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:
•The impact of delays in receiving imported merchandise from Asia on our product availability, product mix, sales and merchandise margin;
•Our expectations regarding higher oceanic shipping and domestic freight and fuel costs, and our plans to manage those cost increases;
•The reliability of, and cost associated with, our sources of supply, particularly imported goods sourced from Asia and higher cost domestic goods;
•Our plans to address the labor shortage at our distribution centers;
•Our expectations regarding increases in the minimum wage by States and localities, potential federal legislation increasing the minimum wage, and proposals to raise federal corporate tax rates;
•The potential effect of general business or economic conditions on our business including the direct and indirect effects of the COVID-19 pandemic, inflation, labor shortages, consumer spending levels, unemployment, the physical and financial health of our customers, the effectiveness and duration of government assistance programs to individuals, households and businesses to support consumer spending, and increased expenses for higher wages and bonuses paid to associates;
•Our expectations regarding reductions in COVID-19-related expenses and the level of shrink in fiscal 2021;
•Our plans to renovate existing Family Dollar stores and build new stores in the H2 store format, including an increase in the number of stores with adult beverages, and the performance of that format on our results of operations;
•Our plans and expectations relating to new store openings and the adoption, testing, implementation and performance of new store concepts such as Dollar Tree Plus and our Combo Store format; and
•The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations (including the proceeding by the Food and Drug Administration).
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 30, 2021, 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:
•We are experiencing disruptions in our supply chain, including shipping delays, port closings and congestion, that have had and could have an adverse impact on our product availability, product mix, sales and merchandise margin.
•Our profitability is vulnerable to increases in oceanic shipping costs, domestic freight and fuel costs, higher wages, substitution of higher cost domestic goods and increases in other operating costs.
•The labor shortage at our distribution centers has had and could have an adverse impact on the operating efficiency of our distribution centers and our ability to transport merchandise to our stores, and could result in lower sales.
•If the COVID-19 pandemic in North America or at our sources of supply overseas worsens or continues longer than expected, there could be a material adverse impact on our business and results of operations.
•Inflation or other adverse change or downturn in economic conditions could impact our sales or profitability.
•Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of unfavorable economic conditions, for example because government assistance to households and businesses terminate or are reduced.
•We may not be successful in implementing important strategic initiatives, and our plans for implementing such initiatives may be delayed due to various factors, including shipping delays, supply chain disruptions and other factors that could affect the availability of adequate levels of necessary domestic and imported merchandise, which may have an adverse impact on our business and financial results.
•Duties, tariffs or other restrictions on trade could adversely affect our financial performance.
•Our supply chain may be disrupted by changes in United States trade policy with China.
•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 results of operations.
•Changes in laws and government regulations, including any increase in federal corporate tax rates, 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.
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.
The Impact of COVID-19
As an essential business, our stores and distribution centers have remained open during the pandemic; however, our business trends and financial results in 2020 were materially different than in prior years. During March 2020, our Dollar Tree and Family Dollar stores began to experience a significant increase in customer demand and sales of essential products and comparable store net sales increased significantly. However, beginning the last week of March 2020 and continuing into April during the peak of the 2020 Easter selling season, comparable store net sales at our Dollar Tree stores decreased. After the 2020 Easter selling season, in both banners, we experienced an increase in demand for and sales of discretionary products and our seasonal business for the other holidays throughout 2020 was strong. Easter sales were strong in both banners during 2021. Our results of operations for the first half of fiscal 2020 include approximately $208.0 million of COVID-19-related expenses; these expenses totaled $10.4 million in the first half of fiscal 2021.
The future impact of COVID-19 on our customers and our business is difficult to predict. The course of the pandemic, including the spread of the Delta variant, the effectiveness of health measures such as vaccines, and the impact of ongoing economic stabilization efforts is uncertain and government assistance payments may not provide enough funding to support current spending. The American Rescue Plan Act of 2021 (“Rescue Act”), which was enacted on March 11, 2021, provides U.S. government funding to address the continuing impact of COVID-19 on the economy, public health, individuals and businesses. Among other things, the Rescue Act provides for $1,400 direct payments to individuals, continues supplemental unemployment benefits until September 2021, extends a prior increase in food stamp benefits, expands the child tax credit and earned income tax credit, provides for rent and utility assistance, and funds COVID-19 vaccinations, testing, treatment and prevention. Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on our customers, suppliers and the broader economies in the locations that we operate as
well as uncertainty around the future impact on our supply chain and the global supply chain, it is challenging to predict our future operations and financial results.
For further discussion of the impacts that COVID-19 had on our financial condition and results of operations during fiscal 2020, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 30, 2021.
