Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Dollar General Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries (the Company) as of February 1, 2019 and February 2, 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended February 1, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2019 and February 2, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 1, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 22, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

	/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2001.

Nashville, Tennessee

March 22, 2019

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

		February 1,			February 2,
		2019			2018
ASSETS
Current assets:
Cash and cash equivalents		$	235,487		$	267,441
Merchandise inventories			4,097,004			3,609,025
Income taxes receivable			57,804			108,265
Prepaid expenses and other current assets			272,725			263,121
Total current assets			4,663,020			4,247,852
Net property and equipment			2,970,806			2,701,282
Goodwill			4,338,589			4,338,589
Other intangible assets, net			1,200,217			1,200,428
Other assets, net			31,406			28,760
Total assets		$	13,204,038		$	12,516,911
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations		$	1,950		$	401,345
Accounts payable			2,385,469			2,009,771
Accrued expenses and other			618,405			549,658
Income taxes payable			10,033			4,104
Total current liabilities			3,015,857			2,964,878
Long-term obligations			2,862,740			2,604,613
Deferred income taxes			609,687			515,702
Other liabilities			298,361			305,944
Commitments and contingencies
Shareholders’ equity:
Preferred stock			—			—
Common stock; $0.875 par value, 1,000,000 shares authorized, 259,511 and 268,733 shares issued and outstanding at February 1, 2019 and February 2, 2018, respectively			227,072			235,141
Additional paid-in capital			3,252,421			3,196,462
Retained earnings			2,941,107			2,698,352
Accumulated other comprehensive loss			(3,207)			(4,181)
Total shareholders’ equity			6,417,393			6,125,774
Total liabilities and shareholders' equity		$	13,204,038		$	12,516,911

The accompanying notes are an integral part of the consolidated financial statements.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

			For the Year Ended
			February 1,			February 2,			February 3,
			2019			2018			2017
Net sales			$	25,625,043		$	23,470,967		$	21,986,598
Cost of goods sold				17,821,173			16,249,608			15,203,960
Gross profit				7,803,870			7,221,359			6,782,638
Selling, general and administrative expenses				5,687,564			5,213,541			4,719,189
Operating profit				2,116,306			2,007,818			2,063,449
Interest expense				99,871			97,036			97,821
Other (income) expense				1,019			3,502			—
Income before income taxes				2,015,416			1,907,280			1,965,628
Income tax expense				425,944			368,320			714,495
Net income			$	1,589,472		$	1,538,960		$	1,251,133
Earnings per share:
Basic			$	5.99		$	5.64		$	4.45
Diluted			$	5.97		$	5.63		$	4.43
Weighted average shares outstanding:
Basic				265,155			272,751			281,317
Diluted				266,105			273,362			282,261
Dividends per share			$	1.16		$	1.04		$	1.00

The accompanying notes are an integral part of the consolidated financial statements.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

			For the Year Ended
			February 1,			February 2,			February 3,
			2019			2018			2017
Net income			$	1,589,472		$	1,538,960		$	1,251,133
Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $344, $509 and $527, respectively				974			809			817
Comprehensive income			$	1,590,446		$	1,539,769		$	1,251,950

The accompanying notes are an integral part of the consolidated financial statements.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except per share amounts)

													Accumulated
		Common					Additional						Other
		Stock		Common			Paid-in			Retained			Comprehensive
		Shares		Stock			Capital			Earnings			Loss			Total
Balances, January 29, 2016		286,694		$	250,855		$	3,107,283		$	2,025,545		$	(5,807)		$	5,377,876
Net income		—			—			—			1,251,133			—			1,251,133
Dividends paid, $1.00 per common share		—			—			—			(281,147)			—			(281,147)
Unrealized net gain (loss) on hedged transactions		—			—			—			—			817			817
Share-based compensation expense		—			—			36,967			—			—			36,967
Repurchases of common stock		(12,354)			(10,810)			—			(979,664)			—			(990,474)
Other equity and related transactions		872			766			10,356			—			—			11,122
Balances, February 3, 2017		275,212		$	240,811		$	3,154,606		$	2,015,867		$	(4,990)		$	5,406,294
Net income		—			—			—			1,538,960			—			1,538,960
Dividends paid, $1.04 per common share		—			—			—			(282,941)			—			(282,941)
Unrealized net gain (loss) on hedged transactions		—			—			—			—			809			809
Share-based compensation expense		—			—			34,323			—			—			34,323
Repurchases of common stock		(7,060)			(6,178)			—			(573,534)			—			(579,712)
Other equity and related transactions		581			508			7,533			—			—			8,041
Balances, February 2, 2018		268,733		$	235,141		$	3,196,462		$	2,698,352		$	(4,181)		$	6,125,774
Net income		—			—			—			1,589,472			—			1,589,472
Dividends paid, $1.16 per common share		—			—			—			(306,562)			—			(306,562)
Unrealized net gain (loss) on hedged transactions		—			—			—			—			974			974
Share-based compensation expense		—			—			40,879			—			—			40,879
Repurchases of common stock		(9,891)			(8,655)			—			(998,839)			—			(1,007,494)
Transition adjustment upon adoption of accounting standard (see Note 1)		—			—			—			(41,316)			—			(41,316)
Other equity and related transactions		669			586			15,080			—			—			15,666
Balances, February 1, 2019		259,511		$	227,072		$	3,252,421		$	2,941,107		$	(3,207)		$	6,417,393

The accompanying notes are an integral part of the consolidated financial statements.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		For the Year Ended
		February 1,			February 2,			February 3,
		2019			2018			2017
Cash flows from operating activities:
Net income		$	1,589,472		$	1,538,960		$	1,251,133
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			454,134			404,231			379,931
Deferred income taxes			52,325			(137,648)			12,359
Loss on debt retirement			1,019			3,502			—
Noncash share-based compensation			40,879			34,323			36,967
Other noncash (gains) and losses			41,851			11,088			(3,625)
Change in operating assets and liabilities:
Merchandise inventories			(521,342)			(348,363)			(171,908)
Prepaid expenses and other current assets			(12,097)			(49,406)			(25,046)
Accounts payable			375,214			427,911			56,477
Accrued expenses and other liabilities			65,857			75,647			42,937
Income taxes			56,390			(156,504)			26,316
Other			(152)			(1,633)			(500)
Net cash provided by (used in) operating activities			2,143,550			1,802,108			1,605,041
Cash flows from investing activities:
Purchases of property and equipment			(734,380)			(646,456)			(560,296)
Proceeds from sales of property and equipment			2,777			1,428			9,360
Net cash provided by (used in) investing activities			(731,603)			(645,028)			(550,936)
Cash flows from financing activities:
Issuance of long-term obligations			499,495			599,556			—
Repayments of long-term obligations			(577,321)			(752,676)			(3,138)
Net increase (decrease) in commercial paper outstanding			(63,300)			(60,300)			490,500
Borrowings under revolving credit facilities			—			—			1,584,000
Repayments of borrowings under revolving credit facilities			—			—			(1,835,000)
Costs associated with issuance and retirement of debt			(4,384)			(9,524)			—
Repurchases of common stock			(1,007,494)			(579,712)			(990,474)
Payments of cash dividends			(306,523)			(282,931)			(281,135)
Other equity and related transactions			15,626			8,033			11,110
Net cash provided by (used in) financing activities			(1,443,901)			(1,077,554)			(1,024,137)
Net increase (decrease) in cash and cash equivalents			(31,954)			79,526			29,968
Cash and cash equivalents, beginning of period			267,441			187,915			157,947
Cash and cash equivalents, end of period		$	235,487		$	267,441		$	187,915
Supplemental cash flow information:
Cash paid for:
Interest		$	98,012		$	88,749		$	92,952
Income taxes		$	313,457		$	660,510		$	679,633
Supplemental schedule of noncash investing and financing activities:
Purchases of property and equipment awaiting processing for payment, included in Accounts payable		$	63,662		$	63,178		$	38,914

The accompanying notes are an integral part of the consolidated financial statements.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of presentation and accounting policies

Basis of presentation

These notes contain references to the years 2018, 2017, and 2016, which represent fiscal years ended February 1, 2019, February 2, 2018, and February 3, 2017, respectively. The Company’s 2018 and 2017 accounting periods were comprised of 52-weeks, while 2016 was a 53-week accounting period. The Company’s fiscal year ends on the Friday closest to January 31. The consolidated financial statements include all subsidiaries of the Company, except for its not-for-profit subsidiary which the Company does not control. Intercompany transactions have been eliminated.

