Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements: This document contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding:
•Our expectations regarding the impact of continued supply chain challenges on our product availability, product mix, sales and merchandise margin, including uncertainties associated with delays in receiving imported merchandise from Asia and the potential increase in our costs if inventory levels exceed the storage capacity of our distribution centers;
•Our expectations regarding higher oceanic shipping and domestic freight and fuel costs;
•Our expectations regarding increased expenses for higher wages and bonuses paid to associates, including increases in the minimum wage by States and localities and potential federal legislation increasing the minimum wage;
•Our expectations regarding the effect of general business or economic conditions on our business and results of operations, including the effects of inflation and labor shortages in our markets;
•The uncertainty of the impact of the COVID-19 pandemic and public health measures on our business, results of operations, customers and suppliers, including any future impact on our supply chain or sources of supply;
•The reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China and higher cost domestic goods;
•The expected impact of labor disagreements and potential work disruptions or strikes, including at ports located in California, Oregon, and Washington, on shipping delays and the availability and cost of merchandise;
•The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations (including U.S. Food and Drug Administration matters);
•Our plans to renovate existing Family Dollar stores and build new stores in the H2 store format, and the performance of that format on our results of operations;
•Our plans and expectations relating to the introduction of additional price points above $1 in our Dollar Tree stores, including the impact on our gross margins;
•Our plans and expectations relating to new store openings and new store concepts such as Dollar Tree Plus and our Combo Store format;
•Our plans and expectations regarding future strategic investments and the uncertainty with respect to the amount, timing and impact of those investments on our business and results of operations; and
•Our expectations regarding higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores, and construction, permitting and inspection delays related to new store openings.
A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and in this Quarterly Report on Form 10-Q. The following risks could have a material adverse impact on our sales, costs, profitability, financial performance or implementation of strategic initiatives:
•Our profitability is vulnerable to increases in oceanic shipping costs, domestic freight and fuel costs, wage and benefit costs and other operating costs.
•We are experiencing higher costs and disruptions in our distribution network, which have had and could have an adverse impact on our sales, margins and profitability.
•We may stop selling or recall certain products for safety-related or other issues.
•Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of consumer concerns about the quality and safety of our products.
•Inflation or other adverse change or downturn in economic conditions could impact our sales or profitability.
•If the COVID-19 pandemic and associated disruptions worsen or continue longer than expected, there could be a material adverse impact on our business and results of operations.
•Risks associated with our domestic and foreign suppliers could adversely affect our financial performance.
•Our supply chain may be disrupted by changes in United States trade policy with China.
•Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.
•Our profitability is affected by the mix of products we sell.
•Pressure from competitors may reduce our sales and profits.
•Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.
•We may not be successful in implementing or in anticipating the impact of important strategic initiatives, and our plans for implementing such initiatives may be altered or delayed due to various factors, which may have an adverse impact on our business and financial results.
•We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.
•We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems including because of a cyber-attack could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
•The potential unauthorized access to customer information may violate privacy laws and could damage our business reputation, subject us to negative publicity, litigation and costs, and adversely affect our results of operations or business.
•Litigation, arbitration and government proceedings may adversely affect our business, financial condition and/or results of operations.
•Changes in laws and government regulations, or our failure to adequately estimate the impact of such changes, could increase our expenses, expose us to legal risks or otherwise adversely affect us.
•Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures.
•The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.
•Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
•Our business or the value of our common stock could be negatively affected as a result of actions by shareholders.
•The price of our common stock is subject to market and other conditions and may be volatile.
•Certain provisions in our Articles of Incorporation and By-Laws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.
We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements.
We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events, or otherwise.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to disclose to them any material, nonpublic information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any securities analyst regardless of the content of the statement or report. Furthermore, we have a policy against confirming projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Overview
We are a leading operator of more than 16,200 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the fixed price of $1.25. Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores.
Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores. Second is the performance of stores once they are open. Sales vary at our existing stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the period in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand.