Overview
We are a leading operator of more than 15,800 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the fixed price point of $1.00. 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 31, 2021, 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 31, 2021 and August 1, 2020 is as follows:
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26 Weeks Ended
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July 31, 2021
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August 1, 2020
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Dollar Tree
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Family Dollar
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Total
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Dollar Tree
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Family Dollar
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Total
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Store Count:
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Beginning
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7,805
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7,880
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15,685
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7,505
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7,783
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15,288
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New stores
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152
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85
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237
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167
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63
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230
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Re-bannered stores
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—
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(1)
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(1)
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(3)
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4
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1
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Closings
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(23)
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(33)
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(56)
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(17)
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(23)
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(40)
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Ending
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7,934
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7,931
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15,865
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7,652
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7,827
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15,479
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Relocations
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29
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37
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66
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29
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14
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43
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Selling Square Feet (in millions):
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Beginning
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67.4
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57.7
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125.1
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64.6
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56.7
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121.3
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New stores
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1.3
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0.7
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2.0
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1.5
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0.5
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2.0
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Re-bannered stores
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—
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—
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—
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(0.1)
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0.1
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—
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Closings
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(0.2)
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(0.2)
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(0.4)
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(0.1)
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(0.2)
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(0.3)
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Relocations
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—
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0.1
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0.1
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0.1
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—
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0.1
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Ending
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68.5
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58.3
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126.8
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66.0
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57.1
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123.1
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Stores are included as re-banners when they close or open, respectively.
The average size of stores opened during the 26 weeks ended July 31, 2021 was approximately 8,530 selling square feet for the Dollar Tree segment and 9,030 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 31, 2021, as compared with the preceding year, is as follows:
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13 Weeks Ended July 31, 2021
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26 Weeks Ended July 31, 2021
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Sales Growth
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Change in
Customer Traffic
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Change in
Average Ticket
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Sales Growth
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Change in
Customer Traffic
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Change in
Average Ticket
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Consolidated
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(1.2)
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%
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(0.8)
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%
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(0.4)
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%
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(0.2)
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%
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(4.4)
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%
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4.5
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%
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Dollar Tree Segment
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(0.2)
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%
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1.1
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%
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(1.3)
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%
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2.2
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%
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(1.6)
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%
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3.9
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%
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Family Dollar Segment
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(2.1)
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%
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(3.5)
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%
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1.4
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%
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(2.5)
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%
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(8.2)
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%
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6.3
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%
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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
We are continuing to implement our Dollar Tree Plus initiative which adds a multi-price product assortment to the traditional everything-is-one-dollar format. This concept introduces products priced at the $3 and $5 price points and provides our customers with extraordinary value in discretionary categories. As of July 31, 2021, we have approximately 310 Dollar Tree Plus stores and expect to achieve our target of 500 stores by the end of fiscal 2021. We also plan to accelerate the implementation of the Dollar Tree Plus initiative in fiscal 2022 by adding the concept to an additional 1,500 stores.
The roll-out of our Crafter’s Square initiative to all of our Dollar Tree stores was completed during fiscal 2020. The Crafter’s Square assortment carries mark-ups which are higher than our average mark-up.
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. We have taken Family Dollar’s great value and assortment and blended in select Dollar Tree merchandise categories to create a new store format targeted for small towns and rural communities. The Combo store provides another way to introduce the multi-price assortment to Dollar Tree customers and the one-dollar assortment to Family Dollar customers. As of July 31, 2021, we had 105 Combo Stores in operation. Due to the success of the initiative, we plan to accelerate expansion of the program in fiscal 2022, and anticipate adding 400 new, renovated, or relocated Combo Stores in fiscal 2022. We are also in the process of validating the Combo Store concept in other demographic markets.
After a successful pilot program in 2020, we entered into a partnership with Instacart, an online merchandise delivery platform, in February 2021 that enables our Family Dollar customers to shop online and receive same-day delivery of merchandise without having to visit a store. The Instacart platform covers more than 6,000 Family Dollar stores across the United States.
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 approximately 20 Dollar Tree $1.00 merchandise sections 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 31, 2021, we have approximately 3,300 H2 stores. We plan to renovate at least 1,250 stores to this format in fiscal 2021 and also plan to build new stores in this format. In addition, we plan to add adult beverage to 450 stores in fiscal 2021. 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 2021 or in the future:
•Shipping Delays. We rely heavily on Trans-Pacific shipping to acquire merchandise for our stores, and we are experiencing significant shipping delays as a result of the shipping capacity shortage. We are also experiencing issues with port congestion and pandemic-related port closings and ship diversions. If the shipping delays do not improve they could potentially have a material adverse impact on product availability and product mix, and on our sales and merchandise margin. Sales could be negatively impacted if imported goods do not arrive in time to stock our stores. If higher cost domestic goods are substituted for delayed imports, our merchandise margin could be adversely impacted. To address delays in shipments, we are prioritizing product categories for shipment in an effort to obtain seasonal assortments in advance of holiday seasons, adding and evaluating the use of long-term and short-term chartered vessels, and adding alternative sources of supply from North American factories.