The Company sells general merchandise on a retail basis through 15,370 stores (as of February 1, 2019) in 44 states with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States. The Company owns distribution centers for non-refrigerated merchandise (“DCs”) in Scottsville, Kentucky; South Boston, Virginia; Alachua, Florida; Zanesville, Ohio; Jonesville, South Carolina; Marion, Indiana; Bessemer, Alabama; Bethel, Pennsylvania; San Antonio, Texas; Janesville, Wisconsin; Jackson, Georgia, and Longview, Texas, and leases DCs in Ardmore, Oklahoma; Fulton, Missouri; Indianola, Mississippi; and Lebec, California. The Company also owns a cold storage and distribution facility in Pottsville, Pennsylvania.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with insignificant interest rate risk and original maturities of three months or less when purchased. Such investments primarily consist of money market funds, bank deposits, certificates of deposit, and commercial paper. The carrying amounts of these items are a reasonable estimate of their fair value due to the short maturity of these investments.

Payments due from processors for electronic tender transactions classified as cash and cash equivalents totaled approximately $99.5 million and $90.4 million at February 1, 2019 and February 2, 2018, respectively.

Investments in debt and equity securities

The Company accounts for investments in debt and marketable equity securities as held-to-maturity, available-for-sale, or trading, depending on their classification. Debt securities categorized as held-to-maturity are stated at amortized cost. Debt and equity securities categorized as available-for-sale are stated at fair value, with any unrealized gains and losses, net of deferred income taxes, reported as a component of Accumulated other comprehensive loss. Trading securities are stated at fair value, with changes in fair value recorded as a component of Selling, general and administrative (“SG&A”) expense. The cost of securities sold is based upon the specific identification method.

Merchandise inventories

Inventories are stated at the lower of cost or market (“LCM”) with cost determined using the retail last-in, first-out (“LIFO”) method as this method results in a better matching of costs and revenues. Under the Company’s retail inventory method (“RIM”), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales at a department level. The use of the RIM will result in valuing inventories at LCM if markdowns are currently taken as a reduction of the retail value of inventories. Costs directly associated with warehousing and distribution are capitalized into inventory.

The excess of current cost over LIFO cost was approximately $103.7 million and $78.5 million at February 1, 2019 and February 2, 2018, respectively. Current cost is determined using the RIM on a first-in, first-out basis. Under the LIFO inventory method, the impacts of rising or falling market price changes increase or decrease cost of sales (the LIFO provision or benefit). The Company recorded a LIFO provision (benefit) of $25.2 million in 2018, $(2.2) million in 2017, and $(12.2) million in 2016, which is included in cost of goods sold in the consolidated statements of income.

The Company purchases its merchandise from a wide variety of suppliers. The Company’s three largest suppliers each accounted for approximately 8% of the Company’s purchases in 2018.

Vendor rebates

The Company accounts for all cash consideration received from vendors in accordance with applicable accounting standards pertaining to such arrangements. Cash consideration received from a vendor is generally presumed to be a rebate or an allowance and is accounted for as a reduction of merchandise purchase costs as earned. However, certain specific, incremental and otherwise qualifying SG&A expenses related to the promotion or sale of vendor products may be offset by cash consideration received from vendors, in accordance with arrangements such as cooperative advertising, when earned for dollar amounts up to but not exceeding actual incremental costs.

Prepaid expenses and other current assets

Prepaid expenses and other current assets include prepaid amounts for rent, maintenance, business licenses, advertising, and insurance, and amounts receivable for certain vendor rebates (primarily those expected to be collected in cash) and coupons.

Property and equipment

In 2007, the Company’s property and equipment was recorded at estimated fair values as the result of a merger transaction. Property and equipment acquired subsequent to the merger has been recorded at cost. The Company records depreciation and amortization on a straight-line basis over the assets’ estimated useful lives. The Company’s property and equipment balances and depreciable lives are summarized as follows:

		Depreciable				February 1,			February 2,
(In thousands)		Life				2019			2018
Land		Indefinite				$	214,632		$	212,033
Land improvements				20			85,093			79,597
Buildings		39	-	40			1,219,852			1,116,872
Leasehold improvements				(a)			583,531			507,894
Furniture, fixtures and equipment		3	-	10			3,298,594			3,186,406
Construction in progress							117,275			72,490
							5,518,977			5,175,292
Less accumulated depreciation and amortization							2,548,171			2,474,010
Net property and equipment						$	2,970,806		$	2,701,282

	(a)		Amortized over the lesser of the life of the applicable lease term or the estimated useful life of the asset.

Depreciation expense related to property and equipment was approximately $454.1 million, $403.3 million and $378.3 million for 2018, 2017 and 2016, respectively. Amortization of capital lease assets is included in depreciation expense. Interest on borrowed funds during the construction of property and equipment is capitalized where applicable. Interest costs of $3.7 million, $2.0 million, and $1.4 million were capitalized in 2018, 2017 and 2016, respectively.

Impairment of long-lived assets

When indicators of impairment are present, the Company evaluates the carrying value of long-lived assets, excluding goodwill and other indefinite-lived intangible assets, in relation to the operating performance and future cash flows or the appraised values of the underlying assets. Generally, the Company’s policy is to review for impairment stores open more than three years for which current cash flows from operations are negative. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows expected to be generated by the assets. The Company’s estimate of undiscounted future cash flows is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s estimated fair value. The fair value is estimated based primarily upon estimated future cash flows over the asset’s remaining useful life (discounted at the Company’s credit adjusted risk-free rate) or other reasonable estimates of fair market value. Assets to be disposed of are adjusted to the fair value less the cost to sell if less than the book value.

The Company recorded impairment charges included in SG&A expense of approximately $4.1 million in 2018, $7.8 million in 2017 and $6.3 million in 2016, to reduce the carrying value of certain of its stores’ assets. Such action was deemed necessary based on the Company’s evaluation that such amounts would not be recoverable primarily due to insufficient sales or excessive costs resulting in the carrying value of the assets exceeding the estimated undiscounted future cash flows generated by the assets at these locations.

Goodwill and other intangible assets

If not deemed indefinite, the Company amortizes intangible assets over their estimated useful lives. Goodwill and intangible assets with indefinite lives are tested for impairment annually or more frequently if indicators of impairment are present. Definite lived intangible assets are tested for impairment if indicators of impairment are present. Impaired assets are written down to fair value as required. No impairment of intangible assets has been identified during any of the periods presented.