At July 30, 2022, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. A breakdown of store counts and square footage by segment for the 26 weeks ended July 30, 2022 and July 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 26 Weeks Ended |
| July 30, 2022 | | July 31, 2021 |
| Dollar Tree | | Family Dollar | | Total | | Dollar Tree | | Family Dollar | | Total |
Store Count: | | | | | | | | | | | |
Beginning | 8,061 | | | 8,016 | | | 16,077 | | | 7,805 | | | 7,880 | | | 15,685 | |
New stores | 74 | | | 165 | | | 239 | | | 152 | | | 85 | | | 237 | |
Re-bannered stores | (5) | | | 7 | | | 2 | | | — | | | (1) | | | (1) | |
Closings | (27) | | | (60) | | | (87) | | | (23) | | | (33) | | | (56) | |
Ending | 8,103 | | | 8,128 | | | 16,231 | | | 7,934 | | | 7,931 | | | 15,865 | |
Relocations | 17 | | | 45 | | | 62 | | | 29 | | | 37 | | | 66 | |
| | | | | | | | | | | |
Selling Square Feet (in millions): | | | | | | | | | | |
Beginning | 69.7 | | | 59.2 | | | 128.9 | | | 67.4 | | | 57.7 | | | 125.1 | |
New stores | 0.6 | | | 1.5 | | | 2.1 | | | 1.3 | | | 0.7 | | | 2.0 | |
Re-bannered stores | — | | | 0.1 | | | 0.1 | | | — | | | — | | | — | |
Closings | (0.2) | | | (0.4) | | | (0.6) | | | (0.2) | | | (0.2) | | | (0.4) | |
Relocations | 0.1 | | | 0.1 | | | 0.2 | | | — | | | 0.1 | | | 0.1 | |
Ending | 70.2 | | | 60.5 | | | 130.7 | | | 68.5 | | | 58.3 | | | 126.8 | |
Stores are included as re-banners when they close or open, respectively.
The average size of stores opened during the 26 weeks ended July 30, 2022 was approximately 8,540 selling square feet for the Dollar Tree segment and 8,920 selling square feet for the Family Dollar segment. We believe that these size stores are in the ranges of our optimal sizes operationally and give our customers a shopping environment which invites them to shop longer, buy more and make return visits.
The percentage change in comparable store net sales on a constant currency basis for the 13 and 26 weeks ended July 30, 2022, as compared with the preceding year, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended July 30, 2022 | | 26 Weeks Ended July 30, 2022 |
| | Sales Growth | | Change in Customer Traffic | | Change in Average Ticket | | Sales Growth | | Change in Customer Traffic | | Change in Average Ticket |
Consolidated | | 4.9 | % | | (4.0) | % | | 9.2 | % | | 4.7 | % | | (3.8) | % | | 8.8 | % |
Dollar Tree Segment | | 7.5 | % | | (5.8) | % | | 14.2 | % | | 9.4 | % | | (4.7) | % | | 14.8 | % |
Family Dollar Segment | | 2.0 | % | | (1.2) | % | | 3.3 | % | | (0.4) | % | | (2.4) | % | | 2.1 | % |
Constant currency basis refers to the calculation excluding the impact of currency exchange rate fluctuations. We calculated the constant currency basis change by translating the current year’s comparable store net sales in Canada using the prior year’s currency exchange rates. We believe that the constant currency basis provides a more accurate measure of comparable store net sales performance. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.
Dollar Tree Initiatives
In September 2021, we announced our new $1.25 price point initiative and we completed the rollout of this initiative to all Dollar Tree stores during the first quarter of fiscal 2022, increasing the price point on a majority of our $1 merchandise to $1.25. To date, the increase in the price point has more than offset the decline in the number of units sold. As expected, we saw a lift in gross margin in the first half of fiscal 2022 as we sold through our existing inventory. During fiscal 2022, we have begun investing in new products and modifying existing products to provide greater value for our customers and increase customer traffic and store productivity. While we expect our gross margin to be higher in the second half of fiscal 2022 compared with the second half of fiscal 2021, because of the investments in new products, we do not expect the increase to be as high as it was in the first half of fiscal 2022.
We are also continuing to implement our Dollar Tree Plus initiative which introduces products priced at the $3 and $5 price points and provides our customers with extraordinary value in discretionary categories. As of July 30, 2022, we have approximately 2,170 Dollar Tree Plus stores and we expect to implement the concept in a total of 1,500 stores during fiscal 2022.
After a successful launch of the Instacart platform in the Family Dollar segment, we began testing the online delivery service at Dollar Tree stores in the third quarter of fiscal 2021. As of July 30, 2022, the Instacart platform covers nearly 7,000 Dollar Tree stores. This enables our customers to shop online and receive same-day delivery without having to visit a store.
We believe that our Dollar Tree initiatives have and will continue to positively affect our comparable store net sales and earnings.