•Freight Costs. We are experiencing significantly higher international and domestic freight costs as a result of disruptions in the global supply chain. The combination of increased demand and limited availability of Trans-Pacific shipping capacity has caused spot market prices to increase substantially. We are a large importer of merchandise from Asia and particularly sensitive to freight costs. Freight costs for fiscal 2021 are now expected to be $1.50 to $1.60 per diluted share higher than fiscal year 2020. We are working to reduce our freight costs by using chartered vessels, evaluating and securing long-term contracts with our carriers for vessels dedicated in large part to our needs, and adding alternative sources of supply that do not rely on Trans-Pacific shipping.
•Labor Shortage. We are experiencing a shortage of associates and applicants to fill staffing requirements at our distribution centers and stores due to the current labor shortage affecting retail businesses. This has adversely affected 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 at our distribution centers include hosting national hiring events, paying sign-on bonuses, offering enhanced wages in select competitive markets and paying tuition reimbursement.
•Minimum Wage Increases. In 2021, the minimum wage has increased in certain States and localities and may increase nationally depending on the outcome of legislation proposed in Congress. Minimum wage increases in States and localities are expected to increase our costs by $45.0 to $50.0 million in 2021.
•COVID-19 Costs. The amount of COVID-19-related costs for premium pay including bonuses, supplies, protective equipment, and similar items was $279.0 million in fiscal 2020. We expect these costs to be approximately $30.0 million in fiscal 2021.
•Shrink Costs. We expect shrink at cost as a percentage of net sales to be significantly lower in fiscal 2021 than fiscal 2020.
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
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13 Weeks Ended
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26 Weeks Ended
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July 31,
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|
August 1,
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Percentage
Change
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|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
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|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Net sales
|
|
$
|
6,340.2
|
|
|
$
|
6,277.6
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|
1.0
|
%
|
|
$
|
12,817.0
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|
|
$
|
12,564.4
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|
|
2.0
|
%
|
Comparable store net sales change,
on a constant currency basis
|
|
(1.2)
|
%
|
|
7.2
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%
|
|
|
|
(0.2)
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%
|
|
7.1
|
%
|
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|
The increase in net sales in the 13 weeks ended July 31, 2021 was a result of sales of $167.6 million at new stores, partially offset by comparable store net sales decreases in the Family Dollar and Dollar Tree segments.
Enterprise comparable store net sales decreased 1.2% on a constant currency basis in the 13 weeks ended July 31, 2021, as a result of an 0.8% decrease in customer traffic and a 0.4% decrease in average ticket. Comparable store net sales decreased 1.1% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales decreased 2.1% in the Family Dollar segment and decreased 0.2% in the Dollar Tree segment.
The increase in net sales in the 26 weeks ended July 31, 2021 was a result of a comparable store net sales increase in the Dollar Tree segment and sales of $337.4 million at new stores, partially offset by a comparable store net sales decrease in the Family Dollar segment.
Enterprise comparable store net sales decreased 0.2% on a constant currency basis in the 26 weeks ended July 31, 2021, as a result of a 4.4% decrease in customer traffic, partially offset by an increase in average ticket of 4.5%. Comparable store net sales decreased 0.1% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales decreased 2.5% in the Family Dollar segment and increased 2.2% in the Dollar Tree segment. In the first half of 2020, the Family Dollar segment had a comparable store net sales increase of 13.6% as we saw an increase in demand for essential products in the early stages of the COVID-19 pandemic. For the first half of 2020, the Dollar Tree segment had a comparable store net sales increase of 1.1%, as the higher average ticket was partially offset by lower traffic resulting from the COVID-19 pandemic which negatively affected Easter sales.
Gross Profit
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13 Weeks Ended
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|
26 Weeks Ended
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|
|
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Gross profit
|
|
$
|
1,861.0
|
|
|
$
|
1,916.2
|
|
|
(2.9)
|
%
|
|
$
|
3,825.1
|
|
|
$
|
3,711.1
|
|
|
3.1
|
%
|
Gross profit margin
|
|
29.4
|
%
|
|
30.5
|
%
|
|
(1.1)
|
%
|
|
29.8
|
%
|
|
29.5
|
%
|
|
0.3
|
%
|
The decrease in gross profit margin in the 13 weeks ended July 31, 2021 was a result of the net of the following:
•Merchandise cost, including freight, increased 170 basis points resulting primarily from higher freight costs on both segments and higher sales of lower margin consumable merchandise on the Family Dollar segment, partially offset by higher sales of higher margin discretionary merchandise on the Dollar Tree segment.