In accordance with accounting standards for goodwill and indefinite-lived intangible assets, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value as described in further detail below.

The quantitative goodwill impairment test is a two-step process that would require management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of an entity’s reporting units based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the implied fair value of goodwill would require the entity to allocate the estimated fair value of its reporting unit to its assets and liabilities. Any unallocated fair value would represent the implied fair value of goodwill, which would be compared to its corresponding carrying value.

The quantitative impairment test for intangible assets compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

The Company’s goodwill balance has an indefinite life and is not expected to be deductible for tax purposes. Substantially all of the Company’s other intangible assets are trade names and trademarks which have an indefinite life.

Other assets

Noncurrent Other assets consist primarily of qualifying prepaid expenses for maintenance, beer and wine licenses, and utility, security and other deposits.

Accrued expenses and other liabilities

Accrued expenses and other consist of the following:

		February 1,			February 2,
(In thousands)		2019			2018
Compensation and benefits		$	121,375		$	118,755
Self-insurance reserves			107,380			96,277
Taxes (other than taxes on income)			183,941			164,451
Other			205,709			170,175
		$	618,405		$	549,658

Included in other accrued expenses are liabilities for freight expense, interest, utilities, and maintenance.

Insurance liabilities

The Company retains a significant portion of risk for its workers’ compensation, employee health, general liability, property, automobile, and third-party landlord liability claim exposures. Accordingly, provisions are made for the Company’s estimates of such risks. The undiscounted future claim costs for the workers’ compensation, general liability, landlord liability, and health claim risks are derived using actuarial methods and are recorded as self-insurance reserves pursuant to Company policy. To the extent that subsequent claim costs vary from those estimates, future results of operations will be affected as the reserves are adjusted.

Ashley River Insurance Company (“ARIC”), a Tennessee-based wholly owned captive insurance subsidiary of the Company, charges the operating subsidiary companies premiums to insure the retained workers’ compensation, medical stop-loss, and non-property general liability exposures. Pursuant to Tennessee insurance regulations, ARIC maintains certain levels of cash and cash equivalents related to its self-insured exposures.

Operating leases and related liabilities

Rent expense is recognized over the term of the lease. The Company records minimum rental expense on a straight-line basis over the base, non-cancelable lease term commencing on the date that the Company takes physical possession of the property from the landlord, which normally includes a period prior to the store opening to make leasehold improvements if necessary and install store fixtures. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. Tenant allowances, to the extent received, are recorded as deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease. The difference between the calculated expense and the amounts paid result in a liability classified in other long-term liabilities in the consolidated balance sheets, and totaled approximately $70.1 million and $65.9 million at February 1, 2019 and February 2, 2018, respectively.

The Company recognizes contingent rental expense when the achievement of specified sales targets is considered probable. The amount expensed but not paid as of February 1, 2019 and February 2, 2018 was approximately $2.4 million and $2.7 million, respectively, and is included in Accrued expenses and other in the consolidated balance sheets.

Other liabilities

Noncurrent Other liabilities consist of the following:

		February 1,			February 2,
(In thousands)		2019			2018
Self-insurance reserves		$	130,022		$	134,256
Deferred rent			70,139			65,856
Deferred gain on sale leaseback			40,303			44,781
Other			57,897			61,051
		$	298,361		$	305,944

Fair value accounting

The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Other comprehensive income

The Company previously recorded a loss on the settlement of treasury locks associated with the issuance of long-term debt in 2013 which was deferred to other comprehensive income and is being amortized as an increase to interest expense over the 10-year period of the debt’s maturity.

Revenue and gain recognition

The Company recognizes retail sales in its stores at the time the customer takes possession of merchandise. All sales are net of discounts and are presented net of taxes assessed by governmental authorities that are imposed concurrent with those sales. The Company records gain contingencies when realized.

The Company recognizes gift card sales revenue at the time of redemption. The liability for gift cards is established for the cash value at the time of purchase of the gift card. The liability for outstanding gift cards was approximately $5.2 million and $4.2 million at February 1, 2019 and February 2, 2018, respectively, and is recorded in Accrued expenses and other liabilities. Estimated breakage revenue, a percentage of gift cards that will never be redeemed based on historical redemption rates, is recognized over time in proportion to actual gift card

redemptions. The Company recorded breakage revenue of $0.8 million, $0.6 million and $0.5 million in 2018, 2017 and 2016, respectively.

Advertising costs

Advertising costs are expensed upon performance, “first showing” or distribution, and are reflected in SG&A expenses net of earned cooperative advertising amounts provided by vendors which are specific, incremental and otherwise qualifying expenses related to the promotion or sale of vendor products for dollar amounts up to but not exceeding actual incremental costs. Advertising costs were $70.5 million, $68.8 million and $82.7 million in 2018, 2017 and 2016, respectively. These costs primarily include promotional circulars, targeted circulars supporting new stores, television and radio advertising, in-store signage, and costs associated with the sponsorships of certain automobile racing activities in 2016. Vendor funding for cooperative advertising offset reported expenses by $35.0 million, $33.8 million and $35.9 million in 2018, 2017 and 2016, respectively.

Share-based payments

The Company recognizes compensation expense for share-based compensation based on the fair value of the awards on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate may be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the prior estimate. The forfeiture rate is the estimated percentage of share-based awards granted that are expected to be forfeited or canceled before becoming fully vested. The Company bases this estimate on historical experience or estimates of future trends, as applicable. An increase in the forfeiture rate will decrease compensation expense.

The fair value of each option grant is separately estimated and amortized into compensation expense on a straight-line basis between the applicable grant date and each vesting date. The Company has estimated the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.

The Company calculates compensation expense for restricted stock, share units and similar awards as the difference between the market price of the underlying stock or similar award on the grant date and the purchase price, if any. Such expense is recognized on a straight-line basis for time-based awards and generally on an accelerated basis for performance awards over the period in which the recipient earns the awards.

Store pre-opening costs

Pre-opening costs related to new store openings and the related construction periods are expensed as incurred.

Income taxes

Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. Deferred income tax expense or benefit is the net change during the year in the Company’s deferred income tax assets and liabilities.

The Company includes income tax related interest and penalties as a component of the provision for income tax expense.

Income tax reserves are determined using a methodology which requires companies to assess each income tax position taken using a two-step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing

authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial results.

Management estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Accounting standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued comprehensive new accounting standards related to the recognition of revenue and in August 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017. The Company adopted this guidance using the modified retrospective approach effective February 3, 2018, and such adoption had no effect on the Company’s consolidated results of operations, financial position or cash flows.

In February 2016, the FASB issued new guidance related to lease accounting, which requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. In July 2018, the FASB issued additional guidance which allows companies to record the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption, which the Company intends to apply. The Company will adopt the new standard effective February 2, 2019. The Company formed a project team to assess and implement the standard and an executive steering committee to provide oversight. The project team has completed its internal evaluation of existing contractual arrangements for embedded leases, has successfully tested computations in the Company’s lease administration system, and has developed a process to compute the rates to discount the lease liabilities as required by the standard. In addition, the project team has identified and implemented new processes and controls to ensure compliance with the new standard, and has evaluated and documented the Company’s accounting conclusions related to the new standard. The Company will utilize transition practical expedients under which the Company will not be required to reassess (i) whether expired or existing contracts are or contain leases as defined by the new standard, (ii) the classification of such leases, and (iii) whether previously capitalized initial direct costs would qualify for capitalization under the new standard. The Company has identified its store leases as the area in which it will be most affected by the new guidance, and the most significant impact that adoption will have on the Company’s consolidated financial statements is to its consolidated balance sheet. The Company expects to record consolidated right of use assets and consolidated lease liabilities of approximately $8.0 billion each upon transition to the new guidance.