Family Dollar Initiatives
We are executing several initiatives in our Family Dollar stores to increase sales. In March 2021, we announced the development of a new combination store format, which we refer to as a Combo Store, that leverages the strengths of the Dollar Tree and Family Dollar brands under one roof to serve small towns across the country. We are taking Family Dollar’s great value and assortment and blending in select Dollar Tree merchandise categories, creating a new store format targeted for small towns and rural communities with populations of 3,000 to 4,000 residents. As of July 30, 2022, we operated more than 540 Combo Stores.
We are also continuing to execute our store optimization programs. Our H2 stores have significantly improved merchandise offerings throughout the store, including the addition of Dollar Tree $1.25 merchandise items and establishing a minimum number of freezer and cooler doors. These stores have higher customer traffic and provide a higher average comparable store net sales lift, when compared to non-renovated stores, in the first year following renovation. H2 stores perform well in a variety of locations and especially in locations where our Family Dollar stores have been most challenged in the past. As of July 30, 2022, we have approximately 4,095 H2 stores.
Based on the success of the Combo Store and H2 store formats, in fiscal 2022, we anticipate adding 400 new or relocated Combo Stores in total and completing a total of 700 renovations into either the Combo Store format or the H2 store format.
After a successful pilot program in 2020, we entered into a partnership with Instacart in February 2021, which covers more than 6,000 Family Dollar stores across the United States as of July 30, 2022.
In addition, we added adult beverage to approximately 270 stores in the first half of fiscal 2022. We believe the addition of adult beverage to our assortment will drive traffic to our stores.
Additional Considerations
The following trends or uncertainties have already impacted or could impact our business or results of operations during 2022 or in the future:
•Anticipated Pressures on Margins. Our financial performance is impacted by numerous factors, including changes in consumer spending behavior and increased costs due to inflation. We are currently experiencing a material shift in consumer purchasing from higher-margin discretionary merchandise to lower-margin consumable goods which has negatively impacted our product mix and margins. We also are experiencing inflationary price pressures relating to, among other things, merchandise costs, freight costs, wages, utility costs, and repair and maintenance expenses. In addition, we have begun making our planned competitive pricing investments at Family Dollar to improve its value proposition and drive store traffic and productivity. We expect that the consumer’s shift to lower-margin consumable goods and any inflation-related cost increases, coupled with our planned investments in product pricing and our value proposition, will pressure gross margins in the second half of fiscal 2022.
•Supply Chain and Inventory. We rely heavily on Trans-Pacific shipping and domestic trucking and rail freight to acquire and distribute merchandise to our distribution centers and retail stores. Significant disruptions in our supply chain, such as the shipping delays resulting from the COVID-19 pandemic, have negatively impacted our sales and the cost and availability of product in the stores. Although we may continue to experience oceanic shipping delays in the future as a result of shipping capacity shortages, port congestion or closings, and the imposition of lockdowns in certain Chinese localities to address COVID-19 outbreaks, our ability to ship products from overseas on a timely basis has improved in recent months. This improvement has led to an increase in inventory that is in route to or being held in our distribution centers. To the extent that increased inventory levels exceed the storage capacity of our distribution centers, we will need to arrange for temporary offsite warehouse storage facilities and we may incur detention costs and incremental drayage costs, which will increase our cost of goods sold. In addition, the union collective bargaining agreement that governs the wages and benefits of a large number of longshoremen at ports in California, Oregon, and Washington expired on July 1, 2022. If the parties are unable to agree on a new or extended collective bargaining agreement, there could be work slowdowns or strikes that result in additional delays and disruptions in our supply chain which could adversely affect the availability of merchandise and increase our costs. We could also experience higher markdowns as a result of these supply chain challenges. Sales could be negatively impacted if we are not able to deliver inventory timely to stock our stores.
•Freight Costs. We are experiencing significantly higher international and domestic freight costs as a result of disruptions in the global supply chain. This trend, which accelerated in the second half of fiscal 2021, has continued during fiscal 2022. The combination of increased demand and limited availability of Trans-Pacific shipping capacity caused spot market prices to increase substantially. Although Trans-Pacific shipping continues to be pressured, spot market prices have moderated recently as availability of containers and shipping capacity has improved. Domestically, diesel fuel prices are and are expected to remain significantly higher in fiscal 2022 and may increase further because of international tensions. We are a large importer of merchandise from Asia and rely heavily on domestic freight to transport goods to our distribution centers and stores, which makes us particularly sensitive to freight costs. Due to these trends, in the first half of fiscal 2022, import and domestic freight costs were higher compared to the first half of fiscal 2021.