•Occupancy costs increased 25 basis points primarily due to the loss of leverage from the decrease in comparable store net sales for the quarter.
•Markdown costs decreased 10 basis points primarily due to the prior year including $9.8 million of uninsured markdown costs for stores affected by civil unrest.
•Distribution costs decreased 10 basis points resulting from the prior year quarter including COVID-19 premium pay of $2 per hour for all hourly associates, partially offset by higher distribution center payroll and depreciation costs in the Dollar Tree segment resulting from the two new distribution centers.
•Shrink costs decreased 55 basis points resulting from favorable inventory results in relation to accruals and decreases in the shrink accrual rates in both the Family Dollar and Dollar Tree segments in the current quarter.
The increase in gross profit margin in the 26 weeks ended July 31, 2021 was a result of the net of the following:
•Shrink costs decreased 55 basis points resulting from favorable inventory results in relation to accruals and decreases in the shrink accrual rates in both the Family Dollar and Dollar Tree segments in the current year.
•Markdown costs decreased 15 basis points primarily due to lower seasonal markdowns in the Dollar Tree segment resulting from the improved sell-through of Easter merchandise in the current year and $9.8 million of uninsured markdown costs for stores affected by civil unrest in the prior year.
•Distribution costs decreased 10 basis points resulting from the prior year including COVID-19 premium pay of $2 per hour for all hourly associates for hours worked beginning March 8, 2020, partially offset by higher distribution center payroll and depreciation costs in the Dollar Tree segment resulting from the two new distribution centers.
•Occupancy costs increased 10 basis points primarily due to the loss of leverage from the decrease in comparable store net sales.
•Merchandise cost, including freight, increased 30 basis points resulting from higher freight costs on both segments, partially offset by higher sales of higher margin discretionary merchandise, including higher Easter sales in both segments and improved initial mark-on for the Family Dollar segment.
Selling, General and Administrative Expenses
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13 Weeks Ended
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|
26 Weeks Ended
|
|
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|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Selling, general and administrative
expenses
|
|
$
|
1,461.8
|
|
|
$
|
1,541.3
|
|
|
(5.2)
|
%
|
|
$
|
2,908.9
|
|
|
$
|
2,970.3
|
|
|
(2.1)
|
%
|
Selling, general and administrative
expense rate
|
|
23.0
|
%
|
|
24.5
|
%
|
|
(1.5)
|
%
|
|
22.7
|
%
|
|
23.6
|
%
|
|
(0.9)
|
%
|
The decrease in the selling, general and administrative expense rate in the 13 weeks ended July 31, 2021 was the result of the net of the following:
•Payroll expenses decreased 145 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive and stock compensation costs, partially offset by loss of leverage resulting from the comparable store net sales decrease in the quarter and higher health insurance costs. The 13 weeks ended August 1, 2020 included $114.6 million, or 185 basis points, of COVID-19-related payroll expenses including store payroll costs for a $2 per hour premium paid to all store hourly associates for all hours worked during the quarter, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
•Store facility costs decreased 15 basis points primarily due to lower repairs and maintenance costs. The prior year quarter included $3.9 million, primarily for uninsured repairs, related to stores damaged in civil unrest.
•Other selling, general and administrative expenses increased 5 basis points resulting primarily from higher advertising and travel costs and increased debit and credit fees, partially offset by a decrease in insurance costs related to the favorable development of general liability claims and higher costs in the prior year quarter for masks, gloves and cleaning supplies due to the COVID-19 pandemic and expenses related to stores damaged in civil unrest.
The decrease in the selling, general and administrative expense rate in the 26 weeks ended July 31, 2021 was primarily the result of a 100 basis point decrease in payroll expenses primarily due to lower COVID-19-related store payroll costs and lower stock and incentive compensation costs, partially offset by loss of leverage resulting from the comparable store net sales decrease and increased health insurance costs. The first half of 2020 included $172.1 million, or 135 basis points, of COVID-19-related payroll expenses including store payroll costs for a $2 per hour premium paid to all store hourly associates for all hours worked since March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
26 Weeks Ended
|
|
|
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Operating income
|
|
$
|
402.2
|
|
|
$
|
374.9
|
|
|
7.3
|
%
|
|
$
|
922.1
|
|
|
$
|
740.8
|
|
|
24.5
|
%
|
Operating income margin
|
|
6.3
|
%
|
|
6.0
|
%
|
|
0.3
|
%
|
|
7.2
|
%
|
|
5.9
|
%
|
|
1.3
|
%
|
Operating income margin increased to 6.3% for the 13 weeks ended July 31, 2021 compared to 6.0% for the same period last year resulting from the decrease in the selling, general and administrative expense rate, partially offset by the decrease in gross profit margin as described above. Operating income in the 13 weeks ended August 1, 2020 included $134.9 million of COVID-19-related expenses and $16.8 million of uninsured expenses related to civil unrest.