In October 2016, the FASB issued amendments to existing guidance related to accounting for intra-entity transfers of assets other than inventory, which affects the Company’s historical accounting for intra-entity transfers of certain intangible assets. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance effective February 3, 2018 which resulted in an increase in deferred income tax liabilities and a decrease in retained earnings of $41.3 million.

In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. The Company currently does not anticipate a material effect on its consolidated results of operations, financial position or cash flows to result from the adoption of this guidance.

Reclassifications

Certain financial disclosures relating to prior periods have been reclassified to conform to the current year presentation where applicable.

2. Earnings per share

Earnings per share is computed as follows (in thousands except per share data):

		2018
					Weighted
		Net			Average		Per Share
		Income			Shares		Amount
Basic earnings per share		$	1,589,472		265,155		$	5.99
Effect of dilutive share-based awards					950
Diluted earnings per share		$	1,589,472		266,105		$	5.97

		2017
					Weighted
		Net			Average		Per Share
		Income			Shares		Amount
Basic earnings per share		$	1,538,960		272,751		$	5.64
Effect of dilutive share-based awards					611
Diluted earnings per share		$	1,538,960		273,362		$	5.63

		2016
					Weighted
		Net			Average		Per Share
		Income			Shares		Amount
Basic earnings per share		$	1,251,133		281,317		$	4.45
Effect of dilutive share-based awards					944
Diluted earnings per share		$	1,251,133		282,261		$	4.43

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is determined based on the dilutive effect of share-based awards using the treasury stock method.

Share-based awards that were outstanding at the end of the respective periods, but were not included in

the computation of diluted earnings per share because the effect of exercising such options would be antidilutive, were 0.8 million, 2.1 million and 1.7 million in 2018, 2017 and 2016, respectively.

3. Income taxes

The provision (benefit) for income taxes consists of the following:

(In thousands)		2018			2017			2016
Current:
Federal		$	320,361		$	426,933		$	613,009
Foreign			159			105			135
State			53,091			79,011			88,990
			373,611			506,049			702,134
Deferred:
Federal			48,262			(159,728)			11,053
Foreign			(38)			(22)			—
State			4,109			22,021			1,308
			52,333			(137,729)			12,361
		$	425,944		$	368,320		$	714,495

A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to income before income taxes is summarized as follows:

(Dollars in thousands)		2018					2017					2016
U.S. federal statutory rate on earnings before income taxes		$	423,237		21.0	%	$	643,326		33.7	%	$	687,969		35.0	%
Impact of tax rate changes			(12,222)		(0.6)			(310,756)		(16.3)			—		—
State income taxes, net of federal income tax benefit			44,584		2.2			61,201		3.2			60,168		3.1
Jobs credits, net of federal income taxes			(27,506)		(1.4)			(26,759)		(1.4)			(18,952)		(1.0)
Increase (decrease) in valuation allowances, net of federal taxes			—		—			4,435		0.2			(1,474)		(0.1)
Stock-based compensation programs			(3,682)		(0.2)			(2,227)		(0.1)			(9,915)		(0.5)
Increase (decrease) in income tax reserves			3,952		0.2			(1,837)		(0.1)			(2,161)		(0.1)
Other, net			(2,419)		(0.1)			937		0.1			(1,140)		(0.1)
		$	425,944		21.1	%	$	368,320		19.3	%	$	714,495		36.3	%

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act reduces the federal corporate tax rate to 21% from 35% effective January 1, 2018, including a reduction in the Company’s current year federal corporate tax rate for 2017 to 33.7% as a result of the Company’s 2017 fiscal year ending approximately one month after the effective date of the Act.

Under accounting standards for income taxes, the impact of new tax legislation must be taken into account in the period in which the new legislation is enacted, including the remeasurement of deferred tax assets and liabilities at the tax rates that such items are expected to reverse in future periods. Subsequent to the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), allowing companies to record provisional amounts during a measurement period not to exceed one year after the enactment date while the accounting impact remains under analysis. The Company’s 2017 provision for income taxes reflected such estimates due to the changes in income tax law, including a provisional tax benefit of $335 million. The provisional tax benefit consisted of $310.8 million related to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at the 21% rate and $24.2 million related to the reduced statutory tax rate of 33.7%, compared to 35% in prior years. The Company concluded its analysis of the

accounting impact of the Act pursuant to SAB 118 and recorded immaterial adjustments related to its 2017 provision for income taxes in 2018.

The effective income tax rate for 2018 was 21.1% compared to a rate of 19.3% for 2017 which represents a net increase of 1.8 percentage points. The effective income tax rate was higher in 2018 primarily due to the one-time remeasurement of the deferred tax assets and liabilities at 21% in 2017, which was offset by the reduction in the current federal tax rate from 33.7% in 2017 to 21% in 2018.

The effective income tax rate for 2017 was 19.3% compared to a rate of 36.3% for 2016 which represents a net decrease of 17 percentage points. The effective income tax rate was lower in 2017 primarily due to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at 21%, and the changes in the federal income tax laws pursuant to the Act that lowered the Company’s federal statutory tax rate to 33.7% for 2017, compared to 35% in 2016.

The 2016 effective tax rate was an expense of 36.3%. This expense was greater than the federal statutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The effective income tax rate was lower in 2016 as compared to 2015 due principally to the adoption of a change in accounting guidance related to employee share-based payments, requiring the recognition of excess tax benefits in the statement of income rather than in the balance sheet, as reported in prior years.

Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

		February 1,			February 2,
(In thousands)		2019			2018
Deferred tax assets:
Deferred compensation expense		$	6,490		$	6,522
Accrued expenses			3,278			3,324
Accrued rent			22,668			23,418
Accrued insurance			6,869			8,630
Accrued incentive compensation			15,219			6,394
Share based compensation			15,713			13,442
Interest rate hedges			1,421			1,765
Tax benefit of income tax and interest reserves related to uncertain tax positions			472			365
Deferred gain on sale-leaseback			11,649			12,847
Other			3,942			3,900
State tax net operating loss carry forwards, net of federal tax			598			602
State tax credit carry forwards, net of federal tax			8,245			8,350
			96,564			89,559
Less valuation allowances, net of federal income taxes			(4,433)			(4,435)
Total deferred tax assets			92,131			85,124
Deferred tax liabilities:
Property and equipment			(322,575)			(255,215)
Inventories			(56,221)			(46,244)
Trademarks			(308,793)			(269,820)
Prepaid insurance			(12,639)			(22,875)
Other			(1,590)			(6,672)
Total deferred tax liabilities			(701,818)			(600,826)
Net deferred tax liabilities		$	(609,687)		$	(515,702)

The Company has state tax credit carryforwards of approximately $8.2 million that will expire beginning in 2022 through 2028 and the Company has approximately $17.2 million of state apportioned net operating loss carryforwards, which will begin to expire in 2033 and will continue through 2039.