•Labor Shortage and Wage Increases. We are experiencing a shortage of associates and applicants to fill staffing requirements at our stores and distribution centers due to the current labor shortage affecting businesses. This has adversely affected our stores operations, the operating efficiency of our distribution centers and our ability to transport merchandise from our distribution centers to our stores. The steps we have taken to address the labor shortage include hosting national hiring events, paying sign-on bonuses in our distribution centers, offering enhanced wages in select competitive markets, and paying tuition reimbursement. In 2022, the minimum wage has increased in certain States and localities, and proposals to increase the federal minimum wage have been introduced in Congress. Minimum wage increases in States and localities and wage investments in certain markets are expected to increase our costs by more than $195.0 million in 2022.
•Build-out and Construction Costs and Delays. We have experienced higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores. In addition, we have experienced delays in new store openings due to inspection, permitting and contractor delays. We anticipate these increased costs and delays may continue for the foreseeable future. Sales will be negatively impacted if we are not able to complete these projects on time.
•Impact of COVID-19. The future course of the COVID-19 pandemic, the timing and impact of any governmental responses to future outbreaks and the effectiveness of health measures such as vaccines remains uncertain. As a result, it is challenging for us to predict the future impact of COVID-19 on our business, financial results, customers, suppliers and the broader economies in the locations that we operate as well as the future impact on our supply chain and the global supply chain.
•West Memphis Distribution Center. On February 11, 2022, the Food and Drug Administration issued Form 483 observations primarily regarding rodent infestation at our West Memphis, Arkansas distribution center (“DC 202”), as well as other items that require remediation. During the first half of fiscal 2022, we incurred costs related to the product recall, remediation efforts and asset impairment. We expect to incur additional costs in the second half of fiscal 2022 for freight, merchandise disposal, payroll and legal costs associated with the remediation.
•Strategic Investments. Building on our current initiatives, we are currently developing plans to make additional multi-year strategic investments across both banners to further position the company for long-term sustained growth. We anticipate that these investments will relate to four key areas of our business: our associates, our distribution center network and supply chain, our product pricing and value proposition, and our technology infrastructure. Within these areas, the focus of these investments is expected to be on associate wages, improved store execution, enhanced safety and working conditions, increased supply chain efficiencies, competitive pricing at Family Dollar, and enhancements to our systems infrastructure. However, our plans have not been finalized at this time, and there is uncertainty regarding the amount and timing of these investments and the impact of such investments on our future business and results of operations.
Results of Operations
Our results of operations and period-over-period changes are discussed in the following section. Note that gross profit margin is calculated as gross profit (i.e., net sales less cost of sales) divided by net sales. The selling, general and administrative expense rate and operating income margin are calculated by dividing the applicable amount by total revenue.
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Net sales | | $ | 6,765.3 | | | $ | 6,340.2 | | | 6.7 | % | | $ | 13,665.4 | | | $ | 12,817.0 | | | 6.6 | % |
Comparable store net sales change, on a constant currency basis | | 4.9 | % | | (1.2) | % | | | | 4.7 | % | | (0.2) | % | | |
The increase in net sales in the 13 weeks ended July 30, 2022 was a result of sales of $178.8 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.
Enterprise comparable store net sales increased 4.9% on a constant currency basis in the 13 weeks ended July 30, 2022, as a result of a 9.2% increase in average ticket, partially offset by a 4.0% decrease in customer traffic. Comparable store net sales increased 4.8% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 7.5% in the Dollar Tree segment and increased 2.0% in the Family Dollar segment.
The increase in net sales in the 26 weeks ended July 30, 2022 was a result of sales of $364.3 million at new stores and a comparable store net sales increase in the Dollar Tree segment, partially offset by a comparable store net sales decrease in the Family Dollar segment.