Operating income margin increased to 7.2% for the 26 weeks ended July 31, 2021 compared to 5.9% for the same period last year resulting from the decrease in the selling, general and administrative expense rate, partially offset by the decrease in gross profit margin as described above. Operating income in the 26 weeks ended August 1, 2020 included $208.0 million of COVID-19-related expenses and $16.8 million of uninsured expenses related to civil unrest.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
26 Weeks Ended
|
|
|
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Interest expense, net
|
|
$
|
33.0
|
|
|
$
|
34.8
|
|
|
(5.2)
|
%
|
|
$
|
66.0
|
|
|
$
|
75.0
|
|
|
(12.0)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net decreased $1.8 million in the 13 weeks ended July 31, 2021 compared to the same period last year, resulting from lower average debt outstanding in the current year quarter.
Interest expense, net decreased $9.0 million in the 26 weeks ended July 31, 2021 compared to the same period last year, resulting from lower average debt outstanding in the current year.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
26 Weeks Ended
|
|
|
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Provision for income taxes
|
|
$
|
86.8
|
|
|
$
|
78.4
|
|
|
10.7
|
%
|
|
$
|
199.2
|
|
|
$
|
156.0
|
|
|
27.7
|
%
|
Effective tax rate
|
|
23.5
|
%
|
|
23.1
|
%
|
|
0.4
|
%
|
|
23.3
|
%
|
|
23.5
|
%
|
|
(0.2)
|
%
|
The effective tax rate for the 13 weeks ended July 31, 2021 was 23.5% compared to 23.1% resulting primarily 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 for the 26 weeks ended July 31, 2021 was 23.3% compared to 23.5% for the same period last year resulting from additional tax deductions in the current year related to restricted stock vesting while last year the restricted stock vesting resulted in an increase in tax expense. This benefit to the tax rate was partially offset by higher state tax rates and lower Work Opportunity Tax Credits as a percentage of pre-tax income in the current year.
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 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Net sales
|
|
$
|
3,264.3
|
|
|
$
|
3,176.9
|
|
|
2.8
|
%
|
|
$
|
6,585.6
|
|
|
$
|
6,254.4
|
|
|
5.3
|
%
|
Gross profit
|
|
1,057.7
|
|
|
1,071.9
|
|
|
(1.3)
|
%
|
|
$
|
2,176.0
|
|
|
$
|
2,052.6
|
|
|
6.0
|
%
|
Gross profit margin
|
|
32.4
|
%
|
|
33.7
|
%
|
|
(1.3)
|
%
|
|
33.0
|
%
|
|
32.8
|
%
|
|
0.2
|
%
|
Operating income
|
|
$
|
328.4
|
|
|
$
|
306.6
|
|
|
7.1
|
%
|
|
$
|
728.7
|
|
|
$
|
588.6
|
|
|
23.8
|
%
|
Operation income margin
|
|
10.1
|
%
|
|
9.7
|
%
|
|
0.4
|
%
|
|
11.1
|
%
|
|
9.4
|
%
|
|
1.7
|
%
|
Net sales for the Dollar Tree segment increased $87.4 million, or 2.8%, for the 13 weeks ended July 31, 2021 compared to the same period last year. The increase was due to sales from new stores of $105.8 million, partially offset by a 0.2% decrease in comparable store net sales. Average ticket decreased 1.3% and customer traffic increased 1.1%.
Net sales for the Dollar Tree segment increased $331.2 million, or 5.3%, for the 26 weeks ended July 31, 2021 compared to the same period last year. The increase was due to a 2.2% increase in comparable store net sales and sales from new stores of $218.0 million. Average ticket increased 3.9% and customer traffic declined 1.6%.
Gross profit margin for the Dollar Tree segment decreased to 32.4% for the 13 weeks ended July 31, 2021 compared to 33.7% for the same period last year as a result of the net of the following:
•Merchandise cost, including freight, increased 175 basis points primarily due to increased freight costs and lower initial mark-on, partially offset by increased sales of higher margin discretionary merchandise.
•Occupancy costs increased 10 basis points as a result of the loss of leverage due to the comparable store net sales decrease in the quarter.