The Company established a valuation allowance for the state tax credit carryforwards, in the amount of $4.4 million (net of federal benefit) increasing income tax expense in 2017. In 2018, management continues to believe that results from operations will not generate sufficient taxable income to realize certain state tax credits before they expire. In 2016, the Company reversed all of the previously recorded valuation allowance for state tax credit carryforwards in the amount of $1.5 million, which was recorded as a reduction in income tax expense.

Based upon expected future income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the remaining deferred tax assets.

The Company’s 2014 and earlier tax years are not open for further examination by the Internal Revenue Service (“IRS”). The IRS, at its discretion, may choose to examine the Company’s 2015 through 2017 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, with few exceptions, the Company’s 2015 and later tax years remain open for examination by the various state taxing authorities.

As of February 1, 2019, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $5.0 million, $0.8 million and $0.9 million, respectively, for a total of $6.7 million. This total amount is reflected in noncurrent Other liabilities in the consolidated balance sheet.

As of February 2, 2018, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $1.0 million, $0.7 million and $0.8 million, respectively, for a total of $2.5 million. This total amount is reflected in noncurrent Other liabilities in the consolidated balance sheet.

The Company’s reserve for uncertain tax positions will not be reduced in the coming twelve months as a result of expiring statutes of limitations. As of February 1, 2019, approximately $5.0 million of the uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

The amounts associated with uncertain tax positions included in income tax expense consists of the following:

(In thousands)		2018			2017			2016
Income tax expense (benefit)		$	3,919		$	(2,076)		$	(3,795)
Income tax related interest expense (benefit)			133			(123)			(31)
Income tax related penalty expense (benefit)			33			(9)			50

A reconciliation of the uncertain income tax positions from January 29, 2016 through February 1, 2019 is as follows:

(In thousands)		2018			2017			2016
Beginning balance		$	1,041		$	3,117		$	6,964
Increases—tax positions taken in the current year			95			66			41
Increases—tax positions taken in prior years			3,914			27			52
Decreases—tax positions taken in prior years			—			—			(1,435)
Statute expirations			—			(2,169)			(2,453)
Settlements			(90)			—			(52)
Ending balance		$	4,960		$	1,041		$	3,117

4. Current and long-term obligations

Consolidated current and long-term obligations consist of the following:

		February 1,			February 2,
(In thousands)		2019			2018
Senior unsecured credit facilities
Term Facility		$	—		$	175,000
Revolving Facility			—			—
1.875% Senior Notes due April 15, 2018 (net of discount of $16)			—			399,984
3.250% Senior Notes due April 15, 2023 (net of discount of $1,084 and $1,322)			898,916			898,678
4.150% Senior Notes due November 1, 2025 (net of discount of $562 and $632)			499,438			499,368
3.875% Senior Notes due April 15, 2027 (net of discount of $375 and $413)			599,625			599,587
4.125% Senior Notes due May 1, 2028 (net of discount of $471)			499,529			—
Unsecured commercial paper notes			366,900			430,200
Capital lease obligations			10,977			12,321
Tax increment financing due February 1, 2035			6,360			7,335
Debt issuance costs, net			(17,055)			(16,515)
			2,864,690			3,005,958
Less: current portion			(1,950)			(401,345)
Long-term portion		$	2,862,740		$	2,604,613

At February 1, 2019, the Company’s maintained a $1.25 billion senior unsecured revolving credit facility (the “Revolving Facility”) that provides for the issuance of letters of credit up to $175.0 million and is scheduled to mature on February 22, 2022.

Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of February 1, 2019 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility. As of February 1, 2019, the commitment fee rate was 0.15%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings.

The Revolving Facility contains a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional liens; sell all or substantially all of the Company’s assets; consummate certain fundamental changes or change in the Company’s lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 1, 2019, the Company was in compliance with all such covenants. The Revolving Facility also contains customary events of default.

On June 11, 2018, the Company voluntarily prepaid the entire $175.0 million outstanding balance of its senior unsecured term loan facility and recognized an associated loss of $1.0 million which is reflected in Other (income) expense in the consolidated statement of income for the year ended February 1, 2019. As of February 1, 2019, the Company had no outstanding borrowings, outstanding letters of credit of $7.6 million, and borrowing availability of $1.2 billion under the Revolving Facility that, due to its intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $689.5 million. In addition, the Company had outstanding letters of credit of $32.9 million which were issued pursuant to separate agreements.

As of February 1, 2019, the Company had a commercial paper program under which the Company may

issue unsecured commercial paper notes (the “CP Notes”) from time to time in an aggregate amount not to exceed $1.0 billion outstanding at any time. The CP Notes have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness. The Company intends to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. As of February 1, 2019, the Company’s consolidated balance sheet reflected outstanding CP notes of $366.9 million, which were classified as long-term obligations due to the Company’s intent and ability to refinance these obligations as long-term debt. An additional $186.0 million of outstanding CP Notes were held by a wholly-owned subsidiary of the Company and are therefore not reflected on the consolidated balance sheet. As of February 1, 2019, the outstanding CP Notes had a weighted average borrowing rate of 2.7%.

On April 10, 2018, the Company issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on May 1, 2028. Interest on the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year, and the first interest payment commenced on November 1, 2018. The Company incurred $4.4 million of debt issuance costs associated with the issuance of the 2028 Senior Notes.

Effective April 15, 2018, the Company redeemed $400.0 million aggregate principal amount of outstanding 1.875% senior notes due 2018 (the “2018 Senior Notes”). There was no gain or loss associated with the redemption. The Company funded the redemption price for the 2018 Senior Notes with proceeds from the issuance of the 2028 Senior Notes.

On April 11, 2017, the Company issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”), at a discount of $0.4 million, which are scheduled to mature on April 15, 2027. Interest on the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year, and commenced on October 15, 2017. The Company incurred $5.2 million of debt issuance costs associated with the issuance of the 2027 Senior Notes.

On April 27, 2017, the Company redeemed $500.0 million aggregate principal amount of outstanding 4.125% senior notes due 2017 (the “2017 Senior Notes”), resulting in a pretax loss of $3.4 million which is reflected in Other (income) expense in the consolidated statement of income for the year ended February 2, 2018.

Collectively, the 2028 Senior Notes, the 2027 Senior Notes and the Company’s other Senior Notes due 2023 and 2025 as reflected in the table above comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”). The Company may redeem some or all of its Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of the Senior Notes has the right to require the Company to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

The Senior Indenture contains covenants limiting, among other things, the ability of the Company and its subsidiaries to (subject to certain exceptions): consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; and to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Notes to become or to be declared due and payable, as applicable.

Scheduled debt maturities at February 1, 2019, including capital lease obligations, for the Company’s fiscal years listed below are as follows (in thousands): 2019 - $368,850; 2020 - $1,958; 2021 - $1,913; 2022 - $1,791; 2023 - $901,418; thereafter - $1,608,307.

5. Assets and liabilities measured at fair value

The following table presents the Company’s assets and liabilities required to be measured at fair value as of February 1, 2019, aggregated by the level in the fair value hierarchy within which those measurements are classified.

		Quoted Prices
		in Active
		Markets			Significant
		for Identical			Other			Significant			Total Fair
		Assets and			Observable			Unobservable			Value at
		Liabilities			Inputs			Inputs			February 1,
(In thousands)		(Level 1)			(Level 2)			(Level 3)			2019
Liabilities:
Long-term obligations (a)		$	2,480,044		$	384,236		$	—		$	2,864,280
Deferred compensation (b)			24,896			—			—			24,896

	(a)		Included in the consolidated balance sheet at book value as Current portion of long-term obligations of $1,950 and Long-term obligations of $2,862,740.