Enterprise comparable store net sales increased 4.7% on a constant currency basis in the 26 weeks ended July 30, 2022, as a result of an 8.8% increase in average ticket, partially offset by a 3.8% decrease in customer traffic. Comparable store net sales increased 4.6% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 9.4% in the Dollar Tree segment and decreased 0.4% in the Family Dollar segment.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Gross profit | | $ | 2,124.4 | | | $ | 1,861.0 | | | 14.2 | % | | $ | 4,464.9 | | | $ | 3,825.1 | | | 16.7 | % |
Gross profit margin | | 31.4 | % | | 29.4 | % | | 2.0 | % | | 32.7 | % | | 29.8 | % | | 2.9 | % |
The increase in gross profit margin in the 13 weeks ended July 30, 2022 was a result of the net of the following:
•Merchandise cost, which includes freight, decreased 245 basis points resulting primarily from higher initial mark-on, partially offset by higher freight costs and increased sales of lower margin consumable merchandise.
•Occupancy costs decreased 20 basis points due to leverage from the comparable store net sales increase.
•Distribution costs decreased 10 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts due to increases in inventory levels, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
•Shrink costs increased 30 basis points in the current year quarter resulting from more favorable inventory results in relation to accruals in the prior year quarter.
•Markdown costs increased 40 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher clearance markdowns resulting from a move to a higher value assortment at the $1.25 price point on the Dollar Tree segment.
The increase in gross profit margin in the 26 weeks ended July 30, 2022 was a result of the net of the following:
•Merchandise cost, which includes freight, decreased 305 basis points resulting primarily from higher initial mark-on, partially offset by higher freight costs and increased sales of lower margin consumable merchandise on the Family Dollar segment.
•Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts resulting from increases in inventory levels, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
•Occupancy costs decreased 20 basis points due to leverage from the comparable store net sales increase.
•Shrink costs increased 20 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.
•Markdown costs increased 45 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher clearance markdowns resulting from a move to a higher value assortment at the $1.25 price point on the Dollar Tree segment.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Selling, general and administrative expenses | | $ | 1,622.2 | | | $ | 1,461.8 | | | 11.0 | % | | $ | 3,233.7 | | | $ | 2,908.9 | | | 11.2 | % |
Selling, general and administrative expense rate | | 24.0 | % | | 23.0 | % | | 1.0 | % | | 23.7 | % | | 22.7 | % | | 1.0 | % |
The increase in the selling, general and administrative expense rate in the 13 weeks ended July 30, 2022 was the result of the following:
•Other selling, general and administrative expenses increased 45 basis points primarily due to unfavorable development of general liability insurance claims, higher legal fees, higher debit and credit fees and inflationary pressure across several expense categories.
•Store facility costs increased 30 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.
•Payroll expenses increased 5 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock compensation expenses, partially offset by leverage from the comparable store net sales increase.
•Depreciation and amortization expense increased 10 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the comparable store net sales increase.
The increase in the selling, general and administrative expense rate in the 26 weeks ended July 30, 2022 was the result of the following:
•Other selling, general and administrative expenses increased 60 basis points primarily due to long-lived asset impairments at the Family Dollar West Memphis, Arkansas distribution center, higher legal fees, including costs related to the reconstitution of the Board of Directors and higher store supplies expense.
•Store facility costs increased 20 basis points primarily due to costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall, higher utility costs and higher repairs and maintenance expenses as we focus on store conditions for our customers and associates.
•Payroll expenses increased 5 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock compensation expenses, partially offset by leverage from the comparable store net sales increase.
•Depreciation and amortization expense increased 10 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the comparable store net sales increase.
Operating Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Operating income | | $ | 505.4 | | | $ | 402.2 | | | 25.7 | % | | $ | 1,236.9 | | | $ | 922.1 | | | 34.1 | % |
Operating income margin | | 7.5 | % | | 6.3 | % | | 1.2 | % | | 9.0 | % | | 7.2 | % | | 1.8 | % |
Operating income margin increased to 7.5% for the 13 weeks ended July 30, 2022 compared to 6.3% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.
Operating income margin increased to 9.0% for the 26 weeks ended July 30, 2022 compared to 7.2% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Interest expense, net | | $ | 30.6 | | | $ | 33.0 | | | (7.3) | % | | $ | 64.6 | | | $ | 66.0 | | | (2.1) | % |
| | | | | | | | | | | | |
Interest expense, net decreased $2.4 million in the 13 weeks ended July 30, 2022 compared to the same period last year, resulting from higher interest income on investments.
Interest expense, net decreased $1.4 million in the 26 weeks ended July 30, 2022 compared to the same period last year, resulting from higher interest income on investments.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Provision for income taxes | | $ | 114.8 | | | $ | 86.8 | | | 32.3 | % | | $ | 275.9 | | | $ | 199.2 | | | 38.5 | % |
Effective tax rate | | 24.2 | % | | 23.5 | % | | 0.7 | % | | 23.5 | % | | 23.3 | % | | 0.2 | % |
The effective tax rate was 24.2% for the 13 weeks ended July 30, 2022 compared to 23.5% for the comparable prior year period, resulting from higher state tax rates and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year quarter.