•Shrink costs decreased 55 basis points resulting from favorable inventory results in relation to accruals in the current quarter and a decrease in the shrink accrual rate.
•Distribution costs decreased 5 basis points as a result of a $2 per hour premium paid to all hourly distribution center associates for all hours worked in the prior year quarter, partially offset by increased payroll costs and higher depreciation costs in the current quarter resulting from two new distribution centers. Total distribution center COVID-19-related expenses were approximately $6.7 million for the 13 weeks ended August 1, 2020.
Gross profit margin for the Dollar Tree segment increased to 33.0% for the 26 weeks ended July 31, 2021 compared to 32.8% for the same period last year as a result of the net of the following:
•Shrink costs decreased 50 basis points resulting from favorable inventory results in relation to accruals in the current year and a decrease in the shrink accrual rate.
•Markdown costs decreased 15 basis points resulting from lower seasonal markdowns due to the higher Easter sell-through in the current year.
•Occupancy costs decreased 5 basis points as a result of leverage due to the comparable store net sales increase in the current year.
•Distribution costs were flat as a percentage of net sales compared to the same period last year as increased payroll and depreciation costs related to two new distribution centers were offset by the $2 per hour premium paid in the prior year period to all distribution center hourly associates for all hours worked from March 8, 2020. Total distribution center COVID-19-related expenses were approximately $10.3 million for the 26 weeks ended August 1, 2020.
•Merchandise cost, including freight, increased 45 basis points primarily due to higher freight costs, partially offset by increased sales of higher margin discretionary merchandise, including a higher Easter sell-through. Easter sales were significantly lower last year as a result of the COVID-19 pandemic.
Operating income margin for the Dollar Tree segment increased to 10.1% for the 13 weeks ended July 31, 2021 from 9.7% for the same period last year. The increase in operating income margin in the 13 weeks ended July 31, 2021 was the result of a lower selling, general and administrative expense rate and the gross margin decrease noted above. The selling, general and administrative expense rate decreased to 22.3% in the 13 weeks ended July 31, 2021 compared to 24.0% for the same period last year as a result of the following:
•Payroll expenses decreased 155 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation expenses, partially offset by higher health insurance expenses and the loss of leverage from the comparable store net sales decrease. The 13 weeks ended August 1, 2020 included $66.0 million of COVID-19-related payroll expenses including store payroll costs for a $2 per hour premium paid to all store hourly associates for all hours worked during the 13 weeks ended August 1, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
•Other selling, general and administrative expenses decreased 20 basis points resulting primarily from a decrease in insurance costs related to the favorable development of general liability claims, partially offset by increased debit and credit fees resulting from higher debit and credit card penetration. The prior year included higher costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.
•Store facility costs decreased 5 basis points due to lower repairs and maintenance costs.
Operating income in the 13 weeks ended August 1, 2020 included $76.6 million of COVID-19-related expenses.
Operating income margin for the Dollar Tree segment increased to 11.1% for the 26 weeks ended July 31, 2021 from 9.4% for the same period last year. The increase in operating income margin in the 26 weeks ended July 31, 2021 was the result of the gross margin increase noted above, and a decrease in the selling, general and administrative expense rate. The selling, general and administrative
expense rate decreased to 21.9% in the 26 weeks ended July 31, 2021 compared to 23.4% for the same period last year as a result of the following:
•Payroll expenses decreased 130 basis points primarily due to lower COVID-19-related store payroll costs, lower incentive compensation expenses and leverage from the comparable store net sales increase, partially offset by higher health care costs. The first half of 2020 included $99.7 million of COVID-19-related payroll expenses including store payroll costs for a $2 per hour premium paid to all store hourly associates for all hours worked since March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
•Other selling, general and administrative expenses decreased 10 basis points resulting primarily from lower store supplies expense and a decrease in insurance costs related to the favorable development of general liability claims, partially offset by increased debit and credit fees resulting from higher debit and credit card penetration. The prior year included costs for the installation of plexiglass sneeze guards at all registers in our stores and higher costs for masks, gloves and cleaning supplies due to the COVID-19 pandemic.
•Depreciation and amortization decreased 5 basis points as a result of leverage from the comparable store net sales increase.
Operating income in the 26 weeks ended August 1, 2020 included $118.8 million of COVID-19-related expenses and $5.1 million of uninsured costs related to civil unrest.