	(b)		Reflected at fair value in the consolidated balance sheet as a component of Accrued expenses and other current liabilities of $2,043 and a component of noncurrent Other liabilities of $22,853.

The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, short-term investments, receivables and payables approximate their respective fair values. The Company does not have any recurring fair value measurements using significant unobservable inputs (Level 3) as of February 1, 2019.

6. Commitments and contingencies

Leases

As of February 1, 2019, the Company was committed under operating lease agreements for most of its retail stores. Many of the Company’s stores are subject to build-to-suit arrangements with landlords which typically carry a primary lease term of up to 15 years with multiple renewal options. The Company also has stores subject to shorter-term leases and many of these leases have renewal options. Certain of the Company’s leased stores have provisions for contingent rent based upon a specified percentage of defined sales volume.

The land and buildings of the Company’s DCs in Missouri, Mississippi and California are subject to operating lease agreements and the leased DC in Oklahoma is subject to a financing arrangement. Certain leases contain restrictive covenants, and as of February 1, 2019, the Company is not aware of any material violations of such covenants.

The Company is accounting for its DC in Oklahoma as a financing obligation as a result of, among other things, the lessor’s ability to put the property back to the Company under certain circumstances. The property and equipment, along with the related lease obligation associated with this transaction are recorded in the consolidated balance sheets. The Company is the owner of a secured promissory note (the “Ardmore Note”) which represents debt issued by the third party entity from which the Company leases the DC in Oklahoma and therefore the Company holds the debt instrument pertaining to its lease financing obligation. Because a legal right of offset exists, the Company is accounting for the Ardmore Note as a reduction of its outstanding financing obligation in its consolidated balance sheets.

Future minimum payments as of February 1, 2019 for operating leases are as follows:

(In thousands)
2019		$	1,185,608
2020			1,135,292
2021			1,073,768
2022			1,004,124
2023			928,989
Thereafter			4,518,502
Total minimum payments		$	9,846,283

As of February 1, 2019, total future minimum payments for capital leases were $13.3 million, with a present value of $11.0 million. The gross amount of property and equipment recorded under capital leases and financing obligations at each of February 1, 2019 and February 2, 2018, was $36.2 million. Accumulated depreciation on property and equipment under capital leases and financing obligations at February 1, 2019 and February 2, 2018, was $14.3 million and $12.4 million, respectively.

Rent expense under all operating leases is as follows:

(In thousands)		2018			2017			2016
Minimum rentals		$	1,154,429		$	1,075,984		$	935,663
Contingent rentals			4,656			5,532			6,748
		$	1,159,085		$	1,081,516		$	942,411

Legal proceedings

From time to time, the Company is a party to various legal matters in the ordinary course of business, including actions by employees, consumers, suppliers, government agencies, or others. The Company has recorded accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made.

Except as described below, the Company believes, based upon information currently available, that such matters, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s consolidated financial statements as a whole. However, litigation and other legal matters involve an element of uncertainty. Future developments in such matters, including adverse decisions or settlements or resulting required changes to the Company’s business operations, could affect our consolidated operating results when resolved in future periods or could result in liability or other amounts material to the Company’s consolidated financial statements.

Wage and Hour/Employment Litigation

California Wage/Hour Litigation: The Company is defending a number of wage and hour lawsuits filed by California employees, including store employees (both key carriers and non-key carriers) as well as distribution center employees. The plaintiffs in these lawsuits allege, on behalf of themselves and other similarly situated current and former California employees, that the Company failed to comply with California law in some or all of the following respects: failure to pay for all time worked, failure to provide meal and rest periods, failure to reimburse business-related expenses, failure to provide accurate wage statements, and failure to pay timely wages and provide appropriate termination pay. Plaintiffs seek to recover some or all of the following: alleged unpaid wages, injunctive relief, consequential damages, pre- and post-judgment interest, penalties under the Private Attorney General Act (the “PAGA”), and attorneys’ fees and costs.

Pennsylvania Wage/Hour Litigation: Plaintiff alleges that he and other similarly situated current and former hourly distribution center employees were subjected to unlawful policies and practices and were denied

regular and overtime wages in violation of federal and Pennsylvania law. Plaintiff seeks to proceed on a nationwide collective basis under federal law and a statewide class basis under Pennsylvania law and to recover alleged unpaid wages, liquidated damages, statutory damages, and attorneys’ fees and costs.

Tennessee Wage/Hour Litigation: Plaintiffs allege that they and other similarly situated current and former “key holders” were not paid for all hours worked in violation of federal, Illinois and Tennessee law. Plaintiffs seek to proceed on a nationwide collective basis under federal law and a statewide class basis under Illinois and Tennessee law and to recover alleged unpaid wages, statutory and common law damages, liquidated damages, pre-judgment and post-judgment interest and attorneys’ fees and costs. The Company has reached a preliminary agreement with plaintiffs, which must be submitted to and approved by the Court, to resolve this matter for an amount not material to the Company’s financial statements as a whole.

California Suitable Seating Litigation: Plaintiff alleges that the Company failed to provide her and other current and former California store employees with “suitable seats” in violation of California law and seeks to recover penalties under the PAGA, injunctive relief, and attorneys’ fees and costs. The Company has reached a preliminary agreement with the plaintiff, which must be submitted to and approved by the Court, to resolve this matter for an amount not material to the Company’s financial statements as a whole.

California Credit Reporting Litigation: In addition to certain of the claims outlined in “California Wage/Hour Litigation” above, the plaintiff in this lawsuit alleges, on behalf of a nationwide class under federal law and a statewide class under California law, that the Company failed to provide applicants with adequate disclosures and summary of rights relating to certain background checks. With the exception of the claims outlined in “California Wage/Hour Litigation” above, the plaintiff has agreed to voluntarily dismiss his claims, and the Company does not expect these claims to have a material impact on its financial statements as a whole.

EEOC Litigation: The United States Equal Employment Opportunity Commission (“EEOC”) alleges that the Company’s use of post-offer, pre-employment physical assessments, as applied to candidates for the general warehouse position in the Bessemer, Alabama distribution center, violates the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”). The EEOC seeks the following: back pay, front pay, pre-judgment interest, compensatory damages, punitive damages and injunctive relief.

The Company is vigorously defending the Wage and Hour/Employment Litigation and believes that its policies and practices comply with federal and state laws and that these actions are not appropriate for class or similar treatment. At this time, it is not possible to predict whether these matters ultimately will be permitted to proceed as a class or other similar action, or the size of any putative class or classes. Likewise, except as to the resolution of the Tennessee Wage/Hour Litigation, the California Suitable Seating Litigation and the California Credit Reporting Litigation, at this time it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, except as to the resolution of the Tennessee Wage/Hour Litigation, the California Suitable Seating Litigation and the California Credit Reporting Litigation, the Company is unable to estimate any potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of these actions could have a material adverse effect on the Company’s consolidated financial statements as a whole.

Consumer/Product Litigation

In December 2015 the Company was first notified of several lawsuits in which plaintiffs allege violation of state law, including state consumer protection laws, relating to the labeling, marketing and sale of certain Dollar General private-label motor oil. Each of these lawsuits, as well as additional, similar lawsuits filed after December 2015, was filed in, or removed to, various federal district courts of the United States (collectively “the Motor Oil Lawsuits”).