The effective tax rate was 23.5% for the 26 weeks ended July 30, 2022 compared to 23.3% for the comparable prior year period. Higher state tax rates and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year were offset by higher tax deductions related to restricted stock vesting.
Segment Information
Our operating results for the Dollar Tree and Family Dollar segments and period-over-period changes are discussed in the following sections.
Dollar Tree
The following table summarizes the operating results of the Dollar Tree segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Net sales | | $ | 3,571.1 | | | $ | 3,264.3 | | | 9.4 | % | | $ | 7,352.9 | | | $ | 6,585.6 | | | 11.7 | % |
Gross profit | | $ | 1,334.9 | | | $ | 1,057.7 | | | 26.2 | % | | $ | 2,869.6 | | | $ | 2,176.0 | | | 31.9 | % |
Gross profit margin | | 37.4 | % | | 32.4 | % | | 5.0 | % | | 39.0 | % | | 33.0 | % | | 6.0 | % |
Operating income | | $ | 550.8 | | | $ | 328.4 | | | 67.7 | % | | $ | 1,315.0 | | | $ | 728.7 | | | 80.5 | % |
Operating income margin | | 15.4 | % | | 10.1 | % | | 5.3 | % | | 17.9 | % | | 11.1 | % | | 6.8 | % |
Net sales for the Dollar Tree segment increased $306.8 million, or 9.4%, for the 13 weeks ended July 30, 2022 compared to the same period last year. The increase was due to an increase in comparable store net sales of 7.5% and $91.8 million of new store sales. Average ticket increased 14.2% and customer traffic decreased 5.8%. The 13 weeks ended July 30, 2022 includes the impact of our $1.25 price point initiative which increased the selling price of the majority of our $1 merchandise to $1.25. The rollout of this initiative was completed during the first quarter of fiscal 2022. The increase in price point more than offset the decline in the number of units sold during the second quarter of fiscal 2022.
Net sales for the Dollar Tree segment increased $767.3 million, or 11.7%, for the 26 weeks ended July 30, 2022 compared to the same period last year. The increase was due to an increase in comparable store net sales of 9.4% and $202.9 million of new store sales.
Average ticket increased 14.8% and customer traffic decreased 4.7%. The 26 weeks ended July 30, 2022 was impacted by our $1.25 price point initiative. The increase in price point more than offset the decline in the number of units sold during the first half of fiscal 2022.
Gross profit margin for the Dollar Tree segment increased to 37.4% for the 13 weeks ended July 30, 2022 compared to 32.4% for the same period last year as a result of the net of the following:
•Merchandise cost, which includes freight, decreased 455 basis points primarily due to higher initial mark-on, partially offset by higher freight costs.
•Occupancy costs decreased 50 basis points primarily due to leverage from the comparable store net sales increase.
•Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels in the current year, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
•Markdown costs increased 5 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.
•Shrink costs increased 20 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year quarter.
Gross profit margin for the Dollar Tree segment increased to 39.0% for the 26 weeks ended July 30, 2022 compared to 33.0% for the same period last year as a result of the net of the following:
•Merchandise cost, which includes freight, decreased 525 basis points primarily due to higher initial mark-on and increased sales of higher margin discretionary merchandise, partially offset by higher freight costs.
•Occupancy costs decreased 65 basis points primarily due to leverage from the comparable store net sales increase.
•Distribution costs decreased 35 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels, partially offset by higher hourly wages.
•Shrink costs increased 10 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.
•Markdown costs increased 20 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.
Operating income margin for the Dollar Tree segment increased to 15.4% for the 13 weeks ended July 30, 2022 from 10.1% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate. The selling, general and administrative expense rate decreased to 22.0% in the 13 weeks ended July 30, 2022 compared to 22.3% for the same period last year as a result of the net of the following:
•Payroll expenses decreased 90 basis points primarily due to leverage from the comparable store net sales increase and favorable development of workers’ compensation claims, partially offset by minimum wage increases and other investments in store payroll.
•Other selling, general and administrative expenses increased 40 basis points primarily due to unfavorable development of general liability insurance claims and inflationary pressure across several expense categories.