Family Dollar
The following table summarizes the operating results of the Family Dollar segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
26 Weeks Ended
|
|
|
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
|
July 31,
|
|
August 1,
|
|
Percentage
Change
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
|
Net sales
|
|
$
|
3,075.9
|
|
|
$
|
3,100.7
|
|
|
(0.8)
|
%
|
|
6,231.4
|
|
|
6,310.0
|
|
|
(1.2)
|
%
|
Gross profit
|
|
803.3
|
|
|
844.3
|
|
|
(4.9)
|
%
|
|
1,649.1
|
|
|
1,658.5
|
|
|
(0.6)
|
%
|
Gross profit margin
|
|
26.1
|
%
|
|
27.2
|
%
|
|
(1.1)
|
%
|
|
26.5
|
%
|
|
26.3
|
%
|
|
0.2
|
%
|
Operating income
|
|
$
|
156.3
|
|
|
$
|
165.1
|
|
|
(5.3)
|
%
|
|
367.7
|
|
|
340.6
|
|
|
8.0
|
%
|
Operation income margin
|
|
5.1
|
%
|
|
5.3
|
%
|
|
(0.2)
|
%
|
|
5.9
|
%
|
|
5.4
|
%
|
|
0.5
|
%
|
Net sales for the Family Dollar segment decreased $24.8 million, or 0.8%, for the 13 weeks ended July 31, 2021 compared to the same period last year. The decrease was due to a comparable store net sales decrease of 2.1%, offset partially by $61.8 million of new store sales. For the 13 weeks ended July 31, 2021, average ticket increased 1.4% and customer traffic declined 3.5%.
Net sales for the Family Dollar segment decreased $78.6 million, or 1.2%, for the 26 weeks ended July 31, 2021 compared to the same period last year. The decrease was due to a comparable store net sales decrease of 2.5%, offset partially by $119.4 million of new store sales. For the 26 weeks ended July 31, 2021, average ticket increased 6.3% and customer traffic declined 8.2%.
Gross profit margin for the Family Dollar segment decreased to 26.1% for the 13 weeks ended July 31, 2021 compared to 27.2% for the same period last year. The decrease is due to the net of the following:
•Merchandise cost, including freight, increased 175 basis points primarily due to higher freight costs and increased sales of lower margin consumable merchandise.
•Occupancy costs increased 35 basis points as a result of loss of leverage from the comparable store net sales decrease.
•Distribution costs decreased 20 basis points primarily due to lower COVID-19-related distribution center payroll costs. The 13 weeks ended August 1, 2020 included $4.7 million of incremental distribution center payroll costs, including a $2 per hour premium for all distribution center hourly associates for all hours worked during the quarter.
•Markdown costs decreased 25 basis points primarily due to $7.0 million of uninsured markdowns in the prior year quarter for stores affected by civil unrest.
•Shrink expense decreased 50 basis points resulting from favorable physical inventory results in relation to accruals in the current year quarter and a decrease in the shrink accrual rate.
Gross profit margin for the Family Dollar segment increased to 26.5% for the 26 weeks ended July 31, 2021 compared to 26.3% for the same period last year. The increase is due to the net of the following:
•Shrink expense decreased 55 basis points resulting from favorable physical inventory results in relation to accruals in the current year and a decrease in the shrink accrual rate.
•Distribution costs decreased 20 basis points primarily due to lower COVID-19-related distribution center payroll costs. The 26 weeks ended August 1, 2020 included $7.5 million of incremental distribution center payroll costs, including a $2 per hour premium for all distribution center hourly associates for all hours worked beginning March 8, 2020.
•Markdown costs decreased 10 basis points primarily due to $7.0 million of uninsured markdowns in the prior year for stores affected by civil unrest.
•Occupancy costs increased 25 basis points as a result of loss of leverage from the comparable store net sales decrease.
•Merchandise cost, including freight, increased 45 basis points primarily due to higher freight costs, offset partially by higher initial mark-on and increased sales of higher margin discretionary merchandise.
Operating income margin for the Family Dollar segment decreased to 5.1% for the 13 weeks ended July 31, 2021 from 5.3% for the same period last year resulting from the gross margin decrease noted above, offset partially by a decrease in the selling, general and administrative expense rate. The selling, general and administrative expense rate was 21.0% in the 13 weeks ended July 31, 2021 compared to 21.9% for the same period last year. The current quarter decrease in the selling, general and administrative expense rate was due to the net of the following:
•Payroll expenses decreased 95 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation, partially offset by loss of leverage from the comparable store net sales decrease and higher health care costs. The 13 weeks ended August 1, 2020 included $48.2 million, or 155 basis points, of COVID-19-related payroll expenses, including a $2 per hour premium paid to all store hourly associates for all hours worked during the 13 weeks ended August 1, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
•Store facility costs decreased 30 basis points primarily due to lower repairs and maintenance expenses. The 13 weeks ended August 1, 2020 included $2.4 million of incremental repairs and maintenance expenses for stores damaged by civil unrest.