On June 2, 2016, the United States Judicial Panel on Multidistrict Litigation (“JPML”) granted the Company’s motion to centralize the Motor Oil Lawsuits in a matter styled In re Dollar General Corp. Motor Oil

Litigation, Case MDL No. 2709, before the United States District Court for the Western District of Missouri (“Motor Oil MDL”). Subsequently, plaintiffs in the Motor Oil MDL filed a consolidated amended complaint, in which they seek to certify two nationwide classes and multiple statewide sub-classes and for each putative class member some or all of the following relief: compensatory damages, injunctive relief, statutory damages, punitive damages and attorneys’ fees. The Company’s motion to dismiss the allegations raised in the consolidated amended complaint was granted in part and denied in part. To the extent additional consumer lawsuits alleging violation of laws relating to the labeling, marketing and sale of Dollar General private-label motor oil have been or will be filed, the Company expects that such lawsuits will be transferred to the Motor Oil MDL.

In May 2017, the Company received a Notice of Proposed Action from the Office of the New Mexico Attorney General (the “New Mexico AG”) which alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated New Mexico law (the “New Mexico Motor Oil Matter”). The State is represented in connection with this matter by counsel for plaintiffs in the Motor Oil MDL.

On June 20, 2017, the New Mexico AG filed an action in the First Judicial District Court, County of Santa Fe, New Mexico pertaining to the New Mexico Motor Oil Matter. (Hector H. Balderas v. Dolgencorp, LLC, Case No. D-101-cv-2017-01562). The Company removed this matter to New Mexico federal court on July 26, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the New Mexico AG has moved to remand it to state court. (Hector H. Balderas v. Dolgencorp, LLC, D.N.M., Case No. 1:17-cv-772). The Company’s and the New Mexico AG’s above-referenced motions are pending. The Company’s action for declaratory judgment enjoining the New Mexico AG from pursuing the New Mexico Motor Oil Matter was dismissed on September 28, 2018. (Dollar General Corporation v. Hector H. Balderas, D.N.M., Case No. 1:17-cv-00588).

On September 1, 2017, the Mississippi Attorney General (the “Mississippi AG”), who also is represented by the counsel for plaintiffs in the Motor Oil MDL, filed an action in the Chancery Court of the First Judicial District of Hinds County, Mississippi in which the Mississippi AG alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated Mississippi law. (Jim Hood v. Dollar General Corporation, Case No. G2017-1229 T/1) (the “Mississippi Motor Oil Matter”). The Company removed this matter to Mississippi federal court on October 5, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the Mississippi AG moved to remand it to state court. (Jim Hood v. Dollar General Corporation, N.D. Miss., Case No. 3:17-cv-801-LG-LRA). The Company’s and the Mississippi AG’s above-referenced motions are pending.

On January 30, 2018, the Company received a Civil Investigative Demand (“CID”) from the Office of the Louisiana Attorney General requesting information concerning the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil (the “Louisiana Motor Oil Matter”). In response to the CID, the Company filed a petition for a protective order on February 20, 2018 in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking to set aside the CID. (In re Dollar General Corp. and Dolgencorp, LLC, Case No. 666499). The Company’s petition is pending.

A mediation held in the Motor Oil MDL on February 26, 2018, was unsuccessful. On August 20, 2018, plaintiffs moved to certify two nationwide classes relating to their claims of alleged unjust enrichment and breach of implied warranties. In addition, plaintiffs moved to certify a multi-state class relating to their claims of breach of implied warranties and multiple statewide classes relating to their claims of alleged unfair trade practices/consumer fraud statutory claims, unjust enrichment and breach of implied warranties. The Company opposed the plaintiffs’ certification motion. On March 21, 2019, the court granted the plaintiffs’ certification motion as to 16 statewide classes regarding claims of unjust enrichment and 16 statewide classes regarding state consumer protection laws. The court denied plaintiffs’ motion in all other respects.

The Company is vigorously defending these matters and believes that the labeling, marketing and sale of its private-label motor oil comply with applicable federal and state requirements and are not misleading. The Company further believes that these matters are not appropriate for class or similar treatment. At this time, however, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, whether on a statewide or nationwide basis, or the size of any putative class or classes. Likewise, at this

time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, the Company is unable to estimate the potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of the Motor Oil MDL, the New Mexico Motor Oil Matter, the Mississippi Motor Oil Matter and/or the Louisiana Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

7. Benefit plans

The Dollar General Corporation 401(k) Savings and Retirement Plan, which became effective on January 1, 1998, is a safe harbor defined contribution plan and is subject to the Employee Retirement and Income Security Act (“ERISA”).

A participant’s right to claim a distribution of his or her account balance is dependent on the plan, ERISA guidelines and Internal Revenue Service regulations. All active participants are fully vested in all contributions to the 401(k) plan. During 2018, 2017 and 2016, the Company expensed approximately $20.2 million, $17.5 million and $16.0 million, respectively, for matching contributions.

The Company also has a nonqualified supplemental retirement plan (“SERP”) and compensation deferral plan (“CDP”), known as the Dollar General Corporation CDP/SERP Plan, for a select group of management and other key employees. The Company incurred compensation expense for these plans of approximately $0.7 million in each of 2018, 2017 and 2016, respectively.

The deferred compensation liability associated with the CDP/SERP Plan is reflected in the consolidated balance sheets as further disclosed in Note 5.

8. Share-based payments

The Company accounts for share-based payments in accordance with applicable accounting standards, under which the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’s stock option grants are estimated on the grant date using the Black-Scholes-Merton valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The fair value of the Company’s other share-based awards discussed below are estimated using the Company’s closing stock price on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.

On July 6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan, which plan was subsequently amended and restated on several occasions (as so amended and restated, the “Plan”). The Plan allows the granting of stock options, stock appreciation rights, and other stock-based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company common stock authorized for grant under the Plan is 31,142,858.

Since May 2011, most of the share-based awards issued by the Company have been in the form of stock options, restricted stock units and performance share units, and unless noted otherwise, the disclosures that follow refer to such awards. With limited exceptions, stock options and restricted stock units granted to employees generally vest ratably on an annual basis over four-year and three-year periods, respectively. Awards granted to board members generally vest over a one-year period. The number of performance share units earned are based on performance criteria measured over a period of one to three years, and such awards generally vest over a three-year period. With limited exceptions, the performance share unit and restricted stock unit awards are payable in shares of common stock on the vesting date.

The weighted average for key assumptions used in determining the fair value of all stock options granted in the years ended February 1, 2019, February 2, 2018, and February 3, 2017, and a summary of the methodology applied to develop each assumption, are as follows:

		February 1,		February 2,		February 3,
		2019		2018		2017
Expected dividend yield		1.2	%	1.3	%	1.3	%
Expected stock price volatility		25.0	%	25.5	%	25.4	%
Weighted average risk-free interest rate		2.7	%	2.1	%	1.6	%
Expected term of options (years)		6.3		6.3		6.3

Expected dividend yield - This is an estimate of the expected dividend yield on the Company’s stock. An increase in the dividend yield will decrease compensation expense.

Expected stock price volatility - This is a measure of the amount by which the price of the Company’s common stock has fluctuated or is expected to fluctuate. An increase in the expected volatility will increase compensation expense.

Weighted average risk-free interest rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected term of options - This is the period of time over which the options granted are expected to remain outstanding. The Company has estimated the expected term as the mid-point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.