•Store facility costs increased 10 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.
•Depreciation and amortization expense was flat as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.
Operating income margin for the Dollar Tree segment increased to 17.9% for the 26 weeks ended July 30, 2022 from 11.1% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate. The selling, general and administrative expense rate decreased to 21.1% in the 26 weeks ended July 30, 2022 compared to 21.9% for the same period last year as a result of the net of the following:
•Payroll expenses decreased 95 basis points primarily due to leverage from the comparable store net sales increase and favorable development of workers’ compensation claims, partially offset by minimum wage increases and other investments in store payroll.
•Store facility costs decreased 10 basis points primarily due to leverage from the comparable store net sales increase, partially offset by an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.
•Depreciation and amortization expense decreased 5 basis points primarily due to leverage from the comparable store net sales increase, partially offset by capital expenditures related to store renovations and improvements.
•Other selling, general and administrative expenses increased 25 basis points primarily due to unfavorable development of general liability claims, higher store supplies expense in connection with the $1.25 price point initiative, and inflationary pressure across several expense categories.
Family Dollar
The following table summarizes the operating results of the Family Dollar segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | | | 26 Weeks Ended | | |
| | July 30, | | July 31, | | Percentage Change | | July 30, | | July 31, | | Percentage Change |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 | |
Net sales | | $ | 3,194.2 | | | $ | 3,075.9 | | | 3.8 | % | | $ | 6,312.5 | | | $ | 6,231.4 | | | 1.3 | % |
Gross profit | | $ | 789.5 | | | $ | 803.3 | | | (1.7) | % | | $ | 1,595.3 | | | $ | 1,649.1 | | | (3.3) | % |
Gross profit margin | | 24.7 | % | | 26.1 | % | | (1.4) | % | | 25.3 | % | | 26.5 | % | | (1.2) | % |
Operating income | | $ | 55.0 | | | $ | 156.3 | | | (64.8) | % | | $ | 144.5 | | | $ | 367.7 | | | (60.7) | % |
Operating income margin | | 1.7 | % | | 5.1 | % | | (3.4) | % | | 2.3 | % | | 5.9 | % | | (3.6) | % |
Net sales for the Family Dollar segment increased $118.3 million, or 3.8%, for the 13 weeks ended July 30, 2022 compared to the same period last year. The increase was due to a comparable store net sales increase of 2.0% and $87.0 million of new store sales. For the 13 weeks ended July 30, 2022, average ticket increased 3.3% and customer traffic declined 1.2%.
Net sales for the Family Dollar segment increased $81.1 million, or 1.3%, for the 26 weeks ended July 30, 2022 compared to the same period last year. The increase was due to $161.4 million of new store sales, partially offset by a comparable store net sales decrease of 0.4%. For the 26 weeks ended July 30, 2022, average ticket increased 2.1% and customer traffic declined 2.4%. Customers received significant government stimulus dollars in the prior year period. In addition, during the 13 weeks ended April 30, 2022, approximately 400 stores serviced by the West Memphis, Arkansas distribution center were temporarily closed in connection with the voluntary retail-level product recall. The Family Dollar comparable store net sales increased 0.5% when excluding the effect of the store closures.
Gross profit margin for the Family Dollar segment decreased to 24.7% for the 13 weeks ended July 30, 2022 compared to 26.1% for the same period last year. The decrease is due to the following:
•Markdown costs increased 80 basis points primarily due to higher clearance and promotional markdowns.
•Shrink expense increased 45 basis points in the current year quarter resulting from more favorable inventory results in relation to accruals in the prior year quarter.
•Merchandise cost, which includes freight, increased 15 basis points primarily due to higher freight costs and higher sales of lower margin consumable merchandise, partially offset by higher initial mark-on.
•Distribution costs were flat compared with the prior year quarter as higher capitalized balances resulting from increases in inventory levels in the current year offset higher hourly wages and higher maintenance and compliance costs in our distribution centers.
Gross profit margin for the Family Dollar segment decreased to 25.3% for the 26 weeks ended July 30, 2022 compared to 26.5% for the same period last year. The decrease is due to the net of the following:
•Markdown costs increased 75 basis points primarily due to higher clearance and promotional markdowns.
•Occupancy costs increased 25 basis points primarily due to loss of leverage from the comparable store net sales decrease and higher real estate tax expenses.
•Shrink expense increased 35 basis points in the current year resulting from more favorable inventory results in relation to accruals in the prior year.