•Depreciation and amortization expense increased 10 basis points primarily due to loss of leverage from the comparable store net sales decrease.
•Other selling, general and administrative expenses increased 35 basis points primarily due to increases in advertising and travel expenses and loss of leverage from the comparable store net sales decrease. Promotional advertising was lower in the prior year quarter due to the COVID-19 pandemic.
Operating income in the 13 weeks ended August 1, 2020 included $57.1 million of COVID-19-related expenses and $11.7 million of uninsured costs related to civil unrest.
Operating income margin for the Family Dollar segment increased to 5.9% for the 26 weeks ended July 31, 2021 from 5.4% for the same period last year resulting from the gross margin increase noted above and a decrease in the selling, general and administrative expense rate. The selling, general and administrative expense rate was 20.6% in the 26 weeks ended July 31, 2021 compared to 20.9% for the same period last year. The current year decrease in the selling, general and administrative expense rate was due to the net of the following:
•Payroll expenses decreased 60 basis points primarily due to lower COVID-19-related store payroll costs and lower incentive compensation, partially offset by loss of leverage from the comparable store net sales decrease. The 26 weeks ended August 1, 2020 included $72.0 million, or 115 basis points, of COVID-19-related payroll expenses, including a $2 per hour premium for all store hourly associates for hours worked beginning March 8, 2020, bonuses for certain field management associates, guaranteed bonus payouts and Thank You bonuses for store managers, quarantine pay and sick pay as well as the related payroll taxes.
•Depreciation and amortization expense increased 5 basis points primarily due to loss of leverage from the comparable store net sales decrease.
•Other selling, general and administrative expenses increased 25 basis points primarily due to an increase in advertising expenses and loss of leverage from the comparable store net sales decrease. Promotional advertising was lower in the prior year due to the COVID-19 pandemic.
Operating income in the 26 weeks ended August 1, 2020 included $87.5 million of COVID-19-related expenses and $11.7 million of uninsured costs related to civil unrest.
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 31, 2021 and August 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
|
July 31,
|
|
August 1,
|
(in millions)
|
|
2021
|
|
2020
|
Net cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
736.1
|
|
|
$
|
1,437.0
|
|
Investing activities
|
|
(451.5)
|
|
|
(471.1)
|
|
Financing activities
|
|
(980.8)
|
|
|
245.4
|
|
Net cash provided by operating activities decreased $700.9 million primarily due to increases in merchandise inventories and decreases in current liabilities and other liabilities.
Net cash used in investing activities decreased $19.6 million primarily due to lower capital expenditures in the current year.
For the 26 weeks ended July 31, 2021, cash used in financing activities was $980.8 million compared to cash provided by financing activities of $245.4 million for the 26 weeks ended August 1, 2020. The cash used in financing activities in the current year is primarily due to $947.5 million of cash paid for stock repurchases. In the prior year, we preemptively drew $750.0 million on our Revolving Credit Facility to reduce our exposure to potential short-term liquidity risk in the banking system as a result of the COVID-19 pandemic, which was partially offset by the final $250.0 million payment on the Senior Floating Rate Notes and a $250.0 million repayment of the Revolving Credit Facility draw.
At July 31, 2021, our long-term borrowings were $3.25 billion and we had $1.15 billion available under our Revolving Credit Facility. We also have $425.0 million in Letter of Credit Reimbursement and Security Agreements with various financial institutions, under which $393.3 million was committed to letters of credit issued for routine purchases of imported merchandise as of July 31, 2021.
We repurchased 9,156,898 shares of common stock on the open market for approximately $950.0 million during the 26 weeks ended July 31, 2021. Approximately $2.5 million in share repurchases 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. We did not repurchase any shares of common stock in the 26 weeks ended August 1, 2020. As of July 31, 2021, we have $1.45 billion remaining under Board repurchase authorization.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and diesel fuel cost changes. We may enter into interest rate or diesel fuel swaps to manage exposure to interest rate and diesel fuel price changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Interest Rate Risk
Our exposure to interest rate risk relates to our Revolving Credit Facility, as borrowings under the Revolving Credit Facility bear interest at LIBOR, reset periodically, plus 1.00% to 1.50% as determined by our credit ratings and leverage ratio. At July 31, 2021, there were no borrowings outstanding under the Revolving Credit Facility.
Item 4. Controls and Procedures.
Our management has carried out, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act as of the end of
the period covered by this report. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of July 31, 2021, our disclosure controls and procedures were designed and functioning effectively to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
In the second quarter of 2021, we implemented a new journal entry management system and developed new controls to connect the new system with our existing general ledger system. There have been no other changes in our internal control over financial reporting during the fiscal quarter ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.