A summary of the Company’s stock option activity during the year ended February 1, 2019 is as follows:

				Average			Remaining
		Options		Exercise			Contractual		Intrinsic
(Intrinsic value amounts reflected in thousands)		Issued		Price			Term in Years		Value
Balance, February 2, 2018		3,076,913		$	71.31
Granted		764,783			93.72
Exercised		(419,842)			65.74
Canceled		(164,604)			81.61
Balance, February 1, 2019		3,257,250		$	76.76		7.3		$	124,674
Exercisable at February 1, 2019		1,219,179		$	67.17		5.9		$	58,356

The weighted average grant date fair value per share of options granted was $24.37, $17.66 and $20.06 during 2018, 2017 and 2016, respectively. The intrinsic value of options exercised during 2018, 2017 and 2016, was $15.4 million, $7.3 million and $17.3 million, respectively.

The number of performance share unit awards earned is based upon the Company’s financial performance as specified in the award agreement. A summary of performance share unit award activity during the year ended February 1, 2019 is as follows:

		Units		Intrinsic
(Intrinsic value amounts reflected in thousands)		Issued		Value
Balance, February 2, 2018		209,090
Granted		115,619
Converted to common stock		(105,613)
Canceled		(8,107)
Balance, February 1, 2019		210,989		$	24,272

The balance of performance share unit awards at February 1, 2019 includes 53,813 unvested awards, the number of which was computed based upon the performance targets specified in the awards. The number of such awards which will ultimately vest will be based in part on the Company’s financial performance in 2019 and 2020. The weighted average grant date fair value per share of performance share units granted was $92.98, $70.68 and $84.67 during 2018, 2017 and 2016, respectively.

A summary of restricted stock unit award activity during the year ended February 1, 2019 is as follows:

		Units		Intrinsic
(Intrinsic value amounts reflected in thousands)		Issued		Value
Balance, February 2, 2018		491,968
Granted		261,550
Converted to common stock		(233,053)
Canceled		(70,426)
Balance, February 1, 2019		450,039		$	51,772

The weighted average grant date fair value per share of restricted stock units granted was $93.16, $70.90 and $84.56 during 2018, 2017 and 2016, respectively.

At February 1, 2019, an additional 3,264 options issued prior to June 2011 were outstanding, all of which were exercisable, with an aggregate intrinsic value of $0.3 million. The intrinsic value of such options exercised during 2018, 2017 and 2016 was $3.5 million, $6.9 million and $10.8 million, respectively.

At February 1, 2019, the total unrecognized compensation cost related to unvested stock-based awards was $65.1 million with an expected weighted average expense recognition period of 2.1 years.

The fair value method of accounting for share-based awards resulted in share-based compensation expense (a component of SG&A expenses) and a corresponding reduction in income before and net of income taxes as follows:

		Stock			Performance			Restricted
(In thousands)		Options			Share Units			Stock Units			Total
Year ended February 1, 2019
Pre-tax		$	14,556		$	8,597		$	17,726		$	40,879
Net of tax		$	10,902		$	6,439		$	13,277		$	30,618
Year ended February 2, 2018
Pre-tax		$	11,599		$	6,159		$	16,565		$	34,323
Net of tax		$	7,223		$	3,835		$	10,315		$	21,373
Year ended February 3, 2017
Pre-tax		$	12,008		$	7,258		$	17,701		$	36,967
Net of tax		$	7,325		$	4,427		$	10,798		$	22,550

9. Segment reporting

The Company manages its business on the basis of one reportable operating segment. See Note 1 for a brief description of the Company’s business. As of February 1, 2019, all of the Company’s operations were located within the United States with the exception of certain subsidiaries in Hong Kong and China, which collectively are not material with regard to assets, results of operations or otherwise, to the consolidated financial

statements. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

(in thousands)		2018			2017			2016
Classes of similar products:
Consumables		$	19,865,086		$	18,054,785		$	16,798,881
Seasonal			3,050,282			2,837,310			2,674,319
Home products			1,506,054			1,400,618			1,373,397
Apparel			1,203,621			1,178,254			1,140,001
Net sales		$	25,625,043		$	23,470,967		$	21,986,598

10. Common stock transactions

On August 29, 2012, the Company’s Board of Directors authorized a common stock repurchase program, which the Board has since increased on several occasions. On March 13, 2019, the Company’s Board of Directors authorized a $1.0 billion increase to the existing common stock repurchase program and as of such date, a cumulative total of $7.0 billion had been authorized under the program since its inception. The repurchase authorization has no expiration date and allows repurchases from time to time in the open market or in privately negotiated transactions. The timing and number of shares purchased depends on a variety of factors, such as price, market conditions, compliance with the covenants and restrictions under the Company’s debt agreements and other factors. Repurchases under the program may be funded from available cash or borrowings including under the Company’s Revolving Facility and issuance of CP Notes discussed in further detail in Note 4.

During the years ended February 1, 2019, February 2, 2018, and February 3, 2017, the Company repurchased approximately 9.9 million shares of its common stock at a total cost of $1.0 billion, approximately 7.1 million shares of its common stock at a total cost of $0.6 billion, and approximately 12.4 million shares of its common stock at a total cost of $1.0 billion, respectively, pursuant to its common stock repurchase program.

The Company paid quarterly cash dividends of $0.29 per share in 2018. On March 13, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.32 per share, which is payable on or before April 23, 2019 to shareholders of record on April 9, 2019. The amount and declaration of future cash dividends is subject to the sole discretion of the Company’s Board of Directors and will depend upon, among other things, the Company’s results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Board may deem relevant in its sole discretion.

11. Quarterly financial data (unaudited)

The following is selected unaudited quarterly financial data for the fiscal years ended February 1, 2019 and February 2, 2018. Each quarterly period listed below was a 13-week accounting period. The sum of the four quarters for any given year may not equal annual totals due to rounding.

		First			Second			Third			Fourth
(In thousands)		Quarter			Quarter			Quarter			Quarter
2018:
Net sales		$	6,114,463		$	6,443,309		$	6,417,462		$	6,649,809
Gross profit			1,862,249			1,974,873			1,895,059			2,071,689
Operating profit			490,184			545,476			442,143			638,503
Net income			364,852			407,237			334,142			483,241
Basic earnings per share			1.36			1.53			1.26			1.85
Diluted earnings per share			1.36			1.52			1.26			1.84

		First			Second			Third			Fourth
(In thousands)		Quarter			Quarter			Quarter			Quarter
2017:
Net sales		$	5,609,625		$	5,828,305		$	5,903,606		$	6,129,431
Gross profit			1,698,983			1,790,522			1,766,456			1,965,398
Operating profit			473,795			493,146			417,431			623,446
Net income			279,489			294,783			252,533			712,155
Basic earnings per share			1.02			1.08			0.93			2.63
Diluted earnings per share			1.02			1.08			0.93			2.63

The Company purchased 15 retail store locations and assumed the lease obligations on approximately 300 retail store locations in 2017, and relocated certain of its existing stores to the acquired locations. As a result, the Company incurred expenses, primarily related to costs for remaining lease liabilities, of $7.3 million ($4.4 million net of tax, or $0.02 per diluted share), which was recognized in Selling, general and administrative expense in the second quarter of 2017.

In the fourth quarter of 2017, the Company closed an incremental 35 stores as result of a strategic review process. The Company incurred $28.3 million of costs ($17.6 million net of tax, or $0.07 per diluted share) related to these store closings, most of which was in the form of SG&A expenses for remaining lease liabilities.