•Distribution costs decreased 10 basis points due to higher capitalized balances resulting from increases in inventory levels in the current year, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
•Merchandise cost, which includes freight, decreased 10 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and higher sales of lower margin consumable merchandise.
Operating income margin for the Family Dollar segment decreased to 1.7% for the 13 weeks ended July 30, 2022 from 5.1% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate. The selling, general and administrative expense rate was 23.0% in the 13 weeks ended July 30, 2022 compared to 21.0% for the same period last year. The current quarter increase in the selling, general and administrative expense rate was due to the following:
•Payroll expenses increased 70 basis points primarily due to minimum wage increases and other investments in store payroll and an increase in workers’ compensation expense due to favorable accrual adjustments in the prior year, partially offset by lower incentive compensation expenses.
•Store facility costs increased 50 basis points primarily due to higher utility costs and an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates.
•Other selling, general and administrative expenses increased 45 basis points primarily due to higher legal fees, higher debit and credit fees, higher store supplies expense related to store projects and inflationary pressure across several expense categories.
•Depreciation and amortization expense increased 30 basis points primarily due to capital expenditures related to store renovations and improvements.
Operating income margin for the Family Dollar segment decreased to 2.3% for the 26 weeks ended July 30, 2022 from 5.9% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate. The selling, general and administrative expense rate was 23.0% in the 26 weeks ended July 30, 2022 compared to 20.6% for the same period last year. The current year increase in the selling, general and administrative expense rate was due to the following:
•Payroll expenses increased 80 basis points primarily due to minimum wage increases and other investments in store payroll, an increase in workers’ compensation expense due to favorable accrual adjustments in the prior year and loss of leverage from the decrease in comparable store net sales.
•Other selling, general and administrative expenses increased 65 basis points primarily due to long-lived asset impairments at the West Memphis, Arkansas distribution center, higher legal fees, higher debit and credit fees, higher store supplies expense related to store projects, loss of leverage from the decrease in comparable store net sales and inflationary pressure across several expense categories.
•Store facility costs increased 60 basis points primarily due to costs associated with the removal of product from certain stores in connection with the voluntary retail-level product recall, higher utility costs, higher repairs and maintenance expenses as we focus on store conditions for our customers and associates and loss of leverage from the decrease in comparable store net sales.
•Depreciation and amortization expense increased 30 basis points primarily due to capital expenditures related to store renovations and improvements and loss of leverage from the decrease in comparable store net sales.
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand and renovate existing stores, expand our distribution network and operate our existing stores. Our working capital requirements for existing stores are seasonal in nature and typically reach their peak in the months of September and October. Historically, we have satisfied our seasonal working capital requirements for existing stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.
The following table compares cash flow-related information for the 26 weeks ended July 30, 2022 and July 31, 2021:
| | | | | | | | | | | | | | |
| | 26 Weeks Ended |
| | July 30, | | July 31, |
(in millions) | | 2022 | | 2021 |
Net cash provided by (used in): | | | | |
Operating activities | | $ | 520.6 | | | $ | 736.1 | |
Investing activities | | (533.4) | | | (451.5) | |
Financing activities | | (283.3) | | | (980.8) | |
Net cash provided by operating activities decreased $215.5 million primarily due to higher inventory levels, partially offset by higher current year earnings, net of non-cash items and higher accrued liability balances.
Net cash used in investing activities increased $81.9 million primarily due to higher capital expenditures in the current year.
Net cash used in financing activities decreased $697.5 million primarily due to $250.0 million of cash paid for stock repurchases in the current year compared to $947.5 million in the prior year.
At July 30, 2022, our long-term borrowings were $3.45 billion and we had $1.5 billion available under our Revolving Credit Facility, less amounts outstanding for standby letters of credit totaling $45.3 million. We also have $425.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which $324.3 million was committed to letters of credit issued for routine purchases of imported merchandise as of July 30, 2022.
We repurchased 1,754,496 and 9,156,898 shares of common stock on the open market during the 26 weeks ended July 30, 2022 and July 31, 2021, respectively, for $250.0 million and $950.0 million, respectively. Of the shares repurchased during the 26 weeks ended July 31, 2021, approximately $2.5 million had not settled as of July 31, 2021 and this amount was accrued in the accompanying unaudited condensed consolidated balance sheet as of July 31, 2021. At July 30, 2022, we had $2.25 billion remaining under Board repurchase authorization.