLAR GENERAL CORPORATION | |
| | |
Date: March | By: | /s/ |
| |
|
| | Chief Executive Officer |
We, the undersigned directors and officers of the registrant, hereby severally constitute Todd J. Vasos,Jeffery C. Owen, John W. Garratt and Anita C. Elliott, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||
| |
| |
|
| ||||
/s/ | | Chief Executive Officer & Director | | March |
| | (Principal Executive Officer) | | |
| | | | |
/s/ John W. Garratt | |
| | March |
JOHN W. GARRATT | | (Principal Financial Officer) | | |
| | | | |
/s/ Anita C. Elliott | | Senior Vice President & Chief Accounting Officer | | March |
ANITA C. ELLIOTT | | (Principal Accounting Officer) | | |
| | | | |
/s/ Warren F. Bryant | | Director | | March |
WARREN F. BRYANT | | | | |
| | | | |
/s/ Michael M. Calbert | | Director | | March |
MICHAEL M. CALBERT | | | | |
| | | | |
/s/ | | Director | | March |
| | | | |
| | | | |
/s/ Patricia D. Fili-Krushel | | Director | | March |
PATRICIA D. | | | | |
| | | | |
/s/ Timothy I. McGuire | | Director | | March |
TIMOTHY I. MCGUIRE | | | | |
| | | | |
|
|
| ||
| ||||
| ||||
/s/ William C. Rhodes, III | | Director | | March |
WILLIAM C. RHODES, III | | | | |
| | | | |
/s/ | | Director | | March |
| | | | |
| | | | |
/s/ Ralph E. Santana | | Director | | March |
RALPH E. SANTANA | | | | |
| | | | |
/s/ Todd J. Vasos | | Director | | March 24, 2023 |
TODD J. VASOS | | | | |
8882